Another month, another discussion about other comprehensive income. But more than that, the extraordinary meeting of the International Accounting Standards Board on 2 February served to underline a maxim that the London-based standard setter has consistently ignored: plan the work and work the plan.
Lest we forget, the purpose the IASB’s limited-scope project to address how entities account for defined-benefit pension plans is all about making “targeted improvements”. It
is just unfortunate that the board has consistently neglected to take aim at the target, let alone hit it.
Among the apparently moving targets is the ambition to scrap the deferral mechanisms currently found in IAS19 and require DB plan sponsors to “recognise all changes in defined benefit obligations and in the fair value of plan assets when those changes occur” using what has become known as the net interest or ‘Stephen Cooper’ approach.
During its October 2010 meeting, where it continued the process of redeliberating the proposals in its May 2010 exposure draft, the board confirmed that it will in future require sponsors to disaggregate, or divide, changes in the defined-benefit obligation and the fair value of plan assets into service cost, finance cost, and remeasurement components.
The following month, it agreed, rather unsurprisingly, that service cost goes in profit or loss, net interest on the net defined-benefit liability or asset into finance costs, and the dreaded plan re-measurements in OCI.
So tell us something new. The individual components of pension expense are familiar, the net interest approach merely assumes that a pension plan is a financing activity, and plan remeasurements are, well, our old friends actuarial gains and losses. A work of blue-skies thinking and unparalleled genius this project is not; the surprise is that it took quite so long to do.
Also during November, the board tentatively decided to give entities a free choice between putting plan remeasurements directly into either net income or OCI. The impact of this decision was so obvious that even a journalist could spot it.
Under a headline ‘Presenting failures’, this column noted: “The board’s tentative November decisions nonetheless allow a surprising amount of flexibility to preparers… 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.”
So when on 21 January the board decided to rethink the November decision to give that free choice, you could be forgiven for thinking that the staff had been reading IPE - albeit through gritted teeth. Well, think again.
David Tweedie had something of an explanation for the decision to revisit the issue. “One of the main reasons that we are looking at this is the fact, as stated in the basis, that we were trying to remove the options,” he said. “We are being attacked for having options. In fact there’s a speech coming up in two or three weeks’ time by one of our former board members that specifically attacks us on this and that would certainly be some lovely ammunition for him.”
This explanation raises two questions: first, why did the board not realise back in November that the decision to allow unrestricted free choice would self-evidently create an option; secondly, who on earth could be making a speech with the potential to shake the pensions project to its very core?
In all likelihood, the speech in question was one delivered by former IASB member Jim Leisenring, to a public audience of the American Accounting Association in Tampa, Florida. Not only was the speech delivered in public, it was also a re-run of an earlier speech he gave in May 2010 to an AAA audience at Baruch College in New York.
Yes, it is true that Leisenring criticised optionality under International Financial Reporting Standards. However, in his Tampa speech, he also levelled the same criticism against US generally accepted accounting principles. In fact, anyone sitting through the speeches could be forgiven for thinking that his commentary on the state of financial reporting was anything other than vintage Leisenring.
Among the themes he singled out, in no particular order of importance, is the suggestion that standard setters need to finalise their conceptual frameworks in order to minimise upheaval and inconsistency in standard setting caused by board member turnover, that application of IFRS around the world is inconsistent, and that the spin-doctor claims for the number of countries using IFRS is not the same as correctly and consistently applying IFRS.
But even knowing this, it is hard to see why the IASB would want to waste yet more time discussing an option that few entities will ever use. The OCI election returns to the board table in February.