Back in April, the International Accounting Standards Board was debating the content of its discussion paper on the International Financial Reporting Standards conceptual framework.
That document eventually emerged in July and is intended to inform the board’s work on a follow-up exposure draft for a revised Conceptual Framework. Its exploration of other comprehensive income (OCI) is perhaps of most relevance to pensions accounting.
First, IASB is looking at OCI because you asked them to. Respondents to the IASB’s Agenda Consultation 2011 singled out performance reporting and the use of OCI and recycling as hot-button topics. And for anyone who read this column in July, it should come as no surprise that the IASB’s preliminary view is that the framework “should require a profit or loss total or subtotal that also results, or could result, in some items of income or expense being recycled.”
From that starting point, the discussion paper moves on to consider three approaches to profit or loss and recycling. The first approach prohibits recycling. It would mean that profit or loss is conceptually no different from any other primary financial statement subtotal or total.
It also implies that the framework need not specify whether an entity should present profit or loss, or any other total or subtotal. The decision to require or permit profit or loss, or any other total or subtotal, is one that the IASB could take when it develops or revises particular IFRSs.
This approach is almost certainly a non-starter, not least for what it would mean for cashflow hedging. And it is unlikely that IASB is in any rush to re-open hedge accounting.
So, heading further into the territory of the foregone conclusion, IASB has set out two approaches to OCI: a broad approach and a narrow approach. Although the former is of more relevance to pensions, it is important to understand why the board cannot make the latter work for both pensions and revaluations of property, plant and equipment. And here is where it becomes confusing. The narrow approach to OCI is governed by three principles:
1. Items of income and expense presented in profit or loss provide the primary source of information about the return an entity has made on its economic resources in a period.
2. All items of income and expense should be recognised in profit or loss unless recognising an item in OCI enhances the relevance of profit or loss in that period.
3. An item recognised in OCI must subsequently be reclassified (recycled) to profit or loss.
This occurs when reclassification results in relevant information.
These three principles in turn govern two categories of OCI items: bridging items and mismatch remeasurements. The snag is that neither will get you to recycling on pensions.
There is a similar problem with revaluations of property, plant and equipment.
And so, under the broad approach, the board has left principles 1 and 2 largely unchanged, but amended principle 3 in order to give itself more discretion about whether items of income or expense recognised in OCI should be recycled.
During a 26 July webcast on the project, IASB chairman Hans Hoogervorst was asked ‘why the rush?’. He said: “I don’t think we are in a hurry.”
You might beg to differ. No matter perhaps that paragraphs 8.22 and 8.26 are repetitive. Perhaps, with a bit more time or thought, paragraph 8.32 could have differentiated between listed and unlisted derivatives? And no doubt the incomplete and unhelpfully weak argument in the document leaves him untroubled.
For example, although IASB opines in table 8.1 that the long-term nature of an item might distinguish it as an item that belongs in OCI, it counter argues that it is “[d]ifficult (and perhaps arbitrary) to determine what is ‘short term’.”
Put another way, you are going to have to do their job for them. Comments close on the document on 14 January 2014.