The International Accounting Standards Board (IASB) has recently issued guidance clarifying the extent to which pension scheme surpluses may be recognised as a balance sheet asset where there is a statutory or contractual obligation to pay minimum contributions to the scheme. In addition, the guidance also adds the possibility of needing to recognise an additional liability due to minimum contributions – even when the scheme is in deficit.
As a result of these changes, companies may be dissuaded from having a funding target for schemes which is greater than the IAS19 liabilities.
Â
Recognising a surplus
IAS19 places a limit on the extent to which a company may recognise a pension scheme surplus as a balance sheet asset. The limit is generally the amount that could be realised in the form of a refund from the scheme or by way of reduction in future contributions to the scheme. A surplus may only be recognised if the company has an unconditional right to the refund or if it can reduce its contributions under the rules of the scheme and prevailing legislation. In short, companies “can’t count it if they can’t count on getting to itâ€.
Few, if any, pension schemes in
Impact of statutory or contractual minimum contributions
Expected future contributions normally have no impact on the company P&L or net assets, as payment of the contribution will just swap one asset (company cash) for another (cash in the scheme). However, statutory or contractual minimum contributions for future service may restrict the possible reduction in future service company contributions to the scheme and hence the amount of surplus that can be recognised.
Also, statutory or contractual minimum contributions to remove a past service shortfall (on the statutory or contractual basis) may be expected to create, or increase, an IAS19 surplus (when they are eventually paid). This potential future surplus would have to be tested for recoverability. Consequently, any restriction in the balance sheet asset is brought forward to when the commitment to these minimum deficit contributions arises, rather than deferred until the contributions are actually paid.
Â
Statutory or contractual requirements for
We expect that the new Pensions Regulator will issue relevant guidance for article 30 of Law 146(I) 2006 regarding funding requirements (‘Schedule’ of Recovery) that will determine the rate at which most companies will pay contributions to their Cypriot pension schemes.
It is unclear how much these requirements to be determined under this new legislation, place a contractual obligation on sponsors of Cypriot pension schemes to pay minimum contributions. The IASB has said that it does not intend to issue further guidance on the matter as, on principle, it does not interpret international accounting standards for the circumstances of individual countries. The guidance could therefore be interpreted in
• Only the contributions expected to be paid before a Schedule is due to be replaced following the next funding valuation count as minimum funding contributions
• Contributions for the whole period covered by a Schedule count as minimum funding contributions, or
• In case the Regulator issues requirements involving for instance a Statement of Funding
Principles, then contributions implied by the Statement of Funding Principles for the current and subsequent Schedules count as minimum funding contributions.
In the meantime, companies should consider the implications and the view of their auditor, before agreeing to funding targets of Technical Provisions in excess of the IAS19 liabilities.
If you have any questions on this spotlight, contact your usual Hewitt consultant or www.hewitt.com.cy.
