On 29 April the IASB published its proposals to revamp IAS 19, employee benefits, which “aims to make fundamental improvements to the recognition, presentation and disclosure of defined benefit plans by mid-2011. These improvements will make it easier for users of financial statements to understand how defined benefit (DB) plans affect a company’s financial position, financial performance and cash flows.”
The project has its sights set on three “deficiencies” in IAS 19:
• Deferred recognition - companies do not have to account for changes in their DB plans immediately;
• Lack of comparability - companies can choose different options for recognising gains and losses;
• Disclosure shortcomings - the board reasons that existing disclosures are voluminous but fail to highlight the risks arising from DB plans.
Accordingly, the exposure draft focuses on: immediate recognition of DB cost; presentation; and disclosure. As previously mooted, the board wants to scrap the options in IAS 19 that allow a company to defer the recognition of:
• Some of the gains and losses arising on changes in estimates of the DB obligation;
• Changes in the fair value of its plan assets.
Instead, the board has proposed that plan sponsors should recognise those items immediately. To justify this change, it argues that: “The response to the IASB’s 2008 discussion paper indicated general support for immediate recognition.”
The board perceives presentation as an area where comparability across similar entities and businesses is lacking. This is because as well as permitting options for recognition of what are often short handed as actuarial gains and losses, IAS 19 offers DB plan sponsors a range of presentation alternatives.
The proposals in the draft aim to achieve clarity of presentation by requiring entities to present service cost in profit or loss; finance cost as part of finance costs in profit or loss; and re-measurements in other comprehensive income.
Running in parallel with the IAS 19 amendment exposure draft is another draft that proposes that the board should scrap the option currently found in IAS 19 to present a single statement of comprehensive income. The proposal has the effect of mandating a single statement presentation format.
The move to a single statement is likely to prove at least as controversial as the board’s pensions accounting proposals. Often overlooked is the linkage between the US FASB’s work to revamp financial instruments accounting under US GAAP - it has recently launched a consultation process on a mainly fair-value accounting model for financial assets and liabilities - and financial statement presentation.
As a well-placed source pointed out recently, financial statement presentation is a much bigger issue than just pensions accounting. If the IASB and FASB fail to secure the move to a single statement of comprehensive income, the US politically charged financial instruments proposals fall by the wayside.
Indeed, the board notes on its OCI project website that: “The IASB is addressing the presentation of OCI separately from its project on financial statement presentation because of the important interaction with other projects such as those on financial instruments and post-employment benefits.”
Bizarre though it might seem for non-accountants, financial statement presentation is one of those issues that can rapidly boil over. So the IASB and the FASB have devised a cunning plan to take some of the heat out of the debate. During the 19 January board meeting, the two standard setters agreed to avoid any reference to a single statement of comprehensive income, opting instead for much less inflammatory references to a continuous statement format.
Eagle-eared listeners to the IASB’s recent pensions webcast might have noticed project manager Andrea Pryde correct her reference mid-flow to a single statement. As David Tweedie noted during the 19 January meeting: “We wondered whether to avoid a lot of the ‘aggro’ that will arise, and yet still present exactly what we want, it might be more subtle if we talked about showing continuous statements of comprehensive income.”