The revised IAS19 standard is set to shake-up the pensions industry and close the gap in accounting between the US and Europe, as Helen Morrissey reports
On June 16 The International Accounting Standards Board (IASB) published its revised IAS19 standard. The announcement signals the end of a long process which began with a discussion paper issued in 2008. This was followed by an exposure draft outlining potential amendments in 2010 before a “near final draft” was then circulated in early June. Companies will need to adopt the standard by 2013. While this meant that the changes didn’t necessarily come as a shock, the revised standard looks set to have a big impact on how companies present their financial information across the globe.
The two major changes confirmed in the new standard were the removal of the corridor method and abolition of the use of expected return on assets. The corridor method enabled companies to effectively defer recognition of the gains and losses associated with their pension scheme. Companies will now have to recognise actuarial gains and losses immediately on their balance sheets. This will markedly increase the volatility for companies who have used the corridor method in the past.
The abolition of expected return on assets will change how companies record their scheme’s investment performance. Under the expected return on assets approach companies could record a profit each year equal to the expected, rather than actual, return on pension scheme investments. This approach tended to favour schemes investing in riskier assets such as equities, as they could record higher expected profits. Under the new standard, performance will be measured according to the discount rate of AA-rated corporate bonds.
The changes were greeted with caution in some quarters with auditor KPMG estimating the changes could reduce UK corporate profits by as much as £10bn ($16bn). However, IASB Board member Stephen Cooper believes UK companies will not be much affected by the changes which will bring much needed clarity to pensions accounting.
“There were two reasons behind these changes,” he said. “One was to develop a clear form of presentation while also improving disclosure requirements. The changes do not change how pension asset and liabilities are measured but how they are reported. We have eliminated the corridor method as well as expected returns on assets. There is no change in how we measure pension costs – we are just dividing it up in different ways. Some costs that were deferred will now be reported as they occur and as a result profit and loss figures may change. This will be more an issue of presentation than measurement.”
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