IFRS vs US GAAP Employee benefits

IFRS vs US GAAP Employee benefits

The following discussion captures a number of the more significant GAAP differences under both the impairment standards. It is important to note that the discussion is not inclusive of all GAAP differences in this area.

The significant differences and similarities between U.S. GAAP and IFRS related to accounting for investment property are summarized in the following tables.

Standards Reference

US GAAP1

IFRS2

715 Compensation – Retirement benefits

710-10 Compensation- General – Overall

712-10 Compensation – Nonretirement Postemployment Benefits – Overall

IAS 19 Employee Benefits

IFRIC 14 The limit on a defined benefit asset minimum funding requirements and their interaction

Introduction

The guidance under US GAAP and IFRS as it relates to employee benefits contains some significant differences with potentially far-reaching implications.

This narrative deals with employee benefits provided under formal plans and agreements between an entity and its employees, under legislation or through industry arrangements, including those provided under informal practices that give rise to constructive obligations.

For a discussion of the recognition of other costs associated with a restructuring, including voluntary redundancies, see a restructuring.

Links to detailed observations by subject

1 Short-term employee benefits
1.1 Compensated absences / Short-term paid absences  1.2 IFRS vs US GAAP Profit-sharing and bonus plans 1.3 IFRS vs US GAAP Low-interest loans
2. IFRS vs US GAAP Post-employment benefits / Post-employment and post-retirement benefits
3. Defined benefit vs defined contribution plans
3.1 Severance payments 3.2 Minimum benefit guarantees 3.3 Multi-employer and multiple-employer plans
3.4 Group plans 3.5 State plans
4. Accounting for defined contribution plans
5. Accounting for defined benefit plans
5.1 Actuarial valuation method 5.2 Plan assets 5.3 Defined benefit cost
5.4 Current service cost 5.5 Past service cost 5.6 Amendments
5.7 Curtailments 5.8 Settlements 5.9 Interest cost and expected return on plan assets / Net interest
5.10 Actuarial gain or loss / Remeasurements 5.11 Presentation of cost components / Presentation of service cost and net interest 5.12 Asset ceiling
5.13 Insured benefits 5.14 Current salary policies 5.15 Reimbursement rights
6. Other long-term employee benefits 7. Reclassification (short >< long)
8. Termination benefits

Overview

US GAAP

IFRS

Unlike IFRS Standards, US GAAP does not contain specific guidance on short-term employee benefits other than compensated absences. However, accrual accounting principles are generally applied in accounting for short-term employee benefits.

Short-term employee benefits’ are employee benefits that are expected to be settled wholly within 12 months of the end of the period in which the services have been rendered, and are accounted for using normal accrual accounting.

Unlike IFRS Standards, post-employment benefits are divided into ‘post-retirement benefits’ (provided during retirement) and ‘other post-employment benefits’ (provided after the cessation of employment but before retirement).

The accounting for post-employment benefits depends on the type of benefit provided, unlike IFRS Standards

Post-employment benefits’ are employee benefits that are payable after the completion of employment (before or during retirement).

Like IFRS Standards, a ‘defined contribution plan’ is a post-retirement benefit plan under which the employer pays specified contributions into a separate entity and has no further obligations. All other post-retirement plans are ‘defined benefit plans’. However, unlike IFRS Standards, other post-employment benefit plans do not have to be classified as either defined contribution or defined benefit plans.

A ‘defined contribution plan’ is a post-employment benefit plan under which the employer pays fixed contributions into a separate entity and has no further obligations. All other post-employment plans are ‘defined benefit plans’.

Like IFRS Standards, contributions to a defined contribution plan are accounted for on an accrual basis.

Contributions to a defined contribution plan are accounted for on an accrual basis.

Accounting for defined benefit plans involves the following steps:

  • determining the present value of the defined benefit obligation by applying an actuarial valuation method, which differs in some respects from IFRS Standards;
  • deducting the fair value of any plan assets, like IFRS Standards;
  • unlike IFRS Standards, there is no adjustment for any effect of limiting a net defined benefit asset to the asset ceiling; and
  • determining service costs, net interest and remeasurements of the net defined benefit liability (asset), which in a number of cases differ from IFRS Standards in terms of measurement, recognition and presentation.

Accounting for defined benefit plans involves the following steps:

  • determining the present value of the defined benefit obligation by applying an actuarial valuation method;
  • deducting the fair value of any plan assets;
  • adjusting the amount of the deficit or surplus for any effect of limiting a net defined benefit asset to the asset ceiling; and
  • determining service costs, net interest and remeasurements of the net defined benefit liability (asset).

IFRS vs US GAAP Employee benefits

The liability and expense are generally measured actuarially under the projected unit credit method for pay-related plans, like IFRS Standards; and under the traditional unit credit method (projected unit credit method without future increases in salary) for certain cash balance plans, unlike IFRS Standards.

The projected unit credit method is used to determine the present value of the defined benefit obligation and the related current service cost and, if applicable, any past service cost.

Like IFRS Standards, to qualify as plan assets, assets need to meet specific criteria. However, unlike IFRS Standards, in general there is no requirement to affirmatively demonstrate that the assets would be unavailable to the entity’s creditors in bankruptcy.

To qualify as plan assets, assets need to meet specific criteria, including a requirement that they be unavailable to the entity’s creditors (even in bankruptcy).

Like IFRS Standards, plan assets include insurance policies issued to the plan by the sponsor or a related party of the sponsor if the policies are transferable.

Insurance policies issued to the sponsor meet the definition of plan assets if they are issued by a party unrelated to the entity and meet certain other criteria. Insurance policies issued to the plan meet the definition of plan assets if they are transferable and meet certain other criteria.

Like IFRS Standards, assets that meet the definition of plan assets and the related liabilities are presented on a net basis in the statement of financial position.

Assets that meet the definition of plan assets, including qualifying insurance policies, and the related liabilities are presented on a net basis in the statement of financial position.

Unlike IFRS Standards, the recognition of an asset in respect of a defined benefit plan is not restricted.

If a defined benefit plan is in surplus, then the amount of any net asset recognised is limited to the present value of any economic benefits available in the form of refunds from the plan or reductions in future contributions to the plan (the ‘asset ceiling’).

Unlike IFRS Standards, the funded status is recognised as a liability if the plan is underfunded; the liability is not subject to additional adjustments related to minimum funding requirements.

Minimum funding requirements to cover existing shortfalls give rise to a liability if payments under the requirement would create a surplus in excess of the asset ceiling.

Like IFRS Standards, benefits are attributed to periods of service in accordance with the plan’s benefit formula unless that formula is back-end loaded, in which case a straight-line attribution is used instead.

Benefits are attributed to periods of service in accordance with the plan’s benefit formula unless that formula is back-end loaded, in which case straight-line attribution is used instead.

Unlike IFRS Standards, curtailment gains are recognised when they occur. Also unlike IFRS Standards, curtailment losses are recognised when they are probable.

Curtailments and other plan amendments are recognised at the same time as the related restructuring or related termination benefits if these events occur before the curtailment or other plan amendments occur.

Like IFRS Standards, ‘multi-employer plans’ are post-retirement plans that pool the assets contributed by various entities to provide benefits to the employees of more than one entity. However, unlike IFRS Standards, all multi-employer plans are accounted for as defined contribution plans, supplemented with additional disclosures.

Multi-employer plans’ are post-employment plans that pool the assets contributed by various entities that are not under common control to provide benefits to employees of more than one entity. Such plans are classified as defined contribution or defined benefit plans following the above definitions. However, if insufficient information is available to permit defined benefit accounting, then the plan is treated as a defined contribution plan and additional disclosures are required.

Unlike IFRS Standards, even if there is an agreement that determines how the surplus in a multi-employer plan would be distributed or a deficit in the plan funded, an asset or liability is not recognised until the liability is assessed or the refund received.

If defined contribution plan accounting is applied to a multi-employer defined benefit plan and there is an agreement that determines how a surplus in the plan would be distributed or a deficit in the plan funded, then an asset or liability that arises from the contractual agreement is recognised.

Unlike IFRS Standards, there is specific guidance on the application of defined benefit accounting to certain plans that would be defined contribution plans except that they contain minimum benefit guarantees. Depending on the form of the minimum guarantee, the plan would be accounted for as a defined benefit plan or as a cash balance plan.

There is no specific guidance on the application of defined benefit accounting to plans that would be defined contribution plans except that they contain minimum benefit guarantees. In our view, a minimum benefit guarantee causes a plan to be a defined benefit plan.

Unlike IFRS Standards, termination benefits are categorised into different types of benefits: ongoing benefit arrangements, contractual terminations, special terminations and one-time terminations.

Termination benefits’ are employee benefits provided as a result of either an entity’s decision to terminate an employee’s employment before the normal retirement date or an employee’s decision to accept an offer of benefits in exchange for the termination of employment.

Unlike IFRS Standards, there is not a single model for the recognition of termination benefits, and the timing of recognition depends on the category of termination benefit.

A termination benefit is recognised at the earlier of the date on which the entity recognises costs for a restructuring that includes the payment of termination benefits and the date on which the entity can no longer withdraw the offer of the termination benefits.

Unlike IFRS Standards, US GAAP does not distinguish between long- and short-term employee benefits.

Other long-term employee benefits’ are all employee benefits other than short-term benefits, post-employment benefits and termination benefits.

Like IFRS Standards, the expense for long-term employee benefits is accrued over the service period; however, the computation may differ from IFRS Standards.

The expense for other long-term employee benefits, calculated on a discounted basis, is usually accrued over the service period. The computation is similar to defined benefit plans.

IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits  IFRS vs US GAAP Employee benefits 

1 Short-term employee benefits

US GAAP

IFRS

Unlike IFRS Standards, US GAAP does not contain specific guidance on short-term employee benefits other than compensated absences – e.g. vacation accruals. However, accrual accounting principles are generally applied in accounting for short-term employee benefits, which is likely to be the same as IFRS Standards in practice. [710-10-25-1]

‘Short-term employee benefits’ are those benefits (other than termination benefits) that are expected to be settled wholly within 12 months of the end of the period in which the employees render the related service, and are accounted for using normal accrual accounting. [IAS 19.8–11]

IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits  IFRS vs US GAAP Employee benefits

1.1 Compensated absences / Short-term paid absences

US GAAP

IFRS

Like IFRS Standards, an employer accrues the obligation for paid absences if the obligation both relates to employees’ past services and vests or accumulates. Like IFRS Standards, a liability for the expected benefit is recognised whether or not the benefits are vesting. Whether the employee may leave before they use the non-vested benefit impacts the measurement of the benefit, like IFRS Standards. [710-10-25-1]

An entity accrues the obligation for paid absences if the obligation both relates to employees’ past services and accumulates. A liability is recognised whether or not the employees are entitled to payment for unused benefits if they leave. However, whether the employee may leave before they use their entitlement impacts the measurement of the benefit. [IAS 19.13, IAS 19.15–16]

IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits  IFRS vs US GAAP Employee benefits

1.2 IFRS vs US GAAP Profit-sharing and bonus plans

US GAAP

IFRS

Like IFRS Standards, a provision is recognised for the expected cost of bonus or profit-sharing plans if a reliable estimate of the obligation can be made. However, unlike IFRS Standards, there is no requirement for there to be a legal or constructive obligation; notwithstanding this difference, we would not generally expect significant differences from IFRS Standards in practice. [712-10-25-4]

A provision is recognised for the expected cost of bonus or profit-sharing plans if an entity has a present legal or constructive obligation and a reliable estimate of the obligation can be made. [IAS 19.19]

Like IFRS Standards, the amount provided for is the best estimate of the amount that the entity expects to pay in cash. Like IFRS Standards, if payment is conditional (e.g. on the employee remaining in service), then the conditions and the possibility of forfeiture are taken into account in measuring the obligation. [712-10-25-4]

The amount provided is the best estimate of the undiscounted amount that the entity expects to pay. If payment is conditional (e.g. on the employee remaining in service), then the conditions and the possibility of forfeiture are taken into account in measuring the obligation. [IAS 19.20, BC55]

IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits  IFRS vs US GAAP Employee benefits

1.3 IFRS vs US GAAP Low-interest loans

US GAAP

IFRS

Like IFRS Standards, loans granted to employees at lower than market interest rates are measured at fair value – i.e. the present value of the anticipated future cash flows discounted using a market interest rate (see chapter 7.7). Like IFRS Standards, the employee benefit is the difference between the fair value of the loan and the amount advanced to the employee.

Loans given to employees at lower than market interest rates are measured at fair value – i.e. the present value of the anticipated future cash flows discounted using a market interest rate (see chapter 7.7). In our view, the employee benefit is the difference between the fair value of the loan and the amount advanced to the employee. [IFRS 9.5.1.1]

IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits  IFRS vs US GAAP Employee benefits

2. IFRS vs US GAAP Post-employment benefits /

IFRS vs US GAAP Post-employment and post-retirement benefits

US GAAP

IFRS

Unlike IFRS Standards, ‘post-employment benefits’ include only benefits payable after employment but before retirement; ‘post-retirement benefits’ are benefits payable after retirement. [712, 715]

‘Post-employment benefits’ are employee benefits (other than termination benefits and short-term employee benefits) that are payable after completion of employment (before or during retirement) – e.g. pensions, lump-sum payments on retirement and medical benefits after employment. [IAS 19.5(b), IAS 19.8]

Like IFRS Standards, post-employment and post-retirement benefit plans include both arrangements in formal plans and informal arrangements that constitute substantive plans. [712-10-15-3, 715-10-15-3]

Post-employment benefit plans include both formal arrangements and informal practices that give rise to constructive obligations. [IAS 19.61]

Unlike IFRS Standards, US GAAP distinguishes between post-employment (after employment but before retirement) benefits and post-retirement (during retirement) benefits. Additionally, the accounting and reporting requirements for post-employment and post-retirement benefits differ depending on the type of benefit provided. The discussion that follows is based on post-retirement plans, with additional information on post-employment plans when appropriate. [712, 715]

All post-employment benefits are accounted for under a single set of requirements. [IAS 19]

IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits  IFRS vs US GAAP Employee benefits

3. Defined benefit vs defined contribution plans

US GAAP

IFRS

Like IFRS Standards, post-retirement benefits are classified as either defined contribution or defined benefit plans. However, unlike IFRS Standards, post-employment benefit plans are not required to be classified as defined contribution or defined benefit plans; instead, they are accounted for based on the type of benefit, and therefore differences from IFRS Standards may arise in practice. [712-10, 715-20, 715-70]

US GAAP uses the term ‘projected benefit obligation’ for defined benefit pension plans and the term ‘accumulated post-retirement benefit obligation’ for non-pension defined benefit plans. This chapter uses the generic term ‘defined benefit obligation’ for ease of comparison.

Post-employment plans are classified as either defined contribution or defined benefit plans. The classification determines the accounting treatment. [IAS 19.27]

IFRS vs US GAAP Employee benefits

Like IFRS Standards, a post-retirement plan is classified as a defined contribution plan if the entity pays specified contributions into a separate entity and will have no further obligation (legal or constructive) to pay further amounts. However, unlike IFRS Standards, the definition of a defined contribution plan generally requires the plan to provide an individual account for each participant’s assets. All other post-retirement plans are defined benefit plans. [715-70-05, 715-70-20]

A post-employment plan is classified as a defined contribution plan if the entity pays fixed contributions into a separate entity (a fund) and will have no further obligation (legal or constructive) to pay further amounts if the fund has insufficient assets to pay all employee benefits relating to current and prior service. All other post-employment plans are defined benefit plans. [IAS 19.8]

IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits  IFRS vs US GAAP Employee benefits

3.1 Severance payments

US GAAP

IFRS

Under US GAAP, severance payments that are part of an ongoing benefit arrangement are post-employment rather than post-retirement benefits. Therefore, unlike IFRS Standards, they are not classified as either defined benefit or defined contribution plans, and differences from IFRS Standards may arise in practice. Severance payments that are part of a pension plan or post-retirement benefit plan are recognised when they are probable and reasonably estimable; therefore, differences from IFRS Standards may arise in practice. [712-10-5, 715-30, 715-60]

Amounts that are payable on cessation of employment, regardless of the reason for the employee’s leaving, are post-employment benefits rather than termination benefits. The normal principles apply in determining whether such payments give rise to defined benefit or defined contribution plans. [IAS 19.164]

IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits  IFRS vs US GAAP Employee benefits

3.2 Minimum benefit guarantees

US GAAP

IFRS

Like IFRS Standards, under US GAAP plans that provide a minimum benefit guarantee are generally defined benefit plans. For some benefit arrangements determined to be non-pay-related defined benefit plans – e.g. cash balance plans with fixed interest crediting rates – the plan’s benefit obligation does not include the impact of expected future salary increases, which may differ from practice under IFRS Standards. [715-30-35-71]

In certain cases, a plan that would otherwise be a defined contribution plan contains minimum benefit guarantees – e.g. the employer may guarantee a minimum return on the investment or contributions. IFRS Standards do not contain specific guidance on such plans, except for certain guaranteed minimum returns on plan assets. In our view, a minimum benefit guarantee causes a plan to be a defined benefit plan.

IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits  IFRS vs US GAAP Employee benefits

3.3 Multi-employer and multiple-employer plans

US GAAP

IFRS

Under US GAAP, a ‘multi-employer plan’ is a plan to which two or more unrelated employers contribute, usually under one or more collective bargaining agreements. A characteristic of multi-employer plans is that assets contributed by one participating employer may be used to pay the benefits of employees of another participating employer, like IFRS Standards. [715-80]

‘Multi-employer plans’ are plans that pool the assets contributed by various entities that are not under common control to provide benefits to the employees of more than one entity. [IAS 19.8]

Unlike IFRS Standards, if a plan is determined to be a multi-employer plan, then the employer accounts for the plan like a defined contribution plan, supplemented with additional disclosures. [715-80-35]

There are no specific requirements for the classification of multi-employer plans. Such plans are classified and accounted for in the same way as single-employer plan – i.e. as a defined contribution or a defined benefit plan – considering the characteristics of the scheme and the obligation of the employer, except as outlined below. [IAS 19.32]

Unlike IFRS Standards, even if there is an agreement that determines how the surplus in a multi-employer plan would be distributed or a deficit in the plan funded, an asset or liability is not recognised until the liability is assessed or the refund received. [715-80-35]

If insufficient information is available for a multi-employer defined benefit plan to be accounted for in accordance with the requirements for defined benefit plans, then it is treated as a defined contribution plan except that:

  • an asset or liability for any surplus or deficit is recognised if there is a contractual agreement that determines how a surplus in the plan would be distributed or a deficit in the plan funded; and
  • additional disclosures are required. [IAS 19.34, IAS 19.37]

Like IFRS Standards, if withdrawal from a multi-employer plan is probable and would result in the employer having an obligation to the plan for a portion of the plan’s unfunded benefit obligation, then the employer recognises a liability for the withdrawal funding amount. However, because of differences in the meaning of ‘probable’, the liability may be recognised at a date different from IFRS Standards (see chapter 3.12). [715-80-35-2]

A liability that arises from the wind-up of a multi-employer defined benefit plan, or the entity’s withdrawal from a multi-employer defined benefit plan, is recognised and measured in accordance with the provisions standard (see chapter 3.12). [IAS 19.39]

Like IFRS Standards, a ‘multiple-employer plan’ is intended to allow participating employers to pool their assets for investment purposes while maintaining separate accounts for the purposes of benefit payments. Like IFRS Standards, multiple-employer plans are accounted for by each employer as defined benefit plans or defined contribution plans based on the general requirements on classifying plans. Like IFRS Standards, for defined benefit plans, each employer accounts for its respective share of the assets and liabilities of the plan following the general principles for single-employer plans. [715-60-20, 715-60-35-131]

Plans that allow participating employers to pool their assets for investment purposes while maintaining separate accounts for the purposes of benefit payments (multiple-employer plans) do not share actuarial risks and therefore are not considered multi-employer plans. Therefore, each employer within the plan would account for the portion related to their employees as a defined contribution plan or a defined benefit plan based on the general requirements on classifying plans. For defined benefit plans, each employer accounts for its respective share of the assets and liabilities of the plan following the general principles for single-employer plans. [IAS 19.8, IAS 19.38]

Something else -   Differences in international financial reporting

IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits  IFRS vs US GAAP Employee benefits

3.4 Group plans

US GAAP

IFRS

Unlike IFRS Standards, defined benefit plans in which entities (sub-groups) under common control share risks are accounted for similarly to multi-employer plans, and therefore as defined contribution plans, in the financial statements of the subsidiary entity. Accordingly, the subsidiary sub-group records expenses each period based on any contributions being made to the parent entity. In certain cases, the subsidiary sub-group records an allocated portion of costs from the parent; any difference between cumulative costs recognised and cumulative funding recorded as a liability to the parent for future contributions, or as a capital contribution from the parent. [715-30-55-64, 715-80-55-2]

Defined benefit plans in which entities (sub-groups) under common control share risks are group plans rather than multi-employer plans. Group plans are classified as either a defined contribution plan or a defined benefit plan in accordance with the terms of the plan. The accounting for defined benefit group plans in sub-group financial statements depends on whether there is a contractual agreement or stated policy for charging the net defined benefit cost to individual group entities. [IAS 19.40–41]

IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits  IFRS vs US GAAP Employee benefits

3.5 State plans

US GAAP

IFRS

Like IFRS Standards, the employer determines the substance of its obligation under a state plan to determine whether the plan is a defined contribution or a defined benefit plan.

State plans are accounted for in the same way as multi-employer plans – i.e. they are classified as defined contribution or defined benefit plans, as appropriate. [IAS 19.43, 45]

IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits  IFRS vs US GAAP Employee benefits

4. IFRS vs US GAAP Accounting for defined contribution plans

US GAAP

IFRS

Like IFRS Standards, an entity accounts for its contributions to a defined contribution plan on an accrual basis. Like IFRS Standards, an asset or liability may result from advance payments or payments due, respectively, to a defined contribution fund. [715-70-35]

An entity accounts for its contributions to a defined contribution plan on an accrual basis. An asset or liability may result from advance payments or payments due, respectively, to a defined contribution fund. [IAS 19.51]

IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits  IFRS vs US GAAP Employee benefits

5. IFRS vs US GAAP Accounting for defined benefit plans

US GAAP

IFRS

Accounting for defined benefit plans involves the following steps.

  • Determining the present value of the defined benefit obligation by applying an actuarial valuation method, like IFRS Standards.
  • Deducting the fair value of any plan assets, like IFRS Standards.
  • Unlike IFRS Standards, there is no adjustment for any effect of limiting a net defined benefit asset to the asset ceiling.
  • Determining service costs (current, past and settlement) and net interest (to be recognised in profit or loss) and remeasurements of the net defined benefit liability (asset). There are a number of differences from IFRS Standards in the measurement and recognition of these items, which are discussed below. [715-20-35]

Accounting for defined benefit plans involves the following steps.

  • Determining the present value of the defined benefit obligation by applying an actuarial valuation method.
  • Deducting the fair value of any plan assets.
  • Adjusting the amount of the deficit or surplus for any effect of limiting a net defined benefit asset to the asset ceiling.
  • Determining service costs (current, past and settlement) and net interest (to be recognised in profit or loss), and remeasurements of the net defined benefit liability (asset) to be recognised in OCI. [IAS 19.57]

The net defined benefit liability (asset) recognised in the statement of financial position is the present value of the defined benefit obligation minus the fair value of any plan assets (the deficit or surplus in the defined benefit plan), like IFRS Standards. However, unlike IFRS Standards, this amount is not adjusted for an asset ceiling. [715-30-25-1]

The net defined benefit liability (asset) recognised in the statement of financial position is determined as follows.

  • Step 1: Present value of the defined benefit obligation minus the fair value of any plan assets equals the deficit or surplus in the defined benefit plan.
  • Step 2: Adjust for any effect of limiting a net defined benefit asset to the asset ceiling (see below). [IAS 19.8, IAS 19.63–64]

Like IFRS Standards, benefits are attributed to periods of service in accordance with the plan’s benefit formula unless that formula is back-end loaded, in which case a straight-line attribution is used instead. [715-30-35-36, 715-60-35-61]

Benefits are attributed to periods of service in accordance with the plan’s benefit formula unless that formula is back-end loaded, in which case straight-line attribution is used instead. [IAS 19.70]

Like IFRS Standards, benefits are attributed from the date on which service by the employee first leads to benefits under the plan until the date from which further service by the employee will lead to no additional benefits under the plan. Unlike IFRS Standards, this period includes additional benefits attributable to further salary increases, which can create differences in certain pay-related non-pension benefit schemes. [715-30-35-38, 715-60-35-66, 35-68]

Benefits are attributed from the date on which service by the employee first leads to benefits under the plan until the date from which further service by the employee will lead to no material amount of further benefits under the plan, other than from further salary increases. [IAS 19.70, IAS 19.73]

IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits  IFRS vs US GAAP Employee benefits

5.1 Actuarial valuation method

US GAAP

IFRS

US GAAP requires the actuarial method selected to reflect the benefit plan’s benefit formula. Like IFRS Standards, the projected unit credit method is used to determine the present value of the defined benefit obligation, with the exception of certain cash balance plans for which the traditional unit credit method is used, unlike IFRS Standards. [715-30-35-36]

The projected unit credit method is used to determine the present value of the defined benefit obligation. [IAS 19.67]

Unlike IFRS Standards, the traditional unit credit method is used to determine the present value of the defined benefit obligation for certain cash balance plans that provide for a fixed crediting rate as a percentage of salary and a fixed interest crediting rate until retirement. For other cash balance plans, the projected unit credit method is used in practice. [715-30-35-36, 35-71]

Contribution-based promises are defined benefit plans with a promised return on actual or notional contributions that is based on either or both of the following features:

  • a guaranteed return of a fixed amount or rate; and/or
  • a benefit that depends on future asset returns.
IFRS vs US GAAP Employee benefits

Because these plans are defined benefit plans, the projected unit credit method generally applies to the measurement of the related defined benefit obligation. However, in our experience, in some jurisdictions entities predominantly apply a methodology under which benefits that depend on future asset returns are measured at the fair value of the related assets.

Unlike IFRS Standards, each assumption is a best estimate assumption, which means that it is judged on its own in the absence of other assumptions. The financial assumptions are based on current market expectations and reflect estimated future salary increases, like IFRS Standards. However, unlike IFRS Standards, anticipated future changes in state benefits that may affect benefits payable under the plan are not reflected until they are enacted. [715-30-35-42, 715-60-35-71]

The actuarial assumptions represent the entity’s best estimates of the future variables that will determine the ultimate cost of settling the defined benefit obligation and are unbiased and mutually compatible. The financial assumptions are based on current market expectations of future events. Also, the assumptions take into account estimated future salary increases and include any future changes in state benefits that affect benefits payable under the plan and for which there is reliable evidence that the change will occur. [IAS 19.75–80, IAS 19.87]

Like IFRS Standards, the calculation takes into account stated plan benefits as well as any obligations that constitute the substantive plan. [715-30-35-34, 715-60-35-48]

The calculation takes into account not only the stated plan benefits, but also any constructive obligations. [IAS 19.87]

Like IFRS Standards, the obligation is discounted using a high-quality corporate bond rate; however, unlike IFRS Standards, there is no guidance for situations in which the corporate bond market is not deep, although in practice the government bond rate is typically used in those circumstances. Also, like IFRS Standards, the currency and maturity of the bonds match the currency and maturity of the pension obligation. Like IFRS Standards, if bonds with a maturity that matches the maturity of the obligation are not available, then an appropriate discount rate is estimated by extrapolating interest rates on bonds using the yield curve and considering any available evidence about likely longer-term interest rates, or based on an appropriately adjusted high-quality bond index. However, US GAAP has additional guidance on the determination of the high-quality bond rate, and therefore differences from IFRS Standards may arise in practice. [715-30-35-43 – 35-44, 715-60-35-79, 35-81]

The obligation is discounted using a high-quality corporate bond rate, or a government bond rate if there is an insufficiently deep high-quality corporate bond market. The depth of the market for high-quality corporate bonds is assessed at the currency level. The currency and maturity of the bonds need to be consistent with the currency and maturity of the defined benefit obligation. If bonds with a maturity that matches the maturity of the obligation are not available, then an appropriate discount rate is estimated by extrapolating interest rates on shorter-term bonds using the yield curve and considering any available evidence about likely longer-term interest rates. [IAS 19.83, IAS 19.86]

In practice, an entity often measures the defined benefit obligation using spot rates on an appropriate yield curve reflecting the estimated timing and amount of benefit payments and the currency in which the benefits are to be paid, like IFRS Standards. From that information, a single weighted-average rate is computed (and disclosed) as the discount rate used to measure the obligation. In our view, current service cost and interest cost may be measured using either the single weighted-average discount rate for the entire obligation, or different weighted-average discount rates, derived from the same yield curve for different categories of plan members (e.g. active members and pensioners or separately for each member in the plan), like IFRS Standards. However, in our view spot rates may also be used, derived from the same yield curve, applied to each projected cash flow, unlike IFRS Standards.

In practice, an entity often uses a single weighted-average discount rate to measure the defined benefit obligation, reflecting the estimated timing and amount of benefit payments and the currency in which the benefits are to be paid. In such cases, the entity also uses a single rate to calculate current service cost and interest cost. However, in our view, in measuring the defined benefit obligation, current service cost and interest cost, an entity might instead use different weighted-average discount rates derived from the same yield curve for different categories of plan members (e.g. active members and pensioners) or separately for each member in the plan, to match more closely the expected timing of the benefit payments for each category. [IAS 19.85]

Like IFRS Standards, plan assets and benefit obligations are measured as at the employer’s reporting date. Unlike IFRS Standards, US GAAP provides a practical expedient whereby plan assets and benefit obligations may be measured at the month-end that is closest to the reporting date of the sponsor and adjusted for certain specific, identified transactions when the sponsor’s year does not end on the last day of a month. [715-30-35-62, 35-63A, 715-60-35-121]

The net benefit liability (asset) is measured as at the reporting date. For practical reasons, the detailed valuation of the defined benefit obligation may be prepared before the end of the reporting period. In this case, the results of the valuation are updated for any material transactions and changes in circumstances up to the end of the reporting period. [IAS 19.58–59]

Unlike IFRS Standards, the income tax effects from plan assets are included in the determination of the return on plan assets.

Taxes payable by the plan on contributions relating to service before the reporting date or on benefits resulting from that service are distinguished from all other taxes payable by the plan. An actuarial assumption is made about the first type of taxes, which are taken into account in measuring current service cost and the defined benefit obligation. All other taxes payable by the plan are included in the return on plan assets. [IAS 19.8, IAS 19.76(b)(iv), IAS 19.130]

IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits  IFRS vs US GAAP Employee benefits

5.2 Plan assets

US GAAP

IFRS

Like IFRS Standards, ‘plan assets’ comprise assets held by a legally separate fund, which:

  • can be used solely to pay or fund employee benefits;
  • are not available to the employer’s creditors – even in the event of bankruptcy; and
  • cannot be returned to the entity except as reimbursement for employee benefits paid or when the proceeds are surplus to requirements. [715-30-55-35]

However, unlike IFRS Standards:

  • companies are not required to affirmatively demonstrate that plan assets are not legally isolated from the employer’s creditors in bankruptcy; however, if the provisions of a trust provide that assets are available to creditors in the event of bankruptcy (such as in most grantor or rabbi trusts), then the assets would not qualify as plan assets, like IFRS Standards; and
  • insurance policies can be plan assets only if they are held by the plan. [715-30-55-35]

‘Plan assets’ comprise:

  • assets held by a legally separate fund, which:
    • can be used solely to pay or fund employee benefits;
    • are not available to the employer’s creditors – even in the event of bankruptcy; and
    • cannot be returned to the entity except as reimbursement for employee benefits paid or when the fund is in surplus; and
  • qualifying insurance policies, which are insurance policies issued to the sponsor by an unrelated entity, the proceeds from which:
    • can be used solely to pay or fund defined benefit obligations;
    • are not available to the employer’s creditors – even in the case of bankruptcy; and
    • cannot be returned to the entity except as reimbursement for employee benefits paid or when the proceeds are surplus to requirements. [IAS 19.8]

Like IFRS Standards, plan assets include insurance policies issued to the plan by the sponsor or a related party of the sponsor if the policies are transferable. [715-30-55-36]

In our view, plan assets also include insurance policies issued to the plan by the sponsor or a related party of the sponsor if the policies are transferable and the other criteria for treatment as assets held by a legally separate fund are met (see above).

Like IFRS Standards, financial instruments – e.g. shares, bonds and intra-group insurance contracts – issued by the reporting entity need to be transferable to qualify as plan assets. Like IFRS Standards, plan assets exclude contributions receivable from the employer and other non-transferable financial instruments issued by the employer to the fund. Other plan assets – i.e. those not issued by the reporting entity – are not required to be transferable, like IFRS Standards. [715-30-20, 715-30-55-35]

Plan assets include transferable financial instruments issued by the reporting entity – including by its subsidiaries – if the criteria for treatment as plan assets are met (see above). Plan assets exclude contributions receivable from the reporting entity and other financial instruments issued by the reporting entity and held by the fund that cannot be transferred to third parties. In our view, if financial instruments issued by associates and joint ventures are not transferable, then we believe that an entity as an accounting policy choice can still treat them as plan assets because such investees are not part of the group. Other plan assets – i.e. those not issued by the reporting entity – are not required to be transferable. [IAS 19.8, IAS 19.114, BC177]

Like IFRS Standards, plan assets are primarily measured at fair value (see chapter 2.4); such measurement overrides the requirements of other Codification topics/subtopics that would otherwise apply to these assets. Unlike IFRS Standards, plan assets used in plan operations, if any, are measured at cost less accumulated depreciation. [715-30-35-50, 715-60-35-107]

Plan assets are measured at fair value (see chapter 2.4). This overrides the requirements of other standards that would otherwise apply to these assets. [IAS 19.57(a)(iii), IAS 19.113]

Unlike IFRS Standards, there is no special guidance for qualifying insurance policies. Accordingly, the obligation is not measured by reference to the fair value of the insurance policy. Also, unlike IFRS Standards, insurance policies can be plan assets only if they are held by the plan.

If the timing and amount of payments under a qualifying insurance policy exactly match some or all of the benefits payable under a plan, then the present value of the related obligation is determined and is deemed to be the fair value of the insurance policy. Generally, the fair value of such insurance policies held by the fund is determined in the same way – i.e. matching that of the related obligation. [IAS 19.115]

Like IFRS Standards, the employer offsets qualifying plan assets against the related obligation to employees; it does not consolidate the fund that holds the plan assets. [715-30-25, 715-60-25]

The employer offsets qualifying plan assets against the related obligation to employees; it does not consolidate the fund that holds the plan assets. [IAS 19.57(a)(iii), IAS 19.113]

Like IFRS Standards, the costs of managing plan assets reduce the return on plan assets. An entity should recognise administration costs as an expense when the administration services are provided, like IFRS Standards. [715-30-35-50, 715-60-35-107]

The costs of managing plan assets reduce the return on plan assets. No specific requirements regarding the accounting for other administration costs are provided. However, an entity should recognise administration costs (except for the costs of handling medical claims) when the administration services are provided. Therefore, the inclusion of such costs in the measurement of the defined benefit obligation is not allowed. In our view, they should instead be recognised as an expense in profit or loss. [IAS 19.8, IAS 19.76(b)(iii), IAS 19.130, IAS 19.BC125–BC127, IAS 1.88]

IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits  IFRS vs US GAAP Employee benefits

5.3 Defined benefit cost

US GAAP

IFRS

Except to the extent that another Codification topic/subtopic requires or permits its inclusion in the cost of an asset (see below), the periodic cost of defined benefit plans is made up of the following:

  • current service cost recognised in profit or loss, like IFRS Standards;
  • interest cost on the obligation recognised in profit or loss, like IFRS Standards;
  • expected return on plan assets recognised in profit or loss, like IFRS Standards (although the amount differs from IFRS Standards);
  • actuarial gains and losses recognised in OCI, like IFRS Standards (although measured differently), and subsequently reclassified to profit or loss, unlike IFRS Standards;
  • prior (past) service costs recognised in OCI, unlike IFRS Standards, and subsequently reclassified to profit or loss, unlike IFRS Standards;
  • any gain or loss on curtailment included in profit or loss, like IFRS Standards (although the amount and timing of the recognition may differ from IFRS Standards); and
  • any gain or loss on settlement recognised in profit or loss, like IFRS Standards (although the settlement amount may differ from IFRS Standards). [715-30-35, 715-60-35]

Except to the extent that another standard requires or permits its inclusion in the cost of an asset (see below), the cost of defined benefit plans is made up of the following components:

  • service cost, recognised in profit or loss, which comprises:
    • current service cost;
    • past service cost, resulting from plan amendments or curtailments; and
    • the gain or loss on settlements;
  • net interest on the net defined benefit liability (asset), recognised in profit or loss; and
  • remeasurements of the net defined benefit liability (asset), recognised in OCI. [IAS 19.120]

Unlike IFRS Standards, only the service cost component is eligible for capitalisation, when applicable. [715-20-45-3A]

All of the components of defined benefit cost are eligible for capitalisation under other IFRS standards. [IAS 19.121]

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IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits  IFRS vs US GAAP Employee benefits

5.4 Current service cost

US GAAP

IFRS

The ‘current service cost’ is defined as the actuarial present value of benefits attributed by the plan’s benefit formula to services rendered by employees during the period, which we would expect to be generally consistent with IFRS Standards in practice. [715-30-35-6, 715-60-35-10]

The ‘current service cost’ is the increase in the present value of the defined benefit obligation resulting from employee service in the current period. It is determined using actuarial assumptions at the start of an annual reporting period. However, if an amendment, curtailment or settlement of a defined benefit plan occurs during that annual reporting period, then the entity determines current service cost for the remainder of the period using the same actuarial assumptions as those used to remeasure the net defined benefit liability (asset). [IAS 19.8, IAS 19.67, IAS 19.122A]

Unlike IFRS Standards, US GAAP requires entities to classify all components of net periodic benefit cost together. Practice varies as to whether supplemental disclosures include interest on service cost as part of service cost or interest cost. [715-30-35-4, 715-60-35-9]

It is unclear where interest that accumulates on service cost should be presented in the financial statements. In our view, it should be recognised in profit or loss and it would be appropriate for it to be classified as part of service cost. For a discussion of where service cost and net interest cost are presented, see below.

IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits  IFRS vs US GAAP Employee benefits

5.5 Past service cost

US GAAP

IFRS

Like IFRS Standards, prior (past) service cost is the change in the present value of the obligation, in respect of prior periods’ service, due to changes in benefit entitlement including the introduction or changes to a defined benefit plan. Unlike IFRS Standards, a curtailment differs from a prior service cost. [715-30-35-10, 715-60-35-12]

Past service cost is the change in the present value of the defined benefit obligation, in respect of prior periods’ service, resulting from a plan amendment (the introduction or withdrawal of, or changes to, a defined benefit plan) or a curtailment (see below). [IAS 19.8, IAS 19.102, IAS 19.104]

Like IFRS Standards, an entity remeasures plan assets and the defined benefit obligation using current actuarial assumptions – e.g. current discount rate or current market prices – before computing the settlement or curtailment gain or loss, or computing the impact on prior service costs of plan amendments. [715-30-35-81, 715-60-35-151]

When determining past service cost (resulting from a plan amendment or curtailment), an entity remeasures the net benefit liability (asset) using the current fair value of plan assets and current actuarial assumptions – e.g. current market interest rates or current market prices. [IAS 19.99]

Unlike IFRS Standards, US GAAP does not have an asset ceiling, so there is no consideration of the effect of an asset ceiling when remeasuring plan assets and the defined benefit obligation before computing a settlement or curtailment gain or loss, or computing the impact on prior service costs of plan amendments.

When measuring past service cost (resulting from a plan amendment or curtailment), the entity does not consider the effect of the asset ceiling that is reversed separately through OCI. This is because the assessment of the asset ceiling is a distinct step from the calculation of the past service cost, not a part of it. [IAS 19.101A]

IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits  IFRS vs US GAAP Employee benefits

5.6 Amendments

US GAAP

IFRS

Unlike IFRS Standards, prior service cost related to a plan amendment is initially recognised in full in OCI in the reporting period of the amendment. Further, unlike IFRS Standards, it is amortised from accumulated OCI into employee benefit cost over the average remaining working lives (to full eligibility for non-pension benefits) of active participants in the plan unless substantially all participants are inactive (i.e. retired), in which case the prior service cost is amortised into employee benefit cost over the remaining life expectancy of participants. [715-30-35-11, 715-60-35-13]

Like IFRS Standards, if benefits are reduced, then those changes result in a negative prior service cost (credit). Unlike IFRS Standards, a negative prior service cost is first offset against any existing positive prior service cost in accumulated OCI, with any excess amortised to employee benefit cost on the same basis as positive prior service cost. [715-30-35-17]

Past service cost (positive or negative) as a result of a plan amendment is recognised in profit or loss immediately, at the earliest of the following:

  • when the plan amendment occurs;
  • when the related restructuring costs are recognised, if the plan amendment arises as part of a restructuring; and
  • when the related termination benefits are recognised, if the plan amendment is linked to termination benefits. [IAS 19.8, IAS 19.103, IAS 19.106]

IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits  IFRS vs US GAAP Employee benefits

5.7 Curtailments

US GAAP

IFRS

Like IFRS Standards, a ‘curtailment’ is an event that significantly reduces the expected years of future service of present employees, or eliminates for a significant number of employees the accrual of defined benefits for some or all of their future service. [715-30-20 Glossary]

A ‘curtailment’ occurs when a significant reduction in the number of employees covered by the plan takes place. A curtailment may arise from an isolated event, such as the closing of a plant, discontinuance of an operation or termination or suspension of a plan. [IAS 19.105]

Unlike IFRS Standards, curtailment losses are recognised when they are probable and curtailment gains are recognised when they occur.

A curtailment gives rise to past service cost and is recognised at the earliest of the following:

  • when the curtailment occurs;
  • when the related restructuring costs are recognised, if the curtailment arises as part of a restructuring; and
  • when the related termination benefits are recognised, if the curtailment is linked to termination benefits. [IAS 19.8, IAS 19.103]

Like IFRS Standards, gains and losses from curtailments of defined benefit obligations are recognised in profit or loss. Unlike IFRS Standards, when a curtailment occurs, prior service cost associated with years of service no longer expected to be rendered is recognised in profit or loss. Additionally, a decrease (increase) in the benefit obligation that exceeds the net actuarial gain (loss) is recognised in profit or loss, unlike IFRS Standards. [715-30-35-92, 715-60-35-151, 35-164]

Gains or losses from curtailments are recognised in profit or loss. [IAS 19.103]

IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits  IFRS vs US GAAP Employee benefits

5.8 Settlements

US GAAP

IFRS

Like IFRS Standards, a ‘settlement’ eliminates all or a part of the defined benefit plan obligation. However, US GAAP is more prescriptive than IFRS Standards in stating that

a settlement is a transaction that: (1) is an irrevocable action; (2) relieves the employer (or the plan) of primary responsibility for the plan obligation; and (3) eliminates significant risks related to the obligation and the assets used to effect the settlement.

Unlike IFRS Standards, lump sum cash payments meet the definition of settlements. Also, unlike IFRS Standards, if settlements during the year, including lump sum payments, exceed the sum of service and interest cost, recognition of a settlement is required. If settlements are less than that sum, an accounting policy election is made as to whether to recognise a settlement or to record any difference as an actuarial gain or loss in the next remeasurement. [715-30-20, 715-30-35-82]

A ‘settlement’ is a transaction that eliminates all further legal or constructive obligations for part or all of the benefits provided under a defined benefit plan, other than a payment of benefits to, or on behalf of, employees that are set out in the terms of the plan and included in the actuarial assumptions. Lump sum cash payments to participants in exchange for their rights to ongoing payments is not a settlement if provided for in the terms of the plan. [IAS 19.8, IAS 19.111]

Like IFRS Standards, a decrease in contingent benefits that does not arise from a plan amendment is not a plan settlement or curtailment, but rather a potential outcome that was contemplated as part of the original pension plan. [715-30-35-1A]

In our view, an increase or a decrease in contingent benefits – e.g. plan benefits contingent on the funding level of the plan – that does not arise from a plan amendment is not a plan settlement or past service cost, but rather a potential outcome that was contemplated as part of the original pension plan. Therefore, the change should be accounted for as a remeasurement (actuarial gain or loss).

Unlike IFRS Standards, a settlement differs from an amendment that results in prior service cost (see above); and, unlike IFRS Standards, under US GAAP, prior service costs are recognised in OCI at the date of the amendment. However, like IFRS Standards, the approach for measuring a settlement gain or loss (therefore, the use of current assumptions) is similar to the approach for measuring the impact of a plan amendment that results in prior service costs recognised in OCI.

An approach to measuring a gain or loss on settlement is the same for measuring past service costs (see above). [IAS 19.99, IAS 19.101A]

Like IFRS Standards, gains and losses from settlements of defined benefit obligations are recognised in profit or loss. However, unlike IFRS Standards (for which it is unnecessary), guidance is provided on the allocation of actuarial gains and losses and prior service costs (to be recognised in OCI) in determining the amount of the settlement gain or loss.

Unlike IFRS Standards, the maximum gain or loss subject to recognition in profit or loss when a pension obligation is settled is the net gain or loss included in accumulated OCI, plus any remaining unrecognised net transition amount from the initial application of the Codification Topic included in accumulated OCI. That maximum amount includes any gain or loss first measured at the time of settlement. The maximum amount is recognised in profit or loss if the entire benefit obligation is settled. If only part of the benefit obligation is settled, then the employer recognises in profit or loss a pro rata portion of the maximum amount that is equal to the percentage reduction in the benefit obligation. If the purchase of a participating annuity contract constitutes a settlement, then the maximum gain (but not the maximum loss) is reduced by the cost of the participation before determining the amount to be recognised in profit or loss. [715-30-35-79, 715-60-35-151,

35-164]

A gain or loss on settlement is recognised in profit or loss, calculated as the difference between:

  • the present value of the defined benefit obligation being settled, as determined on the date of settlement; and
  • the settlement price, including any plan assets transferred and any payments made directly by the entity in connection with the settlement. [IAS 19.109]

IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits  IFRS vs US GAAP Employee benefits

5.9 Interest cost and expected return on plan assets / Net interest

US GAAP

IFRS

Unlike IFRS Standards, instead of net interest, an entity recognises:

  • interest cost on the defined benefit liability, which is determined by applying the discount rate used to measure the defined benefit obligation at the start of the annual period to the defined benefit liability at the start of the annual period; and

  • expected return on plan assets, which is determined by applying the expected long-term rate of return on plan assets to the market-related value of the plan assets at the beginning of the period. [715-30-35-47, 715-60-35-84]

‘Net interest’ is the change during the period in the net defined benefit liability (asset) that arises from the passage of time. It is determined by multiplying the net defined benefit liability (asset) by the discount rate at the start of the annual period, taking into account any changes in the net defined benefit liability (asset) during the period as a result of contributions and benefit payments. [IAS 19.8, IAS 19.123]

While the approach is similar to IFRS Standards, under US GAAP, if there is a curtailment or settlement during an annual reporting period, then the entity determines the interest cost on the defined benefit liability, and the expected return on plan assets for the remainder of the period, using assumptions that reflect the benefits offered under the plan and plan assets at the time of the curtailment or settlement.

Unlike IFRS Standards, the expected return on plan assets reflects the best estimate at the beginning of the period of future market returns on plan assets over the life of the obligation.

For an amendment, curtailment or settlement during the annual reporting period, the entity determines net interest for the remainder of the period using the net defined benefit liability (asset) that reflects the benefits offered under the plan and plan assets after the plan amendment, curtailment or settlement, and the discount rate used to remeasure that net defined benefit liability (asset). [IAS 19.123A]

Something else -   IFRS 7 Financial instruments Disclosures High level summary

IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits  IFRS vs US GAAP Employee benefits

5.10 Actuarial gain or loss / Remeasurements

US GAAP

IFRS

Unlike IFRS Standards, actuarial gains and losses comprise:

  • actuarial gains and losses on the defined benefit obligation; and
  • the return on plan assets, excluding amounts included in the expected return on plan assets. [715-30-20]

Unlike IFRS Standards, US GAAP does not have an asset ceiling.

Remeasurements of the net defined benefit liability (asset) comprise:

  • actuarial gains and losses, which arise on the defined benefit obligation;
  • the return on plan assets, excluding amounts included in net interest on the net defined benefit liability (asset); and
  • any change in the effect of the asset ceiling, excluding amounts included in net interest on the net defined benefit liability (asset). [IAS 19.8, IAS 19.127]

Unlike IFRS Standards, actuarial gains and losses arise from differences between the actual and expected outcome in both the valuation of the obligation and the plan assets. [715-30-20]

Actuarial gains and losses arise from changes in the present value of the defined benefit obligation as a result of:

  • experience adjustments: i.e. the effects of differences between the previous actuarial assumptions and the actual outcome; and
  • the effects of changes in actuarial assumptions. [IAS 19.8, IAS 19.128]

The return on plan assets comprises interest, dividends and other income derived from the plan assets, as well as realised and unrealised gains or losses on the plan assets, less:

  • any costs of managing plan assets; and
  • any tax payable by the plan itself, other than tax included in the actuarial assumptions used to measure the present value of the defined benefit obligation. [IAS 19.8]

Unlike IFRS Standards, actuarial gains and losses arising in the period are recognised immediately in OCI to the extent that they are not recognised in employee benefit cost (see below). Unlike IFRS Standards, employers can elect to amortise from accumulated OCI into employee benefit cost the amount of actuarial gains and losses in excess of the ‘corridor’ amount. The corridor is 10 percent of the greater of the defined benefit obligation and the market-related value of plan assets at the beginning of the period; the ‘market-related value’ is a calculated amount that includes deferred gains and losses that differs from fair value. The difference between the market-related value and the fair value of plan assets is recognised as a component of the expected return on plan assets over a period of five years or less, unlike IFRS Standards. The corridor is calculated and applied separately for each plan. [715-30-35-18, 35-21, 715-60-35-23]

Unlike IFRS Standards, the net cumulative (unamortised) actuarial gain or loss at the beginning of the period in excess of the corridor is amortised into employee benefit cost on a straight-line basis over the expected average remaining working lives of the employees participating in the plan or, if substantially all participants are inactive, over the remaining life expectancy of participants; generally, US GAAP is explicit that the calculation needs to be based on active employees in the plan. Unlike IFRS Standards, an entity is permitted to recognise actuarial gains and losses in employee benefit cost using any systematic and rational method that results in faster recognition than using the corridor method. [715-30-35-18, 35-21, 715-60-35-23]

Any balance is recognised as a component of OCI for the reporting period, and remains in accumulated OCI until it is reclassified to employee benefit cost; an entity is also permitted to recognise all actuarial gains and losses immediately in profit or loss, unlike IFRS Standards. However, recognition in OCI without any reclassification to employee benefit cost is not permitted, unlike IFRS Standards. [715-30-35-18, 35-21, 715-60-35-23]

Remeasurements of the net defined benefit liability (asset) are recognised in full in OCI in the reporting period during which they arise and are not reclassified to profit or loss in a subsequent period. However, the entity may transfer cumulative amounts recognised through OCI to another component of equity. [IAS 19.122]

IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits  IFRS vs US GAAP Employee benefits

5.11 Presentation of cost components / Presentation of service cost and net interest

US GAAP

IFRS

Unlike IFRS Standards, there are specific presentation requirements under US GAAP. The service cost component of net benefit cost is presented in the same line item or items as other compensation cost. Other components of net benefit cost are presented separately from the service cost component and outside operating income if the operating income subtotal is presented. [715-20-45-3A, 715-30-35-7A, 715-60-35-10A]

The employee benefits standard does not specify where service cost and net interest on the net defined benefit liability (asset) are presented. It also does not specify whether an entity presents service cost and net interest separately or as components of a single item of income or expense. An entity therefore chooses an approach, to be applied consistently, for the presentation of service cost and net interest on the net defined benefit liability (asset) in profit or loss. [IAS 19.134, IAS 19.BC201, IAS 1.45]

IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits  IFRS vs US GAAP Employee benefits

5.12 Asset ceiling

US GAAP

IFRS

Unlike IFRS Standards, the funded status (the difference between the fair value of plan assets and the defined benefit obligation) is recognised as an asset if the plan is over funded (i.e. the measured amount of plan assets exceeds the measured amount of plan liabilities); the asset is not subject to additional adjustments related to an asset ceiling or a minimum funding requirement. [715-30-25, 715-60-25]

If a plan is in surplus, then the amount recognised as an asset in the statement of financial position is limited to the ‘asset ceiling’. This is the present value of any economic benefits available to the entity in the form of a refund from the plan or a reduction in future contributions to the plan. [IAS 19.8, IAS 19.64]

Unlike IFRS Standards, there is no requirement to evaluate whether an economic benefit is available to an entity; the funded status (see above) is recognised as an asset if the plan is overfunded. [715-30-25, 715-60-25]

An economic benefit is available to an entity if, in accordance with the terms of the plan and applicable statutory requirements, it is realisable during the life of the plan or on settlement of the plan liabilities. [IFRIC 14.7–8]

IFRS vs US GAAP Employee benefits

 

IFRS vs US GAAP Employee benefits

The economic benefit available as a refund of a plan surplus is measured as the amount of the surplus at the reporting date less any associated costs, and is available only if an entity has an unconditional right to such a refund during the life of the plan, on gradual settlement of plan liabilities, or on plan wind-up. [IFRIC 14.11, IFRIC 14.13–14]

The economic benefit available as a reduction in future contributions is measured as follows.

  • If there is no minimum funding requirement for contributions relating to future service, then as the present value of the future service cost to the entity for each year over the shorter of the expected life of the plan and the expected life of the entity.
  • If there is a minimum funding requirement for contributions for future services, then as the sum of:
    • any prepaid amount that reduces future minimum funding requirement contributions for future service; and
    • the present value of the estimated future service cost to the entity in each year less the estimated minimum funding requirement contributions that would be required for future service in the given year if there were no prepayment of future minimum funding requirement contributions. This amount cannot be less than zero. [IAS 19.64, IFRIC 14.16, IFRIC 14.20, IFRIC 14.22]

Unlike IFRS Standards, the funded status – the defined benefit obligation minus the fair value of the plan assets – is recognised as a liability if the plan is underfunded; the liability is not subject to additional adjustments related to an asset ceiling or a minimum funding requirement. [715-30-25, 715-60-25]

A liability is recognised for contributions payable to fund an existing shortfall with respect to service already received under a minimum funding requirement if the contributions payable are not expected to be available as a refund or reduction in future contributions after they are paid into a plan. [IFRIC 14.23–24]

IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits  IFRS vs US GAAP Employee benefits

5.13 Insured benefits

US GAAP

IFRS

Like IFRS Standards, if employee benefits are insured, then the accounting treatment depends on the nature of the obligation retained by the employer.

If employee benefits are insured, then the accounting treatment depends on the nature of the obligation retained by the employer. [IAS 19.46]

Like IFRS Standards, if annuity contracts purchased from an insurance company are irrevocable and involve the transfer of significant risk from the employer to the insurance company then, to the extent covered by the annuity contract, the cost of current benefits is the cost of purchasing the contracts in recognising the settlement of the obligation. [715-30-35-53, 715-60-35-109]

If an employer purchases an insurance policy from an unrelated third party and in so doing settles its legal and constructive obligations under a defined benefit plan, then the purchase of the insurance policy is treated as a settlement of some or all of the employer’s obligations. [IAS 19.46, IAS 19.49, IAS 19.112]

Like IFRS Standards, if the substance of the contract with the insurance company is such that the employer remains subject to all or most of the risks and rewards associated with the defined benefit obligation and any assets transferred to the insurance company, then that contract does not qualify as an annuity contract and a settlement has not occurred. Like IFRS Standards, the insurance policy is treated as a plan asset or as a separate asset, depending on whether the insurance policy is held by the plan or, unlike IFRS Standards, by the employer (see above). [715-30-35-59, 715-60-35-120]

If the employer retains an indirect obligation – e.g. if actuarial risk will be transferred back to the employer by way of increased premiums, or the employer retains an obligation to pay the benefits through a plan – then the plan continues to be treated as a defined benefit plan. The insurance policy is treated as a plan asset or as a separate asset, depending on whether it is a qualifying insurance policy (see above). [IAS 19.48]

IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits  IFRS vs US GAAP Employee benefits

5.14 Current salary policies

US GAAP

IFRS

If all the benefits attributed by the plan’s benefit formula to service in the current period are covered by the purchase of non-participating annuity contracts, then the cost of the contracts determines the service cost component of pension cost for that period, similar to defined contribution accounting, like IFRS Standards. Benefits covered by the annuity contracts are excluded from the benefit obligation and the annuity contract is excluded from plan assets, like IFRS Standards. [715-30-35-53]

An employer may purchase insurance policies each period to settle all of its defined benefit obligations. In this case, recognising as an expense the cost of the policies bought – in effect, defined contribution accounting – will have the same effect as applying defined benefit accounting and recognising a settlement gain or loss, although the disclosure requirements for defined benefit plans may still be relevant. [IAS 19.46]

Benefits beyond those covered under nonparticipating annuity contracts are accounted for as defined benefit plans, which would generally be like the treatment under IFRS Standards. [715-30-35-55]

However, an insurance policy may not cover all of the employer’s defined benefit obligations. If the employer has an obligation to make payments if the insurer does not pay all future employee benefits related to employee service in the current and prior periods, then in our view the resultant plan should be accounted for as a defined benefit plan, even if some of the obligations have been settled and are no longer recognised. [IAS 19.46]

IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits  IFRS vs US GAAP Employee benefits

5.15 Reimbursement rights

US GAAP

IFRS

Unlike IFRS Standards, if an entity will be reimbursed for expenditures required to settle a defined benefit obligation but the reimbursement right does not give rise to a plan asset, then it is recognised when recovery is probable (likely to occur) to the extent that benefits cost has been incurred.

If an entity will be reimbursed for expenditures required to settle a defined benefit obligation, but the reimbursement right does not give rise to a plan asset, then it is recognised as a separate asset when recovery is virtually certain. [IAS 19.48, IAS 19.116]

Reimbursement rights in respect of post-retirement healthcare plans are measured at the present value of the expected reimbursement amount; however, we would not generally expect significant differences to arise in practice. Unlike IFRS Standards, reimbursements may be recognised immediately in employee benefit cost or initially in OCI depending on the type of reimbursement and whether or not the reimbursement is coming from a governmental body. [715-60-35-137 – 35-138]

Reimbursement rights are measured at fair value and the changes in fair value are accounted for in the same way as the changes in the fair value of plan assets (see above). Remeasurements arising on reimbursement rights are recognised in OCI. [IAS 19.116]

IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits  IFRS vs US GAAP Employee benefits

6. Other long-term employee benefits

US GAAP

IFRS

Unlike IFRS Standards, US GAAP does not distinguish between long- and short-term employee benefits.

IFRS vs US GAAP Employee benefits

‘Other long-term employee benefits’ are all employee benefits other than short-term employee benefits, post-employment benefits and termination benefits. Such benefits may include accumulating annual leave that can be carried forward and used more than 12 months after the end of the annual reporting period in which the employees render the related services, paid long-service leave, other long-service benefits (e.g. a bonus or extra salary after 20 years of service) and profit-sharing and other bonus schemes that are not expected to be settled wholly within 12 months of the end of the annual reporting period in which the employee services were received by the entity. [IAS 19.8, IAS 19.153]

Like IFRS Standards, other long-term employee benefits are accounted for in a manner similar to post-employment benefits if there is a plan in place. If a plan is not in place, then other long-term benefits are recognised over the period during which service is rendered. In addition, unlike IFRS Standards, for post-employment benefits actuarial gains and losses and past service costs may, but are not required to, be recognised in the same manner as for defined benefit pension plans. [712-10-35-1]

Other long-term employee benefits that are defined benefit plans are accounted for in a manner similar to post-employment defined benefit plans, except that the components of the defined benefit cost are not disaggregated and are recognised in profit or loss. [IAS 19.155–156]

Unlike IFRS Standards, deferred compensation contracts with individual employees that are not equivalent to a post-retirement benefit plan are accounted for individually on an accrual basis in accordance with the terms of the underlying contract. [710-10-25-9]

Deferred compensation contracts are accounted for in the same way as other long-term employee benefits. [IAS 19.153]

IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits  IFRS vs US GAAP Employee benefits

7. Reclassifications (short><long)

US GAAP

IFRS

Unlike IFRS Standards, US GAAP does not contain specific guidance on short-term employee benefits other than compensated absences, and there is no distinction between long- and short-term employee benefits.

Reclassification of a short-term employee benefit as long-term need not occur if the entity’s expectations of the timing of settlement change temporarily. However, the benefit is reclassified if the entity’s expectations of the timing of settlement change other than temporarily, or the characteristics of the benefit change – e.g. from a non-accumulating to an accumulating benefit. [IAS 19.10]

IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits  IFRS vs US GAAP Employee benefits

8. Termination benefits

US GAAP

IFRS

Unlike IFRS Standards, US GAAP distinguishes four types of termination benefits:ongoing benefit arrangements, contractual terminations, special terminations and one-time terminations (see chapter 3.12). [420-10, 712-10]

‘Termination benefits’ are those benefits provided in exchange for termination of an employee’s employment as a result of either an entity’s decision to terminate that employment before the normal retirement date or an employee’s decision to accept an offer of benefits in exchange for termination (see chapter 3.12). [IAS 19.8, IAS 19.159]

Unlike IFRS Standards, the recognition of termination benefits depends on whether it is a one-time benefit, a contractual benefit, or a benefit payment pursuant to a plan. The criteria for recognition of one-time benefits are similar to IFRS Standards (see below). Contractual termination benefits and benefits payable pursuant to a plan are recognised when it is probable that the benefits will be paid and the amounts can be reasonably estimated, unlike IFRS Standards. [420-10-25-4, 712-10-25-1 – 25-4]

An obligation for termination benefits is regarded as arising from the termination and not from the employee’s service. An entity recognises a liability and an expense for termination benefits at the earlier of:

  • when it recognises costs for a restructuring in the scope of the provisions standard that includes the payment of termination benefits; and
  • when it can no longer withdraw the offer of those benefits. [IAS 19.165]

The criteria that need to be met under US GAAP before an obligation for one-time termination benefits is recognised are similar to the criteria under IFRS Standards on when an entity can no longer withdraw the offer of termination benefits payable as a result of an entity’s decision to terminate an employee’s employment. However, unlike IFRS Standards, there also is a criterion that management with the appropriate authority to approve the action commits to the plan. In addition, unlike IFRS Standards, one-time termination benefits cannot be recognised earlier if they are related to a restructuring. [420-10-25-4]

The entity can no longer withdraw the offer when it has communicated to the affected employees a plan of termination meeting all of the following criteria:

  • actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made;
    • the plan identifies:
    • the number of employees whose employment is to be terminated;
    • their job classifications or functions and their locations (although the plan need not identify these for individual employees); and
  • the expected completion date; and
  • the plan establishes the termination benefits that employees will receive in sufficient detail so that employees can determine the type and amount of benefits they will receive when their employment is terminated. [IAS 19.167]

Unlike IFRS Standards, special termination benefits are distinguished from one-time termination benefits. Special termination benefits are generally additional benefits offered for a short period of time to induce voluntary termination or early retirement and are recognised when the employee irrevocably accepts the offer and the amount can be reasonably estimated. [712-10-25-1]

If the termination benefits are payable as the result of an employee’s decision to accept an offer of benefits in exchange for the termination of employment – i.e. to take voluntary redundancy – then the entity can no longer withdraw the offer of termination benefits at the earlier of:

  • when the employee accepts the offer; and
  • when a restriction (such as a legal, regulatory or contractual requirement) on the entity’s ability to withdraw the offer takes effect. [IAS 19.166]

Like IFRS Standards, for one-time termination benefits, if future service beyond legally mandated minimums (which is unlike IFRS Standards) is required, then the cost of the termination benefit is recognised ratably over the employees’ remaining service period. [420-10-25-9]

Under IFRS Standards, if the benefit is conditional on future services being provided, then it is not a termination benefit. [IAS 19.162]

Unlike IFRS Standards, costs related to an ongoing benefit arrangement or contractual termination benefit arrangement are recognised when they are probable and reasonably estimable. [712-10-25-2]

Benefits forming part of an ongoing arrangement or contractual termination arrangement are subject to the general requirements for the recognition of termination benefits.

Unlike IFRS Standards, US GAAP distinguishes four types of termination benefits: ongoing benefit arrangements, contractual terminations, special terminations and one-time terminations. Unlike IFRS Standards, measurement of termination benefits is not dependant on whether the termination benefits are short-term or long-term benefits. [712-10-30-1]

Termination benefits are measured in accordance with the nature of the employee

benefit provided:

  • if they are provided as an enhancement to a post-employment benefit, then an entity applies the requirements for post-employment benefits, except that the requirements for the attribution of benefits are not relevant;
  • if they are expected to be settled wholly before 12 months after the end of the annual reporting period in which the termination benefit is recognised, then an entity applies the requirements for short-term employee benefits; and
  • if they are not expected to be settled wholly before 12 months after the annual reporting date, then an entity applies the requirements for other long-term employee benefits. [IAS 19.169–170]

Also read: Employee benefits

IFRS vs US GAAP Employee benefits

IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits  IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits  IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits  IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits IFRS vs US GAAP Employee benefits  IFRS vs US GAAP Employee benefits   IFRS vs US GAAP Employee benefits  IFRS vs US GAAP Employee benefits 

IFRS vs US GAAP Employee benefits

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