GLOBAL - The International Accounting Standards Board (IASB) has rejected a staff proposal calling on the board to drop the proposed net-interest approach for the presentation of defined benefit (DB) pension plan components in an entity's statement of comprehensive income (SOCI).

Instead, the board voted to retain the new approach, first detailed in an exposure draft back in April, by a margin of nine votes to four.

The decision comes as the board progresses its deliberations of the proposals in that exposure draft in light of a round of formal public comment.

Staff at the London-based accountancy standard-setter had argued strongly against the net-interest model, which, controversially, will see an end to DB plan sponsors reporting an expected return on plan assets on the income statement.

Reacting to the development, Eric Steedman, a leading consultant actuary with Towers Watson, told IPE: "The IASB appears to be sticking to its intentions in the key area of recognition and presentation.

"There was never much doubt that spreading gains and losses to future periods under the 10% corridor approach was heading for the scrap-heap."

The new approach - which is now subject to a final balloting of board members ahead of its issue next year as a finalised International Financial Reporting Standard - will also see the board remove the IAS19 corridor and the OCI-approach, or Statement of Recognised Income and Expense.

Despite this upheaval, the pensions staff noted in their 20 October agenda paper that they did not believe the net-interest approach represented a "significant enough improvement to justify a change in the existing requirements of IAS19".

The paper continues: "The board can still achieve its objectives of improving comparability and understandability by eliminating the existing presentation options, and these benefits can be achieved with expected return approach."

The April exposure draft proposed a new presentation approach for changes in the DB obligations and the fair value of plan assets. Under a proposal credited largely to IASB member Stephen Cooper, plan sponsors must present a service cost component in profit or loss; a finance cost component - net interest on the net DB liability or asset - as part of finance costs in profit or loss; and remeasurements in other comprehensive income.

The decision also leaves those businesses that have until now relied on the corridor to address how they will handle the transition to the net-interest approach.

Steedman said: "On transitioning to the new approach, companies that have been using the spreading approach will have to recognise gains and losses that have been left off balance sheet under the current rules.

"Although transition has not yet been discussed, there is every reason to believe this will be done by drawing up a fresh opening balance sheet, not by a movement though profit and loss."

The move has proved controversial, with critics and supporters of the net-interest approach split broadly across three camps: those who support the adoption of US GAAP as a waypoint to a comprehensive review of pensions accounting, supporters of the expected return and those who agree with the net interest approach.

North American entities currently reporting under GAAP, many of which support recycling - or reclassification - of items from other comprehensive income to net income, have also set out their opposition to the net interest approach.

Summing up the convergence landscape, Steedman said: "The new IAS 19 approach -based on tentative decisions to date - would bring substantial alignment of the balance sheet with US GAAP. Profit and loss under IAS19 and GAAP would, though, look very different.

"GAAP will continue to permit the 10% spreading approach, which defers recognition of gains and losses and eventually recycles them though profit or loss.

"Under IAS19, gains and losses would be immediately recognised, albeit through other comprehensive income, rather than profit or loss. GAAP will continue to have an explicit assumption for expected returns on assets that differs from the discount rate."
 

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