The corridor is no more. On 20 October, members of the International Accounting Standards Board (IASB) voted to scrap the IAS19 deferral mechanism. In its place comes the net interest approach.
The net interest model, dubbed by one board member the ‘Stephen Cooper’ approach, requires defined benefit plan sponsors to present service cost in profit or loss, finance cost as a component of financing in profit or loss, and so-called remeasurements in other comprehensive income (OCI).
So what did the board’s leading exponent of the new accounting regime have to say? “I was very surprised by the level of support for the net interest approach,” Stephen Cooper, IFRS member, said. “80% of actuarial professional bodies supported it, 73% of actuarial firms supported it, if you exclude corporates, 62% overall of all respondents supported it - either agreement or conditional agreement.”
There again, it all depends who you are when assessing whether this particular glass is half full or half empty “The corporates, of course, tip it the opposite way. So, when you include them it’s 42% support for net interest because the vast majority - 76% of corporates and preparer associations - supported the expected return. There was an enormous split.
“BC 32 talks about the return being arbitrary and the whole thing being a practical expedient. Of course, that was picked up in many of the comment letters. The Basis starts off with using the discount rate as the expected return on the assets and dealing with assets and liabilities separately, which, of course, isn’t what the net interest approach is all about.
“The net interest approach, is described correctly in the paragraphs in the middle, but, of course, it is sort of damned with faint praise in the Basis, which is my problem initially. So, the fact that there was this amount of support, I thought, was amazing.”
Even more amazing was the staff recommendation at paragraph 33(a) of Agenda Paper 4D: “The expected return approach is consistent with the measurement of the net defined benefit asset or liability and reflects the underlying economics of the plan assets.”
Cooper comments: “This was something that was included in many of the preparers’ comment letters - that they invest in risky assets to produce a return which therefore reduces the cost of providing pensions. And that is fine in the sense that it would hopefully reduce the expected cash outflows in respect of pensions, but I dispute that it changes the cost of providing the pensions. We’re likely to put the actuarial gains and losses into OCI. I agree with that. I don’t think it’s the best way of dealing with it because I think we need to revisit performance reporting, but I agree with that approach.
“If we go with the expected return you are putting the expected rate of return on those risky assets in profit or loss, but your putting the loss associated with those risky assets in OCI.
“So I think completely the opposite, [namely] that it is failing to reflect the underlying economics by using the expected return. Now, if we had the actual return in the profit or loss, or if we had the actuarial gains and losses in the profit or loss, I might think differently, but to give people the credit for investing in risky assets in the income statement without showing the cost of investing in those risky assets, which is the risk and the volatility, in the same statement, really just doesn’t seem right to me.
“So, we are presenting this thing as a receivable or payable. It is a deficit or surplus. We have to make up something to the fund; we are going to get some sort of benefit back from the fund. I think the better reflection of the economics is the interest accretion on the amount we owe to and from the fund.
“Now I accept the point that we are measuring the assets and liabilities differently, and that the net amount is something of an odd measure. It is a measure of the amount owed to and the amount owed from. I’m sure we can improve on that measure, but it is still a measure on that and, therefore, the interest accretion is a measure of the interest that is arising on that.”