Plan settlement

Learning objectives

• Calculate the gain or loss on settlement from the remeasured obligation and the settlement price given in a case.L2, L3
• Recognise the gain or loss on settlement in profit or loss.L2, L3

Normative references

• IAS 19 §8Definitions: categories of benefits (short-term, i.e. expected to be settled wholly before twelve months after the end of the annual reporting period in which the service is rendered; post-employment; other long-term; termination benefits); defined contribution plan (fixed contributions paid into a separate entity, with no legal or constructive obligation to pay further contributions if the fund is insufficient) and defined benefit plan (any other plan); deficit or surplus (present value of the obligation less the fair value of plan assets), net defined benefit liability (asset) (the deficit or surplus adjusted for the effect of the asset ceiling) and asset ceiling (present value of the refunds or reductions in future contributions available); plan assets (assets held by a legally separate fund dedicated to the benefits, and qualifying insurance policies, not available to the entity's creditors); past service cost (change in the obligation for prior service resulting from a plan amendment or a curtailment, the latter being a significant reduction in the number of employees covered); settlement (a transaction that eliminates all or part of the obligations, other than benefits provided for in the plan terms and included in the actuarial assumptions).
• IAS 19 §99When determining past service cost or a gain or loss on settlement, the entity remeasures the net defined benefit liability (asset) using the current fair value of plan assets and current actuarial assumptions (including current market interest rates and other current market prices), reflecting the benefits offered and the plan assets before and after the plan amendment, curtailment or settlement.
• IAS 19 §101AWhen a plan amendment, curtailment or settlement occurs, past service cost or the gain or loss on settlement is determined without considering the effect of the asset ceiling; the effect of the asset ceiling is then determined after the event, and any change in it is recognised in remeasurements (para. 57(d)) (amendments of February 2018).
• IAS 19 §109The gain or loss on settlement is the difference between the present value of the obligation being settled, as determined on the date of settlement, and the settlement price, including any plan assets transferred and any payments made directly by the entity; it is recognised when the settlement occurs (para. 110).

Original summaries of the paragraphs (reference register), never a quotation of the standard.

3 questions

• On 30 September, Tarnel SA settles the rights of a group of retirees by a payment of {settlement_price} taken from the fund. The corresponding obligation, remeasured at 30 September using current actuarial assumptions and before the settlement, is {settled_obligation}; at the last reporting date it was {last_closing}, using the assumptions of the time (case data). Calculate the settlement loss.L2
• Valdor SA settles the rights of a group of members for a price of {settlement_price}, whereas the corresponding obligation, remeasured at the settlement date using current assumptions, is {settled_obligation}. As a case convention, the entry shows only the net effect on the net liability (the movements of the settled obligation and assets offset each other). Post the entry for the settlement loss.L2
• Hydra SA transfers to an insurer all the obligations of a defined benefit plan, which it thereby settles definitively (case facts). At the settlement date, the present value of the obligation being settled, determined at that date, is 1,000,000; the settlement price comprises plan assets transferred of 850,000 and a direct payment by Hydra of 100,000 (case data). What is the gain or loss on settlement, and when is it recognised?L2