Deficit-clearing future minimum funding requirements when refunds are not available [IFRIC 14.IE9-IE21]
An entity has a funding level on the minimum funding requirement basis (which is measured on a different basis from that required under IAS 19) of 95% in Plan C. Under the minimum funding requirements, the entity is required to pay contributions to increase the funding level to 100% over the next three years. The contributions are required to make good the deficit on the minimum funding requirement basis (shortfall) and to cover future service.
Plan C also has an IAS 19 surplus at the end of the reporting period of €50m, which cannot be refunded to the entity under any circumstances. There are no unrecognised amounts.
|
year |
Total minimum funding contribution requirement |
Minimum contributions required to make good the shortfall |
Minimum contributions required to cover future accrual |
|
1 |
135 |
120 |
15 |
|
2 |
125 |
112 |
13 |
|
3 |
115 |
104 |
11 |
The entity’s present obligation in respect of services already received includes the contributions required to make good the shortfall but does not include the minimum contributions required to cover future accrual.
The present value of the entity’s obligation, assuming a discount rate of 6% per year, is approximately 300, calculated as follows:
€120m/(1.06) + €112m /(1.06)2 + €104m/(1.06)3
When these contributions are paid into the plan, the IAS 19 surplus (i.e. the fair value of assets less the present value of the defined benefit obligation) would, other things being equal, increase from €50m to €350m. However, the surplus is not refundable although an asset may be available as a future contribution reduction.
As noted above, the economic benefit available as a reduction in future contributions is the present value of:
- the future service cost in each year to the entity; less
- any minimum funding contribution requirements in respect of the future accrual of benefits in that year
over the expected life of the plan.
The amounts available as a future contribution reduction are set out below.
|
year |
IAS 19 service cost €m |
Minimum contributions required to cover future accrual €m |
Amount available as contribution reduction €m |
|
1 |
13 |
15 |
(2) |
|
2 |
13 |
13 |
0 |
|
3 |
13 |
11 |
2 |
|
4+ |
13 |
9 |
4 |
Assuming a discount rate of 6%, the economic benefit available as a future contribution reduction is therefore equal to:
€(2)m/(1.06) + €0m/(1.06)2 + €2m/(1.06)3 + €4m/(1.06)4 + €4m/(1.06)5 + €4m/(1.06)6 …. = €56m.
The asset available from future contribution reductions is accordingly limited to €56m.
As discussed at 5.3.2.D below, IFRIC 14 requires the entity to recognise a liability to the extent that the additional contributions payable will not be fully available. Therefore, the entity reduces the defined benefit asset by €294m (€50m + €300m – €56m).
As discussed at 5.5.3 below, the effect of the asset ceiling is part of remeasurements and the €294m is recognised immediately in other comprehensive income and the entity recognises a net balance sheet liability of €244m. No other liability is recognised in respect of the obligation to make contributions to fund the minimum funding shortfall.
When the contributions of €300m are paid into the plan, the net balance sheet asset will become €56m (€300m – €244m).