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5.12 Settlements
Publication date: 30 Nov 2022
us IFRS & US GAAP guide
Because of differences in the definition of a settlement and an accounting policy choice that is available under US GAAP but not IFRS, the frequency of accounting for transactions as a settlement may differ between US GAAP and IFRS.
US GAAP | IFRS |
A settlement gain or loss normally is recognized in earnings when the settlement occurs. Lump sum payments are considered a form of settlement. However, an employer may elect an accounting policy whereby settlement gain or loss recognition is not required if the cost of all settlements within a plan year does not exceed the sum of the service and interest cost components of net benefit cost for that period. | A settlement gain or loss is recognized when the settlement occurs. If the settlements are due to lump sum elections by employees as part of the normal operating procedures of the plan, settlement accounting does not apply. |
Different definitions of partial settlements may lead to more settlements being recognized under IFRS.
US GAAP | IFRS |
A partial settlement of any one participant’s obligation is generally not allowed. If a portion of the obligation for vested benefits to plan participants is satisfied and the employer remains liable for the balance of those participants’ vested benefits, it may not eliminate significant risks related to the pension benefit obligation for the participants and therefore, the amount that is satisfied is not considered settled. | A partial settlement occurs if a transaction eliminates all further legal or constructive obligations for part of the benefits provided under a defined benefit plan. |
Dissimilar settlement calculation methodologies can result in differing amounts being recognized in income and other comprehensive income.
US GAAP | IFRS |
Under US GAAP, a settlement gain/loss reflects the pro-rata recognition of previously unamortized gains or losses on the entire plan. | Under IFRS, a settlement gain or loss generally reflects the difference between the settlement price and the actuarial valuation of the obligation that has been settled. |
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