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US GAAP vs. IFRS: the basics, March 2010 - Employee benefits other than share-based payments - Ernst & Young - United States

US GAAP vs. IFRS: the basics, March 2010

Employee benefits other than
share-based payments

Similarities

ASC 715 Compensation — Retirement Benefits and ASC 712 Compensation — Nonretirement Post-Employment Benefits (formerly FAS 87, FAS 88, FAS 106, FAS 112, FAS 132 (Revised), FAS 158 and FSP FAS 132-R-1) and IAS 19 Employee Benefits are the principal sources of guidance for employee benefits other than share-based payments under US GAAP and IFRS, respectively.

Under both GAAPs, the periodic postretirement benefit cost under defined contribution plans is based on the contribution due from the employer in each period. The accounting for defined benefit plans has many similarities as well. The defined benefit obligation is the present value of benefits that have accrued to employees through services rendered to that date, based on actuarial methods of calculation. In addition, both US GAAP and IFRS provide for certain smoothing mechanisms in calculating the period pension cost.

Significant differences


US GAAPIFRS
Actuarial method used for defined benefit plansDifferent methods are required dependent on the characteristics of the benefit calculation of the plan.Projected unit credit method is required in all cases.
Valuation of defined benefit plan assetsValued at “market-related” value (which is either fair value or a calculated value that smooths the effect of short-term market fluctuations over five years) as of the balance sheet date.Valued at fair value as of the balance sheet date.
Treatment of actuarial gains and losses for annual benefit costMay be recognized in the income statement as they occur or deferred through either a corridor approach or other rational approach applied consistently from period to periodMay be recognized in the income statement as they occur or deferred through a corridor approach or other rational approach applied consistently from period to period. Entities can elect to recognize immediately in other comprehensive income. Gains or losses immediately recognized in other comprehensive income are not subsequently recognized in the income statement.
Amortization of deferred actuarial gains and lossesOver the average remaining service period of active employees and over the remaining life expectancy of inactive employees.Over the average remaining service period (that is, immediately for inactive employees).
Amortization of prior service costsOver the future service lives of employees or, for inactive employees, over the remaining life expectancy of those participants.Over the average remaining vesting period; immediate recognition if already vested.
Recognition of plan asset or liability in the balance sheetMust recognize in balance sheet the over/under funded status as the difference between the fair value of plan assets and the benefit obligation. Benefit obligation is the pension plan obligation for pension plans and accumulated pension plan obligation for any other postretirement plans.

No portion of a plan asset can be classified as current; current portion of net postretirement liability is the amount expected to be paid in the next 12 months.

Must recognize a liability in the balance sheet equal to the present value of the defined benefit obligation plus or minus any actuarial gains and losses not yet recognized, minus unrecognized prior service costs, minus the fair value of any plan assets. (Note: If this amount is negative, the resulting asset is subject to a “ceiling test.”)

Balance sheet classification not addressed in IAS 19.

Settlements and curtailmentsSettlement gain or loss recognized when obligation is settled. Curtailment losses recognized when curtailment is probable of occurring, while curtailment gains are recognized when the curtailment occurs.Gain or loss from settlement or curtailment recognized when it occurs.
Multi-employer pension plansAccounted for similar to a defined contribution plan.Plan is accounted for as either a defined contribution or defined benefit plan based on the terms (contractual and constructive) of the plan. If a defined benefit plan, must account for the proportionate share of the plan similar to any other defined benefit plan unless insufficient information is available.

Convergence

The FASB and the IASB have agreed to a long-term convergence project that will comprehensively challenge the accounting for postretirement benefits. This project is expected to address many of the common concerns with the current accounting model such as the smoothing and deferral mechanisms in the current model.

The IASB issued a discussion paper in March 2008. As a result of the comments received on the discussion paper, the IASB has divided the project into two parts. Part 1 of the project addresses the recognition and presentation of changes in the defined benefit obligation and in plan assets, disclosures, and other related issues.

Part 2 of the project addresses contribution-based promises, potentially as part of a comprehensive review of the accounting for pensions and other postretirement benefits.

The IASB plans to issue an Exposure Draft on Part 1 during the first quarter of 2010, and an interim standard that would improve pension and other postretirement benefit accounting by 2011.

The FASB currently is monitoring the work of the IASB to determine its next steps on the project.

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