IT is only a couple of years since the latest amendments to the accounting for pension liabilities under International Financial Reporting Standards (IFRS) became effective, but the International Accounting Standards Board (IASB) recently announced a new project. You may wonder whether this is necessary. I think it is.
Let me explain the background for reconsidering aspects of pensions accounting. The revision to IAS 19 Employee Benefits, which became effective in 2013, was concerned with presentation of the pension expense rather than its measurement. Investors had complained about the ‘corridor approach’, which allowed allocation of the effect of changes in estimates over future periods, and the lack of comparability caused by the available presentation choices.
Removing this and requiring an alternative presentation of reporting remeasurements of the net pension asset or liability in other comprehensive income (OCI) seem to have been well received. Investors appreciate the removal of the artificial deferral of actuarial gains and losses, so the balance sheet pension asset or liability now represent the actual position. This avoids confusion that could arise if a pension fund in deficit were reported as an asset. Preparers benefit from the continued use of OCI, with the result that volatility in the pension funding status, which many do not regard as part of their core trading activities, does not affect the all-important profit or loss and earnings per share (EPS) amounts.
Conversations with our constituents indicate there has been a positive response to the removal of the expected return on assets from the income statement. There has been a good response to its replacement by a net interest income or expense amount arising from the net funding position. This replaces a subjective expected return with an objective net interest amount. It ensures the income statement does not benefit from risky asset investment returns when associated risks and volatility are reported outside profit or loss.
So why more changes?
The research project on pensions accounting is focused on measurement, in particular on the measurement challenges that arise from hybrid pension schemes that do not fall into defined contribution (DC) and defined benefit (DB) categories in IAS 19. These schemes include contribution-based promises or cash balance plans. Some schemes may be close to a DC plan, but with features that mean they fall into the DB category, though full DB accounting for such schemes does not seem to portray the economic position. Some may be close to DB, but with risk-sharing provisions that reduce the sponsor’s exposure. In this case, the recent revisions to IAS 19 that relate to risk-sharing help sponsors achieve an appropriate measurement, but many feel that more work needs to be done.
The IASB has previously looked into dealing with the challenges posed by hybrid schemes. Our Interpretations Committee issued a draft of an interpretation (D9) that addressed the problem. The IASB also considered contribution-based promises in the Discussion Paper that preceded the latest revisions to IAS 19, where it looked at a fair value measurement basis for such schemes. However, neither discussion resulted in change.
I see pension schemes as a continuum with differing degrees and forms of risk-sharing. It may be worth considering the measurement of pension schemes more widely, to identify a measurement basis that works for all types. We may be able to draw on the work we have done on insurance accounting, such as the work related to the measurement of insurance liabilities.
This raises the question of whether developing a model that covers the full spectrum might see us change the requirements for DB schemes. We need to address issues that have arisen in practice, such as the problems of determining the high-quality bond yield. These need to be considered in developing a coherent measurement basis that can meet the needs for reporting all schemes.
The project aims to ensure we stay attuned to changes in the market and consider the need for changes. It is too early to say whether the project will result in suggested changes to IAS 19. However, we are keen to hear your thoughts.
Stephen Cooper is an IASB board member at the IFRS Foundation
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