Accounting standard setters have warned the International Accounting Standards Board (IASB) to tread carefully over its proposed changes to rules on hybrid pension plans.

The International Financial Reporting Standards (IFRS) Foundation’s advisory group on accounting standards has given qualified support to a bid by the IASB to tackle the challenges presented by pension promises where the final benefit is linked to an asset return – ie hybrid pension funds.

Speaking during a meeting of the Accounting Standards Advisory Forum (ASAF) in December, ASAF member Andrew Watchman said: “First of all, we think that there is an issue with the asset return based promises with the projected benefit based on an expected asset return and discounting them back at a different discount rate.

“So we do see that as a mismatch and this seems to to address the mismatch, [and] in that sense it seems to have the potential to improve the reporting of these types of scheme.”

IASB staff recently presented proposals to the board for dealing with so-called hybrid pension promises based on an asset return. The purpose of the research was to address an inconsistency that arose from the use of a corporate bond rate to discount benefits that are based on a higher-than-risk-free asset rate of return.

Staff are exploring a solution to the problem that relies on using an asset rate of return that does not exceed the discount rate.

The staff team told the board that they wanted to conduct outreach on this potential solution and present their findings during the second half of 2019. However, they highlighted that, if the outreach confirmed that the approach was unworkable, they would propose that the board halt its work on pensions.

‘Arbitrary’ discount rate

Despite the support for the IASB’s decision to tackle accounting for hybrid pension plans, Christina Ng from the Asian-Oceanian standard setters’ group warned that the proposed research plan would lead to calls for the board to consider other aspects of pensions accounting.

She said: “If you’re going to do this, you need to be very careful how you explain it [because] I think people are going to say you’ve opened it and … you really need to think about bigger issues.”

Ng also warned that a comment from the IASB’s vice-chair, Sue Lloyd – in which she described the discount rate problem as “a mathematical issue” – was the wrong way to communicate with constituents.

“If you explain it that way, you actually run the risk that people then say, ‘why don’t you open up and have another think about what the actual appropriate discount rate is’,” she said.

“It’s a very arbitrary discount rate that you have, which is either government bonds or [the] return on corporate bonds, and so there is a whole lot of other discussion I think we could usefully have about what is the right discount rate.”

EFRAG report on track

Meanwhile, it also emerged during the ASAF meeting that the European Financial Reporting Advisory Group (EFRAG) remains on track to issue a planned discussion paper on pensions accounting during the first quarter of this year.

Watchman – who since April 2016 has chaired EFRAG’s technical experts group – said: “Based on the current situation, we expect that the discussion paper will include the capped asset return approach [as well as] two other approaches which were tentatively called ‘fair value’ and ‘fulfilment value’.”

EFRAG launched its project on IAS 19 – the international accounting rules for employee benefits – in January 2017.

In common with the IASB’s research project, the EFRAG project is examining a number of shortcomings with pensions accounting in relation to hybrid plans. The group has stated that it did not expect to propose a wholesale revisiting of the accounting model in IAS 19.

FRC lists audit review companies

Separately, the UK Financial Reporting Council (FRC) has released a list of companies that have been subject to examinations by its audit quality review team.

Among the companies selected for review was troubled bakery chain Patisserie Valerie. The company suspended trading in its shares in October after fraudulent accounting irregularities emerged. The company’s finance director was subsequently arrested. 

The FRC list revealed that it reviewed the company’s audited financial statements to 30 September 2017.

The watchdog’s oversight of UK audit has been widely panned as ineffective with politicians and, latterly, a review by former civil servant Sir John Kingman, calling for it to be wound up.