IFRIC 14 (International Financial Reporting Interpretations Committee Interpretation 14) relates to IAS 19 (International Accounting Standard 19) and provides guidance on the recognition of a defined benefit asset and the interaction between the minimum funding requirements and the limit on a defined benefit asset.
IAS 19 sets out the accounting requirements for defined benefit plans, which are a type of employee benefit plan where the employer promises to provide specified retirement benefits to its employees. One aspect of defined benefit plans is the recognition of a defined benefit asset, which arises when the fair value of the plan assets exceeds the present value of the defined benefit obligation (i.e., the present value of the expected future benefit payments to employees).
IFRIC 14 clarifies that the limit on a defined benefit asset should be determined by considering the lower of the surplus in the defined benefit plan (i.e., the fair value of plan assets minus the present value of the defined benefit obligation) and any “asset ceiling” that may be imposed by the minimum funding requirements or other legal or contractual requirements. The asset ceiling is the maximum amount that an entity can recognize as an asset in its financial statements.
Furthermore, IFRIC 14 specifies that the minimum funding requirements should not affect the recognition of a defined benefit asset if the surplus in the plan (i.e., fair value of plan assets minus the present value of the defined benefit obligation) is not available to the entity. However, if the surplus is available to the entity, the minimum funding requirements should be considered in determining the limit on the defined benefit asset.
Here are some additional details related to IFRIC 14 and its interaction with IAS 19:
Impact on Financial Statements:
IFRIC 14 provides guidance on how the limit on a defined benefit asset affects the financial statements of an entity. If the limit imposed by the minimum funding requirements or other legal or contractual requirements is lower than the surplus in the defined benefit plan, the excess amount is not recognized as an asset in the financial statements. Instead, it is treated as a liability, and any further surplus is not recognized until the liability is settled or the minimum funding requirements or other legal or contractual requirements change.
Disclosure Requirements:
IFRIC 14 requires entities to disclose information about the amount of the defined benefit asset, any asset ceiling imposed by minimum funding requirements or other legal or contractual requirements, and the extent to which the surplus in the plan is not recognized as an asset due to the limit. Entities are also required to disclose information about the effects of the limit on the defined benefit asset on their future financial performance.
Interaction with Minimum Funding Requirements:
IFRIC 14 clarifies that the minimum funding requirements should not be considered in the recognition of a defined benefit asset if the surplus in the plan is not available to the entity due to legal or contractual restrictions. However, if the surplus is available to the entity, the minimum funding requirements should be considered in determining the limit on the defined benefit asset. This means that entities need to carefully evaluate the availability of surplus in the plan and the impact of minimum funding requirements when determining the limit on the defined benefit asset.
Judgment and Estimation:
The application of IFRIC 14 requires judgment and estimation, as it involves determining the limit on a defined benefit asset based on various factors such as the surplus in the plan, asset ceiling imposed by minimum funding requirements, and other legal or contractual requirements. Entities need to exercise professional judgment and make reasonable estimates in accordance with the principles of IFRIC 14 to ensure appropriate recognition and disclosure of the defined benefit asset in their financial statements.
In conclusion, IFRIC 14 provides guidance on the limit on a defined benefit asset and the interaction with minimum funding requirements and other legal or contractual requirements. Compliance with IFRIC 14 is important for entities that have defined benefit plans to ensure accurate and transparent reporting of their employee benefit obligations and related assets in their financial statements.