Stephen Bouvier looks at the UK ASB's latest recommendations on pension liability accounting, and how they fit with ongoing IASB efforts

Defined-benefit pensions accounting has largely been about linked projects running on parallel tracks. And alongside the IASB's update of IAS19 has been not only financial statement presentation, but also the UK ASB's efforts to inspire the future direction of pensions accounting.

In January 2008, the ASB released a discussion paper, The Financial Reporting of Pensions, as part of Europe's ProActive Accounting in Europe initiative, a pan-European partnership capturing a range of cross-border views. An ASB team led the development of the paper, which details their preliminary views.

The ASB's re-deliberations of the conclusions in its discussion paper in November 2009. The ASB hopes that this latest publication will "provide the International Accounting Standards Board with recommendations on how it might develop a future financial reporting standard on pensions". Among the central recommendations are:
 

Entities should recognise a liability to pay benefits only where a present obligation exists to an individual employee and measure plan assets held at current market values; Standard setters should research the presentation of appropriately disaggregated pension plan components; Replacement of the IAS 19 AA-corporate bond discount rate with a risk-free rate to reflect only the time value of money; Disclosure by plan sponsors in line with the ASB's disclosure objectives; and Exclusion of own-credit from the measurement of pension liabilities.


The challenge for the wider public is not only to follow the debate, but also to align the ASB's conclusions with the IASB's efforts. The key point, it seems, is that the IASB is planning a scaled-back revamp of IAS19, whereas the ASB's conclusions point to the longer term.

Certainly, with preparers facing an unprecedented workload, the burden of developing new thinking on pensions accounting rests largely with national standard setters such as the ASB. Within six months of the ASB releasing its discussion paper, the IASB updated, largely in secret, the memorandum of understanding between it and the US FASB. Under that new MOU, preparers were suddenly faced with some 50 due-process documents.

"I couldn't imagine more unfortunate timing," says Charles Rodgers, a senior consultant at Towers Watson. "Given everything else that people have on their plate, the timing of the ASB initiative is less than ideal. I would expect any longer-term review of pensions accounting to be way out in the future - something like 2018 - given the board's current timetable."

And adding to the burgeoning IASB reading list are three further documents from the ASB - the January 2008 discussion paper, a November 2009 re-deliberations document, and a 46-page reporting statement on pension plan disclosure.

Somewhat disappointingly in an accounting landscape short of workable solutions, the ASB concluded on the issue of financial statement presentation that "alternative approaches should be evaluated before development of a new financial reporting standard". Ironically, the ASB notes in its executive summary that "it could not undertake that research as it sought to respond to the consultation in a timely manner".

Sitting alongside the ASB's re-deliberations document is the reporting statement on retirement benefit disclosures, to which the November 2009 document cross-refers. Paragraph 8 of the reporting statement specifies a principle for mortality disclosures. An express mortality disclosure requirement is widely expected to be absent - other than where material, perhaps - from the upcoming IASB pensions exposure draft, an omission that could prove contentious for some users of financial statements.

As an element of best practice, the ASB specifies that an entity should disclose "the principal actuarial assumptions used as at the balance sheet date". But successful as this experience might have been in the UK, Tim Reay, a principal at Hewitt Associates, warns that what works in the UK might not travel well elsewhere: "I think standard setters should remember that what works in one jurisdiction might not work in another. You really do need sufficient reliable mortality data in order to draw meaningful conclusions," he says.

"In the UK, through the actuarial profession, we have collected detailed mortality experience data for many decades and, as a result, have been able to reach detailed conclusions that actuaries in other countries have perhaps been unable to reach as reliably. A good example of this is the cohort effect observed in the UK, where it has emerged that longevity among people born in the inter-war years was improving faster than among those either born before or after that time."

Where the two are broadly on the same track is in their approach to own-credit risk. IASB has excluded financial liabilities from the scope of its new financial instruments standard largely as a result of the difficulty of reaching agreement on own credit. It has also ended up in the same place on immediate recognition.