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Presenting Failures

The IASB’s discussion of pensions accounting in November posed some of the hitherto unanswered questions about the drive to converge IFRS and US GAAP: at precisely what time are accounting standards going to be set?

The answer, if the 16 November meeting is anything to go by is this: as late as 22.30. And as the board finally took the decisions that flowed naturally enough from the decision in October to stick with the so-called net interest approach, it was hard not to wonder how long does it has to take to remove a corridor? Answer: since June 2006.

First a recap. On 20 October, the board took roughly half of the decisions required of them to replace the corridor and expected return methodology in IAS 19 with the net interest approach.

The 20 October decision focused on disaggregation. The board agreed on the following model: changes in the net defined benefit liability/asset should be split according to service cost, finance cost and remeasurement components.

As for the detail, the service cost component excludes “gains and losses arising from changes in the assumptions used to measure the service cost”, and the finance cost component is made up of “net interest on the net defined benefit liability (asset), determined by applying the rate used to measure the defined benefit obligation to the net defined benefit liability (asset).”

All of this left it pretty much a foregone conclusion that the board would agree in November that service cost goes into profit or loss, the finance cost component (the net interest on the net defined-benefit liability or asset) as a finance cost in profit or loss, and plan remeasurements in OCI.

The board’s tentative November decisions nonetheless allow a surprising amount of flexibility to preparers. First, the board has opted not to specify where in profit or loss an entity should present the service cost and finance cost components. And, mainly, it appears, to promote immediate recognition, they will give entities the option of presenting plan remeasurements either in profit or loss or in other comprehensive income. The exposure draft required entities to present plan remeasurements in other comprehensive income.

OCI has seen quite a bit of activity recently. Both IASB and FASB published proposals to mandate a single statement of comprehensive in May. As if to underline the fact that the FASB’s response to a much overplayed aspect of the financial crisis hinges on the move to a single statement, the US board issued its financial instruments proposals on the same day.

At a 19 January 2010 meeting between IASB and FASB, Russell Golden, the then technical director at the Connecticut-based FASB, summed up the approach to a single statement as follows: “Rather than saying a single statement, you say both a statement of income and a statement of comprehensive income need to be shown continuously, so you still say there are two statements, they are just displayed continuously.”

Constituents, it seems, were not fooled by the crude spin. Yes, users of financial statements supported the move to a single statement, but elsewhere acceptance was much more mixed. And so by the time the two boards met, yet again, on 17 November, the project could be summed up in the weasel-words of permitting “the option for reporting entities to present OCI in a continuous statement of comprehensive income or in two separate but consecutive statements.”

The reality of this decision is not so much a principles-based accounting standard as layout instructions for a typesetter: if you start the statement of OCI on a new page, you must not put a picture, table or any form of illustration between it and the preceding income statement.

The issue that the boards’ work leaves unaddressed is the broader performance reporting question: what is OCI? Until the boards address that question, it is likely to remain a dump truck for the items you would rather not see affect net income. The IASB was supposed to have consulted its constituents on its post-2011 agenda priorities by now. True to the IASB code of missed deadlines, that consultation is unlikely to see the light of day before the new year.

In its absence, you can but wonder whether politicians would rush to pay even lip service to the IASB if they understood the basis on which its decisions are made.
 

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