John Lappin reports on a crucial international debate

A draft version of international pensions accounting standards, opposed by UK accountants and companies and internationally by actuaries is being reconsidered by the International Accounting Standards Committee (IASC) in a bid to reach consensus.

Failure to reach agreement could see the UK's Accounting Standards Board (ASB), which is represented on the IASC, publishing a dissenting set of standards.

At the National Association of Pension Funds conference last month, Sir David Tweedy chairman of the ASB an-nounced that if necessary the board would go it alone and reject the international proposals.

Tweedy is supported by many British companies and could receive support from Ireland, while the International Forum of Actuarial Associations (IAAF) which represents 40 international associations has described the IASC's proposals for pension fund liabilities accounting as financially misleading".

The IASC proposals have been prompted by European companies that plan a stock market listing in the US, but do not currently wish to adopt GAAP standards, but a delay could make GAAP the de facto international standard.

IAAF representatives who attend the IASC board and consultative meetings got agreement for the draft, officially known as the International Accounting Standard on Employee Benefits (Ex-posure Draft E54), to be re-ferred back to the responsible steering committee for consideration of the various ob-jections. This committee which the IASC are also able to attend, reports in July with final approval publication ex-pected in March.

Discussing the possibility of failure to reach agreement, Paul Thornton of Watson Wyatt, who as chair of the IFAA Subcommittee on IASC matters attended the April meeting, says: "It is an accounting standard that we don't control. At the end of the day, if they produce a standard we disagree with, we can only beg to differ and not endorse it. There is little else we can do."

Commenting on the ASB's stand he adds: "In the world scene, they are on their own but in Britain they have quite a lot of support from companies and actuaries."

Disagreement arises from the fact that the IASC's proposals differ from both the US FAS87 standard and the British SSAP24.

In its submission to the IASC, the IFAA says: "The IASC's proposed standard fails to give adequate recognition to the nature and term of the benefits obligations."

It continues: "The proposed method for determining the amount of the accounting liability does not conform to actuarial principles and may, as a result, be financially misleading."



Under SSAP 24, assets are measured as an actuarial valuation rather than a market valuation as the IASC is now proposing. The pension liability is calculated at the rate of return of assets in the scheme and volatility is soaked up by spreading forward gains and losses and recognising them gradually.

The IASC proposes to use a discount rate based on corporate bond yields for reasons of simplicity but the IFAA and ASB feel that this should reflect other types of asset, including equities where some of the liabilities are salary related.

It is concerned that the inappropriate use of bond yields will cause unnecessary volatility of results generating misleading balance sheet and revenue items in company accounts from price or wage-indexed and long term liabilities.

The IFAA proposes the establishment of a framework to allow the actuarial bodies of individual countries affect-ed to lay down guidance for the actuaries on the appropriate discount rate.

Anne McGeachin, project director at the ASB says that her organisation may compromise on some of the disputed matters. "The ASB is considering a move to market values for assets held by a scheme because it doesn't believe that the use of actuarial values rather than market values is a sufficiently significant issue to warrant being different from the international proposals."

"It proposes using the rate of return on appropriate matching assets so that it moves away from how the scheme is actually funded to what assets would be appropriate to match the liability," she continues.

But the ASB doesn't agree with the IASC on the discount rate, believing that it is not appropriate to use a risk-free rate when volatility in pension schemes is obvious.



The IFAA is also in dispute over the IASC proposal for a "corridor of 10% of the greater assets and liabilities within which profit and losses would not be recognised but would be deferred indefinitely". IFAA believes that in many countries volatility will result in frequent breaches of the corridor producing a very uneven and distorted pattern of recognition over time.

It suggests using the de-ferred recognition of actuarial gains and losses over the average working lifetime of the workforce, subject to re-cognition of gains and losses over a 25% threshold.

McGeachin for the ASB appears to be moving in the same direction adding: "We are still discussing volatility but one idea is that gains and losses should be recognised immediately in the statement of total recognised gains and losses rather than spread forward."

The ASB expects the July meeting of the IASC to stick with market values for assets but is still debating with the IASC over the discount rate.

"We hope to be able to persuade them at that meeting to move from their discount rate to the rate we are proposing. In terms of absorbing the volatility that is all up in the air. I don't know whether we will succeed in changing minds.""