GLOBAL - The International Accounting Standards Board (IASB) has tentatively cleared a staff proposal that could see so-called pension plan remeasurements go straight into profit and loss on a company's balance sheet, and possibly net of tax.

The proposal, if finalised, would leave businesses reporting under International Financial Reporting Standards with a direct hit against their earnings per share measure - a key business performance indicator relied on by analyst investors.

In a separate development, the IASB has also been forced to concede its guidance on minimum funding requirements, IFRIC14, is "flawed" so have decided to reexamine the literature.

Staff have yet to confirm what they mean by "remeasurements" but the proposals, agreed during a 23 January board meeting, are moving ahead despite one senior IASB member acknowledging the sponsors of defined-benefit pension plans will be forced to put what many see as a flawed measurement of an entity's pension obligation directly through income.

Jim Leisenring warned: "Our vulnerabilities are people will say, 'one of the problems with putting this in profit or loss [is that] you haven't measured it right. And you won't look at how to measure it, you want to do that a decade from now, and so why are you making me put this in profit or loss?' That's going to be an argument very difficult to refute."

He also said the proposal creates an uneven playing field with US GAAP.

Leisenring, a former FASB vice-chairman, explained the US standard setter had decided it was "not going to move on this until they get the measurement right."

At present, IAS19 broadly allows plan sponsors to defer recognition of pension costs in P&L in two ways:
the so-called 'corridor' method where a proportion of gains or losses are recognised; and
immediate recognition in P&L using the SORIE (other comprehensive income) approach.

IASB launched the first phase of its bid to address the criticism of IAS19 in June 2006 when it effectively ruled out any changes to the standard's measurement requirements. IASB also said it wanted to focus on a solution for so-called "troublesome" pension plans - cash-balance or hybrid-risk plans.

A second, wider-ranging project - dubbed Phase II - was slated to address wider pensions accounting issues in conjunction with the US accounting standard setter.

IASB published a due process discussion paper in March 2008. This document proposed a new plan classification dubbed "contribution based". In addition to requiring businesses to use what the board claimed were fair value measurement techniques, the proposals also required entities to put pension plan costs directly into P&L.

But faced with widespread opposition to its plans - and the likelihood of failing to put in place improvements to pensions accounting by 2011 - the board agreed on 23 January to put its proposals for contribution-based plans on a back burner for the time being.

Instead staff will now develop an exposure draft to address disclosure, presentation and recognition but their plans to develop a suggested financial statement layout [link here] have also hit a brick wall.

Referring to paragraph 18 of Agenda Paper 16C, IASB member Prabhakar Kalavacherla said he objected to the staff's proposal to present "remeasurements" net of tax on two grounds.

"The way the staff has it right now ... is that the present location of the remeasurement arising from changes in pension assumptions is shown below continuing operations, and I cannot fathom why this is not part of the continuing operations."

And on the net of tax proposal, he warned: "I don't know whether net of tax is a presentation that is permitted elsewhere before you get to the profit or loss."

The IASB's staff's objective in developing the proposals was to show the pension costs separately from the other operating and financing activities of the business.

In response, IASB senior project manager Anne McGeachin said: "We agree that it is part of continuing operations so we would need to amend the line item described as 'profit from continuing operations' to be 'profit from continuing operations before remeasurements of pensions'."

She continued: "And we also agree that in order to get the net of tax treatment we would need to make an amendment to IAS1 on the tax expense."

Of the two references to IAS1 - the IASB standard which guides entities on the layout of financial statements - neither refers to the need to amend the standard. So IASB members Jan Engström and Jim Leisenring have declined to support the proposal.

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