16 January 2017
The term IFRIC 14 might not sound too interesting at first glance, but in my view, it is the trickiest and riskiest component of IAS19 pensions accounting.
What is IFRIC14 and why does it matter?
Essentially, pensions accounting should be straightforward. You calculate a liability value using assumptions set out in the accounting standard and the difference between that value and the value of the plan’s assets is shown on the balance sheet.
However, because of the way it’s calculated, the balance sheet amount can be significantly less than the total contributions that the company will pay to the plan in the future. IFRIC 14 requires that, in certain situations, the company has to disclose a higher amount (based on these future contributions). This can make a significant difference both to the balance sheet and to the financing costs disclosed in the company’s profit and loss account.
Until 2015, the circumstances under which IFRIC 14 applied were relatively limited. The actual rules are very complex but, typically, the position boils down to the following question:
Can the company assume that the pension plan continues until the last member dies?
If yes, then IFRIC 14 typically has no impact.
If no, then under IFRIC 14 the company must assume that all the money it is committed to paying into the scheme will never be refunded, and this may lead to an extra liability on the balance sheet.
Proposed future changes
In 2015, the International Accounting Standards Board (IASB), presented an exposure draft to clarify IFRIC 14. This proposed that, if the trustees of a pension plan have a unilateral power either to augment benefits or to wind up the scheme, then the company couldn’t assume it could run the scheme until the last member dies. Under this stricter interpretation of IFRIC 14 significantly more companies would potentially have to show extra liabilities on their balance sheets.
In late 2016, the IASB tentatively decided to finalise the new version of IFRIC 14, but subject to some “drafting amendments”. Instead of asking companies to look at whether trustees have the power to wind up a scheme, the newly amended wording refers to whether the trustees have the power to settle, or buy out, the benefits.
My experience is that the power for trustees to settle or buy out liabilities is a much more common power than wind-up. If implemented, these IFRIC 14 changes therefore mean many more companies will have their balance sheets impacted. Exactly which companies will be affected is not clear (or indeed logical) and will depend more often than not on a “small print legal lottery” of the detail in a plan’s rules.
What can companies do now?
It is early days and we don’t expect changes to be coming into effect until 2019. There might well be further changes before then too, but there are still things companies can do now.
- First, consider what your pensions strategy would be in a worst case scenario where you had to show extra liabilities on your balance sheet
- If you are having any ongoing valuation discussions, consider the potential IFRIC 14 impact of any agreed recovery plan contributions beyond 2019
- Consider getting legal advice on whether you are likely to be impacted – particularly if advice hasn’t been sought recently
- Based on this, consider whether you should include any wording within your upcoming year-end disclosures (this is something that the FRC have been specifically saying that UK companies should do)
- Lastly, don’t get caught out but keep track of the situation - this remains an area to watch
For more information, our webinar in October 2016, covered this issue as it was emerging late last year. Click here to access