The European Financial Reporting Advisory Group has received a largely mixed response to its discussion paper setting out three possible approaches for dealing with so-called hybrid or asset-return dependent pension promises.
In summary, of the 13 responses received by the end of the consultation period, only the capped-asset approach secured support among constituents, with no respondent backing the competing fulfillment value approach and the fair-value approach.
An EFRAG spokesperson told IPE: “The next step for the EFRAG Secretariat is to prepare a summary of the feedback received and present it at the EFRAG [Technical Experts Group] meeting.
“In early March, EFRAG TEG will discuss the possible ways forward.”
EFRAG, which advised the European Union on accounting matters, issued a discussion paper in May last year setting out possible alternative accounting approaches to the current model in International Accounting Standard 19, Employee Benefits.
A number of jurisdictions in Europe say they are struggling to accurately value hybrid pension promises using the IAS 19 projected unit credit approach.
This is because IAS 19 forces them to project their benefit promise forward using an asset-based rate of return and discount back using a high-quality corporate bond rate.
In response, EFRAG has suggested three accounting models: the capped asset return approach, the fair-value approach and the fulfilment value approach.
The capped-asset approach involves measuring the pension liability at the higher of the IAS 19 obligation:
- with the expected return capped at the level of the discount rate, or
- assuming the level of the minimum guaranteed return.
Among those supporting EFRAG’s proposal for a so-called capped-asset return approach was the London-based Association of Consulting Actuaries.
In a response dated 15 November, the body’s accounting committee chair Warren Singer wrote: “We believe this approach has the advantage of addressing in a pragmatic and easy to implement way the internal measurement mismatch currently caused by inconsistency between the estimated cashflows for these benefits and the discount rate under IAS 19.”
Meanwhile, Belgian insurer Assuralia also gave its backing to the model.
Assuralia said that “several insurance undertakings in Belgium already follow this approach or a similar one”, and went on to add that its comparability with existing IAS 19 requirements mean it will be cheap to implement.
However, other European voices were more muted in their response.
The Confederation of Swedish Enterprise warned in its response that the real problem with IAS 19 is the discount rate and said that “none of the proposals should be further developed.”
Furthermore, as previously reported by IPE, no German respondents supported the proposals in the discussion paper.
Thomas Hagemann, Mercer Germany’s chief actuary, said: “The feedback was very interesting for me from what I’ve read, because it seems that no one supported either of the two more complex approaches.
“When it came to the capped asset approach, there were really two points of view in the comment letters. First, there were those such as the ABA, IVS and DRSC [in Germany] who said they supported it – but with changes – and others who rejected it outright.”
IASB poublishes planned 2020 consultations
The International Accounting Standards Board has released an update setting out its planned consultations this year.
The briefing shows that the board plans to launch its five-yearly agenda consultation in the second half of 2020, as well as an exposure draft detailing potentially wide-ranging changes to IAS 19’s footnote disclosure requirements.
EU adopts IASB’s amendments
The European Union has formally adopted the IASB’s recent amendments to its three financial instruments standards.
The changes affect IAS 39, Financial Instruments: recognition and measurement, International Financial Reporting Standard 9, Financial Instruments, and IFRS 7, Financial Instruments: Disclosures.
The amendments give companies limited exemptions from the hedge-accounting requirements in both IAS 39 and IFRS 9 so they do not have to discontinue and resume hedge accounting just because an interest rate benchmark in a hedging instrument changes as a result of interbank offered rate reform.