Softer approach to accounting for surplus under IFRIC 14

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A forthcoming amendment to the accounting standard interpretation IFRIC 14 will clarify the circumstances in which an employer can recognise an accounting surplus on its balance sheet.

Unconditional right to refund

Currently, in order to be able to recognise a surplus under IFRIC14, there must be an economic benefit available to the company – a reduction in contributions in the case of a scheme open to future accrual, and/or the company has an unconditional right to a refund of the surplus at some point in the future.

Just what constitutes an “unconditional right to refund of surplus” has been the subject of much recent discussion at the IFRS.  Now, its Interpretations Committee has proposed an amendment to IFRIC 14 which will confirm that a company has an unconditional right to a refund of a surplus if no third parties can refuse its request for a refund in at least one of the following situations:

  • while the scheme is ongoing, without requiring that the liabilities be settled;
  • assuming that the liabilities are settled gradually over time until all members have left the scheme; or
  • in the event of full settlement of the liabilities (ie on winding-up).
"The implications of these changes appear to be less severe than previously indicated, in that the Interpretations Committee is not seeking to prohibit recognition of surplus in schemes where there is no future accrual of benefits."

Further implications

A company cannot rely on the second case above if the trustee has a unilateral right to trigger wind-up of the scheme.  We believe this is a rare situation for UK schemes.

If an unconditional right is established, the amount that can be recognised would be reduced to the extent that the Trustee has a unilateral right to use part or all of a surplus for other purposes (for example to improve benefits).  This is more likely to prove an obstacle in the UK – many schemes’ rules will provide for augmentation of members’ benefits, perhaps up to a limit, and this could require additional work to assess the extent of a reduction to the surplus (if, indeed, the trustees do not have power to use the whole of the surplus in this way).

There had been a suggestion that a trustee power to purchase annuities might result in a restriction of the amount of surplus that would be available to the company.  However, the Interpretations Committee has said that future investment actions, such as a power to purchase a buy-in policy, should not affect the ability to recognise a current surplus.

Actions for employers

The implications of these changes appear to be less severe than previously indicated, in that the Interpretations Committee is not seeking to prohibit recognition of surplus in schemes where there is no future accrual of benefits.  The changes are expected to be made separately from the IFRS annual improvements process and, once they are confirmed, employers should review the rules of their scheme and revisit any legal opinion previously obtained about the ability to recognise a surplus.

For more information or to discuss the issues raised in this blog, please contact Martin Hooper on 020 7776 2200 or martin.hooper@barnett-waddingham.co.uk.