ED INT FRS Multi-Employer Plans

INTERPRETATION OF [DRAFT] FRS

MULTI-EMPLOYER PLANS

Comments to be received by 9 June 2004

INVITATION TO COMMENT

The Council on Corporate Disclosure and Governance (CCDG) invites comments on any aspect of this draft Interpretation Multi-employer Plans. It would particularly welcome answers to the questions below. Comments are most helpful if they indicate the specific paragraph to which they relate, contain a clear rationale and, where applicable, provide a suggestion for alternative wording.

Comments should be submitted in writing so as to be received no later than 9 June 2004 preferably by email to: or addressed to:

Council on Corporate Disclosure and Governance

c/o Accounting and Corporate Regulatory Authority

10 Anson Road #05-01/15

InternationalPlaza

Singapore 079903

Fax: 6225 1676

Question 1

In your experience, are participants in defined benefit multi-employer plans able to obtain the information necessary to apply defined benefit accounting? If not, what causes the information not to be available? How do such entities monitor and manage the risks involved in their participation in the plan?

Question 2

Does application of defined benefit accounting by participants in multi-employer plans provide useful information compared with the disclosure of substantial information about the plan as required by paragraphs 30(b) and (c) of FRS 19?

Question 3

The consensus requires a participant in a multi-employer plan to apply defined benefit accounting by, if possible:

(a)measuring the plan in accordance with FRS 19 using assumptions that apply to the plan as a whole; and

(b)allocating the plan so that the entity recognises an asset or liability that reflects the extent to which the surplus or deficit in the plan will affect its future contributions.

Do you agree that this is an appropriate way for a participant in a multi-employer plan to apply defined benefit accounting? If not, how should defined benefit accounting be applied?

Question 4

The appendix to the draft Interpretation sets out a proposed amendment to FRS 19, narrowing the scope of the definition of state plans and requiring them to be accounted for as defined contribution plans. Plans that are excluded from the definition of state plans will be multi-employer plans.

Do you agree with the narrowed scope of the definition of state plans?

Do you agree that state plans defined as proposed should be accounted for as defined contribution plans?

INTERPRETATION OF [DRAFT] FRS X

Multi-employer Plans

Interpretation [draft] FRS X Multi-employer Plans ([draft] INT FRS X) is set out in paragraphs 1-21. [Draft] INT FRS X is accompanied by an amendment to FRS 19 and a Basis for Conclusions. The scope and authority of Interpretations are set out in the CCDG Preface to the Interpretation of Financial Reporting Standards.

Reference:

FRS 19 Employee Benefits

Background

1This [draft] Interpretation provides guidance on the requirements in FRS 19 Employee Benefits relating to multi-employer plans. A multi-employer plan is defined as a plan (other than a state plan) that:

(a)pools the assets contributed by various entities that are not under common control; and

(b)uses those assets to provide benefits to employees of more than one entity, on the basis that contribution and benefit levels are determined without regard to the identity of the entity that employs the employees concerned.

2Paragraph 29 of FRS 19 states that where a multi-employer plan is a defined benefit plan an entity should account for its proportionate share of the defined benefit obligation, plan assets and cost associated with the plan in the same way as for any other defined benefit plan.

3Paragraph 30 of FRS 19 states that when sufficient information is not available to use defined benefit accounting for a multi-employer plan that is a defined benefit plan, an entity should account for the plan as if it were a defined contribution plan and give some additional disclosures.

4Paragraph 32 of FRS 19 goes on to state that an entity may not be able to identify its share of the underlying financial position and performance of the plan with sufficient reliability for accounting purposes if:

(a)the entity does not have access to information about the plan that satisfies the requirements of FRS 19; or

(b)the plan exposes the participating entities to actuarial risks associated with the current and former employees of other entities, with the result that there is no consistent and reliable basis for allocating the obligation, plan assets and cost to individual entities participating in the plan.

Issue

5The issues addressed in this [draft] Interpretation are:

(a)when do plans meet the definition of a multi-employer plan?

(b)how should a participant in a multi-employer plan apply the requirements in FRS 19 relating to defined benefit plans?

(c)when might the information necessary for defined benefit accounting not be available?

(d)how should state plans be treated?

Consensus

When do plans meet the definition of a multi-employer plan?

6To meet the definition of a multi-employer plan, the contribution and benefit levels must be determined without regard to the identity of the entity that employs the employees concerned. This means that there must be some sharing between the participants in the plan of the actuarial risks associated with their current and former employees. In other words, participation in a multi-employer plans creates different assets and liabilities for the participating employers from those that would arise for those employers if they had single entity plans.

7As paragraph 33 of FRS 19 states, multi-employer plans are distinct from group administration plans (sometimes called multiple employer plans), which are merely an aggregation of single employer plans and which do not expose the participating employers to the actuarial risks associated with current and former employees of other entities.

How should a participant in a defined benefit multi-employer plan apply the requirements in FRS 19 relating to defined benefit accounting?

8Defined benefit accounting in accordance with FRS 19 requires an entity to measure the assets and liabilities in the plan and to determine the resulting components of the defined benefit cost.

9To apply defined benefit accounting to a multi-employer plan it is necessary to measure the liabilities in the plan on the basis of assumptions that apply to the plan as a whole. So, for example, the measurement of the plan liabilities shall reflect salary expectations, staff turnover, life expectancy etc for the whole membership, not the specific entity. The plan assets shall be measured at fair value and the assumptions required for the expected return on assets shall apply to the plan as a whole. (Guidance on when the information necessary to do this is available is given in paragraphs 16 and 17 below).

10Having measured the plan as a whole[*], the entity shall then determine whether there is a consistent and reliable basis of allocation of the plan across the participants. Guidance on when this can be done is given in paragraph 18.

11The amounts allocated to the entity for the components of cost shall be recognised in accordance with the requirements of FRS 19. In particular, the options for deferred recognition of actuarial gains and losses are available. The assumptions made for this purpose about the average remaining service lives may relate to the entity alone or to the plan as a whole.

12Information may be available to determine the surplus or deficit in the plan but not to analyse the change in the surplus or deficit into the cost components required by FRS 19 for single entity plans. If this is the case, the entity shall determine whether there is a consistent and reliable basis of allocation of the surplus or deficit across the participants. If there is such a basis of allocation the entity shall recognise its share of the surplus or deficit in the balance sheet and shall recognise the total change in value of the entity’s share of the surplus or deficit immediately in profit or loss.

When might the information necessary for defined benefit accounting not be available?

13As noted above, paragraph 30 of FRS 19 states that when sufficient information is not available to use defined benefit accounting for a multi-employer plan that is a defined benefit plan, an entity should account for the plan as if it were a defined contribution plan and give some additional disclosures.

14In the context of paragraph 30, ‘is not available’ means ‘cannot be obtained’. An entity shall make every practicable[*] effort to apply defined benefit accounting to multi-employer plans in which it participates.

15Paragraph 32 of FRS 19 states that an entity may not be able to identify its share of the underlying financial position and performance of the plan with sufficient reliability for accounting purposes if:

(a)the entity does not have access to information about the plan that satisfies the requirements of the Standard; or

How to interpret paragraph 32(a) of FRS 19

16An entity shall not assume that, simply because it is a participant in a multi-employer plan, it does not have access to the information referred to in paragraph 32(a) of FRS 19. Sources of such information include statements from the plan to individual entities or accounts for the plan as a whole. When necessary, roll forward techniques may be used to estimate information as at the balance sheet date. If the information given by the plan is not on the same measurement basis as required by FRS 19, it may be possible either to adjust the information given to estimate the FRS 19 measurement basis, or for new measurements to be performed on the basis of raw data.

17When an entity is a dominant participant or one of a few participants in a plan, it should generally be assumed that the necessary information can be obtained. Given this, it will be rare for such participants not to be able to give substantial information about the plan in accordance with paragraph 30(c) of FRS 19, even if they are unable to determine a consistent and reliable basis for allocation. When the entity is one of many participants whose interest in the plan is small relative to the plan as a whole, obtaining the information may be more difficult.

How to interpret paragraph 32(b) of FRS 19

18The objective of the allocation of the plan to participating entities is for an entity to recognise an asset or liability that reflects the extent to which the surplus or deficit in the plan will affect its future contributions. Where possible, the allocation shall be based on terms of the plan including those terms relating to the responsibility to fund shortfalls or the ability to benefit from overfunding. For example, the allocation may be based on an amount reflecting any penalty for withdrawing from the plan. If it is not possible to determine from the terms of the plan the extent to which the surplus or deficit in the plan will affect future contributions, there is no consistent and reliable basis for allocation.

How should state plans be treated?

19State plans shall be treated as defined contribution plans in accordance with paragraphs 36-38 of FRS 19, as amended by the Appendix to this [draft] Interpretation.

Effective date

20An entity shall apply this [draft] Interpretation for annual periods beginning on or after [1 January 2005]. Earlier adoption is encouraged. If an entity applies this [draft] Interpretation for a period beginning before [1 January 2005], it shall disclose that fact.

Transitional provisions

21At the date of the beginning of the earliest comparative period in the financial statements in which the [draft] Interpretation results in defined benefit accounting being applied to a plan for the first time, an entity shall measure and recognise the net employee benefit asset or liability under the plan in accordance with FRS 19 as interpreted by this [draft] Interpretation, except that no actuarial gains or losses shall remain unrecognised. The change to any previously recognised net employee benefit asset or liability shall be recognised as an adjustment to opening retained earnings. The transitional provisions in FRS 19 do not apply.

Appendix

Amendment to FRS 19 Employee Benefits

The amendment in this [draft] appendix shall be applied for annual periods beginning on or after [1 January 2005]. If an entity applies this [draft] Interpretation for an earlier period, the amendment shall be applied for that earlier period.

A1Paragraph 36 of FRS 19 Employee Benefits shall be amended to read as follows:

36.An entity shall account for a state plan as a defined contribution plan.

A2Paragraph 37 of FRS 19 shall be amended to read as follows:

37.State plans are established by legislation to cover all entities (or all entities in a particular category, for example, a specific industry) and are operated by national or local government. Some plans established by an entity provide both compulsory benefits, which are a substitute for benefits that would otherwise be covered under a state plan, and additional voluntary benefits. Such plans are not state plans.

A3Paragraph 38 of FRS 19 shall be amended to read as follows:

38.State plans are defined benefit or defined contribution in nature based on the entity’s obligation under the plan. Many state plans are funded on a pay-as-you-go basis: contributions are set at a level that is expected to be sufficient to pay the required benefits falling due in the same period; future benefits earned during the current period will be paid out of future contributions. Nevertheless, in most state plans, the entity has no legal or constructive obligation to pay those future benefits: its only obligation is to pay the contributions as they fall due and if the entity ceases to employ members of the state plan, it will have no obligation to pay the benefits earned by its own employees in previous years. For this reason, state plans are normally defined contribution plans. Furthermore, in the rare cases when a state plan is a defined benefit plan, an entity is unlikely to be able to obtain the information necessary and make the allocations necessary to apply defined benefit accounting. However, if the state plan is a defined benefit plan, the information required by paragraph 30(b) and (c) shall be disclosed.

Basis for Conclusions

This Basis for Conclusions accompanies, but is not part of, the draft Interpretation.

BC1This Basis for Conclusions summarises the considerations in reaching a consensus. Greater weight was given to some factors than to others.

BC2The concern that the paragraphs in FRS 19 on multi-employer plans have been interpreted to allow all participating entities in multi-employer plans an automatic exemption from defined benefit accounting was asked to be addressed. The uncertainty over when the definition of multi-employer plans is met and how defined benefit accounting should be applied to such plans was noted.

BC3It was agreed that a draft Interpretation that proposes guidance on when a plan meets the definition of a multi-employer plan, how defined benefit accounting should be applied to such plans and, in the light of that guidance, when the necessary information might not be available be published. However, it was agreed that the information necessary for defined benefit accounting for state plans operated by national or local government would be available so rarely that those plans should always be treated as defined contribution plans. It was agreed that the amendment to FRS 19 set out in the Appendix be proposed.

The definition of a multi-employer plan

BC4The definition of a multi-employer plan in FRS 19 requires the contribution and benefit levels to be determined without regard to the identity of the entity that employs the employees concerned. It was agreed that the objective of the definition is to distinguish multi-employer plans, in which the actuarial risks (including investment risks) are shared across participants, from other situations in which administration or investment management may be shared but participants’ risks are the same as in a single entity plan. This latter situation is sometimes referred to as a ‘multiple employer’ plan.

Applying defined benefit accounting to multi-employer plans

BC5Multi-employer plans are plans that share risks across participants. This means that the asset or liability that arises from a multi-employer plan will differ from the asset or liability that would arise from a single-entity plan.

BC6In particular, it was noted that because the plan assets are pooled and the contribution levels are set without regard to the identity of the entity that employs the employees concerned, the entity’s share of the plan assets and the entity’s share of the plan liabilities will only by chance equal the plan assets and plan liabilities that arise directly from the entity’s own contributions and service by the entity’s own employees. Further, it was noted that, because the benefit levels are also set without regard to the identity of the entity that employs the employees concerned, assumptions specific to the employees of the entity are not relevant in measuring the plan liabilities.

BC7It was concluded, therefore, that the multi-employer plan should be measured based on assumptions that apply to the plan as a whole. The entity should then determine its share of the plan assets, plan liabilities and cost components based on the terms of its participation.