GLOBAL - The London-based International Accounting Standards Board (IASB) marked the end of its controversial pensions project to update International Accounting Standards 19, Employee Benefits (IAS19), with the publication of amendments to the accounting standard.

The changes take effect from 1 January 2013, with earlier adoption permitted.

The move will see the removal of the IAS19 'corridor', a new requirement to report the 'net interest' on the net defined-benefit balance sheet asset or liability, and enhanced disclosure requirements.

Commenting on the development, Lynn Pearcy, KPMG's global IFRS employee benefits standards leader, broadly welcomed the bid to improve transparency around pensions accounting.

"The global economic crisis increased the focus on the off-balance sheet pension liabilities that can result from the corridor's deferred recognition," she said.

"The IASB's proposal to eliminate this deferral received widespread support, and mandating their recognition in other comprehensive income will increase comparability in this area. Companies will need to consider the impact of these revisions not only on their defined benefit plan costs but also on wider matters such as compliance with debt covenants."

Eric Steedman, a consultant actuary with Towers Watson, added: "The changes have been well trailed, and, in the main, items contain no surprises and are a simplification. The impact will be very different for companies according to the options they are following under current IAS19, although many will see their disclosed balance sheet provisions increase and/or their net income reduce. To a large extent, analysts should already be anticipating these adjustments.

He added: "For companies that are currently using the option to amortise the effect of fluctuations in the plan's position, the move to immediate recognition means interim accounting has become more complicated. Like companies that are already using the immediate recognition option, they will now have to true up for significant market movements at each interim reporting date."

Under the new accounting regime for defined-benefit plans, which take effect from 1 January 2013, entities will be required to disaggregate or split pension costs on the face of the income statement into service cost (reported in profit or loss); net interest on the net defined benefit liability or asset (reported in profit or loss); and remeasurements of the net defined benefit liability or asset (reported in other comprehensive income).

As a result of the changes, defined-benefit sponsors will lose the corridor option; the opportunity to report in net income a credit for an expected return on plan assets; and the presentation of pension items in two separated statements, as P&L and OCI must now be presented either in a single statement or consecutively.

UK companies are likely to feel keenly the switch from reporting an expected return on plan assets with a credit based on the interest on plan assets equal to the AA corporate bond discount rate.

In a 16 June briefing on the change, KPMG's UK pensions experts warned: "Because expected returns for a typical pension plan portfolio can be around 1% higher than AA discount rates in current market conditions, and based on UK plc pension assets of around £1,000bn, this is expected to dent UK reported profits by around £10bn."

The IASB launched its pensions project in 2006 with the focus on addressing the measurement of so-called troublesome cash-balance plans. That effort resulted in 2008 in a discussion paper detailing a new measurement model - contribution-based promises.

Commentators largely panned the move, forcing the IASB to beat a retreat and instead develop a series of "targeted improvements" to pensions accounting.

Critics of contribution-based promises railed at the new model's complexity, as well as its potential for increasing income statement volatility.

They also noted that, far from addressing the challenges faced by some plans in jurisdictions such as Switzerland and Belgium, where minimum return guarantee features are a common feature of plan design, the new methodology snagged career-average plans - a category of plan for which IAS19's projected unit credit regime functioned adequately.

The IASB eventually published its targeted-amendment exposure draft in March 2010. In place of the now defunct IAS19 deferral mechanisms, the board explained it wanted entities to "recognise all changes in defined benefit obligations and in the fair value of plan assets when those changes occur".

During its October 2010 redeliberation of the exposure draft, the board confirmed that, in future, entities must disaggregate changes in the defined-benefit obligation and the fair value of plan assets into service cost, finance cost and remeasurement components.

The shake-up of IAS19 also heralds an increased disclosure burden for defined-benefit plan sponsors aimed at increasing transparency for users of financial statements.

Towers Watson's Eric Steedman told IPE: "The new disclosure rules put greater emphasis on showing the risks of defined benefit plans and how these are being managed. That will increase the workload for most preparers. Unlike the original suggestions, however, the final requirements are on the right side of do-able."

The changes to IAS19's disclosure requirements fall into four broad pots:

• Disclosure objectives (paragraphs BC212-BC214)
• The characteristics of the defined benefit plan and amounts in the financial statements (paragraphs BC215-BC228)
• The amount, timing and uncertainty of the entity's future cashflows (paragraphs BC229-BC243)
• Multi-employer plans

Steedman said: "The hope is that the new disclosure rules won't lead to a proliferation of 'boilerplate' standard wording, but rather insightful, situation-specific comment. The proof of the pudding will though be in the eating.

"The IASB has indicated that relevant information should not be obscured by excessive detail, which is a welcome principle. There remains a long list of required disclosures, and judgement will be required as to their application."

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