IASB Exposure Draft ED/2015/5 Remeasurement on a Plan Amendment, Curtailment or Settlement/Availability of a Refund from a Defined Benefit Plan

Our Ref.: C/FRSCSent electronically through the IASB Website (www.ifrs.org)

19 October 2015Mr Hans HoogervorstInternational Accounting Standards Board30 Cannon StreetLondon EC4M 6XHUnited KingdomDear Hans,IASB Exposure Draft ED/2015/5 Remeasurement on a Plan Amendment, Curtailmentor Settlement/Availability of a Refund from a Defined Benefit PlanThe Hong Kong Institute of Certified Public Accountants is the only body authorised by lawto set and promulgate standards relating to financial reporting, auditing and ethics forprofessional accountants in Hong Kong. We are grateful for the opportunity to provide youwith our comments on this Exposure Draft (ED).We support the IASB's initiative to clarify the application of the requirements in relation tothe availability of refunds from a defined benefit plan under IFRIC 14 IAS 19 – The Limit ona Defined Benefit Asset, Minimum Funding Requirements and their Interaction and theaccounting treatment under IAS 19 Employee Benefits for issues related to theremeasurement of the net defined benefit liability (asset) in the event of a plan amendment,curtailment or settlement. Nevertheless, we have suggested improvements in theAppendix of this letter that would clarify the proposed amendments.In addition, we noted that the IASB has not addressed the inconsistency between IAS 19and IAS 34 Interim Financial Reporting. This relates to the question of when an entityshould remeasure the net defined benefit liability (asset) as part of this proposal, inparticular, when 'significant market fluctuations' occur during the reporting period. In view ofthe potential diversity in practice, we suggest that the IASB reconsiders this issue andprovides clarification as soon as possible.Our responses to the questions raised in the ED are explained in more detail in theAppendix.Page 2 of 7If you have any questions regarding the matters raised in this letter, please contact me orEky Liu, Associate Director of the Standard Setting Department (eky@hkicpa.org.hk).Yours sincerely,Christina NgHead of Financial ReportingCN/ELEncl.Page 3 of 7Detailed comments on IASB ED/2015/5 Remeasurement on a Plan Amendment,Curtailment or Settlement/Availability of a Refund from a Defined Benefit PlanQuestion 1- Accounting when other parties can wind up a plan or affect benefitsfor plan members without an entity's consentThe IASB proposes amending IFRIC 14 to require that, when an entitydetermines the availability of a refund from a defined benefit plan:

(a) the amount of the surplus that an entity recognises as an asset on the basisof a future refund should not include amounts that other parties (for example,the plan trustees) can use for other purposes (for example, to enhancebenefits for plan members) without the entity's consent.(b) an entity should not assume a gradual settlement of the plan as thejustification for the recognition of an asset, if other parties can wind up theplan without the entity's consent.(c) other parties' power to buy annuities as plan assets or make otherinvestment decisions without changing the benefits for plan members doesnot affect the availability of a refund.Do you agree with the proposed amendments? Why or why not?While we support the IASB's aim to clarify the application of paragraphs 11 and 12 ofIFRIC 14, we do not consider the proposed paragraphs 12A and 12B to be useful inexplaining the application of paragraphs 11 and 12. The proposed paragraphs 12A and12B appear to be case specific rather than principles-based and they will only be clearif examples with fact patterns are provided in IFRIC 14. Therefore, instead of addingthe proposed paragraphs 12A and 12B, we recommend that the IASB developsillustrative examples using the fact pattern in paragraph BC 1 of the ED to clarify theapplication of the principles in paragraphs 11 and 12 of IFRIC 14.Question 2 – Statutory requirements that an entity should consider to determinethe economic benefit availableThe IASB proposes amending IFRIC 14 to confirm that when an entitydetermines the availability of a refund and a reduction in future contributions,the entity should take into account the statutory requirements that aresubstantively enacted, as well as the terms and conditions that are contractuallyagreed and any constructive obligations.Do you agree with that proposal? Why or why not?We support the proposal to clarify that an entity should take into account the statutoryrequirements that are substantively enacted, as well as the terms and conditions thatare contractually agreed and any constructive obligations when the entity determinesthe availability of a refund and a reduction in future contributions.We consider that the proposed amendments are aligned with:

․ the concept of 'substantively enacted' that have been used in paragraph 21 ofIFRIC 14 and IAS 12 Income Taxes. We agree that an entity should not take intoAPPENDIXPage 4 of 7account future changes in regulations or tax if they are not yet substantivelyenacted; and․ the current requirements for an entity to account for its legal or constructiveobligation when measuring its defined benefit obligation according to paragraphs61 and 88 of IAS 19.Nevertheless, we consider that paragraph 7 of IFRIC 14 (including the IASB'sproposed additional text) could be improved to make the requirement easier tounderstand. We recommend the following changes to the proposed amendedparagraph 7 of IFRIC 14:

"An entity shall determine the availability of a refund or a reduction in futurecontributions in accordance with the terms and conditions of the plan that arecontractually agreed, as well as constructive obligations, and any statutoryrequirements that are substantively enacted, at the end of the reporting perioddate of this determination. For example, When a plan amendment, curtailmentor settlement occurs and an entity determines changes in the effect of theasset ceiling as required by paragraph 64A of IAS 19 when a plan amendment,curtailment or settlement occurs, it shall determine the availability of a refundor a reduction in future contributions in accordance with the terms andconditions of the plan that are contractually agreed, as well as constructiveobligations, and any statutory requirements that are substantively enacted, atthe date of this determination."Question 3 – Interaction between the asset ceiling and past service cost or again or loss on settlementThe IASB proposes amending IAS 19 to clarify that:

(a) the past service cost or the gain or loss on settlement is measured andrecognised in profit or loss in accordance with the existing requirements inIAS 19; and(b) changes in the effect of the asset ceiling are recognised in othercomprehensive income as required by paragraph 57(d)(iii) of IAS 19, as aresult of the reassessment of the asset ceiling based on the updated surplus,which is itself determined after the recognition of the past service cost or thegain or loss on settlement.Do you agree with that proposal? Why or why not?We agree with the proposed amendments to clarify that recognising past service costor a gain or loss on settlement and assessing the asset ceiling are two distinct steps.However, we consider that this clarification could be improved by including a numericalexample under paragraph 64A of IAS 19. The example should illustrate how theproposed amendments affect the calculation of past service cost or the gain or loss onsettlement, and the changes in the effect of asset ceiling when a plan amendment,curtailment or settlement occurs.Page 5 of 7Question 4 – Accounting when a plan amendment, curtailment or settlementoccursThe IASB proposes amending IAS 19 to specify that:

(a) when the net defined benefit liability (asset) is remeasured in accordancewith paragraph 99 of IAS 19:

(i)

the current service cost and the net interest after the remeasurementare determined using the assumptions applied to the remeasurement;

and(ii)

an entity determines the net interest after the remeasurement based onthe remeasured net defined benefit liability (asset).(b) the current service cost and the net interest in the current reporting periodbefore a plan amendment, curtailment or settlement are not affected by, orincluded in, the past service cost or the gain or loss on settlement.Do you agree with that proposal? Why or why not?General commentsWe agree with the proposed clarification on the calculation and classification of currentservice cost and net interest when the net defined benefit liability (asset) is remeasuredunder a curtailment or settlement. Such an event normally leads to a scalable changein the defined benefit plan and hence results in greater impact on the remeasurementof the defined benefit liability (asset) and the calculation of current service cost and netinterest.However, it is not uncommon for Hong Kong employers to voluntarily raise the benefitlevels of individual employees throughout the year. Such discretionary top-up ofindividual benefits by the employers would appear to fall within the definition of a 'planamendment' under paragraph 104 of IAS 19, which states that:

"A plan amendment occurs when an entity introduces, or withdraws, a definedbenefit plan or changes the benefits payable under an existing defined benefitplan."Accordingly, a plan amendment involving only minor changes to the defined benefitplan would trigger the requirements of the proposed amendments even if it is expectedto result in insignificant impact to the current service cost and net interest if they wereto be determined according to the proposed amendments. We are concerned that theadditional costs of implementing the proposed amendments in this situation wouldoutweigh the expected benefits of providing more relevant information.We note that the IASB has considered the costs and benefits of the proposedamendments and that "the requirement to apply IFRS only to material items asdescribed in paragraph 8 of IAS 8 Accounting Policies, Changes in AccountingEstimates and Errors would continue to apply" in this proposed amendment (paragraphBC 17 of the ED).We understand that it is the IASB's usual practice to carry forward the basis forconclusions of the ED into the basis for conclusions of the final standard. But in light ofPage 6 of 7the above concern, we would like to emphasise to the IASB the importance of ensuringthe message in paragraph BC 17 of the ED will be carried forward to the final basis forconclusions of the standard.Alternatively, the scope of a 'plan amendment' could be made clearer if the IASBclarifies the definition of a 'plan amendment', in particular, whether minor changes tothe defined benefit plan falls within the definition of a 'plan amendment'.Proposed footnote to BC 64 of IAS 19We also note that the IASB has proposed incorporating the following footnote toparagraph BC 64 of IAS 19 as a result of the proposed requirements on the calculationof the current service cost and net interest when a plan amendment, curtailment orsettlement occurs:

"[Draft]RemeasurementonaPlanAmendment,CurtailmentorSettlement/Availability of a Refund from a Defined Benefit Plan (Amendmentsto IAS 19 and IFRIC 14), issued in [date], amended IAS 19. Theseamendments provide guidance on the calculation of the current service costand net interest if an entity remeasures the net defined benefit liability (asset)

as required in paragraph 99. The accounting required by these amendments isdifferent from the accounting described in paragraph BC64. Paragraph BC64does not provide either principles or guidance (emphasis added)."We find this footnote and paragraph BC64 of IAS 19 confusing when read together as:

․the first sentence of the existing paragraph BC64 of IAS 19 seems to becontradictory to the proposed amendments; and․it is not clear how the accounting treatment as required by the proposedamendments is different from those described in paragraph BC 64 of IAS 19.Therefore, instead of incorporating the footnote, we recommend that the IASB re-considers amending the text in BC 64 of IAS 19 and explains clearly in the basis forconclusions how the calculation of the current service cost and net interest would bedifferent when a plan amendment, curtailment or settlement occurs as a result of theproposed amendments.Inconsistency in the approaches of IAS 19 and IAS 34 Interim Financial Reporting onwhen a net defined benefit plan should be remeasuredParagraph 99 of IAS 19 requires that a net defined benefit liability (asset) isremeasured only when a plan amendment, curtailment or settlement occurs, whileparagraph B9 of IAS 34 requires an entity to perform the remeasurement under thefollowing two circumstances:

․significant market fluctuations; or․significant one-off events, such as plan amendments, curtailments andsettlements.We note that the IASB has considered this inconsistency but "decided not to addressthis issue, because it observed that addressing this issue is too broad to be included inthis proposal" (paragraph BC 18 of the ED). However, this mismatch would createinconsistency in the application of the standards which results in diversity in practice.Page 7 of 7We therefore recommend that the IASB re-considers this mismatch and clarifies whichapproach (i.e. the approach under IAS 19 or IAS 34) is appropriate.Provision of numerical illustrative examplesConsistent with our response to Question 3 above, we recommend that the IASBprovides numerical examples in the standard to illustrate the proposed amendments onthe calculation of the current service cost and the net interest when an entity isrequired to remeasure the defined benefit liability (asset) in accordance with paragraph99 of IAS 19. One example could be a case where a curtailment occurs after the entityhas sold out part of its business during the year. The example could illustrate how thecurrent service cost and the net interest would be determined before, and after, thecurtailment according to the proposed amendments.Question 5 – Transition requirementsThe IASB proposes that these amendments should be applied retrospectively,but proposes providing an exemption that would be similar to that granted inrespect of the amendments to IAS 19 in 2011. The exemption is for adjustmentsof the carrying amount of assets outside the scope of IAS 19 (for example,employee benefit expenses that are included in inventories) (see paragraph173(a) of IAS 19).Do you agree with that proposal? Why or why not?We support the proposal to apply these amendments retrospectively as this wouldenhance comparability of financial information. We do not foresee any significant costburden to the preparers in Hong Kong as the proposed amendments mainly clarify theexisting requirements in IAS 19 and IFRIC 14, and are largely consistent with thecurrent practice in Hong Kong.Notwithstanding our comment directly above, for cost-benefit reasons, we agree withthe proposal to provide an exemption for adjustments of the carrying amount of assetsoutside the scope of IAS 19 before the beginning of the earliest comparative periodpresented in the financial statements in which the amendments are first applied.~ End ~