GLOBAL - Swiss pharmaceutical and diagnostics giant Roche has slammed proposals by the IASB's parent body, the International Accounting Standards Committee Foundation, to create a seven-member oversight body comprised mainly of securities regulators to oversee the activities of the IASCF's trustees.

The remarks, set out in a letter to the Delaware-incorporated IASCF, form part of a stinging eight-page rebuke to the board.

They also come as the representatives of the UK actuarial profession warn of the "real impacts on real people derived from the inconsistent and tougher presentation of pension commitments".

Despite acknowledging efforts by the IASCF trustees to improve governance, "our confidence - as preparers - in the effectiveness of that governance and due process has seldom been at a lower ebb," state authors of the Roche letter.

"However, we do not believe that the standard-setting process - for all the additional steps and safeguards which have been built in - is resulting in the kind of standards which the capital and other financial markets need."

The letter's authors, Dr Erwin Schneider, Roche's head of corporate finance accounting and controlling, together with external relations specialist Alan Dangerfield, single out what they claim is the board's over-reliance on accounting theory for particular criticism.

Schneider and Dangerfield also make a public call for future board members to have "at least five years' recent experience of actually preparing, using and front-line auditing of financial reporting".

On linked IASCF proposals to increase the number of board members from 14 to 16, Roche argues: "The proposals maintain a strong tendency to potentially give excessive weight to countries with an 'Anglo-Saxon' accounting tradition."

The Roche letter recommended the IASCF set "an overall maximum of 50% of members from the UK and its ex-colonies (incl. USA)"

The IASB's parent body - the IASCF trustees - announced its latest constitutional review process in November 2007 and the foundation's reform proposals, published on 21 July, detail plans to set up a monitoring group to oversee the activities of the IASCF trustees.

Under these proposals, a representative from the US Securities & Exchange Commission, the International Monetary Fund, the World Bank and the Japan Financial Services Agency would each have a seat among the group's seven-strong membership.

More controversially, if adopted, the proposals would allow the monitoring group to directly petition the IASB chairman Sir David Tweedie.

But Roche argued in its 12 September comment letter the board's proposed monitoring group should adopt an "aggressively critical" approach to holding the IASB to account.

"It should not accept, for instance, that the Board receives overwhelmingly negative comments to a proposal but nevertheless presses ahead with it, with the argument that the feedback did not bring to light any new arguments not previously considered or that the commentators obviously had not understood the proposal," said Roche in its letter.

"There is a clear need to specify that the Board's "independence" does not extend to the freedom to impose theoretical requirements which the participants in the markets do not need or support," Roche notes in its comment letter.

The comments were made just as the IASB board itself faced strong criticism over its pensions accounting project containing proposals which could hit German pension plans hard in particular.

German chemicals company BASF AG warned in its response to IAS19 proposals "approximately 95% of BASF's post-employment benefit obligation related to the active members would be reallocated to contribution-based promises".

BASF warned: "By trying to control the short-term volatility risk for earnings, which does not necessarily reflect the long-term risk situation of the benefit plans, the reporting entities could be forced to make economically-inefficient decisions."

Any such move, the 25-page comment letter concluded, "could lead to serious distortions in different segments of the capital market".

Meanwhile, representatives of the UK actuarial profession have slated the IASB's pensions accounting reform proposals as "problematic - far more so than the current requirements" in IAS19.

"…Proposals create an artificial distinction between categories of pension benefit that are almost identical (in some cases economically identical but presented differently)," the actuaries argued.

"The proposed approach to recognising plans that will now be re-categorised as contribution based will make them look more onerous and volatile than comparable liabilities. This will mislead management and investors, guiding them to sub-optimal decisions, with real world impacts on employees."

In its September comment letter, representative body The Actuarial Profession called on the IASB to "give up any attempt to fundamentally change the accounting for any category of pension benefits until a comprehensive review of pensions accounting as a whole has been completed".

The actuaries' critique of the IASB's proposals noted: "IASB staff have wrestled with this problem for several years now, and it is unlikely to be soluble as long as the accounting for pure DC and final salary plans remain as they are. Drawing further lines between categories of pension benefits will not resolve the problem."

The 13-page document continued: "Pensions has suffered from being a test bed for the introduction of new accounting methods, with real impacts on real people derived from the inconsistent and tougher presentation of pension commitments relative to comparable liabilities."

Paralleling the complexity argument raised separately by Roche in its constitutional reform comment letter, The Actuarial Profession warned the board of "the magnitude of the extra costs that would in practice result from implementing the proposals for 'higher of' promises".

"To judge what would be involved if the suggested approach was implemented, we suggest considering the calculations implied by projecting forward the assets and two different pension promises for 40 years for say 1000 stochastic runs for each of the tens of thousands of members of a pension plan," explained the actuaries.

A so-called higher-of promise might arise where a pension plan sponsor in effect offers its member an embedded option or guarantee by defining a member's benefit as the "higher of" more than one specified amount.

Existing IAS19 rules classifies these benefit promises as defined benefit plans but the IASB suggested in its March discussion paper on IAS19 this accounting treatment "may underestimate the liability".

The Institute of Actuaries' and Faculty of Actuaries' letter noted: "[G]athering the data required for each of these members at the balance sheet date from the plan administrator and performing (and checking) the required calculations all before the accounts are finalised."

"All this means that while the approach set out in the paper is possible in theory, in practice the costs of pension cost calculations will be (literally) several orders of magnitude higher than now, and are unlikely to be possible within the timescale available from the year-end to the date on which the accounts are finalised," they concluded.

IASB published its due process discussion paper on IAS19 reform in March 2008 and its six-month comment period on the document closed 26 September.

The board has proposed a new pension plan classification, the contribution-based plan, which the board claims represents the fair value of certain types of pension plan design.

Controversially, the new definition requires businesses to show the movements in their pension plan liabilities directly in the profit or loss account.

If you have any comments you would like to add to this or any other story, contact Julie Henderson on + 44 (0)20 7261 4602 or email julie.henderson@ipe.com

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