IAS 19 vs ASC 715: Employee Benefit Accounting

IAS 19 and ASC 715 agree on the broad shape of a defined benefit plan: a projected obligation, plan assets at fair value, a funded status on the balance sheet and a cost that runs through the income statement. They disagree on six mechanics. The table lists each with the paragraph or document that sets it and the practical effect for a US subsidiary that has to report under both.

The rest of the guide takes each row in turn, with a worked example that uses made-up numbers. For the service pages that apply this, see IAS 19 employee benefit valuations and ASC 715 pension and OPEB valuations.

IAS 19 covers all types of employee benefits except share-based payment, which is IFRS 2. The IFRS Foundation page lists four groups: short-term benefits, post-employment benefits (defined contribution and defined benefit plans), other long-term benefits and termination benefits. Termination benefits are recognized at the earlier of when the offer can no longer be withdrawn and when related restructuring costs are recognized (paragraph 165).

ASC 715 is narrower. FASB's ASU 2017-07 says its amendments apply to all employers, including not-for-profit entities, that offer defined benefit pension plans, other postretirement benefit plans or other types of benefits accounted for under Topic 715. A defined contribution 401(k) sits outside the actuarial work in both cases: the expense is the contribution.

Two practical points follow. A US subsidiary that offers a long-service award or a long-term disability benefit may need IAS 19 treatment for items its US GAAP statements book elsewhere, so the group pack's benefit list is longer than the US plan list. And the Codification text of ASC 715 sits behind a login, so we cite the FASB Statements and Updates that the Codification absorbed, as FASB Statement 168 confirms, and the signing actuary confirms the current ASC wording before a report is signed.

Both standards project pay where the plan formula depends on it. IAS 19 names the method: the projected unit credit method for the present value of the obligation, the current service cost and any past service cost (paragraph 67). ASC 715's central measure for a pension plan is the projected benefit obligation, which reflects future compensation levels where the formula uses pay, alongside the accumulated benefit obligation, which does not.

The discount rate is where the wording parts. IAS 19 says the rate is set by reference to market yields at the end of the reporting period on high quality corporate bonds, using government bond yields in currencies without a deep market in such bonds, with currency and term consistent with the obligation (paragraph 83). Statement 87, paragraph 44, says rates should reflect those at which pension benefits could be effectively settled, and it points to the prices of annuity contracts that could settle the obligation, including annuity rates published by PBGC, with the rate of return on high-quality fixed-income investments as a second guide.

In a dual-reporting file the two rates are usually close, but the file should say how each was set and what moved. We record the curve or bond portfolio, the payment timing and last year's rate for both, so the auditor can retrace either selection.

Both standards value plan assets at fair value for the funded status. They split when a plan has a surplus. IAS 19 says the net defined benefit asset is measured at the lower of the surplus and the asset ceiling (paragraph 64), which is the present value of the future benefits available as a reduction in future contributions or a cash refund (paragraph 65). Statement 158 requires an employer to recognize the funded status, plan assets at fair value less the benefit obligation, as an asset or a liability in the statement of financial position, and the Statements we read set no ceiling.

A change in the effect of the asset ceiling is a remeasurement under IAS 19 and goes to OCI (paragraph 127(c)).

The numbers below are illustrative, in $000.

Check: 4,300 - 4,000 = 300, and 300 - 180 = 120. Surpluses are uncommon after the last decade of low rates, but they appear when a plan is overfunded after a sponsor contribution or a rate rise, and then the asset ceiling is the reason the IAS 19 balance sheet differs from the US GAAP one.

IAS 19 puts remeasurements, which are actuarial gains and losses, the return on plan assets above interest income and changes in the asset ceiling effect, in OCI (paragraphs 120 and 127). Paragraph 122 says those amounts are not reclassified to profit or loss later, though the entity may transfer them within equity.

ASC 715 also routes unrecognized gains and losses through OCI, under Statement 158, but then releases them. Statement 87 paragraph 32 requires, as a minimum, amortization of a net gain or loss in AOCI when it exceeds 10 percent of the greater of the projected benefit obligation or the market-related value of plan assets at the start of the year. The minimum is that excess divided by the average remaining service period of active participants. Paragraph 33 lets an employer use any systematic method in place of the minimum, if it is applied consistently to gains and losses and disclosed. For retiree benefits Statement 106 sets the matching corridor.

Here is a one-year illustration with made-up figures. The obligation is 5,000, the market-related value of assets is 4,000 and the net loss in AOCI at the start of the year is 600. The corridor is 10% of the greater, 5,000, which is 500. The excess is 600 - 500 = 100, and with 10 years of average remaining service the minimum amortization is 10.

Under ASC 715, net periodic cost rises by 10 and AOCI falls to 590. Under IAS 19, cost does not change and the remeasurement loss stays in OCI at 600. Over time the two OCI balances drift apart, and the group pack needs the cumulative bridge.

IAS 19 computes net interest by multiplying the net defined benefit liability or asset by the discount rate, using the balance and rate at the start of the year (paragraphs 123 and 123A). Interest income on plan assets is the fair value of the assets at the start of the year times the same discount rate (paragraph 125). The excess of the actual return over that interest income is a remeasurement in OCI.

ASC 715 builds the cost from interest cost on the obligation, an expected long-term return on plan assets applied to a market-related value, and amortization of AOCI amounts. Statement 87, paragraph 30, says the expected return is based on the expected long-term rate of return and the market-related value, which may be fair value or a calculated value smoothed over up to five years. The difference between actual and expected return is an asset gain or loss in AOCI.

The example uses an obligation of 8,000, plan assets of 6,500, a discount rate of 4.5%, an expected return of 6.5% and an actual return of 520 (illustrative, $000).

Check: 8,000 x 4.5% = 360; 6,500 x 4.5% = 292.5; 6,500 x 6.5% = 422.5; 520 - 292.5 = 227.5; 520 - 422.5 = 97.5. The difference in profit or loss is 67.5 + 62.5 = 130, which equals the 2.0-point gap between 6.5% and 4.5% on 6,500. In the US, ASU 2017-07 puts these components outside any operating subtotal. IAS 19 leaves presentation to other standards, now IFRS 18, effective for annual periods beginning on or after 1 January 2027.

The timing of cost is the big difference. IAS 19 recognizes past service cost as an expense at the earlier of the plan amendment or curtailment and the date the entity recognizes related restructuring costs or termination benefits (paragraph 103). For the remainder of the year it uses the assumptions from the remeasurement for current service cost and net interest (paragraphs 99, 122A, 123A and 125).

ASC 715 takes a different route for an amendment. Statement 158 puts prior service cost or credit into OCI when it arises and adjusts AOCI as the amounts are later recognized in net periodic cost. For a benefit improvement of 200 (illustrative), IAS 19 books 200 of expense at the amendment date. ASC 715 books 200 to OCI and, if amortization runs straight-line over 10 years of average remaining service, 20 a year in cost.

Curtailments and settlements are covered by FASB Statement 88. A curtailment is a significant reduction in, or elimination of, defined benefit accruals for present employees' future services. A net curtailment loss is recognized when a curtailment is probable and reasonably estimable, and a net gain when the related employees terminate or the amendment is adopted (paragraph 14). For settlements, gain or loss recognition is permitted but not required when the cost of all settlements in a year is no more than service cost plus interest cost (paragraph 11).

For a freeze, see defined benefit freeze and DB-to-DC conversion costing.

IAS 19 states its disclosure objectives in paragraph 135: explain the characteristics of the plans and the risks, identify the amounts in the financial statements, and describe how the plans may affect the amount, timing and uncertainty of future cash flows. Paragraph 145 requires a sensitivity analysis for each significant actuarial assumption at the end of the reporting period, showing how the obligation would have been affected by changes that were reasonably possible at that date, and paragraph 146 asks for a description of any asset-liability matching strategies (see pension asset-liability and cash flow studies).

ASC 715's list is in Subtopic 715-20. ASU 2018-14 changed it in August 2018. It removed the amounts in AOCI expected to be recognized in cost over the next fiscal year, the amount and timing of plan assets expected to be returned to the employer, and, for public entities, the effect of a one-percentage-point change in assumed health care cost trend rates. It added the weighted-average interest crediting rates for cash balance plans and an explanation of the reasons for significant gains and losses in the obligation. It took effect for fiscal years ending after December 15, 2020 for public business entities and December 15, 2021 for all other entities.

In practice a US subsidiary that files US GAAP statements and sends IAS 19 figures to its parent builds two disclosure tables from one set of workpapers. The sensitivity table is the piece IAS 19 asks for and US GAAP no longer asks for on health care trend, so the group template may carry a table the US note doesn't.

The bridge from ASC 715 to IAS 19 has seven lines in most files. Each should show the amount, the cause and the paragraph that creates it.

• Discount rate, where the two selections differ.
• Net interest against interest cost less expected return.
• Amortization of net gains and losses, which IAS 19 doesn't have.
• Prior service cost amortization against immediate past service cost.
• The asset ceiling, where a surplus exists.
• Curtailment and settlement timing.
• The cumulative OCI difference carried forward.

The census, plan document and asset statement are shared, but the two valuations are separate calculations, which is why a dual reporter pays for two sets of results from one data file. Your parent's group accounting manual decides which basis each reporting package uses; your own auditor decides whether the US GAAP file is enough.

Finbryn prepares the data reconciliation, the calculations and the bridge, in the group's template where there is one. General information only. The valuations behind either standard are reviewed and signed by a credentialed actuary named in the engagement letter. The month-end side of the same job, the monthly bridge and group pack, is covered under IFRS reporting packs for US subsidiaries.

For governments, the equivalent is a GASB 75 OPEB valuation.