GERMANY - German multinational BASF AG has revealed around 95% of its active-member pension obligation will shift to the IASB's proposed fair value pension measure, if the standard-setter's recently-published proposals to reform pension accounting become GAAP.
"Only final salary promises and other post-retirement benefit promises remain in the defined-benefit section, thus approximately 95% of BASF's post-employment benefit obligation related to the active members would be reallocated to contribution-based promises," BASF said in a response to the IASB proposals in August.
This latest revelation follow earlier claims suggesting more than 99% of rival concern Bayer AG's defined-benefit obligation will also shift to the new plan classification. (See earlier IPE article: German pensions face near full value shift under IASB reform)
BASF comments only appeared on the IASB website on 2 September, but fresh information arose on 12 September on what the IASB's contingency plans may be if it fails to come up with a workable solution for contribution-based plans.
"If we can't effectively address the accounting issue posed by these CB plans, that will be an issue that we will probably set aide to get the bigger issue taken care of," said Wayne Upton, IASB director.
On the separate issue of the IASB's plans to scrap deferred recognition of pension plan gains and losses - so-called 'smoothing' - he added: " Obviously the fallback position would be to do what the FASB has already done" in FASB Statement No. 158.
Speaking during an IASB meeting with national standard setters in London, he explained: "If we can't find an effective approach to presentation … that's an issue that we may set aside. We don't plan to fail but those are our contingency plans," continued Upton.
IASB unveiled a discussion paper in March proposing, among other changes, changes to pensions accounting requirements and a new definition of contribution-based pension plans.
The IASB said it hoped the new plan classification would form the basis for improving the accounting for what it has dubbed "troublesome" cash-balance-type plans.
The board has divided its work on pensions into two phases. After completion of Phase I, which should result in improvements to IAS 19 by 2011, the board has said it hopes to work with the FASB to mount a full-scale review of pensions accounting.
The project now hangs in the balance as the United States is mulling a move to IFRS reporting, and has run into controversy over plans to change the accounting for the UK's career average plans from the projected unit credit method to the new fair value model.
In a stinging critique on that project, the BASF argued the IASB risks distorting capital markets, leading Europe's businesses to make "economically-inefficient decisions" as well as increasing income statement volatility.
The BASF comment letter also points to a report by JPMorgan analyst Sarah Deans of BT plc's 2006/2007 results "to illustrate an extreme case of volatility".
This research found, BASF noted, that "applying the all through profit or loss approach … would increase the reported net income by 52% compared to the current approach. Major companies listed in the DAX 30 index would have reported fluctuations for their 2007 earnings by 30%, up to 40%, under this approach.
"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.
"Controlling these short-term volatility risks will likely increase the long-term costs of providing the benefits already promised," concluded BASF.
Among these "economically-inefficient decisions", BASF argued, the implications could be a decision to close existing defined-benefit plans and to "shift their allocation of plan assets in order to reduce the accounting volatility, eg by the implementation of LDI … concepts."
Any such move, the 25-page comment letter concluded, "could lead to serious distortions in different segments of the capital market".
In a surprise development that indicates the seriousness with which BASF is treating the board's proposals on immediate recognition, the firm also said: "We propose to perform field tests before deciding on such a fundamental change in accounting principles."
Although critical of the new contribution-based definition and its impact on the income statement, BASF said it supported the board's proposals for changes to the balance sheet.
"In general, we support the aims addressed by the board to no longer allow the deferred recognition in the balance sheet and to eliminate the current situation of the existing three options for recognising actuarial gains and losses."
The comment letter noted: "Paragraph 19.93A of IAS19 already permits the board's aim of presenting ‘the current funded status in the balance sheet'."
Also in BASF's sights was the board's proposal to ditch risk as a means of "distinguishing different benefit categories" as a result of its new contribution-based plan definition.
The letter's author wrote: "Both defined-benefit and contribution-based promises are exposed to salary risks, asset-based risks, demographic risks, and vesting uncertainties.
"The category 'contribution-based promises' would include promises both with and without risks."
He concluded "there is no convincing reason to have a different treatment in measurement and presentation of actuarial gains or losses arising from these promises."
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