IASB takes first steps toward full-on review of pensions accounting
The International Accounting Standards Board (IASB) could be about to embark on a radical shake-up of pensions accounting with wide-ranging implications for sponsors of both defined benefit (DB) and defined contribution (DC) retirement plans.
One option mulled by the London-based standard setter during its 22 September meeting is to scrap International Accounting Standard 19, Employee Benefits (IAS19), and replace it with a single, principles-based accounting model for DB and DC plans.
Any such move would open up a public debate about the correct basis for discounting pension promises.
Board members signalled their strong support for the staff to continue with their research into the topic.
Research project staff wrote in a paper presented to IASB members: “To consider a measurement model fundamentally, we may also consider issues relating to discount rates and attribution of benefits.”
And speaking during the 22 September meeting, IASB member Stephen Cooper indicated his support for a comprehensive review of pensions accounting.
“I think that’s the only way to go,” he said.
The former sell-side analyst continued: “If you try and do contribution-based promises, as we’ve discovered in the past, it just becomes impossible, and you get these bright lines.
“The only way to solve this is to look at the whole range of things.
“We don’t need to understand all of the different plans out there.
“We obviously have to have an understanding of plans in sufficient detail, but I wouldn’t say … go off and identify every single one of these things.”
In their introduction to the board, staff noted that they “have not yet decided” whether they should publish a discussion paper.
They do, however, plan to issue a research paper during 2015 to explore a “conceptually sound and robust measurement model” for pension plans, and the cost-benefit analysis of any such accounting model, given recent trends in plan design.
Staff also explained that if the research paper identifies “enough evidences [sic] to consider a fundamental amendment to [IAS19], we may propose to publish a Discussion Paper.”
In addition, the staff could identify issues that it would be appropriate to deal with through the post-implementation review of IAS19 that is slated to take place during 2016.
The IASB – and also its interpretative body, the International Financial Reporting Standards Interpretations Committee (IFRS IC) – has a long history on the subject of pensions accounting.
IAS19 currently addresses two types of retirement promise through its focus on DB and DC plans.
In the case of the latter, it simply requires sponsors to expense plan contributions as they are incurred.
With DB promises, however, it applies the so-called projected unit credit approach.
This requires preparers to project forward using a scheme’s benefit assumptions to arrive at a projected liability, and then discount back using a AA corporate bond rate to reach a net present value.
The IAS19 methodology has failed to address, however, the rise in so-called intermediate-risk plans or contribution-based promises.
Such plans have proliferated in recent years with the move among employers to derisk their pensions exposure.
The IASB attempted to tackle the issue with a discussion paper in 2008.
This document was largely panned by commentators who argued that its proposals were difficult to apply and dragged too many plans into a new fair-value measurement approach.
The decision to abandon the discussion paper proposals led the board to issue instead a series of targeted revisions to IAS19 in 2011.
These amendments left unaddressed how entities ought to account for contribution-based promises.
Since 2011, the IFRS IC has attempted to offer guidance to preparers by exploring a solution to the challenges presented by DB plans with a guaranteed minimum return.
The committee was forced, however, to abandon its work.
IFRS IC member Tony de Bell said: “To be honest, I’m not sure you can resolve it without addressing the broader aspects in [IAS]19.”