Members of the International Accounting Standards Board (IASB) have given staff the green light to carry on with the process of consulting stakeholders on a possible accounting solution to the challenges posed by so-called hybrid pension plans under International Accounting Standard 19 (IAS 19) Employee Benefits.
Speaking during the board’s January meeting, IASB member Jianqiao Lu said it was “a better practical approach to take forward” and that he agreed staff should develop an illustrative example to test how it might work in practice.
The board is currently working on a model dubbed the “capped ultimate costs adjustment approach”.
The board’s decision means staff will now bring illustrative examples to a future board meeting to demonstrate how accounting outcomes would differ under that model compared to existing IAS 19 requirements.
Staff revealed during the meeting that they are focused on three main questions:
- how much of a difference the capped approach would make to the measurement of the defined benefit (DB) obligation;
- whether it would cause any difficulties in practice; and
- how widespread are the types of plan that the approach is trying to address?
The IASB’s work on hybrid pension plans is intended to address an inconsistency that arises from the use of a corporate bond rate to discount benefits that are based on a higher-than-risk-free asset rate of return under IAS 19.
Staff think one solution might be to calculate the defined benefit obligation (DBO) with an asset rate of return that does not exceed the discount rate.
The staff have already indicated that if the approach turns out to be unfeasible, they will recommend that the board calls time on the project.
Meanwhile, during the same meeting session, the IASB also concluded discussion on a set of revamped disclosure objectives for IAS 19 that could see the volume of pensions disclosures shrink, while at the same time giving users of financial statements more focused and relevant information about pensions obligations.
Speaking during the meeting, IASB member Ann Tarca said: “So long as [preparers] understand what we’re trying to achieve, they could be producing fewer disclosures that are more relevant.”
Tarca noted that there was an overlap between the revamped disclosure proposals and the existing requirements for disclosure under IAS 19 Employee Benefits.
In response, project manager Kathryn Donkersley said: “Applied properly, I would expect that the pages in financial statements devoted to this to be less.”
She added, however, that she would be reluctant to say it was the same because the proposed approach is different.
The basis for the board’s work on DB disclosures is draft guidance it developed in 2018 to assist it with developing and drafting disclosure requirements.
This guidance is based around using specific disclosure objectives to elicit relevant information supported by a catch-all or high-level disclosure.
Disclosures under International Financial Reporting Standards (IFRSs) have tended to emerge in a standard-specific fashion over several decades.
The board hopes that its new approach, however, will encourage preparers to take a broader view of their approach to disclosures.
In overview, board members approved staff recommendations detailed in paragraphs 20, 23, 27, 31, 34 and 37 of Agenda Paper 11B either to confirm or amend the board’s earlier tentative decision in respect of DB disclosures.
The board also decided to leave unchanged its tentative decisions on defined contribution (DC) plans (paragraph 41), short-term employee benefits, other long-term employee benefits and termination benefits (paragraph 58).
IASB members also approved staff proposals to amend their earlier tentative decisions in respect of multi-employer (paragraph 47) and group plans (paragraph 53).
An official summary of the IASB’s meeting decisions is available on the IASB website.