Why FDs should not resist the updated IAS 19

Changes to the corridor rule will also be painful, but more for European and US companies, where it is more commonly used, than for UK companies. It allows companies to spread the volatility impact of a major hit to the pension scheme – from another stockmarket crash, for example, over future years.

There are currently two ways to recognise such a hit: take it on to the balance sheet immediately, or use the corridor method to damp down the impact of the loss. But the IASB dislikes the corridor method because it allows a company’s balance sheet and its ‘real’ position to get out of sync. The balance sheet might show a large asset as far as the fund is concerned, while, in reality, if the loss was recognised immediately, it would generate a significant liability instead of an asset.

As Marklew points out, companies in the European banking sector, where volatility on the balance sheet is proving difficult to manage, and where the corridor method is widely used, will not like this change at all.

Keeping positive
Peter Black, partner with Punter Southall, points out that things could have been worse. “At one point there was a move to say that all the gains and losses in the fund had to go through the company’s P&L immediately. That would have had a hugely volatile impact on the P&L and since many of those gains and losses would be theoretical – because the company, or rather the scheme, was not about to crystalise the losses – the P&L would have been catapulted quite a long way from reality,” he explains. “Not exactly the outcome that a standard-setting body should be seeking.”

Black points out that the additional disclosure demanded in the draft will be particularly annoying to many companies. “There is already a huge amount of disclosure required with respect to company pension schemes, and most finance directors will feel that adding still more disclosure will further increase costs without necessarily increasing comprehension,” he says.

As LCP’s Marklew points out, the IASB wants companies to move from a rules-based approach on disclosure to principles-based disclosure, with the presumption being that companies should provide more rather than less information. “It remains to be seen how companies will react to this new approach and whether they use it to make more relevant information available to users of accounts, or simply fill the pages with irrelevant detail.”

Marklew argues that despite the controversial bits, the IASB is likely to press ahead and he expects most of the changes it is proposing to go through. “The new exposure draft taken as a whole has the merit of being simple and practical,” he concludes. “So companies should face up to the idea that the IASB will probably get the standard issued in the time scale it is proposing.”

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