REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL on the effect of the revised International Accounting Standard (IAS) 19 on the volatility of own funds of credit institutions and investment firms.
Date: 2016-01-06
Institutions: Directorate-General for Financial Stability, Financial Services and Capital Markets Union, European Commission
Subjects: credit institution, financial accounting, financial control, financial legislation, international standard, investment company, market supervision, standardised accounting system, supplementary pension

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   EN 

   EUROPEAN COMMISSION  Brussels, 6.1.2016  COM(2015) 685 final   REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL on the effect of the revised International Accounting Standard (IAS) 19 on the volatility of own funds of credit institutions and investment firms.  
 
 
1. 

INTRODUCTION 

According to Article 36(1)(e) of Regulation (EU) No 575/2013 ('CRR'), credit institutions and 
investment  firms  shall  deduct  defined  benefit  pension  fund  ('DBPF')  assets  on  their  balance 
sheet from Common Equity Tier 1 ('CET1') items. 
The revision of International Accounting Standard 19 “employee benefits” ('IAS 19')1 has led 
to  changes  in  the  valuation  of  DBPFs.  Article  519  CRR  contains  a  mandate  for  the 
Commission to prepare a report for the European Parliament and the Council on whether the 
revised IAS 19 in  conjunction  with the deduction of net pension  assets as  set out in Article 
36(1)(e) would lead to undue volatility of institutions’ own funds. 

The Commission has been asked to take into account the report prepared by the EBA on this 
issue  in  accordance  with  the  mandate  provided  by  the  same  Article.  If  appropriate,  the 
Commission's report shall be accompanied by a legislative proposal to introduce a treatment 
which adjusts net DBPF assets or liabilities for the calculation of own funds. 

The  EBA  submitted  its  report  "On  the  impact  on  the  volatility  of  own  funds  of  the  revised 
IAS 19 and the deduction of defined pension assets from own funds under Article 519 of the 
Capital Requirements Regulation (CRR)" ("the EBA report")2 on 24 June 2014. 

This  Commission  report  responds  to  a  legal  obligation  to  assess  the effects  of  very specific 
changes  in  the  calculation  of  Common  Equity  Tier  1  capital  in  credit  institutions  and 
investment firms due the adoption CRR and a new IAS 19. 

2. 

2.1. 

MAIN ISSUES 

Current treatment under the CRR 

Article 36 CRR contains the requirement for banks to deduct DBPF  assets from CET1. The 
rationale for this treatment is that the loss absorption capacity of these assets is doubtful from 
a prudential point of view. In the event that a bank would enter into bankruptcy or resolution, 
these assets would not be available to bear the losses. 

It should be noted that Article 41 CRR contains an exemption from this general deduction rule 
in  relation  to  assets  in  the  DBPF  which  the  institution  has  an  unrestricted  ability  to  use, 
subject to supervisory permission. 

1 COMMISSION REGULATION (EU) No 475/2012 of 5 June 2012 amending Regulation (EC) No 1126/2008 
adopting certain international accounting standards in accordance with Regulation (EC) No 1606/2002 of the 
European Parliament and of the Council as regards International Accounting Standard (IAS) 1 and International 
Accounting Standard (IAS) 19 
2 EBA (2014): Report. On the impact on the volatility of own funds of the revised IAS 19 and the deduction of 
defined pension assets from own funds under Article 519 of the Capital Requirements Regulation (CRR): The 
report identifies the accounting and regulatory changes due the review of IAS 19 and analyses whether these 
changes might affect own funds. It includes a quantitative assessment of the impact of these changes on the 
volatility of own funds during a specific time period assuming full application of CRD IV/CRR and the revised IAS 
19 requirements. Qualitative and quantitative information for a sample of EU institutions and Member States 
highlight the main effects of the prudential and accounting changes, their magnitude and what types of 
institutions are mainly affected. Finally, the report also looks at other variables which could have a direct 
impact on defined benefit pension funds and the volatility of own funds. The EBA report can be retrieved from: 
https://www.eba.europa.eu/documents/10180/534414/EBA+Report+on+the+impact+on+the+volatility+of+ow
n+funds+from+defined+pension+plans.pdf 

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2.2. 

Changes due to revision of IAS 19 

The revision in IAS 19 has led to changes in the valuation of DBPFs. The EBA has identified 
only two aspects of the revision of IAS 19 which may have an impact on the calculation of 
own funds: 

1.  Immediate recognition of actuarial gains and losses: Under the previous version of 
IAS  19,  changes  in  the  actuarial  assumption  did  not  have  to  be  taken  into  account 
immediately as long as they remained within a certain corridor3 (hence the so-called 
“corridor  approach”)  and  could  be  apportioned  over  several  periods,  whereas  under 
the revised IAS 19, they will need to be immediately recognised. 

2.  Immediate  recognition  of  all  past  service  costs:  Past  service  costs  represent  the 
change in the present value of the defined benefit obligation for employee services in 
prior  periods,  resulting  from  an  amendment  or  a  curtailment  to  the  plan.  Under  the 
previous  IAS  19,  vested  past  service  costs  were  recognised  in  the  profit  and  loss 
account immediately, while unvested service costs were recognised over the average 
vesting period on a straight-line basis. 

In this respect, it should be noted that CEBS as the predecessor of the EBA commented4 on 
the  previous  version  of  IAS  19,  raising  concerns  regarding  the  “corridor  approach”  and 
proposed  abolishing  it  subject  to  transitional  provisions.  While  IAS  19  has  abolished  the 
corridor approach on actuarial gains and losses, the CRR has provided transitional provisions 
to soften the impact on own funds.  

2.3. 

Transitional measures under CRR 

The CRR sets out the following transitional measures to soften the impact of the changes in 
IAS 19 and the deduction of defined benefit pension fund assets in general: 

1.  General  phasing-in  of  the  deduction  of  DBPF  assets  from  2014  to  2017  enabled  by 

Articles 469(1)(a) and Article 478  CRR.  

2.  Special  phasing-in  of  the  effect  of  the  changes  in  IAS  19  from  2014  to  2018  under 

Article 473 CRR. 

3.  Phasing out of filters applied at national level from 2014 to 2018 under Article 481 

CRR. 

3 See COMMISSION REGULATION (EC) No 1126/2008, Annex, IAS 19 Employee Benefits, paragraph 95 
4 CEBS Comment Letter on IASB ED/2010/3 Defined Benefit Plans – Proposed Amendments to IAS 19 on 6 
September 2010.  

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3. 

ASSESSMENT  OF  THE  POTENTIAL  INTRODUCTION  OF  VOLATILITY 
DUE TO THE REVISION OF IAS 19  

Based on the report provided by the EBA, the analysis of the effect of the revision of IAS 19 
in  conjunction  with  the  deduction  of  DBPF  assets  according  to  Article  36(1)(e)  CRR  is 
assessed as follows5: 

3.1. 

Impact depending on offsetting gains or losses  

There will be no volatility of own funds where an institution reports a net DBPF asset on the 
balance sheet and there is an equal offsetting gain or loss. Only where the institution reports a 
net DBPF asset without a corresponding gain or loss can the deduction of the net DBPF asset 
result in volatility of own funds. 

3.2. 

Impact at initial application of revised IAS 19 

The impact of the deduction of the net DBPF assets from own funds upon initial application 
will be limited for most institutions due to the low levels of net DBPF assets6 under both the 
previous  and  the  revised  IAS  19.  In  addition,  for  most  institutions,  the  negative  effect  on 
CET1 will be further limited because the level of unrecognised actuarial losses compared to 
their  capital  position  is  small.  Only  a  small7  minority  of  institutions  that  have  significant 
DBPF  assets  may  be  materially  affected.  In  particular,  the  existence  of  substantial 
unrecognised actuarial losses might lead to a reduction in own funds. 

3.3. 

General assessment of limited volatility introduced by revised IAS 198   

Based on the EBA’s report, it can be concluded that, on average, there is limited volatility of 
own funds due to the accounting and  prudential changes. For some institutions and in some 
countries the impact on the volatility of own funds could be higher, depending on the size and 
the performance of the DBPF relative to the capital position of the institution. 

Furthermore,  any  change  in  the  actuarial  assumptions  to  be  used  can  be  viewed  as  an 
improvement  in  the  alignment  of  the  DBPF  book  values  with  the  "real"  exposure  of  the 
institution and the economics of the transaction.  

Finally, any impact on own funds due to the first-time application of the revised IAS 19 can 
be  softened  by  the  specific  transitional  provision  set  out  in Article  473 CRR  or  Article  481 
CRR. The general application of these requirements for deducing DBPF assets can be phased-
in subject to the provisions of Articles 469(1)(a) CRR in conjunction with Article 478 CRR. 

5 EBA has based its analysis on a sample composed of the 57 European institutions in 20 EEA countries used by 
the EBA for the KRI (Key Risk Indicators) analysis.  
6See EBA report p. 25: "All institutions except three (38 institutions) had low levels of net defined benefit 
pension assets under the previous IAS 19, if any, in each of the years of the period assessed (up to 0.2% of 
RWA) and low levels, if any, of unrecognised actuarial gains in each of the years assessed (up to 0.4% of RWA)." 
7 According to the EBA report, none of the three institutions in the sample reviewed with relatively high 
defined benefit assets under the previous IAS 19 would be affected as they had significant unrecognised 
actuarial losses that would need to be immediately recognised against defined benefit assets.  
8 For an encompassing presentation of the quantitative evidence, readers are referred to the EBA report and 
especially the tables summarising the quantitative information on page 23 and page 31. 

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4. 

CONCLUSION 

Taking  into  account  the  EBA's  report,  it  is  the  Commission's  assessment  that  the  potential 
additional volatility of own funds introduced by the revision of IAS 19 will be limited and is 
justified by the arguments presented in this report. Furthermore, any impact due to the initial 
application  has  been  mitigated  by  appropriate  transitional  provisions.  Therefore,  the 
Commission concludes that IAS 19, in conjunction with the deduction of DBPF assets set out 
in Article 36(1)(e) CRR and the changes in the net pension liabilities will not lead to undue 
volatility of institutions' own funds. Consequently, the Commission views the CRR treatment 
as  it  stands  as  appropriate  and  will  not  table  a  legislative  proposal  in  conjunction  with  this 
report. 

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