IAS 19R adoption: common issues
IAS 19R has resulted in a number of changes to the accounting for employee benefits, in particular by those companies with a defined benefit pension scheme. To help those yet to prepare their accounts, this article aims to highlight certain issues we have encountered in practice, for example, entities omitting the disclosure explaining the effect of the amendments on the current year and continuing to use old terminology.
FRC issues proposals to amend FRS 102: more debt instruments measured at amortised cost
The Financial Reporting Council (FRC) has issued FRED 54 Basic financial instruments, which sets out its draft proposals for reconsidering the boundary between basic and complex debt instruments for those entities that will apply FRS 102. The proposals would allow more debt instruments to be measured at amortised cost rather than fair value.
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Many entities have applied the International Accounting Standards Board’s (IASB) amendments to IAS 19 Employee Benefits (IAS 19R) for the first time in their December 2013 year-end accounts. The main effect of the amended standard is on the accounting for and disclosure of post-employment benefits. The changes will represent a significant change for many and, in order to help those yet to prepare their accounts, this article aims to highlight certain issues we have encountered in practice.
The key changes brought about by IAS 19R are summarised below:
- ‘Net interest cost/income’ replaces both expected return on plan assets and interest cost.
- Clarification on the treatment of plan administration costs that are now recognised immediately in profit and loss (P&L) (except for those admin costs that arise on managing plan assets that are also recognised as incurred but as a deduction from the return on plan assets).
- Immediate recognition of past service cost.
- Expanded disclosure requirements focusing on risk assessment, sensitivities and expected future cash flows.
In the table below, we highlight some of the more common issues encountered by entities upon first-time adoption of the amended standard.
||Considerations for first-time adopters
|Net interest cost/income
Under previous IAS 19, interest cost and an expected return on plan assets were recognised within the P&L, either gross within finance income/costs or as a net amount in operating expenses.
Under IAS 19R, interest cost and expected return on plan assets have been replaced by a single measure called ‘net interest’. This is calculated by multiplying the net defined benefit liability (asset) by the discount rate.
Any difference between the actual and expected return on plan assets was recognised in accordance with the entity’s accounting policy for actuarial gains and losses; for UK companies, this was generally recognised within OCI.
|The amended standard does not specify where in the P&L this item should be recognised. When it is included within finance income or finance costs, a single ‘net interest’ amount should be recognised in either line item as appropriate. This may be a change for entities that previously presented separate amounts for ‘interest income’ and ‘interest expense’ within finance income and finance costs respectively.
|Disclosure of changes in accounting policy arising from a new standard
||The adoption of IAS 19R represents a change in accounting estimate for most entities with defined benefit pension plans. As such, entities will need to apply the disclosure requirements of IAS 8 for a change in accounting policy.
||Per IAS 8, the amount of the adjustment, e.g. arising from one of the key changes summarised above, must be disclosed for each financial statement line item, for both the current period and each prior period presented. Entities may also need to disclose the adjustment to earnings per share (if required).
IAS 19R introduces extensive new disclosures and replaces the disclosure requirements within previous IAS 19. The amendment introduces for the first time disclosures around, for example:
- a sensitivity analysis for each significant actuarial assumption disclosed;
- funding arrangements and policy that affect future contributions; and
- information about the maturity profile of the defined benefit obligation.
Entities wishing to ‘roll forward’ prior year disclosures should consider the extensive new disclosure requirements within IAS 19R. Although it may be possible to roll forward certain disclosures, entities need to be aware that additional and entirely new information will need to be provided.
Our Guide to financial statements: illustrative disclosures or Guide to financial statements: disclosure checklist offer further guidance on the new disclosure requirements.
IAS 19R introduces revised terminology. For example, actuarial gains and losses form part of the wider class of newly-defined ‘remeasurements’ that comprise:
- actuarial gains and losses on the defined benefit obligation;
- the difference between actual investment returns and the return implied by the net interest cost; and
- the effect of the asset ceiling, excluding any related amount included in the net interest cost.
Entities should update their accounts for the revised terminology and apply the changes consistently to all parts of the financial statements affected. Depending on the accounting policy applied previously, we may expect the amended standard to change the description of line items in the primary statements (e.g. OCI and the statement of changes in equity) and the related notes (e.g. finance income, finance cost, change of accounting policy disclosures and employee benefits notes).
IAS 19R is effective for periods beginning on or after 1 January 2013. Retrospective application is required (i.e. restatement of comparative financial information) and this may lead to disclosure of a third balance sheet when applicable. We would expect that, when comparatives are restated to reflect the amendments, comparative primary financial statements and any related notes have the heading ‘restated’. Further, the restatement may also affect other parts of the financial statements e.g. EPS disclosures, historical summaries, etc.
KPMG has various publications and resources to assist entities applying IAS 19R for the first time. These are available for download free of charge and include:
Alternatively, please speak to your usual KPMG contact.
Under FRS 102, entities have a choice to apply either Sections 11 and 12 of FRS 102, or the recognition and measurement requirements of IAS 39 Financial instruments: recognition and measurement and/or IFRS 9 Financial instruments along with the disclosure requirements of FRS 102. For entities with financial instruments that are considering their accounting policy choice, the exposure draft on basic financial instruments may affect this decision.
Under Sections 11 and 12 of FRS 102 debt instruments are classified as either ‘Basic financial instruments’ or ‘Other financial instruments’. Basic financial instruments are generally measured at amortised cost whilst other debt instruments are measured at fair value through profit or loss. Measurement at amortised cost is permitted only to the extent that the debt instrument meets certain prescriptive criteria. The current requirements for amortised cost classification are widely viewed as being overly restrictive. They could even result in some instruments being measured at fair value under UK GAAP, when IFRS might measure them at amortised cost.
In order to address this issue, the Financial Reporting Council (FRC) has published Financial Reporting Exposure Draft (FRED) 54 Draft Amendments to FRS 102 Basic financial instruments. The FRED proposes to make the criteria less restrictive and thus allow a wider range of debt instruments to be measured at amortised cost. Debt instruments that fail the revised criteria would continue to be measured at fair value.
Instruments that would qualify for amortised cost measurement under the proposals include loans at standard variable rates, including those with initial discount periods, capped and floored rates. Mortgages linked to a house price index would continue to be measured at fair value.
The FRC’s consultation period for the proposals runs until the end of April 2014 and the final amendment is expected to be published this summer. The draft amendments are proposed to be effective for financial years beginning on or after 1 January 2015, the same effective date as FRS 102.
Links to guidance and examples of how we can help may be found on our New UK GAAP web page. Alternatively, please speak to your usual KPMG contact.
KPMG in the UK has recently published Breaking News UK, a monthly publication that summarises key developments in UK and International Financial Reporting Standards and UK company law. You may subscribe by sending an email to Breaking News UK.
KPMG IFRG Limited has published the following since the November/December 2013 Update, which are available on its web site at www.kpmgifrg.com:
- First Impressions: IFRS 9 (2013) – Hedge accounting and transition (December 2013)
- IFRS Guide to annual financial statements – Illustrative disclosures for investment funds (December 2013)
KPMG IFRG Limited also publishes In the Headlines, which provides information in relation to new exposure drafts and standards issued by the IASB, as well as any other relevant developments affecting current and future IFRS reporters.
In the Headlines, Issue 1 2014 – Accounting for rate-regulated activities
In the Headlines, Issue 2 – Review of business combinations accounting
In the Headlines, Issue 3 – Bridging the GAAP