This article is the nineteenth in a series of articles that takes our readers on a journey through International Financial Reporting Standards (IFRS) with a special focus on the standards’ quintessential feature: they are principles-based. In this article, we provide an overview of some of the most significant differences between IFRS and U.S. generally accepted accounting principles (GAAP) with regard to employee benefits. Actual differences in the accounting treatment between the two frameworks depend on specific circumstances.
Because the accounting for defined contribution plans is quite straightforward under both IFRS and U.S. GAAP, this article focuses only on defined benefit pension plans. The international standard that deals with pension obligations is International Accounting Standard (IAS) 19, Employee Benefits. Prominent U.S. GAAP literature on this subject includes FASB Statements No. 87, Employers' Accounting for Pensions, No. 88, Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits, and No. 132 (R), Employers’ Disclosures about Pensions and Other Postretirement Benefits, together with various interpretations.
Under both frameworks, an actuarial technique is used to determine the value of the pension plan liability. U.S. GAAP mandates measurement at least annually, while IAS 19 states that an entity must determine the present value of defined benefit obligations and the fair value of plan assets with sufficient regularity to ensure that the valuation is reasonably up to date.
Plan assets are measured at fair value under both U.S. GAAP and IFRS. However, under U.S. GAAP, the expected return on plan assets is applied to the market-related value of plan assets, which can be either fair value or a calculated value that recognizes changes in fair value in a systematic and rational manner over not more than five years. The expected return on plan assets is determined based on the expected long-term rate of return on plan assets and the market-related value of plan assets. Under IFRS, the expected return on plan assets is based on market expectations, at the beginning of the period, for returns over the entire life of the related obligation and is applied to the fair value of the plan assets. If the net amount of the pension plan results in a net asset, there is a limit above which the “negative” pension liability cannot be recognized under IFRS. This “asset ceiling” provision is not present in U.S. GAAP.
Under both IFRS and U.S. GAAP, entities have to recognize a minimum amount of actuarial losses using the “10% corridor approach.” Under U.S. GAAP, actuarial gains and losses recognized in Other Comprehensive Income (OCI) are eventually recognized in the income statement. For annual periods beginning on or after January 1, 2009, as a result of the introduction of the Statement of Comprehensive Income in IFRS, actuarial gains and losses recognized in OCI will not eventually be recognized in the income statement.
This summary analysis of differences is not exhaustive. Other differences exist between the two frameworks, but a complete analysis can be performed only based on specific facts and circumstances. For further information, please contact Bob Dohrer (robert.dohrer@rsmi.com) or Marco Marcellan (marco.marcellan@rsmi.com) in our International Assurance Services Group.
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