On 16 June 2011 the International Accounting Standards Board (IASB) published a revised version of its planned amendments to the international accounting standard IAS 19 (Employee Benefits). It is expected to change the way that defined benefit pensions are accounted for from 2013 onwards.
The revisions to IAS 19 were proposed in an exposure draft in 2010. The key proposals from the exposure draft have been retained.
Most companies recognise gains and losses in the period within which they arise, however some choose to defer recognition of all gains and losses provided they fall within a ‘corridor’. The revised standard removes the "corridor mechanism" under which companies currently have the option to spread actuarial gains and losses (such as those caused by stock market movements) over time. Instead, all companies will essentially be required to recognise the pension surplus/deficit immediately on the balance sheet, with actuarial gains and losses being recognised through the "other comprehensive income" part of the accounts.
For employers that currently defer the recognition of gains and losses using the corridor approach, the impact is likely to be very substantial with employers seeing significant changes to their balance sheets.
A big change is abolishing the "expected return on assets", which is currently credited to a company's profits and reflects the investment return on pension scheme assets expected by the company. The "interest cost" and "expected return on assets" figures will be replaced by a single "net interest" figure calculated using the discount rate. For many companies, reported profits will fall as a result as this credit will disappear.
Under the current standard, expenses associated with running a pension scheme are usually netted off against return on assets having the effect that the expected, rather than the actual, expenses in each year are charged to the P&L account.
In future companies will need to disclose these expenses separately with the actual rather than the estimated expenses. This will flow through to the P&L, highlighting the cost of running Defined Benefit schemes.
The new rules will come in for accounting years beginning on or after 1 January 2013, with earlier adoption permitted. When preparing 2013 accounts, the figures for 2012 presented as prior year comparators will also need to be shown calculated under the new rules.
Although the changes only affect employers who are required to comply with IAS19, it cannot be long before the equivalent UK standard FRS17 will follow suit.
The changes will be unwelcome for some companies given the reduced profits that will be seen as a result. With this is mind, companies should consider the effect of the new rules on their profit forecasts. However, the revisions should make it easier for investors to understand how a Defined Benefit scheme affects a company’s financial position.