The London-based International Accounting Standards Board (IASB) has approved for publication a series of amendments to International Accounting Standard 19 (IAS 19), Employee Benefits, on the treatment of employee contributions.
The changes – developed by the board in co-operation with its interpretive body, the International Financial Reporting Standards Interpretations Committee – will go out with an effective date of 1 July 2014.
The changes will amend IAS 19 in two ways.
First, employers can recognise employee contributions as a reduction against service cost only where they are linked to the employee’s service within that reporting period.
Second, attribution of any negative benefit must follow the requirements of paragraph 70 of the standard.
But also emerging during the board’s 16 September discussions were major question marks over the board’s prospects for mounting a root-and-branch reassessment of pensions accounting, and proposals for the interpretations committee to revive what is known as the IFRIC D9 approach as a possible solution to the problem of contribution-based promises.
But perhaps of greatest interest to IASB-watchers were signals from a senior staff member that there is little appetite for a root-and-branch reform of IAS 19 accounting.
IASB director Alan Teixeira said: “It’s on the longer-term research plan, but we don’t have any staff allocated to it or any standard setters who’ve expressed an interest in the project.
“At the moment, there is nothing specific planned for it.”
His comments came in response to remarks by IASB member Stephen Cooper, who told the 16 September meeting that the time had come for a fresh look at pensions.
Cooper said: “I do think what we’re doing here, and also the contribution-based promises that are currently under discussion at the interpretations committee, indicate that we need to have a more fundamental look at the measurement of pension liabilities.”
IASB’s vice-chairman Ian Mackintosh added that one option for the board to consider might be to revisit a 2008 discussion paper on pensions accounting produced under the auspices of the EU-wide Proactive Accounting Activities in Europe initiative.
The European Financial Reporting Advisory Group (EFRAG) issued the document in January 2008.
EFRAG released a report on feedback to the proposals and subsequent re-deliberations in November 2009.
In overview, the discussion paper proposed that a liability “in respect of future pensions should be measured at a current value”.
The document argued: “The objective of a current value measure of future payments of pension benefits is to reflect today’s value of the future cash outflows expected to settle the liability when it falls due.
“This approach might be viewed as an ‘entity‐specific’ measurement because it aims to reflect not only the properties of the liability itself but also the relationship to its owner.”
More controversially, on discounting, the report’s authors called for the use of a “current market discount rate to reflect the time value of money only – i.e. a risk‐free rate.”
Alan Teixeira responded, however, that his reading of the market was that there “might be a lack of appetite” among possible project collaborators for breathing fresh life into the initiative.
Teixeira said: “We’ve given everybody an opportunity to express an interest, and that’s one project that no-body outside has expressed an interest [in doing].
“We might have to push hard to get somebody to do it.”
But consultant actuary Simon Robinson at Aon Hewitt, speaking with IPE, questioned the need for change.
“I actually think the current IAS 19 works pretty well,” he said.
“There are some quirks – for example, contribution-based promises. But preparers of accounts have generally taken a pragmatic view on how to value these within the confines of the current IAS 19, and re-opening the debate might be akin to opening Pandora’s Box.
“We can see that, with the minor revisions to IAS 19 around treating employee contributions as a negative benefit, what might seem a minor technical amendment is actually very difficult to achieve in practice with, I would argue, no benefit to users of accounts.”
Cooper also warned against any tinkering around the edges.
Speaking this time on an update on the interpretation committee’s activities, he questioned its decision to explore IFRIC D9 as a possible solution to contribution-based promises.
“This is fine in terms of these plans that have a link to asset returns, it works well,” he said.
“Existing accounting under DB accounting just produces the wrong answer, and that’s quite clear.”
Cooper said the board should have fixed the problem sooner rather than wait until now.
The approach, he added would not fix the challenge of plans that offer a guaranteed return or “higher-of” plans.
D9 was, for these retirement promises “really bad accounting” that is “inconsistent with what we are doing in insurance”.
“In insurance,” he said, “we are trying to get guarantees on the balance sheet, measured properly. The D9 approach just looks at intrinsic value.
“It doesn’t take into account time value. So I’m rather concerned the Interpretations Committee seems to think D9 is a good answer.”
Cooper also questioned the wisdom of including what he referred to as “current salary [and] career-average” plans within the scope of the work on D9.
“That was the problem we had with the discussion paper when we had a second attempt to resolve this problem,” he said.
“That failed because the scope was too wide. So, I’m concerned the problems we’ve had are just going to come back.”
Pensions expert Simon Robinson said while he had sympathy with Cooper’s comments about D9, “trying to resolve them simply highlights more fundamental problems in IAS 19 such as the distinction between defined benefit and defined contribution plans”.
He added: “Accounting for defined benefit plans under IAS 19 is not consistent with other areas of accounting – this inconsistency is not limited to contribution-based promises.”