Germany: Old-Age, Part-Time Pension Accounting to Reflect IAS 19 Changes

Employer Action Code: Monitor

Old-age, part-time pension (OAPT) accounting in Germany is likely to change because of the recent revision of International Accounting Standard 19 (IAS 19). OAPT programs are used to help transition employees into retirement as part of voluntary workforce reductions.

Key Details

Until now, the German Accounting Standards Committee (DRSC), the German equivalent of the International Financial Reporting Standards Interpretations Committee (IFRS IC), has regarded these as termination benefits and required companies to account for them accordingly. However, in January 2012, the IFRS IC directed that in the future, in line with the new IAS 19, OAPT should be regarded as “other long-term employee benefits.” The DRSC issued draft implementation guidance on July 4, 2012, and at the same time launched a consultation process with interested parties. This consultation period ended in August, and it is expected that the final guidance rules will be published in October.

It is also expected that, in addition to confirming that OAPT payments are to be regarded as “other long-term employee benefits,” the DRSC guidelines will contain the following provisions:

• Financing, on a straight-line basis, will normally start on the date an individual OAPT contract is signed and end on the date the OAPT payment becomes due, but in all events, no later than the end of the OAPT working period.
• If a minimum service period is required to participate in the OAPT, this has to be taken into account for the financing period and will lead to a past-service cost that appears immediately on the profit and loss account (P&L) statement.
• If a collective OAPT agreement (e.g., with a works council or trade union) is in place that gives employees the right to participate in the OAPT (i.e., the company cannot refuse eligible individuals from enrolling in an OAPT if they request participation), reserves for potential participants must be created and used to account in advance for this arrangement. An actuarial calculation using appropriate assumptions about participation rates will be required.
• As with the rest of IAS 19 (2011), retrospective application of the guidelines will apply. OAPT reserves as of January 1, 2012 (for clients with a financial year that coincides with the calendar year), will have to be recalculated to comply with the new DRSC guidance.

The German Institute of Auditors is also planning to change local generally accepted accounting principles in addition to OAPT changes under the new IAS 19. But it is very likely that these changes will not be in effect before next year and will not be retroactive, unlike IAS 19.

Employer Implications

Pending the publication of the final guidance rules, companies should consider what measures they need to put in place to comply with this change. They should also be conscious of the potential negative impact on P&Ls.