The launch of the International Accounting Standards Board (IASB)'s Discussion Paper was overshadowed by the earlier Discussion Paper on pensions accounting from the UK's Accounting Standards Board (ASB). Its proposals are important and are, in a sense, more urgent than the ASB's. The ASB's Discussion Paper was intended to provoke debate and provide a basis for recommendations to the IASB. Responses to the IASB's Discussion Paper will lead to an exposure draft for amendments to IAS 19, with a view to issuing a revised standard by 2011.

The IASB discussion paper is presented as tidying up problems in pensions accounting that cannot wait for the more thorough review of pensions accounting on which the IASB has embarked with the US accounting standards setter, FASB (Financial Accounting Standard's Board). Its proposals are more radical than one would expect from an interim review and to some extent pre-empt the results of the later review.

The discussion paper proposes the immediate recognition of gains and losses arising from defined benefit plans; changes in the presentation of pension cost in the income statement; and the definition of a new category of ‘contribution-based' pension promises and how they should be accounted for.

The first proposal involves the removal of the different presentation options permitted by IAS 19. Although companies appear to be reconciled to the elimination of the ‘corridor' option, a move which would generally be welcomed by analysts and users of accounts, it is by no means clear that the total removal of flexibility would be beneficial. Nor is it so urgent that it cannot wait for the completion of the more thorough review of pensions accounting being undertaken by the IASB and FASB. This is particularly the case as a requirement for immediate recognition necessarily raises the question of how the resulting volatility should be dealt with in the income statement.

A fully satisfactory solution to this question cannot be found until the conclusion of the IASB's separate project on presentation. Taking highly volatile pension returns (capital gains and losses as well as income) through the income statement would overwhelm operating returns and be extremely misleading. The economic reality is that, as very long term liabilities, companies' pension obligations are essentially stable from one year to the next. Likewise, changes in the value of the scheme assets have little impact on the cash flows earned by the assets to fund the liabilities. There is a strong probability that many finance directors and company boards would react to apparent volatility in the accounts by closing schemes that are perfectly affordable, further undermining pension provision.

The third proposal, providing for a definition of ‘contribution-based' pension promises, is directed at accounting for schemes that combine characteristics of defined benefit and defined contribution. These are not well accounted for at present. The impact of the proposal will be considerable in a number of European countries. The proposal is novel and it is difficult to work out its full effect. It is not appropriate for what is intended as an interim amending standard. Any problems requiring urgent action should instead be dealt with on the basis of existing standards.

Julian Le Fanu is a policy adviser, Investment Regulation and Funding at the National Association of Pension Funds.

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