3.28ȱ Othersȱtakeȱtheȱviewȱthat,ȱifȱemployeesȱdoȱnotȱreceiveȱanyȱ‘backlog’ȱofȱbenefitsȱforȱpastȱserviceȱ (vestedȱorȱunvested)ȱwhenȱtheyȱbecomeȱeligibleȱtoȱjoinȱtheȱplan,ȱtheyȱareȱnotȱearningȱanythingȱofȱvalueȱforȱ servicesȱbeforeȱthen.ȱȱInȱotherȱwords,ȱtheȱbenefitsȱareȱnotȱbenefitsȱinȱrespectȱofȱservicesȱprovidedȱbeforeȱ vesting.ȱȱInȱaccordanceȱwithȱtheȱviewȱinȱparagraphȱ3.11ȱthatȱtheȱrenderingȱofȱservicesȱisȱtheȱobligatingȱ event,ȱtheȱemployer’sȱcommitmentȱmayȱbeȱviewedȱasȱanȱobligationȱtoȱpayȱbenefitsȱrelatingȱtoȱfutureȱ serviceȱwhich,ȱunderȱthisȱview,ȱisȱnotȱaȱpresentȱobligation.ȱȱThusȱforȱeachȱyearȱofȱserviceȱafterȱageȱ25ȱorȱ fiveȱyears’ȱserviceȱrespectively,ȱaȱpresentȱobligationȱtoȱpayȱaȱbenefitȱofȱ100ȱarisesȱfromȱanȱemployee’sȱ serviceȱinȱthatȱyear.ȱȱItȱisȱthereforeȱclaimedȱthatȱtheȱsubstanceȱofȱbothȱofȱtheseȱarrangementsȱisȱsimilarȱtoȱ thatȱofȱarrangementsȱinȱwhichȱotherȱelementsȱofȱremunerationȱareȱincreasedȱasȱemployeesȱprogressȱ throughȱtheirȱcareers.ȱȱȱ
3.29ȱ Theȱconclusionȱmayȱbeȱdrawnȱthatȱifȱemployeesȱbecomeȱeligibleȱforȱbenefitsȱafterȱaȱqualifyingȱ periodȱofȱservice,ȱnoȱliabilityȱwouldȱariseȱinȱrespectȱofȱservicesȱprovidedȱduringȱtheȱqualifyingȱperiodȱ unlessȱtheȱbenefitsȱareȱinȱrespectȱofȱservicesȱduringȱthatȱperiodȱandȱtheȱemployerȱhasȱanȱobligationȱthatȱitȱ cannotȱrealisticallyȱavoid.ȱȱȱȱ
3.30ȱ TheȱsubjectȱofȱattributingȱbenefitsȱtoȱperiodsȱofȱserviceȱisȱconsideredȱfurtherȱinȱtheȱSectionȱ6,ȱ includingȱsituationsȱwhenȱserviceȱinȱlaterȱperiodsȱleadsȱtoȱhigherȱbenefitsȱthanȱserviceȱinȱearlierȱperiods.ȱ
4 Should the liability reflect benefits that the entity might become
4.3ȱ Twoȱviewsȱmayȱbeȱcontrastedȱthus:ȱ
(i) underȱtheȱviewȱthatȱtheȱliabilityȱreflectsȱonlyȱbenefitsȱthatȱtheȱentityȱisȱcommittedȱtoȱnow,ȱaȱchargeȱ (orȱcredit)ȱtoȱprofitȱorȱlossȱisȱrecognisedȱwhenȱtheȱvalueȱofȱaccruedȱpensionȱbenefitsȱinȱincreasedȱ (orȱdecreased)ȱbyȱsubsequentȱactions,ȱ
(ii) underȱtheȱviewȱthatȱtheȱliabilityȱreflectsȱalsoȱbenefitsȱthatȱtheȱentityȱmightȱbecomeȱcommittedȱtoȱinȱ theȱfuture,ȱanȱestimateȱofȱtheȱincreaseȱ(orȱdecrease)ȱinȱtheȱvalueȱofȱaccruedȱpensionȱbenefitsȱwillȱ alreadyȱhaveȱbeenȱrecognisedȱbyȱtheȱtimeȱitȱoccurs.ȱȱ
Employerȱhasȱlittleȱorȱnoȱdiscretionȱtoȱavoidȱincreasingȱpensionȱbenefitsȱ
Increasesȱguaranteedȱbyȱlawȱorȱcontractȱ
4.4ȱ Inȱmanyȱjurisdictions,ȱfutureȱincreasesȱinȱpensionsȱinȱpayment,ȱpensionsȱinȱdefermentȱorȱbenefitsȱ earnedȱbyȱemployeesȱinȱserviceȱareȱguaranteedȱbyȱlawȱorȱcontractȱinȱorderȱtoȱprovideȱsomeȱprotectionȱ againstȱinflation.ȱȱTheȱamountȱofȱincreasesȱisȱsometimesȱlinkedȱtoȱpriceȱinflation,ȱsometimesȱtoȱsalaryȱ inflation.ȱȱSometimesȱindexationȱisȱlimitedȱtoȱaȱmaximumȱamount.ȱȱȱ
Exampleȱ7ȱ
Theȱbenefitȱisȱaȱlumpȱsum,ȱpayableȱonȱretirement,ȱequalȱtoȱ10%ȱofȱtheȱemployee’sȱsalaryȱinȱeachȱ yearȱofȱservice.ȱȱTheȱbenefitȱis,ȱhowever,ȱincreasedȱinȱlineȱwithȱchangesȱinȱtheȱconsumerȱpriceȱ indexȱfromȱtheȱperiodȱitȱisȱearnedȱuntilȱitȱisȱpaid.ȱȱTheȱbenefitsȱvestȱimmediately.ȱ
4.5ȱ TheȱbenefitȱinȱExampleȱ7ȱisȱtheȱsameȱasȱinȱExampleȱ2,ȱexceptȱthatȱinȱExampleȱ7ȱtheȱamountȱ promisedȱonȱretirementȱisȱincreasedȱtoȱreflectȱpriceȱinflation.ȱȱTheȱpromisedȱbenefitȱinȱExampleȱ7ȱforȱeachȱ yearȱofȱserviceȱisȱclearlyȱmoreȱvaluableȱthanȱinȱExampleȱ2.ȱȱItȱisȱclearȱthatȱtheȱentityȱisȱcommittedȱtoȱ inflationȬrelatedȱincreases,ȱalthoughȱitȱdoesȱnotȱknowȱhowȱmuchȱtheyȱwillȱbe.ȱ
Exampleȱ8ȱȱ
Theȱbenefitȱisȱaȱlumpȱsum,ȱpayableȱonȱretirement,ȱequalȱtoȱ10%ȱofȱtheȱemployee’sȱsalaryȱinȱeachȱ yearȱofȱserviceȱplusȱaȱguaranteedȱreturnȱofȱ5%ȱperȱyearȱonȱtheȱcontributions.ȱȱ
4.6ȱ TheȱbenefitȱinȱExampleȱ8ȱincludesȱtheȱguaranteeȱofȱaȱspecifiedȱreturnȱonȱcontributionsȱforȱeachȱ yearȱofȱservice.ȱȱTheȱguaranteeȱgivesȱriseȱtoȱaȱpresentȱobligation,ȱwhichȱmeansȱthatȱtheȱguaranteeȱshouldȱ beȱreflectedȱinȱtheȱliabilityȱthatȱarisesȱduringȱservice.ȱȱȱ
4.7ȱ Itȱseemsȱclearȱthatȱtheȱpresentȱobligationȱincludesȱfutureȱincreasesȱtoȱbenefitsȱthatȱareȱ
guaranteedȱbyȱlawȱorȱcontract,ȱwhichȱmeansȱthatȱexpectationsȱofȱfutureȱincreasesȱshouldȱbeȱreflectedȱinȱ theȱliabilityȱthatȱarisesȱduringȱservice.
ȱ
Constructiveȱobligationsȱtoȱincreaseȱbenefitsȱ
4.8ȱ Inȱsomeȱplans,ȱalthoughȱbenefitȱincreasesȱmayȱnotȱbeȱguaranteedȱbyȱlawȱorȱcontract,ȱconstructiveȱ obligationsȱtoȱpastȱand/orȱpresentȱemployeesȱmayȱbeȱinferredȱfromȱpastȱactions,ȱe.g.ȱwhenȱthereȱisȱanȱ establishedȱpracticeȱofȱgrantingȱincreasesȱeveryȱyear.ȱȱȱ
4.9ȱ Forȱthisȱpurpose,ȱwhatȱwouldȱbeȱdeemedȱtoȱbeȱaȱconstructiveȱobligationȱoughtȱtoȱbeȱconsistentȱ withȱtheȱcriteriaȱthatȱemergeȱfromȱtheȱIASB’sȱrevisionȱtoȱIASȱ37ȱinȱorderȱtoȱachieveȱgreaterȱconsistencyȱinȱ theȱaccountingȱforȱsuchȱbenefits.ȱȱTheȱpresentȱguidanceȱonȱconstructiveȱobligationsȱinȱIASȱ19ȱisȱquiteȱ permissive.ȱȱForȱexample,ȱparagraphȱ52ȱstates:ȱ“Anȱexampleȱofȱaȱconstructiveȱobligationȱisȱwhereȱaȱchangeȱ inȱtheȱentity’sȱinformalȱpracticesȱwouldȱcauseȱunacceptableȱdamageȱtoȱitsȱrelationshipȱwithȱemployees.”ȱȱ AnȱNAPFȱPolicyȱPaperȱAccountingȱforȱPensions:ȱPensionsȱaccountingȱinȱfinancialȱstatementsȱpreparedȱunderȱ InternationalȱFinancialȱReportingȱStandardsȱ(Novemberȱ2004)ȱnotesȱthatȱinȱpracticeȱconstructiveȱobligationȱ hasȱbeenȱwidelyȱinterpretedȱandȱfutureȱpensionȱincreasesȱareȱusuallyȱincludedȱevenȱwhenȱtheyȱareȱ discretionary.ȱȱ
4.10ȱ Underȱtheȱproposedȱdefinitionȱofȱaȱconstructiveȱobligationȱinȱtheȱcurrentȱexposureȱdraftȱofȱ
amendmentsȱtoȱIASȱ37,ȱanȱentityȱwouldȱhaveȱtoȱcreateȱaȱvalidȱexpectationȱ(ofȱincreases)ȱthatȱtheȱmembersȱ shouldȱbeȱreasonablyȱableȱtoȱrelyȱonȱ(seeȱparagraphsȱ2.5Ȭ2.6,ȱ2.9ȱabove).ȱȱMembersȱmayȱhopeȱthatȱ
increasesȱwillȱbeȱgivenȱ–ȱperhapsȱbecauseȱtheȱemployerȱhasȱaȱpolicyȱofȱconsideringȱgivingȱincreasesȱandȱ hasȱgivenȱthemȱfromȱtimeȱtoȱtimeȱ–ȱbutȱhopeȱwouldȱnotȱbeȱsufficientȱtoȱgiveȱriseȱtoȱaȱconstructiveȱ obligation.ȱȱȱ
4.11ȱ Ifȱconstructiveȱobligationsȱtoȱgiveȱincreasesȱtoȱbenefitsȱwereȱaccountedȱforȱdifferentlyȱfromȱ expectedȱdiscretionaryȱincreasesȱtoȱbenefitsȱ(seeȱdiscussionȱinȱparagraphȱ4.13ȱetȱseq),ȱinȱpracticeȱitȱwouldȱ beȱnecessaryȱtoȱconsiderȱallȱtheȱcircumstancesȱbecauseȱthereȱwouldȱbeȱaȱspectrumȱofȱexpectations.ȱȱThisȱ rangesȱfromȱtheȱhopeȱthatȱincreasesȱwouldȱbeȱpaid,ȱthroughȱanȱexpectationȱthatȱtheyȱwouldȱbeȱpaid,ȱtoȱ groundsȱforȱbelievingȱthatȱincreasesȱwouldȱbeȱpaidȱandȱatȱsomeȱpointȱalongȱthatȱspectrumȱtheȱexpectationȱ wouldȱbecomeȱsufficientlyȱvalidȱforȱaȱconstructiveȱobligationȱtoȱexist.ȱ
4.12ȱ Itȱseemsȱclearȱthatȱtheȱpresentȱobligationȱincludesȱfutureȱincreasesȱtoȱbenefitsȱifȱanȱentityȱhasȱaȱ constructiveȱobligationȱtoȱgiveȱthem,ȱwhichȱmeansȱthatȱexpectationsȱofȱfutureȱincreasesȱshouldȱbeȱ reflectedȱinȱtheȱliabilityȱthatȱarisesȱduringȱservice.ȱȱConstructiveȱobligationsȱoughtȱtoȱbeȱasȱdefinedȱinȱ IASȱ37ȱorȱanyȱrevision.ȱȱȱ
Whenȱanȱemployerȱhasȱdiscretionȱtoȱvaryȱpensionȱbenefits,ȱshouldȱtheȱeffectȱofȱdiscretionaryȱbehaviourȱbeȱestimatedȱ andȱreflectedȱinȱtheȱmeasurementȱofȱliabilitiesȱandȱofȱexpensesȱthatȱareȱrecognisedȱasȱservicesȱareȱprovided?ȱ
4.13ȱ Inȱsomeȱplans,ȱthereȱisȱconsiderableȱemployerȱdiscretionȱtoȱchangeȱbenefitsȱduringȱtheȱlifeȱofȱtheȱ plan.ȱȱ
4.14ȱ Benefitsȱreferredȱtoȱasȱ‘discretionary’ȱincludeȱfutureȱincreasesȱinȱpensionsȱinȱpayment,ȱpensionsȱinȱ defermentȱorȱbenefitsȱearnedȱbyȱemployeesȱinȱserviceȱthatȱareȱnotȱlegalȱorȱconstructiveȱobligationsȱ(asȱ definedȱinȱtheȱaccountingȱstandardsȱonȱliabilities).ȱȱForȱexample,ȱanȱentityȱmayȱhaveȱaȱpolicyȱthatȱitȱwillȱ considerȱmakingȱbenefitȱincreasesȱoverȱandȱaboveȱanyȱincreasesȱguaranteedȱinȱtheȱplanȱrulesȱandȱhasȱaȱ pastȱpracticeȱofȱgrantingȱincreasesȱfromȱtimeȱtoȱtime.ȱȱȱ
Exampleȱ9ȱȱ
Aȱplan’sȱnormalȱretirementȱageȱisȱ65.ȱȱTheȱemployerȱhasȱhadȱaȱpolicyȱofȱallowingȱemployeesȱagedȱ 60ȱandȱoverȱtoȱtakeȱearlyȱretirementȱandȱdrawȱaȱpensionȱimmediatelyȱwithoutȱreductionȱfromȱtheȱ pensionȱthatȱtheyȱwouldȱbeȱentitledȱtoȱatȱageȱ65ȱunderȱtheȱtermsȱofȱtheȱplan.ȱ ȱTheȱemployerȱis,ȱ however,ȱentitledȱtoȱrefuseȱtoȱpayȱenhancedȱbenefitsȱforȱearlyȱretirementȱandȱhasȱbeenȱtakenȱoverȱ byȱanotherȱentityȱwhoseȱmanagementȱhasȱdecidedȱthatȱitȱwillȱnoȱlongerȱapproveȱenhancedȱ benefits.ȱȱȱȱ
4.15ȱ Twoȱbroadȱviewsȱemergeȱonȱthisȱissue.ȱ
4.16ȱ Someȱbelieveȱthatȱthereȱisȱonlyȱoneȱpresentȱobligationȱ–ȱaȱcontractualȱobligationȱtoȱpayȱaȱ pensionȱforȱpastȱservice.ȱȱItȱisȱanȱobligationȱofȱanȱuncertainȱamount.ȱȱUnderȱthisȱview,ȱifȱanȱemployeeȱisȱ owedȱaȱpensionȱfor,ȱsay,ȱtenȱyears’ȱservice,ȱtheȱonlyȱissueȱisȱtoȱestimateȱhowȱmuchȱitȱwillȱcost.ȱȱTheȱ presentȱobligationȱisȱnotȱlimitedȱtoȱreflectingȱestimatesȱofȱfutureȱpaymentsȱthatȱtheȱentityȱisȱpresentlyȱ committedȱ(byȱlegalȱorȱconstructiveȱobligation)ȱtoȱpay.ȱȱTherefore,ȱallȱexpectedȱpayments,ȱincludingȱ benefitsȱthatȱtheȱentityȱmightȱbecomeȱcommittedȱtoȱinȱtheȱfuture,ȱshouldȱbeȱreflectedȱinȱtheȱliability.ȱ 4.17ȱ Underȱthisȱviewȱthereȱisȱalreadyȱaȱliabilityȱforȱanȱelementȱofȱfutureȱincreasesȱthatȱareȱ
discretionary.ȱȱTherefore,ȱestimatesȱofȱfutureȱincreasesȱinȱbenefitsȱwillȱalreadyȱhaveȱbeenȱrecognisedȱbyȱ theȱtimeȱtheyȱoccur.ȱThusȱinȱExampleȱ9,ȱtheȱliabilityȱforȱpastȱserviceȱ(andȱtheȱpensionȱexpenseȱforȱeachȱ period)ȱshouldȱreflectȱexpectationsȱofȱenhancedȱbenefits.ȱȱAnȱargumentȱisȱthatȱtheȱrightsȱofȱemployeesȱ whoȱhopeȱtoȱreceiveȱmoreȱgenerousȱbenefitsȱandȱtheȱobligationsȱofȱemployersȱwhoȱhaveȱaȱpolicyȱofȱ consideringȱgivingȱthemȱareȱmoreȱvaluableȱthanȱwhenȱdiscretionaryȱincreasesȱareȱnotȱinȱprospect,ȱandȱsoȱ theȱeconomicȱcostȱtoȱtheȱemployerȱofȱcurrentȱserviceȱisȱgreater.ȱȱȱȱȱ
4.18ȱ Othersȱbelieveȱthatȱtheȱpresentȱobligationȱincludesȱonlyȱbenefitsȱthatȱtheȱentityȱisȱpresentlyȱ committedȱ(byȱlegalȱorȱconstructiveȱobligation)ȱtoȱpay.ȱȱUnderȱthisȱview,ȱtheȱpracticeȱofȱgrantingȱ increasesȱtoȱbenefitsȱrelatingȱtoȱpastȱserviceȱwouldȱhaveȱtoȱmeetȱtheȱdefinitionȱofȱaȱconstructiveȱ obligationȱinȱitsȱownȱrightȱinȱorderȱtoȱgiveȱriseȱtoȱaȱpresentȱobligation.ȱȱIfȱitȱdoesȱnot,ȱaȱsecondȱeventȱ–ȱ say,ȱtheȱannouncementȱofȱaȱdiscretionaryȱincreaseȱ–ȱisȱnecessaryȱtoȱconfirmȱaȱpresentȱobligationȱinȱ respectȱofȱtheȱelementȱofȱbenefitsȱthatȱisȱdiscretionary.ȱȱȱ
4.19ȱ Underȱthisȱview,ȱaȱliabilityȱ(andȱexpense)ȱdoesȱnotȱariseȱinȱrespectȱofȱfutureȱincreasesȱinȱbenefitsȱ untilȱtheȱentityȱisȱcommittedȱ(byȱlegalȱorȱconstructiveȱobligation)ȱtoȱpayȱthem.ȱȱThusȱinȱExampleȱ9,ȱtheȱ liabilityȱforȱpastȱserviceȱ(andȱtheȱpensionȱexpenseȱforȱeachȱperiod)ȱshouldȱbeȱbasedȱonȱtheȱbenefitsȱthatȱtheȱ
employerȱisȱpresentlyȱcommittedȱtoȱprovideȱandȱshouldȱnotȱreflectȱexpectationsȱofȱenhancedȱbenefits.ȱȱȱ 4.20ȱ Thoseȱwhoȱinterpretȱtheȱliabilityȱdefinitionȱinȱthisȱwayȱbelieveȱthatȱthisȱtreatmentȱwouldȱassistȱ entitiesȱtoȱreportȱtransparentlyȱwhatȱtheyȱareȱcommittedȱtoȱatȱtheȱreportingȱdate.ȱȱTheyȱbelieveȱthatȱthisȱ providesȱtheȱclearestȱviewȱforȱusersȱofȱtheȱentity’sȱobligations.ȱȱAsȱmentionedȱearlier,ȱitȱisȱnotȱpossibleȱtoȱ encapsulateȱallȱrelevantȱinformationȱaboutȱtheȱnatureȱofȱpensionȱobligationsȱinȱtheȱnumbersȱthatȱareȱ reportedȱinȱtheȱbalanceȱsheetȱorȱincomeȱstatement.ȱȱUnderȱthisȱview,ȱinformationȱaboutȱpossibleȱfutureȱ commitmentsȱthatȱmightȱariseȱfromȱmanagement’sȱfutureȱactionsȱwouldȱbeȱclearerȱtoȱusersȱifȱitȱwereȱ communicatedȱbyȱseparateȱdisclosureȱratherȱthanȱbyȱrecognitionȱasȱpartȱofȱanȱalreadyȱcomplexȱliability.ȱȱȱ 4.21ȱ Someȱbelieveȱthereȱisȱaȱsignificantȱdifferenceȱinȱtheȱeconomicȱburdenȱofȱaȱplanȱinȱwhichȱtheȱentityȱ hasȱdiscretionȱandȱaȱplanȱinȱwhichȱanȱentityȱisȱcommittedȱtoȱprovideȱbenefitȱincreasesȱȬȱforȱexample,ȱitȱisȱ widelyȱbelievedȱthatȱintroductionȱofȱmandatoryȱindexationȱofȱbenefitsȱinȱtheȱUKȱimposedȱaȱconsiderableȱ additionalȱeconomicȱburdenȱonȱpensionȱplans.ȱȱTheyȱareȱconcernedȱthatȱanȱapproachȱthatȱreflectsȱallȱ expectedȱpaymentsȱinȱtheȱmeasurementȱofȱexistingȱliabilitiesȱmeansȱthatȱtheȱcostsȱassociatedȱwithȱ
decisionsȱtakenȱinȱfutureȱperiodsȱareȱdisguisedȱinȱfinancialȱstatementsȱbecauseȱtheyȱhaveȱbeenȱanticipatedȱ inȱearlierȱperiods.ȱȱInȱtheirȱviewȱthisȱgoesȱagainstȱtheȱgrainȱofȱtheȱrecentȱeffortsȱofȱaccountingȱstandardȱ settersȱtoȱprecludeȱtheȱrecognitionȱofȱliabilitiesȱinȱrespectȱofȱfutureȱcostsȱwhenȱaȱlegalȱorȱconstructiveȱ obligationȱdoesȱnotȱexist.ȱȱTheyȱbelieveȱthatȱthisȱisȱaȱ‘profitȬsmoothing’ȱapproachȱwhichȱisȱnotȱ representationallyȱfaithfulȱofȱtheȱactivitiesȱofȱeachȱperiod.ȱȱȱ
4.22ȱ Someȱhaveȱadvisedȱthatȱdiscretionaryȱincreasesȱtoȱbenefitsȱareȱoftenȱgrantedȱonlyȱifȱadequateȱ fundingȱisȱinȱplace.ȱȱTheyȱbelieveȱitȱwouldȱbeȱwrongȱtoȱreflectȱasȱaȱliabilityȱpossibleȱincreasesȱtoȱbenefitsȱ thatȱwouldȱnotȱbeȱconsideredȱunlessȱjustifiedȱbyȱfutureȱinvestmentȱreturns,ȱwhichȱareȱnotȱreflectedȱasȱ assets.ȱȱInȱsuchȱcircumstances,ȱtheyȱbelieveȱtheȱfinancialȱconsequencesȱofȱchangesȱtoȱbenefitsȱshouldȱbeȱ recognisedȱwhenȱtheȱdecisionsȱareȱmade.ȱȱȱȱ
4.23ȱ Someȱhaveȱnotedȱthatȱpastȱpracticeȱandȱexpectationsȱofȱdiscretionaryȱbenefitsȱareȱlikelyȱtoȱchangeȱ inȱresponseȱtoȱchangingȱcircumstances.ȱȱTheyȱbelieveȱthatȱevenȱifȱinclusionȱofȱdiscretionaryȱbenefitsȱcouldȱ beȱjustifiedȱconceptually,ȱtheyȱcouldȱnotȱbeȱmeasuredȱreliably.ȱȱȱ
4.24ȱ Thisȱpaperȱconcludesȱthatȱonlyȱbenefitsȱthatȱtheȱentityȱisȱpresentlyȱcommittedȱ(byȱlegalȱorȱ constructiveȱobligation)ȱtoȱpayȱshouldȱbeȱreflectedȱinȱtheȱliability.ȱȱȱ
Contingentȱbenefitsȱ
4.25ȱ Somewhereȱbetweenȱguaranteedȱbenefitsȱandȱdiscretionaryȱbenefitsȱisȱaȱrangeȱofȱbenefitsȱthatȱ mightȱbeȱdescribedȱasȱcontingent,ȱi.e.ȱbenefitsȱthatȱwillȱcrystalliseȱifȱaȱspecifiedȱcontingencyȱoccurs.ȱȱ Examplesȱareȱplansȱthatȱareȱrequiredȱtoȱpayȱpensionsȱthatȱincreaseȱwithȱinflation,ȱbutȱincreasesȱareȱsubjectȱ toȱtheȱfinancialȱpositionȱofȱtheȱsponsoringȱemployerȱorȱ(inȱaȱfundedȱplan)ȱtheȱfundingȱpositionȱofȱtheȱplan.ȱȱ Suchȱcontingentȱbenefitsȱdifferȱfromȱdiscretionaryȱbenefitsȱinȱthatȱthereȱisȱaȱconditionalȱobligationȱunderȱ lawȱorȱcontractȱtoȱgiveȱbenefits.ȱȱȱ
4.26ȱ Asȱdiscussedȱinȱparagraphȱ4.16ȱabove,ȱsomeȱviewȱtheȱaccountingȱforȱsuchȱbenefitsȱasȱaȱ
measurementȱissue.ȱȱConsider,ȱforȱexample,ȱtheȱsituationȱwhereȱanȱemployerȱhasȱanȱobligationȱtoȱincreaseȱ pensionsȱinȱlineȱwithȱinflation,ȱbutȱhasȱanȱoptionȱtoȱreduceȱorȱevenȱeliminateȱanȱincreaseȱifȱtheȱfinancialȱ positionȱofȱtheȱplanȱbecomesȱpoor.ȱȱUnderȱthisȱview,ȱtheȱliabilityȱwouldȱbeȱreportedȱatȱaȱlowerȱamountȱtoȱ reflectȱtheȱprobabilityȱthatȱtheȱplan’sȱfinancialȱpositionȱwillȱbecomeȱpoorȱandȱthatȱpensionsȱwillȱbeȱ increasedȱbyȱaȱlowerȱamountȱthanȱtheyȱwouldȱotherwiseȱbe.ȱȱȱ
4.27ȱ Othersȱbelieveȱthat,ȱasȱwithȱtheirȱviewȱofȱdiscretionaryȱbenefitsȱinȱparagraphȱ4.18ȱabove,ȱ contingenciesȱmayȱconcernȱtheȱrecognitionȱofȱliabilities.ȱȱWeȱsayȱ‘may’ȱbecauseȱclearlyȱcontingentȱ arrangementsȱcanȱbeȱcomplexȱandȱitȱisȱnotȱpossibleȱtoȱmakeȱgeneralȱassertionsȱasȱtoȱwhetherȱ
contingenciesȱconcernȱrecognitionȱorȱmeasurement.ȱȱHowever,ȱitȱisȱreasonedȱthatȱsomeȱfutureȱeventsȱgiveȱ riseȱtoȱnewȱobligationsȱorȱchangeȱtheȱobligationsȱthatȱpresentlyȱexist,ȱinȱwhichȱcaseȱtheȱeffectsȱareȱnotȱ recognisedȱuntilȱtheyȱoccur.ȱ
4.28ȱ Oneȱexampleȱisȱwhenȱincreasesȱinȱbenefitsȱdependȱonȱtheȱperformanceȱofȱinvestments.ȱȱUnderȱthisȱ view,ȱchangesȱinȱtheȱvalueȱofȱinvestmentsȱandȱconsequentȱchangesȱinȱtheȱliabilityȱtoȱpayȱbenefitsȱshouldȱ bothȱbeȱrecognisedȱwhenȱtheyȱoccur.ȱȱForȱexample,ȱifȱanȱemployerȱhasȱanȱobligationȱtoȱuseȱaȱsurplusȱinȱaȱ planȱtoȱincreaseȱbenefits,ȱaȱliabilityȱtoȱincreaseȱbenefitsȱwouldȱariseȱwhenȱtheȱsurplusȱarises.ȱȱȱȱ
4.29ȱ Anotherȱexampleȱisȱwhenȱincreasesȱinȱbenefitsȱareȱsubjectȱtoȱanȱentity’sȱfinancialȱposition.ȱȱ ConsiderȱtheȱbenefitȱinȱExampleȱ7ȱ(paragraphȱ4.4).ȱȱItȱwasȱconcludedȱthatȱtheȱcontractualȱpromiseȱtoȱgiveȱ indexȬlinkedȱincreasesȱisȱaȱliability.ȱȱInȱtheȱlanguageȱofȱIASȱ37,ȱtheȱobligationȱexistsȱindependentlyȱofȱtheȱ entity’sȱfutureȱactions.ȱȱUnderȱthisȱview,ȱthereȱisȱaȱsimilarȱargumentȱinȱrelationȱtoȱaȱbenefitȱthatȱisȱ contingentȱonȱanȱentity’sȱfinancialȱpositionȱ–ȱtheȱobligationȱcannotȱrealisticallyȱbeȱavoidedȱbecauseȱtheȱ entityȱwouldȱhaveȱtoȱdamageȱitselfȱeconomicallyȱinȱorderȱtoȱavoidȱit.ȱȱConsequently,ȱtheȱliabilityȱtoȱ increaseȱbenefitsȱisȱnotȱreducedȱtoȱreflectȱpossibleȱfutureȱchangesȱinȱtheȱentity’sȱfinancialȱpositionȱ 4.30ȱ Thisȱpaperȱputsȱforwardȱtheȱviewȱthatȱreportedȱliabilitiesȱshouldȱnotȱreflectȱtheȱeffectsȱofȱ possibleȱfutureȱchangesȱtoȱanȱentity’sȱfinancialȱpositionȱorȱaȱplan’sȱfundingȱpositionȱ–ȱifȱsuchȱeventsȱ occurȱwithȱconsequencesȱforȱtheȱamountȱofȱbenefitsȱthatȱareȱgiven,ȱallȱofȱtheȱeffectsȱshouldȱbeȱ recognisedȱwhenȱtheyȱoccur.ȱ
Whenȱbenefitsȱareȱ linkedȱtoȱfutureȱ salaries,ȱshouldȱtheȱeffectȱofȱfutureȱsalaryȱincreasesȱbeȱreflectedȱinȱtheȱ measurementȱofȱliabilitiesȱandȱofȱexpensesȱthatȱareȱrecognisedȱasȱservicesȱareȱprovided
4.31ȱ Manyȱbenefitȱdesignsȱlinkȱtheȱamountȱofȱbenefitsȱtoȱtheȱemployee’sȱsalaryȱatȱorȱnearȱretirementȱorȱ leavingȱservice.ȱȱOneȱofȱtheȱmostȱdifficultȱquestionsȱisȱwhetherȱtheȱliabilityȱthatȱarisesȱduringȱserviceȱ shouldȱreflectȱtheȱeffectsȱofȱfutureȱsalaryȱincreases.ȱȱ
4.32ȱ Thereȱseemȱtoȱbeȱtwoȱpervasiveȱissues:ȱ
(i) Membershipȱofȱaȱfinalȱsalaryȱpensionȱplanȱisȱusuallyȱconsideredȱtoȱbeȱaȱmoreȱvaluableȱbenefitȱthanȱ membershipȱofȱaȱcurrentȱorȱaverageȱsalaryȱplan,ȱbecauseȱitȱisȱusuallyȱassumedȱthatȱsalariesȱwillȱ increaseȱduringȱanȱemployee’sȱcareer.ȱ ȱIfȱitȱisȱmoreȱvaluable,ȱwhenȱshouldȱtheȱdifferenceȱbeȱ reflectedȱinȱtheȱfinancialȱstatements?ȱ
(ii) Doesȱtheȱentityȱhaveȱanȱobligationȱ(legalȱorȱconstructive)ȱtoȱincreaseȱbenefitsȱthatȱhaveȱbeenȱ earnedȱbyȱincreasingȱpensionableȱsalaries?ȱ
4.33ȱ Theȱfollowingȱexampleȱisȱbasedȱonȱtheȱexampleȱaccompanyingȱparagraphȱ65ȱofȱIASȱ19,ȱwhichȱ illustratesȱtheȱrequiredȱ‘projectedȱunitȱcredit’ȱmethodȱtoȱdetermineȱtheȱpresentȱvalueȱofȱdefinedȱbenefitȱ obligationsȱandȱcurrentȱserviceȱcost.4ȱȱThisȱisȱaȱsimpleȱexampleȱofȱaȱfinalȱsalaryȱplan.ȱȱȱ
Exampleȱ10ȱ
Aȱlumpȱsumȱbenefitȱisȱpayableȱonȱterminationȱofȱserviceȱandȱequalȱtoȱ10%ȱofȱfinalȱsalaryȱforȱeachȱ yearȱofȱservice.ȱȱTheȱsalaryȱinȱyearȱ1ȱisȱ10,000ȱandȱisȱassumedȱtoȱincreaseȱatȱ7%ȱ(compound)ȱeachȱ year.ȱ
Theȱbenefitȱattributedȱtoȱeachȱyearȱ(usingȱtheȱprojectedȱunitȱcreditȱmethod)ȱforȱanȱemployeeȱwhoȱisȱ expectedȱtoȱleaveȱatȱtheȱendȱofȱyearȱ5ȱisȱsetȱoutȱinȱColumnȱBȱofȱTableȱ1ȱbelow.ȱȱUnderȱthisȱmethod,ȱaȱ benefitȱequalȱtoȱ10%ȱofȱexpectedȱfinalȱsalaryȱisȱattributedȱtoȱeachȱyearȱofȱservice.ȱ
Tableȱ1ȱalsoȱsetsȱout,ȱinȱColumnȱA,ȱtheȱbenefitȱthatȱwouldȱbeȱattributedȱtoȱeachȱyearȱifȱtheȱserviceȱcostȱwasȱ basedȱonȱcurrentȱsalaryȱratherȱthanȱexpectedȱfinalȱsalary.ȱȱUnderȱthisȱmethodȱtheȱliabilityȱatȱeachȱreportingȱ dateȱisȱequalȱtoȱ10%ȱofȱcurrentȱsalaryȱforȱeachȱyearȱofȱserviceȱ–ȱforȱexample,ȱinȱyearȱ2ȱtheȱliabilityȱofȱ2,140ȱ isȱ10%ȱofȱ10,700ȱ(1,070)ȱ×ȱ2ȱyearsȱservice.ȱȱTheȱexpenseȱforȱeachȱreportingȱperiodȱisȱequalȱtoȱtheȱincreaseȱinȱ theȱliability.ȱȱȱȱ
4 An objective of the ‘projected unit credit’ method is to provide a stable contribution rate for active members, as a percentage of pensionable salary, if there is a stable membership of a plan, i.e. if leavers are balanced by new entrants. In calculating the actuarial liability, pensionable salary is projected up to the assumed end of an employee’s career.
Forȱsimplicity,ȱdiscountingȱisȱignoredȱinȱthisȱillustrationȱ(alternatively,ȱitȱcouldȱbeȱsaidȱthatȱaȱdiscountȱrateȱ ofȱ0%ȱisȱassumed).ȱ
Tableȱ1ȱ ȱ
Finalȱsalaryȱplanȱ
Yearȱ Expectedȱ salaryȱ
Benefitȱattributedȱ
ȱ ȱ Aȱ
Currentȱsalaryȱ
Bȱ
Finalȱsalaryȱ(10%)ȱ(IASȱ19)ȱ
ȱ ȱ Currentȱ
periodȱ
Liabilityȱ accumulatedȱ
Currentȱ periodȱ
Liabilityȱ accumulatedȱ
1ȱ 10,000ȱ 1,000ȱ 1,000ȱ 1,311ȱ 1,311ȱ
2ȱ 10,700ȱ 1,140ȱ 2,140ȱ 1,311ȱ 2,622ȱ
3ȱ 11,449ȱ 1,295ȱ 3,435ȱ 1,311ȱ 3,933ȱ
4ȱ 12,250ȱ 1,465ȱ 4,900ȱ 1,311ȱ 5,244ȱ
5ȱ 13,107ȱ 1,655ȱ 6,555ȱ 1,311ȱ 6,555ȱ
ȱ ȱ 6,555ȱ ȱ 6,555ȱ ȱ
4.34ȱ StandardȬsettersȱhaveȱpreviouslyȱtakenȱtheȱviewȱthatȱfutureȱincreasesȱinȱpensionableȱsalariesȱ shouldȱbeȱreflectedȱinȱtheȱliability.ȱȱThusȱinȱExampleȱ10ȱtheȱliabilityȱatȱeachȱreportingȱdateȱduringȱserviceȱ reflectsȱassumptionsȱasȱtoȱtheȱemployee’sȱsalaryȱwhenȱheȱleavesȱservice.5ȱȱForȱexample,ȱafterȱoneȱyear’sȱ serviceȱtheȱliabilityȱ(andȱexpenseȱforȱtheȱperiod)ȱwouldȱreflectȱ10%ȱofȱtheȱemployee’sȱestimatedȱfinalȱsalaryȱ (ColumnȱBȱinȱTableȱ1).ȱȱȱ
4.35ȱ Someȱhaveȱarguedȱthatȱfutureȱsalaryȱincreasesȱshouldȱnotȱbeȱreflectedȱinȱtheȱliability.ȱȱThusȱinȱ Exampleȱ10ȱtheȱliabilityȱatȱeachȱreportingȱdateȱwouldȱreflectȱonlyȱtheȱbenefitȱearnedȱbyȱtheȱemployeeȱifȱheȱ leftȱserviceȱatȱtheȱreportingȱdateȱ(ColumnȱAȱinȱTableȱ1).6ȱȱȱȱ
5 This measure of liability is referred to in SFAS 87 as the ‘Projected benefit obligation’ (PBO).
6 This measure of liability is referred to in SFAS 87 as the ‘Accumulated benefit obligation’ (ABO).
4.36ȱ Asȱtheȱaboveȱexampleȱillustrates,ȱtheȱeffectȱofȱexcludingȱexpectedȱfutureȱsalaryȱgrowthȱisȱthat:ȱ
(a)ȱ smallerȱliabilitiesȱareȱreportedȱuntilȱtheȱendȱofȱemployees’ȱserviceȱlives,ȱandȱȱ
(b)ȱ aȱrising,ȱratherȱthanȱlevel,ȱcostȱtrendȱisȱreportedȱduringȱemployees’ȱserviceȱlives,ȱbecauseȱeachȱ increaseȱinȱaccruedȱbenefitsȱthatȱresultsȱfromȱanȱincreaseȱinȱpensionableȱsalaryȱisȱtreatedȱasȱanȱ expenseȱofȱtheȱcurrentȱperiod. 7ȱȱ
Theȱfinancialȱeffectȱofȱincludingȱorȱnotȱincludingȱfutureȱsalaryȱgrowthȱwillȱvaryȱaccordingȱtoȱtheȱmaturityȱ ofȱtheȱplanȱ(i.e.ȱtheȱeffectȱisȱmoreȱpronouncedȱtheȱmoreȱactiveȱemployeesȱthereȱareȱinȱtheȱplan).ȱȱȱ
4.37ȱ Alternativeȱviewsȱhaveȱcoalescedȱaroundȱtwoȱpositions:ȱ
(a)ȱ Someȱbelieveȱthatȱtheȱliabilityȱforȱpastȱserviceȱ(andȱtheȱpensionȱexpenseȱforȱeachȱperiod)ȱ shouldȱbeȱbasedȱonȱexpectationsȱofȱemployees’ȱpensionableȱsalariesȱwhenȱtheyȱleaveȱservice.ȱ
(b)ȱ Othersȱ(includingȱaȱmajorityȱofȱtheȱASB’sȱmembers)ȱbelieveȱthatȱtheȱliabilityȱforȱpastȱserviceȱ (andȱtheȱpensionȱexpenseȱforȱeachȱperiod)ȱshouldȱbeȱbasedȱonȱtheȱbenefitsȱthatȱtheȱemployerȱisȱ presentlyȱcommittedȱtoȱprovideȱ–ȱthisȱwouldȱusuallyȱbeȱbenefitsȱbasedȱonȱcurrentȱsalariesȱplusȱ anyȱincreasesȱthatȱareȱrequiredȱbyȱlawȱorȱcontractȱandȱwouldȱincludeȱotherȱincreasesȱthatȱareȱ seenȱasȱnonȬdiscretionary,ȱi.e.ȱinȱrespectȱofȱwhichȱthereȱisȱaȱconstructiveȱobligation.ȱȱUnderȱthisȱ view,ȱtheȱpensionȱexpenseȱofȱeachȱperiodȱwillȱreflectȱtheȱextraȱpensionȱliabilityȱincurredȱbyȱ givingȱincreasesȱinȱpensionableȱsalaries.ȱ
Unitȱofȱaccountȱ
4.38ȱ Anȱissueȱthatȱwillȱneedȱtoȱbeȱdrawnȱintoȱtheȱdebateȱonȱaȱfutureȱaccountingȱstandardȱisȱtheȱunitȱofȱ account.ȱȱViewsȱonȱtheȱunitȱofȱaccountȱareȱsetȱoutȱinȱSectionȱ5ȱofȱthisȱChapter.ȱȱȱ
4.39ȱ Asȱnotedȱthere,ȱsomeȱbelieveȱthereȱisȱaȱdifferentȱanswerȱtoȱtheȱquestionȱwhetherȱtheȱliabilityȱ shouldȱreflectȱfutureȱsalaryȱincreasesȱifȱtheȱissueȱisȱapproachedȱbyȱfocusingȱonȱtheȱemployer’sȱobligationȱ toȱtheȱworkforceȱasȱaȱwholeȱratherȱthanȱtoȱanȱindividualȱemployee.ȱȱInȱtheirȱview,ȱevenȱifȱitȱcouldȱbeȱ concludedȱthatȱtheȱemployerȱdoesȱnotȱhaveȱanȱobligationȱtoȱincreaseȱpensionableȱsalariesȱofȱanyȱ
individualȱemployee,ȱthatȱargumentȱisȱmuchȱlessȱplausibleȱifȱtheȱfocusȱisȱonȱtheȱworkforceȱasȱaȱwhole.ȱȱȱȱ 4.40ȱ Othersȱdoȱnotȱagreeȱthatȱtakingȱtheȱwholeȱworkforce,ȱratherȱthanȱtheȱindividual,ȱasȱtheȱunitȱofȱ accountȱshouldȱgiveȱriseȱtoȱaȱdifferentȱanswerȱbecauseȱtheyȱbelieveȱthat,ȱunlessȱtheȱemployerȱhasȱaȱ constructiveȱobligationȱtoȱincreaseȱpensionableȱsalariesȱofȱindividuals,ȱitȱcannotȱhaveȱaȱconstructiveȱ obligationȱtoȱtheȱwholeȱworkforce..ȱȱȱȱ
7 In Column A of Table 1, for each year in which pensionable salary is increased by 7%, the pension expense increases by 13-14% compared with the previous year. The figures shown are, of course, before the effect of discounting.
Viewȱthatȱexpectedȱfutureȱsalaryȱincreasesȱshouldȱbeȱreflectedȱ
4.41ȱ Presentȱaccountingȱstandardsȱsetȱoutȱtheirȱbasisȱforȱtheȱviewȱthatȱfutureȱsalaryȱincreasesȱshouldȱbeȱ reflectedȱinȱtheȱmeasurementȱofȱtheȱliability:ȱ
IASȱ19ȱ(BasisȱforȱConclusions,ȱparagraphȱ36)ȱstates:ȱ
“TheȱBoardȱbelievesȱthatȱtheȱassumptionsȱareȱusedȱnotȱtoȱdetermineȱwhetherȱanȱobligationȱexists,ȱ butȱtoȱmeasureȱanȱexistingȱobligationȱonȱaȱbasisȱwhichȱprovidesȱtheȱmostȱrelevantȱmeasureȱofȱtheȱ estimatedȱoutflowȱofȱresources.ȱȱIfȱnoȱincreaseȱisȱassumed,ȱthisȱisȱanȱimplicitȱassumptionȱthatȱnoȱ changeȱwillȱoccurȱandȱitȱwouldȱbeȱmisleadingȱtoȱassumeȱnoȱchangeȱifȱanȱentityȱexpectsȱaȱchange.”ȱȱȱ FRSȱ17ȱ(AppendixȱIV,ȱparagraphȱ12):ȱȱ
“TheȱFRSȱrequiresȱtheȱdefinedȱbenefitȱliabilityȱtoȱbeȱtheȱbestȱestimateȱofȱtheȱpresentȱvalueȱofȱtheȱ amountȱthatȱwillȱactuallyȱbeȱpaidȱout.ȱȱForȱthisȱtoȱbeȱtheȱcase,ȱallȱexpectedȱchangesȱinȱfactorsȱ affectingȱtheȱpaymentsȱshouldȱbeȱtakenȱintoȱaccount.ȱȱForȱfinalȱsalaryȱliabilities,ȱtheȱliabilityȱwillȱ thereforeȱbeȱbasedȱonȱtheȱexpectedȱfinalȱsalary,ȱnotȱtheȱcurrentȱsalary.ȱȱSomeȱargueȱthatȱthisȱisȱnotȱ consistentȱwithȱFRSȱ12ȱbecauseȱtheȱemployerȱhasȱsomeȱcontrolȱoverȱtheȱfutureȱincreasesȱinȱsalaryȱ andȱhenceȱdoesȱnotȱhaveȱaȱpresentȱobligationȱrelatingȱtoȱthoseȱincreases.ȱȱHowever,ȱthereȱisȱaȱ differenceȱbetweenȱaȱpresentȱcommitmentȱtoȱpayȱaȱpensionȱbasedȱonȱpresentȱsalaryȱandȱaȱpresentȱ commitmentȱtoȱpayȱaȱpensionȱbasedȱonȱfinalȱsalary,ȱwhichȱtheȱBoardȱbelievesȱshouldȱbeȱreflectedȱ inȱtheȱmeasurementȱofȱtheȱliabilities.”ȱ
SFASȱ87ȱ(BasisȱforȱConclusions,ȱparagraphȱ143)ȱstates:ȱ
“…theȱBoardȱconcludedȱthatȱestimatedȱfutureȱcompensationȱlevelsȱshouldȱbeȱconsideredȱinȱ measuringȱtheȱserviceȱcostȱcomponentȱandȱtheȱprojectedȱbenefitȱobligationȱifȱtheȱplan’sȱbenefitȱ formulaȱincorporatesȱthem.ȱȱTheȱBoardȱperceivesȱaȱdifferenceȱbetweenȱanȱemployer’sȱpromiseȱtoȱ payȱaȱbenefitȱofȱ1ȱpercentȱofȱanȱemployee’sȱfinalȱpayȱandȱaȱpromiseȱtoȱpayȱanȱemployeeȱaȱfixedȱ amountȱthatȱhappensȱtoȱequalȱ1ȱpercentȱofȱtheȱemployee’sȱcurrentȱpay.ȱ ȱIgnoringȱtheȱfutureȱ variableȱ(finalȱpay)ȱonȱwhichȱtheȱobligationȱinȱtheȱfirstȱcaseȱisȱbasedȱwouldȱresultȱinȱnotȱ recognisingȱthatȱdifference.”ȱ
4.42ȱ Theȱthrustȱofȱtheȱargumentȱforȱincludingȱtheȱeffectȱofȱexpectedȱfutureȱsalaryȱincreasesȱisȱthatȱtheȱ contractualȱarrangementȱasȱitȱexistsȱtodayȱgivesȱanȱunconditionalȱpromiseȱtoȱtheȱemployeeȱthatȱserviceȱ givenȱoverȱtheȱemployee’sȱcareerȱwillȱbeȱpricedȱatȱtheȱrateȱofȱtheȱemployee’sȱfinalȱsalary.ȱȱPutȱsimply,ȱifȱ employeeȱAȱisȱinȱaȱfinalȱsalaryȱschemeȱandȱemployeeȱBȱisȱinȱaȱcurrentȱsalaryȱscheme,ȱtheȱvalueȱofȱtheȱ promiseȱtoȱAȱisȱdifferentȱfromȱtheȱvalueȱofȱtheȱpromiseȱtoȱBȱ(allȱthingsȱbeingȱequal,ȱtheȱvalueȱofȱtheȱ promiseȱtoȱAȱisȱlikelyȱtoȱbeȱgreater)ȱandȱtheyȱshouldȱnot,ȱtherefore,ȱbeȱreportedȱatȱtheȱsameȱliabilityȱ amounts.ȱȱ
4.43ȱ UnderȱthisȱviewȱtheȱobligationȱtoȱreȬpriceȱtheȱbenefitsȱisȱpartȱofȱtheȱpresentȱobligationȱrelatingȱtoȱ pastȱservice.ȱȱTherefore,ȱtheȱpresentȱobligationȱatȱanyȱpointȱinȱtimeȱcouldȱbeȱanalysedȱasȱfollows:ȱ
x partȱofȱtheȱpensionȱpromiseȱhasȱvestedȱ(i.e.ȱtheȱbenefitȱthatȱrelatesȱtoȱpastȱserviceȱandȱcurrentȱ salary)ȱ
x partȱofȱtheȱpensionȱpromiseȱhasȱnotȱyetȱvestedȱ(i.e.ȱtheȱreȬpricingȱfromȱcurrentȱsalaryȱtoȱfinalȱsalaryȱ isȱconditionalȱonȱcompletingȱfurtherȱservice).ȱȱȱ
4.44ȱ Someȱwouldȱconsiderȱtheȱaboveȱanalysisȱtoȱbeȱconsistentȱwithȱtheȱsuggestedȱanalysisȱofȱvestedȱ andȱunvestedȱbenefitsȱinȱparagraphsȱ3.14Ȭ3.23ȱabove.ȱȱInȱparticular,ȱitȱwasȱsuggestedȱthatȱunvestedȱ benefitsȱinȱrelationȱtoȱpastȱserviceȱgiveȱriseȱtoȱaȱpresentȱobligationȱtoȱ‘standȬready’ȱtoȱmakeȱpaymentsȱifȱ theȱemployeeȱcompletesȱtheȱspecifiedȱperiodȱofȱservice.ȱȱȱ
4.45ȱ Someȱsupportȱthisȱviewȱbyȱquestioningȱwhetherȱtheȱemployerȱhasȱtheȱabilityȱeachȱyearȱtoȱadjustȱ theȱtotalȱremunerationȱpackageȱ(includingȱtheȱincreaseȱinȱvalueȱofȱaccruedȱpensionȱbenefits)ȱtoȱaȱcashȱ equivalentȱamountȱthatȱreflectsȱaȱfairȱvalueȱforȱtheȱservicesȱeachȱyear.ȱȱInȱtheirȱview,ȱifȱtheȱemployerȱdoesȱ notȱhaveȱtheȱabilityȱtoȱdoȱthis,ȱtheȱreportedȱexpenseȱinȱperiodsȱwhenȱpensionableȱsalariesȱareȱincreasedȱisȱ tooȱlargeȱandȱtheȱpresentȱobligationȱisȱundervalued.ȱȱ
4.46ȱ Itȱhasȱbeenȱnotedȱthatȱsomeȱhaveȱarguedȱthatȱfutureȱincreasesȱinȱpensionableȱsalariesȱshouldȱnotȱ beȱreflectedȱinȱtheȱliabilityȱbecauseȱtheyȱareȱwithinȱtheȱentity’sȱcontrolȱandȱareȱthereforeȱ(atȱleastȱtoȱsomeȱ extent)ȱdiscretionary.ȱȱHowever,ȱthoseȱwhoȱbelieveȱthatȱexpectedȱfutureȱsalaryȱincreasesȱshouldȱbeȱ reflectedȱconsiderȱthatȱtheȱobligationȱtoȱpayȱaȱpensionȱbasedȱonȱfinalȱsalaryȱisȱnotȱdiscretionaryȱ–ȱtheȱ questionȱofȱdiscretion,ȱifȱitȱarises,ȱconcernsȱtheȱmeasurementȱofȱtheȱobligation.ȱȱȱȱ
4.47ȱ Toȱsumȱup,ȱsupportersȱofȱthisȱpositionȱrespondȱtoȱtheȱtwoȱissuesȱraisedȱinȱparagraphȱ4.32ȱasȱ follows:ȱ
(i) Theȱexpectationȱofȱmoreȱvaluableȱbenefitsȱinȱaȱfinalȱsalaryȱplanȱshouldȱbeȱreflectedȱinȱtheȱ measurementȱofȱliabilitiesȱandȱexpensesȱreportedȱduringȱemployees’ȱserviceȱlives.ȱ
(ii) Itȱdoesȱnotȱmatterȱwhetherȱanȱentityȱhasȱaȱlegalȱorȱconstructiveȱobligationȱtoȱincreaseȱpensionableȱ salariesȱorȱwhetherȱitȱhasȱdiscretion,ȱbecauseȱmeasurementȱofȱtheȱliabilityȱtoȱpayȱbenefitsȱshouldȱinȱ bothȱcasesȱreflectȱtheȱcommitmentȱtoȱpayȱbenefitsȱrelatedȱtoȱfinal,ȱnotȱcurrent,ȱsalaries.ȱȱȱ
Viewȱthatȱexpectedȱfutureȱsalaryȱincreasesȱshouldȱnotȱbeȱreflectedȱunlessȱthereȱisȱaȱcommitmentȱtoȱincreaseȱ pensionableȱsalariesȱ
4.48ȱ Othersȱdisagreeȱwithȱtheȱrequirementȱinȱtheȱpresentȱstandardsȱtoȱanticipateȱexpectedȱfutureȱsalaryȱ increases.ȱȱTheyȱbelieveȱthatȱonlyȱbenefitsȱthatȱtheȱentityȱisȱpresentlyȱcommittedȱ(byȱlegalȱorȱconstructiveȱ obligation)ȱtoȱpayȱshouldȱbeȱreportedȱasȱliabilities,ȱnotȱbenefitsȱtoȱwhichȱtheȱentityȱmightȱbecomeȱ
committedȱinȱtheȱfuture.ȱȱInȱtheirȱview,ȱthatȱprincipleȱshouldȱapplyȱalsoȱtoȱincreasesȱinȱpensionȱbenefitsȱ
thatȱresultȱfromȱsalaryȱincreasesȱbecauseȱtheyȱbelieveȱitȱprovidesȱtheȱclearestȱviewȱtoȱusersȱofȱanȱentity’sȱ obligations.ȱȱTheyȱbelieveȱthatȱinȱmanyȱsituationsȱthereȱisȱnoȱcommitmentȱtoȱsuchȱincreases,ȱasȱarguedȱ below.ȱȱȱ
4.49ȱ Employeesȱtypicallyȱbecomeȱmoreȱexpensiveȱasȱtheyȱprogressȱthroughȱtheirȱcareers.ȱȱInȱadditionȱ toȱpayingȱhigherȱcurrentȱbenefitsȱasȱtheyȱprogress,ȱinȱaȱfinalȱsalaryȱplanȱtheȱemployerȱalsoȱmakesȱtheȱ originalȱpensionȱpromiseȱmoreȱvaluableȱwithȱeachȱincreaseȱinȱpensionableȱsalary.ȱȱSomeȱbelieveȱthatȱtheȱ currentȱapproachȱisȱinconsistentȱwithȱtheȱtreatmentȱofȱexpectedȱincreasesȱinȱotherȱelementsȱofȱ
remunerationȱ–ȱsuchȱasȱsalariesȱandȱbonusesȱ–ȱwhichȱareȱaccountedȱforȱinȱtheȱperiodsȱinȱwhichȱtheyȱoccur.ȱȱ Theyȱbelieveȱthatȱtheȱincreaseȱinȱvalueȱofȱanȱemployee’sȱpensionȱbenefitsȱisȱinȱeconomicȱtermsȱnotȱ
distinguishableȱfromȱtheȱrestȱofȱtheȱremunerationȱforȱeachȱyearȱofȱserviceȱ–ȱinȱeffectȱitȱisȱaȱbonusȱinȱtheȱ formȱofȱadditionalȱpensionȱbenefits.ȱȱUnderȱthisȱviewȱtheȱcostȱofȱpromotingȱanȱemployeeȱincludesȱanȱ increaseȱinȱtheȱvalueȱofȱtheȱemployee’sȱpensionȱbenefitsȱ(thatȱisȱusuallyȱlargerȱtheȱlongerȱtheȱemployee’sȱ service).ȱȱThatȱcostȱshouldȱbeȱreflectedȱasȱanȱexpenseȱofȱtheȱperiodȱinȱwhichȱtheȱdecisionȱtoȱpromoteȱtheȱ employeeȱisȱmade,ȱtogetherȱwithȱincreasesȱinȱotherȱcomponentsȱofȱtheȱemployee’sȱremuneration.ȱȱȱ 4.50ȱ Inȱresponseȱtoȱtheȱargumentȱinȱ4.42ȱthatȱtheȱvalueȱofȱtheȱpromiseȱtoȱemployeeȱAȱ(inȱaȱfinalȱsalaryȱ plan)ȱisȱlikelyȱtoȱbeȱgreaterȱthanȱtheȱvalueȱofȱtheȱpromiseȱtoȱemployeeȱBȱ(inȱaȱcurrentȱsalaryȱplan),ȱsomeȱ believeȱthatȱtheȱemployerȱoftenȱhasȱconsiderableȱdiscretionȱoverȱtheȱcomponentsȱofȱaȱcompetitiveȱ
remunerationȱpackage.ȱȱTheyȱpointȱtoȱmanyȱexamplesȱwhereȱmanagementsȱhaveȱtakenȱactionsȱtoȱchangeȱ rewardȱstructuresȱforȱfutureȱserviceȱtoȱaddressȱtheȱpensionȱcostȱelement,ȱsuchȱasȱreplacingȱpensionableȱ salaryȱincreasesȱwithȱnonȬpensionableȱbonuses,ȱreplacingȱfinalȱsalaryȱbenefitsȱwithȱcareerȬaverageȱ benefits,ȱorȱevenȱclosingȱfinalȱsalaryȱplansȱtoȱfutureȱaccruals.ȱȱTheyȱcontendȱthatȱitȱwouldȱbeȱrationalȱtoȱ expectȱemployeeȱA’sȱpensionableȱsalaryȱtoȱgrowȱmoreȱslowlyȱthanȱemployeeȱB’sȱpensionableȱsalaryȱtoȱ reflectȱtheȱgreaterȱcostȱassociatedȱwithȱeachȱincreaseȱinȱemployeeȱA’sȱpensionableȱsalary.ȱȱPutȱsimply,ȱ underȱthisȱviewȱmoreȱofȱemployeeȱA’sȱremunerationȱforȱeachȱyearȱisȱdeferred.ȱȱReflectingȱtheȱeffectȱofȱ pensionableȱsalaryȱincreasesȱwhenȱtheyȱoccurȱthereforeȱenhancesȱratherȱthanȱimpairsȱcomparability.ȱȱȱ 4.51ȱ Underȱthisȱview,ȱifȱtheȱtotalȱremunerationȱpackageȱ(includingȱtheȱincreaseȱinȱvalueȱofȱaccruedȱ pensionȱbenefits)ȱappearsȱtoȱgiveȱriseȱtoȱanȱexpenseȱthatȱpurportsȱtoȱreflectȱtheȱremunerationȱforȱtheȱyearȱ thatȱisȱaboveȱaȱfairȱvalueȱforȱtheȱservices,ȱitȱneverthelessȱrepresentsȱtheȱtrueȱeconomicȱcostȱofȱemploymentȱ andȱshouldȱbeȱtransparentlyȱreportedȱasȱsuchȱeachȱyear.ȱȱȱ
4.52ȱ Someȱwhoȱdisagreeȱwithȱincludingȱfutureȱsalaryȱincreasesȱhaveȱsimilarȱconcernsȱtoȱthoseȱwhoȱ believeȱthatȱdiscretionȱmattersȱwhenȱconsideringȱwhatȱbenefitsȱshouldȱbeȱreflectedȱinȱliabilities.ȱȱTheyȱ believeȱthatȱthisȱisȱalsoȱaȱ‘profitȬsmoothing’ȱapproachȱ(asȱillustratedȱinȱTableȱ1)ȱwhichȱdisguisesȱtheȱtrueȱ economicȱcostȱofȱtheȱactivitiesȱofȱeachȱperiodȱ(includingȱtheȱconsequencesȱofȱexpensiveȱmanagementȱ decisions).ȱȱTheyȱalsoȱbelieveȱthatȱmakingȱtheȱaccountingȱmoreȱtransparentȱshouldȱencourageȱrationalȱ decisionȱmaking.ȱȱ
4.53ȱ Toȱsumȱup,ȱsupportersȱofȱthisȱpositionȱrespondȱtoȱtheȱtwoȱissuesȱraisedȱinȱparagraphȱ4.32ȱasȱ follows:ȱ
(i) Theȱ moreȱ expensiveȱ finalȱ salaryȱ planȱ isȱ properlyȱ reflectedȱ inȱ theȱ financialȱ statementsȱ byȱ recognisingȱasȱanȱexpenseȱofȱeachȱperiodȱtheȱsalaryȱforȱthatȱperiodȱplusȱtheȱextraȱpensionȱliabilityȱ incurredȱbyȱgivingȱthatȱsalary.ȱȱȱȱ
(ii) Anȱentityȱdoesȱnotȱhaveȱanȱobligationȱtoȱincreaseȱbenefitsȱthatȱhaveȱbeenȱearnedȱunlessȱitȱhasȱanȱ obligationȱ(legalȱorȱconstructive)ȱtoȱincreaseȱfutureȱpensionableȱsalaries.ȱȱȱ
Viewȱthatȱsomeȱsalaryȱinflationȱshouldȱbeȱreflectedȱ
4.54ȱ Someȱbelieveȱthatȱanȱinflationȱelementȱofȱsalaryȱincreasesȱshouldȱbeȱtakenȱintoȱaccountȱandȱ perhapsȱalsoȱincreasesȱthatȱusuallyȱariseȱfromȱincreasingȱageȱorȱlengthȱofȱservice.ȱȱTheyȱbelieveȱthatȱsuchȱ increasesȱwouldȱfallȱintoȱtheȱcategoryȱofȱbenefitsȱthatȱtheȱemployerȱhasȱlittleȱorȱnoȱdiscretionȱtoȱavoid.ȱȱȱ 4.55ȱ Theyȱwouldȱcontrastȱthoseȱincreasesȱwithȱincreasesȱoverȱwhichȱtheȱemployerȱisȱconsideredȱtoȱhaveȱ discretion,ȱsuchȱasȱthoseȱrelatedȱtoȱpromotion,ȱmeritȱorȱproductivity.ȱȱTheȱeffectȱofȱtheȱlatterȱwouldȱbeȱ consideredȱtoȱbeȱaȱcostȱrelatingȱtoȱserviceȱofȱtheȱcurrentȱperiodȱbecauseȱitȱrepresentsȱhigherȱremunerationȱ forȱtheȱprovisionȱofȱaȱmoreȱvaluableȱserviceȱthanȱpreviously.ȱȱȱ
4.56ȱ Othersȱbelieve,ȱhowever,ȱthatȱitȱisȱnotȱpossibleȱtoȱdistinguishȱdiscretionaryȱandȱnonȬdiscretionaryȱ elementsȱofȱexpectedȱgrowthȱinȱfutureȱpensionableȱsalaries.ȱȱForȱexample,ȱtheyȱwouldȱquestionȱtheȱ validityȱofȱincludingȱsomeȱinflationaryȱsalaryȱprogressionȱbutȱexcludingȱtheȱeffectȱofȱpromotions,ȱwhenȱ theȱrealityȱisȱthatȱthereȱisȱanȱexpectationȱofȱbothȱduringȱanȱemployee’sȱcareer.ȱȱTheyȱalsoȱbelieveȱthatȱ reflectingȱtheȱeffectȱofȱsalaryȱinflationȱinȱpensionȱliabilitiesȱisȱnotȱconsistentȱwithȱtheȱtreatmentȱofȱfutureȱ inflationaryȱincreasesȱinȱotherȱelementsȱofȱemployees’ȱremuneration,ȱwhichȱareȱusuallyȱregardedȱasȱaȱcostȱ ofȱfutureȱserviceȱ(andȱdoȱnotȱgiveȱriseȱtoȱpresentȱobligations).ȱȱTheyȱbelieveȱthatȱinȱtheȱabsenceȱofȱaȱlegalȱ orȱconstructiveȱobligationȱtoȱincreaseȱpensionableȱsalaries,ȱitȱisȱnotȱappropriateȱtoȱassumeȱthatȱemployersȱ haveȱanȱobligationȱtoȱincreaseȱpensionableȱsalariesȱinȱlineȱwithȱinflation.ȱ
Guaranteedȱincreasesȱinȱdeferredȱbenefitsȱ
4.57ȱ Itȱwasȱnotedȱearlierȱthatȱinȱmanyȱjurisdictions,ȱfutureȱincreasesȱtoȱpensionsȱinȱdefermentȱareȱ guaranteedȱbyȱlawȱorȱcontractȱinȱorderȱtoȱprovideȱsomeȱprotectionȱagainstȱinflation.ȱȱThisȱmeansȱthatȱifȱanȱ employeeȱleavesȱserviceȱandȱobtainsȱtheȱrightȱtoȱaȱ(deferred)ȱpensionȱthatȱisȱbasedȱonȱhisȱsalaryȱatȱtheȱdateȱ ofȱleaving,ȱtheȱdeferredȱpensionȱisȱguaranteedȱtoȱgrowȱbyȱwhateverȱmeasureȱisȱprovidedȱbyȱlawȱorȱ
contract.ȱȱȱȱ
4.58ȱ Inȱthoseȱcircumstances,ȱitȱappearsȱthat,ȱasȱarguedȱpreviously,ȱtheȱentityȱdoesȱnotȱhaveȱanȱ
obligationȱtoȱincreaseȱbenefitsȱthatȱhaveȱbeenȱearnedȱbyȱemployeesȱwhoȱremainȱinȱserviceȱunlessȱitȱhasȱaȱ legalȱorȱconstructiveȱobligationȱtoȱincreaseȱfutureȱpensionableȱsalaries.ȱȱButȱwhenȱemployeesȱleaveȱservice,ȱ theȱentityȱclearlyȱhasȱaȱpresentȱobligationȱthatȱincludesȱfutureȱinflationaryȱincreasesȱtoȱbenefitsȱ(asȱarguedȱ
inȱparagraphsȱ4.4Ȭ4.7ȱabove).ȱȱHowȱshouldȱthisȱscenarioȱbeȱreflectedȱinȱtheȱfinancialȱstatements?ȱȱ
4.59ȱ Onȱoneȱview,ȱtheȱliabilityȱatȱeachȱreportingȱdateȱshouldȱreflectȱthatȱcurrentȱemployeesȱhaveȱcertainȱ rightsȱandȱformerȱemployeesȱhaveȱdifferentȱrights.ȱȱTheȱliabilityȱrelatingȱtoȱcurrentȱemployeesȱshouldȱnotȱ reflectȱfutureȱincreases,ȱbecauseȱtheirȱaccruedȱpensionȱrightsȱareȱnotȱguaranteedȱtoȱgrowȱ(unlessȱtheȱentityȱ isȱcommittedȱtoȱincreasingȱpensionableȱsalaries).ȱȱHowever,ȱtheȱaccruedȱpensionȱrightsȱofȱformerȱ
employeesȱareȱguaranteedȱtoȱgrowȱandȱthisȱshouldȱbeȱreflectedȱinȱtheȱliabilityȱtoȱthem.ȱȱThisȱmeansȱthatȱ whenȱanȱemployeeȱleavesȱservice,ȱtheȱliabilityȱwouldȱincrease,ȱreflectingȱaȱcostȱofȱleavingȱatȱthatȱpoint.ȱȱȱ 4.60ȱ Othersȱbelieveȱthatȱviewȱtakesȱtheȱ‘noȱliability’ȱargumentȱtooȱfar.ȱȱTheyȱargueȱasȱfollows.ȱȱ Employeesȱreceiveȱpensionȱbenefitsȱinȱexchangeȱforȱservices.ȱȱOneȱofȱthoseȱbenefitsȱisȱaȱrightȱtoȱ
inflationaryȱincreasesȱifȱtheyȱleaveȱearly.ȱȱInȱeffect,ȱtheȱemployerȱhasȱwrittenȱoptionsȱtoȱemployeesȱthat,ȱifȱ theyȱleave,ȱtheyȱobtainȱaȱrightȱtoȱhaveȱtheirȱaccruedȱbenefitsȱincreased.ȱȱTheȱoptionȱtoȱleaveȱ(andȱ
crystalliseȱguaranteedȱincreases)ȱliesȱwithȱtheȱemployees.ȱȱThatȱbenefitȱisȱaȱpresentȱobligationȱonȱtheȱ employerȱthatȱshouldȱbeȱreflectedȱinȱtheȱliability.ȱȱUnderȱthisȱviewȱanyȱfurtherȱincreaseȱ(orȱdecrease)ȱinȱtheȱ liabilityȱthatȱarisesȱfromȱactualȱincreasesȱinȱpensionableȱsalariesȱofȱemployeesȱwhoȱremainȱinȱserviceȱisȱ recognisedȱasȱanȱexpenseȱofȱtheȱperiodsȱinȱwhichȱsalariesȱareȱincreased.ȱȱTheȱprinciplesȱadvocatedȱinȱthisȱ Chapterȱwouldȱsupportȱthisȱview.ȱȱȱ
4.61ȱ Anȱissueȱthatȱwouldȱariseȱunderȱthisȱapproachȱisȱwhatȱassumptionsȱaboutȱleaversȱshouldȱbeȱ reflectedȱinȱtheȱmeasurementȱofȱtheȱliability.ȱȱSomeȱbelieveȱtheȱliabilityȱshouldȱreflectȱestimatesȱofȱthoseȱ employeesȱthatȱwillȱleaveȱandȱthoseȱthatȱwillȱstay.ȱȱOthersȱbelieveȱtheȱliabilityȱshouldȱreflectȱtheȱfactȱthatȱ allȱemployeesȱhaveȱtheȱrightȱtoȱleaveȱimmediatelyȱandȱreceiveȱtheȱguaranteedȱincreasesȱinȱtheȱdeferredȱ benefitsȱtoȱwhichȱtheyȱwouldȱbecomeȱentitled.ȱȱ
4.62ȱ Thoseȱwhoȱsupportȱtheȱsecondȱviewȱbelieveȱthatȱtheȱminimumȱliabilityȱshouldȱreflectȱtheȱ employer’sȱobligationȱtoȱpayȱinflationȱincreases,ȱsuchȱasȱstatutoryȱindexation,ȱonȱallȱbenefitsȱthatȱhaveȱ beenȱearnedȱ(asȱifȱtheyȱhadȱallȱleftȱservice),ȱbecauseȱtheyȱbelieveȱtheȱemployeeȱhasȱtheȱvestedȱrightȱtoȱ thoseȱbenefits.ȱȱTheyȱwouldȱnotȱreduceȱtheȱliabilityȱtoȱreflectȱtheȱprobabilityȱofȱpeopleȱstaying.ȱȱȱ
Consequently,ȱunderȱthatȱview,ȱaȱdecisionȱbyȱtheȱemployerȱtoȱincreaseȱpensionableȱsalariesȱofȱthoseȱwhoȱ remainȱinȱserviceȱbyȱlessȱthanȱtheȱguaranteedȱinflationȱthatȱisȱapplicableȱtoȱpensionsȱinȱdefermentȱwouldȱ leadȱtoȱaȱcreditȱinȱtheȱprofitȱandȱlossȱaccount.ȱȱȱ
Disclosureȱ
4.63ȱ Someȱsupportersȱofȱeachȱpositionȱonȱtheȱquestionȱofȱfutureȱsalaryȱincreasesȱbelieveȱthatȱ
disclosuresȱinȱfinancialȱstatementsȱshouldȱdistinguishȱmeasuresȱofȱliabilitiesȱ‘with’ȱandȱ‘without’ȱtheȱeffectȱ ofȱfutureȱsalaryȱincreases.ȱȱInȱtheirȱview,ȱwhicheverȱmeasureȱisȱrequiredȱtoȱbeȱreportedȱinȱtheȱbalanceȱ sheet,ȱtheȱotherȱmeasureȱshouldȱbeȱdisclosedȱbecauseȱbothȱmeasuresȱprovideȱrelevantȱinformationȱaboutȱ presentȱandȱexpectedȱfutureȱobligations.ȱȱDisclosureȱofȱtheseȱandȱotherȱalternativeȱmeasuresȱofȱliabilitiesȱisȱ discussedȱinȱChapterȱ9.ȱ
Shouldȱpossibleȱmodificationsȱtoȱtermsȱandȱconditionsȱbeȱreflectedȱinȱtheȱliability?ȱ
4.64ȱ Modificationsȱtoȱpensionȱplansȱhaveȱbecomeȱmoreȱfrequentȱinȱrecentȱyearsȱasȱmanyȱemployersȱ haveȱsoughtȱtoȱmitigateȱrisksȱinherentȱinȱcertainȱplans,ȱespeciallyȱfinalȱsalaryȱplans.ȱȱExamplesȱare:ȱ
closuresȱofȱplansȱ(sometimesȱonlyȱtoȱnewȱmembersȱbutȱsometimesȱalsoȱtoȱtheȱfutureȱaccrualȱofȱbenefitsȱforȱ existingȱemployees);ȱchangingȱfromȱaȱfinalȱsalaryȱbenefitȱformulaȱtoȱaȱdifferentȱbenefitȱformula;ȱchangingȱ theȱnormalȱretirementȱage;ȱchangingȱtheȱrateȱofȱemployees’ȱcontributionsȱtoȱtheirȱbenefits.ȱȱInȱaddition,ȱ modificationsȱtoȱplansȱsometimesȱresultȱfromȱnewȱlegislationȱ–ȱexamplesȱare:ȱmandatoryȱindexationȱofȱ pensionsȱwhenȱpreviouslyȱincreasesȱtoȱpensionsȱwereȱatȱtheȱemployer’sȱdiscretion;ȱaȱreductionȱinȱ
guaranteedȱratesȱofȱincreasesȱtoȱpensions.ȱȱItȱisȱcommonlyȱtheȱcaseȱthatȱbenefitsȱthatȱhaveȱbeenȱpromisedȱ andȱearnedȱbyȱplanȱmembersȱforȱtheirȱpastȱservicesȱcannotȱbeȱreducedȱunlessȱtheȱmembersȱagree.ȱȱȱ 4.65ȱ Underȱtheȱviewȱthatȱtheȱliabilityȱshouldȱreflectȱonlyȱbenefitsȱthatȱtheȱentityȱisȱcommittedȱtoȱnow,ȱ theȱcontractȱinȱwhichȱpensionȱbenefitsȱareȱprovidedȱwouldȱbeȱaccountedȱforȱasȱitȱisȱuntilȱitȱisȱchanged.ȱȱ Modificationsȱthatȱrelateȱtoȱfutureȱserviceȱareȱstraightforwardȱtoȱaccountȱfor,ȱbecauseȱtheȱliabilityȱisȱnotȱ changedȱbyȱtheȱmodification.ȱȱForȱexample,ȱunderȱtheȱviewȱthatȱtheȱliabilityȱinȱaȱfinalȱsalaryȱplanȱonlyȱ includesȱbenefitsȱearnedȱbasedȱonȱcurrentȱsalaries,ȱtheȱeffectȱofȱclosingȱtheȱplanȱtoȱtheȱaccrualȱofȱfutureȱ benefitsȱisȱtoȱreduceȱtheȱreportedȱexpenseȱforȱremunerationȱinȱfutureȱperiodsȱofȱservice.ȱȱModificationsȱ relatingȱtoȱpastȱserviceȱ(suchȱasȱmandatoryȱindexationȱofȱpensions)ȱwouldȱbeȱrecognisedȱwhenȱtheyȱoccur,ȱ becauseȱtheyȱgiveȱriseȱtoȱdifferentȱobligationsȱthanȱexistȱtodayȱ(thisȱisȱconsistentȱwithȱtheȱviewȱarticulatedȱ inȱparagraphȱ4.18ȱabove).ȱȱȱ
4.66ȱ Underȱtheȱviewȱthatȱthereȱisȱonlyȱoneȱpresentȱobligationȱ–ȱaȱcontractualȱobligationȱtoȱpayȱbenefitsȱ forȱpastȱserviceȱ–ȱofȱanȱuncertainȱamountȱ(theȱviewȱarticulatedȱinȱparagraphȱ4.16ȱabove),ȱthereȱisȱanotherȱ possibility.ȱȱForȱexample,ȱunderȱtheȱviewȱthatȱtheȱliabilityȱforȱpastȱserviceȱinȱaȱfinalȱsalaryȱplanȱshouldȱbeȱ basedȱonȱexpectationsȱofȱemployees’ȱpensionableȱsalariesȱwhenȱtheyȱleaveȱservice,ȱtheȱquestionȱarisesȱasȱ toȱwhetherȱtheȱmeasurementȱofȱtheȱliabilityȱshouldȱreflectȱtheȱprobabilityȱthatȱtheȱbenefitsȱwillȱbeȱreducedȱ –ȱforȱexample,ȱbyȱclosingȱtheȱplanȱtoȱtheȱfutureȱaccrualȱofȱbenefitsȱforȱexistingȱemployees.ȱȱInȱtheȱviewȱofȱ some,ȱthatȱapproachȱwouldȱprovideȱtheȱbestȱmeasureȱofȱwhatȱtheȱentityȱexpectsȱtoȱpay.ȱȱȱ
4.67ȱ Anticipatingȱsuchȱchangesȱdoesȱnot,ȱhowever,ȱappearȱtoȱbeȱsupportedȱbyȱotherȱaccountingȱ
standards.ȱȱTheȱapproachȱtakenȱinȱIASȱ37ȱwouldȱprecludeȱreflectingȱfutureȱeventsȱinȱtheȱmeasurementȱofȱaȱ presentȱobligationȱunlessȱthereȱisȱsufficientȱobjectiveȱevidenceȱthatȱtheyȱwillȱoccur.ȱȱForȱexample,ȱtheȱ effectsȱofȱpossibleȱnewȱlegislationȱareȱnotȱtakenȱintoȱconsiderationȱinȱmeasuringȱanȱexistingȱenvironmentalȱ cleanȬupȱobligationȱuntilȱsufficientȱobjectiveȱevidenceȱexistsȱthatȱtheȱlegislationȱisȱvirtuallyȱcertainȱtoȱbeȱ enacted.8ȱȱȱ
4.68ȱ TheȱapproachȱtakenȱinȱtheȱexposureȱdraftȱofȱamendmentsȱtoȱIASȱ37ȱ(2005)ȱisȱratherȱdifferentȱ–ȱ addressingȱtheȱissueȱasȱaȱmatterȱofȱrecognitionȱratherȱthanȱmeasurement.ȱȱItȱproposesȱthatȱtheȱeffectsȱofȱ
8 IAS 37, paragraph 50.
futureȱeventsȱthatȱcreateȱnewȱobligationsȱ(orȱchangeȱorȱdischargeȱexistingȱobligations)ȱareȱnotȱreflectedȱinȱ theȱmeasurementȱofȱaȱliability.ȱȱForȱexample,ȱtheȱeffectsȱofȱpossibleȱnewȱlegislationȱareȱnotȱreflectedȱinȱtheȱ measurementȱofȱaȱliabilityȱbecauseȱitȱisȱreasonedȱthatȱtheyȱgiveȱriseȱtoȱaȱnewȱobligationȱ(orȱchangeȱanȱ existingȱobligation),ȱratherȱthanȱchangeȱtheȱamountȱrequiredȱtoȱsettleȱtheȱexistingȱobligation,ȱwhenȱtheȱ lawȱisȱsubstantivelyȱenacted.9ȱȱTheȱsameȱreasoningȱcouldȱbeȱappliedȱtoȱtheȱeffectsȱofȱpossibleȱ
modificationsȱtoȱpensionȱplans,ȱincludingȱtheȱeffectsȱofȱpossibleȱnewȱlegislationȱonȱexistingȱobligations.ȱ 4.69ȱ Thisȱpaperȱconcludesȱthatȱpossibleȱmodificationsȱtoȱbenefitsȱareȱnotȱreflectedȱinȱtheȱliabilityȱ thatȱexistsȱtodayȱbutȱareȱtakenȱintoȱaccountȱwhenȱtheyȱoccurȱ(whenȱtheyȱgiveȱriseȱtoȱdifferentȱliabilitiesȱ thanȱhaveȱbeenȱpreviouslyȱreported).ȱ