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IASB to amend pension standard IAS 19

The International Accounting Standards Board (IASB) is planning to amend the pensions standard, IAS 19.

The IASB is taking action after reports of large actuarial losses by pension funds following the recent fall in global equity markets.

Pension fund accountants have warned the IASB that some provisions of IAS 19, introduced in 1998, are having an unintended effect. The IASB has now agreed that reporting an asset - and a gain - as a consequence of actuarial loss is an unacceptable consequence of applying IAS 19 in some situations.

Wayne Upton, director of research at IASB, said: “We are fixing IAS 19 basically because two factors were rubbing up against each other to produce unintended consequences. The first is the deferral mechanism, the so-called ‘corridor’. Up to certain limits, you can defer actuarial gains and losses. The corridor puts limits on your ability to do this.

“The other factor is the extent to which a company can recognise as an asset ‘prepaid costs’ – a contribution to the pension plan in excess of what is needed. There is a limit on a company’s ability to recognise that asset.

“When you combine that limit with the deferral mechanism, you can run into situations where you end up with an actuarial loss.”

IASB is now preparing an exposure draft of an amendment of IAS 19 to ensure that such gains are not recognised in future. The draft is expected to be published at the end of February.

“If nothing is done, we are told there are some companies which would significantly gain, although they do not want to recognise this gain,” said Upton. “What we are doing is fixing that unintended consequence In future, when you have that combination of factors, you do not have to recognise the actuarial loss as an asset because you never recognised it as an asset in the first place. It’s really providing a safety valve.”

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