Pensions Accounting: IAS19 in 2013
The priorities facing defined-benefit plan sponsors who report under IAS19 during 2013 split neatly between short-term volatility concerns and the longer-term challenge of implementing IASB’s recent revisions to the standard, say two leading consultants who spoke to IPE about their priorities for 2013.
“The number one pension accounting issue for 2013 that I see is the impact of falls in corporate bond yields around the world during 2012. These will feed through to companies’ 31 December 2012 financial statements, which will be published in early 2013,” says Eric Steedman, a London-based IAS19 specialist with consultants Towers Watson.
“These yields drive the interest rate used to discount pension payments, so lower yields means higher reported liabilities. Substantial increases are expected pretty much everywhere, but in the euro-zone, in particular, they will be eye-watering.” Steedman expects liability increases of 25-50% to be commonplace, in view of the sharp fall – 200 bps or so – in relevant euro-zone yields during 2012.
But he warns that the effect will vary from plan to plan and country to country. “Asset returns may mitigate these impacts to a greater or lesser extent, but that will depend on the funding level and investment strategies,” he adds. Further complicating the landscape are the recent amendments to IAS19 that he expects to “muddy the waters somewhat” on comparability.
He explains that “these movements will impact directly on many companies’ balance sheets at 31 December 2012, although others will not see that direct effect until they adopt the new IAS19 standard, which will be when interim results are reported later during 2013.
There will be knock-on implications for P&L charges. The P&L impact will differ according to each company’s situation and the accounting standard used.” All of which, he argues, puts the spotlight on how discount rates are struck.
And reflecting this pattern of uncertainty, Simon Robinson, an accounting specialist with Aon Hewitt, has spotted signs of the customary bounce in corporate bond yields in early January: “Looking at the UK, sterling AA-rated bond yields jumped up about 20 basis points in the first couple of days of January 2013, which would typically reduce benefit obligations by about 4%.
“That is a potentially quite material impact on the balance sheet and the next year’s P&L charge. However, this comes too late to be taken account of in the year-end accounting results and highlights how sensitive the results can be to the exact reporting date.”
And with the new year out of the way, the Aon Hewitt IAS19 specialist says that he expects the lack of clarity around the recent amendments to IAS19 to dominate his in-tray. “The key issue facing my clients over 2013 is, inevitably, the new IAS19. Once you start digging into the standard, it’s surprising how many bits aren’t clear and where there is work to do – for example, the treatment of the expenses of running the scheme is unclear and the standard is more silent on this than one might expect given the IASB’s discussions on this prior to issuing the revised standard.
“Similarly, it didn’t use to matter whether an expense was classified as an administration expense or an asset management expense, but now it does. With the old version of IAS19, both were recognised in finance income as a deduction from the expected return on plan assets.
“Under the revised IAS19, admin expenses are, we think, recognised in operating income, whereas asset management expenses are recognised in OCI. And the line between administration expenses and asset management expenses isn’t as clear as you might think.
“Many companies are also taking the opportunity to have a good look at the assumptions they use for IAS19. For most, the changes mean increased P&L charges and so they are looking more carefully at the process to see if there are opportunities to mitigate some of the impact, for example by reviewing the assumptions used to remove any prudence,” Robinson says.
So 2013 promises to be a busy year for the International Financial Reporting Standards Interpretations Committee, alongside its ongoing work on discount rates and employee contributions. Is anyone ready to bet against a request for guidance on plan administration costs?