Since the beginning of this year all companies listed on stock exchanges within the EU have been required to prepare their consolidated financial statements in accordance with the new International Financial Reporting Standards (IFRS). Companies listed on exchanges outside the EU have a further year before the requirement applies to them.
The immediate objective of IFRS to provide greater transparency and comparability between company accounts. The longer-term objective is convergence with US GAAP to produce a single set of accounting standards that can be used worldwide.
The same objectives apply to IAS 19, the IFRS employee benefits standard relating to occupational pension schemes. The aim is to increase transparency so that the impact of pension fund assets and liabilities on a company’s accounts is clearly visible.
The recent amendment to IAS19, which changed the way that companies could recognise actuarial gains and losses in their balance sheet, has this aim in mind. It is designed to allow entities to choose “a simpler, more transparent method of accounting than is commonly adopted at present”, according to Sir David Tweedie, chairman of the International Accounting Standards Board (IASB).
Yet the amendment has provoked concerted opposition from continental European countries and revealed deep differences in the way they approach pension accounting.
Employee benefits standard IAS19 initially provided two options for the recognition of actuarial gains and losses. Companies could choose either to recognise actuarial gains and losses immediately in profit or loss or defer the recognition of part of their actuarial gains and losses.
Under what is known as the ‘corridor’ approach, companies can keep actuarial gains and losses that are within a range of 10% of plan assets or obligations off the balance sheet altogether. Any actuarial gains and losses above or below this level have to be amortised over the working life of employees. This spreading option has the effect of smoothing the deficit/surplus in a pension plan, measured by IAS19.
Most European companies reporting under IFRS have chosen this deferral option, according to the UK’s Accounting Standards Board (ASB). Immediate recognition in the income statement has been unpopular “because of the potential of actuarial gains and losses to swamp the information on current trading, which is the primary focus for that statement.”
The IASB has always been unhappy about this bias to deferral. Last year it observed that “deferred recognition is inconsistent with the IASB’s Framework for the Preparation and Presentation of Financial Statements because it results in amounts presented in the balance sheet that do not meet the definition of an asset or a liability”.

The argument for immediate recognition of actuarial gains and losses is that they are ‘economic events’ of the period, the IASB says. “Recognising them when they occur provides a faithful representation of those events. In contrast when recognition is deferred, the information provided is partial and potentially misleading.”
The solution has been for the IASB to introduce a third option that would enable recognition of gains and losses outside the income statement. The model for such an option is provided by FRS17, the UK’s national accounting standard. This is generally consistent with IAS19 but with one key difference. FRS17 provides for immediate recognition of actuarial gains and losses through a Statement of Recognised Gains and Losses (STRGL) rather than through the headline profit and loss.
The IASB proposed, therefore, that companies reporting under IFRS should be allowed to recognise actuarial gains and losses outside profit and loss, in IAS19’s own version of STRGL, a Statement of Recognised Income and Expense (SORIE).
The board felt that such an option would encourage companies that had previously been wary of immediate recognition to use this option. It would also bring IAS19 into line with FRS17, encouraging companies in the UK and Ireland that have already chosen the immediate recognition option to continue to do so.
However, this is seen as a ‘work in progress’ solution. Introducing the amended IAS19 in December, IASB said there were “further conceptual and practical problems with these provisions” and announced that it planned to conduct a comprehensive review of IAS19.
The European Financial Reporting Advisory Group (EFRAG), which advises the European Commission, supports the introduction of a third option. However, a minority of the members of EFRAG’s technical experts group are strongly opposed. And most of the accounting standards bodies (see country review) in continental Europe do not support the amendment.
The chief objection is that a third option will impair comparability, which is a key objective of the IFRS Framework, which states “users must be able to compare the financial statements of an enterprise through time in order to identify trends in its financial position and performance.
“Users must also be able to compare the financial statements of different enterprises in order to evaluate their relative financial position, performance and changes in financial position.”
Another objection is that the IASB should be reducing options in IAS19 rather than adding to them. In its response to the IASB’s proposal to amend 1AS19, Medef, the French employers’ organisation, said a third option was highly undesirable. “The proposed amendment is for the worst – IASB’s decisions should lead to reducing options; none should be added. The need for the option is not conceptually justified, since IAS19 already provides for immediate recognition of actuarial gains and losses.”

A further objection is that the amended IAS19 creates divergence with the US GAAP and most other GAAPs – a primary objective of the IFRS.
However, the most significant objection to a second immediate recognition option is that it weakens the case for deferral and the ‘corridor’ system. The German Actuarial Association (IVS), for example, says support for the deferred recognition option is “important and correct both from a theoretical point of view as well as, pragmatically, within the context of convergence with US-GAAP”.
The IVS also challenges the idea that FRS 17 should be a model for IAS19: “We disagree with the ‘best in class’ status given by the IASB to the UK standard FRS17 on this issue,” it says.
Corporate reaction to the IASB’s amendment has been equally hostile – again largely because of the implicit threat to the deferral option. In Switzerland, Syngenta International said it was “extremely concerned” about the way IASB had spelled out its doubts about the deferral option. “In our view, given the statement that the IASB is considering a more comprehensive pension project, this pre-empts future discussion.”
In Germany, BASF said that the third option, and the use of SORIE, was a one-off, ad hoc solution to a problem that needed a less hurried solution. It suggested to the IASB that the problem of deferred recognition of actuarial gains and losses should be discussed in the context of the IASB’s proposed comprehensive pension accounting project:
“It is not appropriate to address just the issue of recognising actuarial gains and losses in a separate statement of recognised income and expense while another project is under way concerning employee benefit accounting.”
European financial institutions in continental Europe have also signalled their strong doubts. In its submission to the IASB, BNP Paribas commented: “We share the merits of the ‘corridor’ approach and would therefore not be supportive of future projects which would ultimately remove this approach.”
UBS pointed out that deferral through the corridor approach was a more appropriate method for
pension funds than the immediate recognition of gains and losses. It states: “Deferring actuarial gains and losses which do not exceed
the ‘corridor’ is a good solution since the measurement and
recognition of pension plans should be seen on a long-term basis and short-term valuation differences of plan assets and liabilities do not accurately reflect the long-term character of the plan.”
Immediate recognition, on the other hand, would create uncertainty and confuse investors. UBS says: “The volatility in equity which would result from the immediate recognition of actuarial gains and losses might be totally diverse to the entity’s operating performance and would even be misleading to investors since these fluctuations might offset each other over time.”

In Europe the issue has polarised opinion between those – principally continental European institutions – that see the spreading option as a more realistic way of reflecting actuarial gains and losses in a pension scheme and those – principally UK and Irish institutions – that see immediate recognition as the only way to provide the transparency the IASB is seeking, and that credit analysts and rating agencies demand.
Some fear that if the two approaches – immediate and deferred – are allowed to operate side-by-side, as they are now in IAS19, there could be even less transparency than there is now. Actuaries Lane, Clark and Peacock have suggested that “the fact that there are now two options means that two otherwise identical companies both reporting under IAS19 could show very different balance sheet numbers”.
In other words, making the immediate recognition option more attractive to companies is likely to further muddy the water. Whether the IASB’s comprehensive review of IAS19 in the coming year will do anything to clear it remains to be seen.

What they say

The Danish Accounting Standards Committee says: “We do not find it
appropriate to introduce yet another option within IFRS. Nor do we find the introduction of further options is in accordance with the overall intentions in the Improvements project, the very objective of which is to eliminate options within the IFRS literature. “In addition the proposal creates a further
divergence with US GAAP which also seems to contradict the objective of global
convergence of accounting standards.”

The Norwegian Accounting Standards Board (NASB) says: “We are not convinced by the fact that the proposed changes represent an improvement to current reporting under IFRS and we question why such a change is necessary.”
“The IASB is proposing the introduction of an additional option whereas its objective is to increase the comparability of financial statements.”

The Swedish Financial Accounting Standards Council (SFASC) says: “The IASB should handle employee benefit accounting issues in a comprehensive project and abstain from limited amendments.”

The German Accounting Standards Body says: “We see harmonising with the UK’s FRS17 as the only merit of the current proposal. It can only be an interim solution that will potentially need to be revised when broader projects on
pension accounting and performance reporting respectively are developed.”

The Netherlands Council for Annual Reporting (CAR) says: “We are in favour of a stable platform and we do not see any compelling reason to amend IAS19 at this stage.
“We object to introducing a new alternative, especially because we do not see the conceptual merit of excluding gains and losses from the income statement when a fundamental discussion 0n a Statement of recognised Income and expenses (SORIE) has not yet taken place. We believe a discussion on the nature and function of the SORIE should precede ad hoc applications.

The Organismo Italiano di Contabilita (OIC) says: “The new option on the recognition of actuarial gains and losses outside profit and loss makes it difficult to compare different balance sheets. Actuarial gains and losses are just part of income and expense. “Comparability is the essential target that is at the basis of all new principles and too many options are not consistent with this outcome.”

The Conseil National de la Comptabilite (CNC) says: “The proposed exposure draft leads to the introduction of a new option. Elimination of options is a stated goal of the current IASB as it is considered that it options hamper
comparability between companies. Besides the proposed option is not
convergent with FASB standards, another stated goal of the IASB.”

The Accounting Standards Board (ASB) says: “The treatment parallels that of the equivalent UK standard FRS17 which since issuance in November 2000 has had a remarkable effect in identifying the exposures inherent in the pensions strategies of many UK companies and in bringing into focus in the ensuing national debate the issues that need to be addressed.”