The question of having improved disclosure of pension and retirement benefit costs meaningfully re-flected in companies' annual report and accounts has been grappled with for many years. In recent times some progress has been reported as a result of the use of International Accounting Standards (IAS) and of GAAP (generally accepted accounting principles).

But as business increasingly goes international, there are growing pressures for a more standard treatment of these issues in corporate accounting. But there is still a long way to go before harmonisation holds sway, with the different countries still very much doing their own thing.

In co-operation with the International Professional Standards Group of Arthur Andersen, we are giving below the group's summary of the position regarding retirement benefit costs and pension plans accounting for a number of European countries, particularly in relation to IAS and GAAP. This information is abstracted from its GAAP analysis which compares these practices across a total of 16 countries worldwide.

IAS

Retirement benefit costs should be recognised as an expense in the periods during which the company derives benefits from employee service. For defined contribution schemes (DC), the amount expensed should be the contributions payable for the particular accounting period. For defined benefit schemes (DB), the cost of providing retirement benefits should be estimated using actuarial methods.

The amount expensed should comprise the normal current service cost plus cost variations resulting from changes affecting the financial position of the scheme, such as changes in actuarial assumptions. Cost variations should be allocated to accounting periods on a systematic basis, over the expected remaining period of employee service.

Various disclosures including the date of actuarial valuation, frequency of valuation and principal actuarial assumptions adopted should be disclosed.

The IASC recently approved IAS 19 (revised 1998) which will supersede IAS 19, Retirement Benefit Costs. Under IAS 19 (revised 1998), retirement benefit costs and pension plans should be recognised as an expense in the period during which an employee has rendered service.

For DC plans the amount of expense is the contribution payable for the particular accounting period. No actuarial assumptions are required and the obligations are measured on an undiscounted basis.

Accounting for DB plans is complex because actuarial assumptions are required to measure the obligation and the exposure and there is a possibility of actuarial gains and losses. The obligation and costs of pension benefit should be determined using projected unit credit methods. Past service cost are recognised on straight line basis over the average period until the amended benefits become vested while gains or losses on the curtailment or settlement are recognised when the curtailment or settlement occurs. Actuarial gains or losses are amortised based on the expected average remaining working lives of the employees.

Various disclosures including a description of the plan, reconciliation of assets and liabilities and principal actuarial assumptions should be disclosed.

These new requirements are effective for years beginning on or after 1 January 1999.

AUSTRIA

Pension costs should be provided for based on one of two actuarial computations: Gegenwartswertverfahren" (comparable to the US individual level premium method) or "Teilwertverfahren" (comparable to the US entry age normal method). Pension costs should be expensed over the average working lives of employees.

DENMARK

No specific guidelines exist. Legislation requires funding of any commitment to pay pensions to employees. Unfunded pension obligations to management will normally be provided in the balance sheet if they are probable in the foreseeable future. Unprovided obligations must be stated in the notes.

No guidelines on how to calculate pension obligations exist. If the amount is significant, the predominant practice is to base the obligation on actuarial calculations.

FRANCE

Most plans are multi-employer and are accounted for as DC plans. Where this is not the case, the liability may be accrued. It is also permissible to simply disclose the potential liability.

GERMANY

These must be recorded only for employees granted pension plans after 31 December 1986. Plans granted before that date and indirect pension obligations may optionally be recorded as a liability. The unprovided amount should be disclosed in the notes to the financial statements.

The computation of pension accruals generally follows an income tax law and differs significantly from FASB 87 in the following respects:

p Basis: single employer DB pension plans.

p No implementation of future benefits.

p No matching with related funds.

p Interest rate fixed at 6%.

ITALY

No specific guidelines exist. Italian law requires the provision of a reserve for employee termination indemnities, which is classified under a separate balance sheet caption. The calculation method follows the guidelines of a specific law. The Emerging Issues Task Force of the FASB has determined that the Italian employee termination indemnity is a DB plan for the purposes of FASB 87; local actuaries indicate according FASB 87.

NETHERLANDS

Pursuant to the Pension and Savings Act, pension liabilities are insured with a life insurance company, a company pension fund, or an industry pension fund. The usual schemes for building up pension rights are DC plans and DB plans. To meet the pension rights, funds should be provided during the employee's active period of employment. The payments into the fund, which are based on actuarial calculations, can take the form of single payments or regular contributions.

A recent draft guideline for annual reporting in The Netherlands allows the accounting for the pension liabilities and provision under FAS 87, IAS 19 and SSAP 24.

The provision for pension liabilities can be calculated on a specific basis. The pension charges should be calculated at discounted value and the charges associated with the accumulated pension rights should be attributed to the profit and loss account in the year in which the work from which the rights derive was performed during the period which the company derives benefits from employee service.

The pension provision should be separately stated and specified in the notes as liabilities due within one year, one to five years, and over five years. The pension plan, the funding and actuarial information have to be disclosed. If the pensions are insured with a life insurance company, no detailed actuarial information is necessary. The method of calculating the provision, (specific or general) and the results of the test of adequacy have to be disclosed. The legal entity has to perform an analysis, based on the principles for the calculation of the pension provision as applied by the Verzekeringskamer on the adequacy of the pension provision.

Charges connected with pension rights including past-service charges in respect of new schemes or improvements in the existing pension schemes are to be included in the operating result.

NORWAY

According to a preliminary NAS, these costs should be recognised on a systematic and rational basis over the period during which the company de-rives benefits from employee service.

For DC schemes, amounts charged should be the contributions payable for the accounting period.

For DB schemes, the pension cost should be calculated using actuarial valuation methods and "best estimate" assumptions. The annual cost charged to the profit and loss account should usually comprise the regular cost (based on projected future salary levels), and variations. Regular cost should be calculated so that it represents a reasonably stable percentage of pensionable payroll. Variations from regular cost may arise for various reasons and are generally recognised over the expected remaining service lives of current employees under the scheme.

The difference between the actuarial present value of promised retirement benefits (based on projected future salary levels) and market value of pension assets (adjusted for net deferred variations) should be shown as long term receivables or long term liabilities in the balance sheet. Actuarial information, assumptions and net deferred gains/losses should be disclosed.

The discount rate used by most Norwegian companies is a long term rate.

The effect of implementing the accounting standard should be charged directly against equity.

SPAIN

Since 1990, accounting practice has followed the accrual basis. However, Spanish GAAP permit the shortfalls in 1989 between the pension commitments and risks incurred, on one hand, and those insured and covered for accounting purposes, on the other, to be provisioned in the following periods (starting from 1990):

p Those for retired employees: 7 years.

p Those for serving employees: 15 years.

SWEDEN

The compensation cost of an employee's pension benefits should be recognised over the employee's approximate service period. The pension liability should be based on actuarial reports.

Retirement benefit plans, post employment benefit plans or similar for the board of directors, managing director and/or other corporate management that holds a similar position must be disclosed in notes to the financial statements, as well as the total cost for such retirement benefit plans for all employees.

This area is under development.

SWITZERLAND

Retirement benefit costs should be recognised as an expense in the periods during which the company derives benefits from employee service. For pure DC schemes, or for predominantly DC schemes with less than 250 employees, the amount expensed should be the contributions payable for the period. In all other cases, the cost should be estimated using actuarial estimates for the commitments for the pension plan (applying the accrued benefit valuation method) and market values for all other assets and liabilities. Differences arising from the employer's contributions payable according to the plan and the actuarial estimates are included in the balance sheet. Assets can only be recognised in case they can effectively reduce future employer's contribution. Liabilities arising from such differences have to be amortised over no more than the estimated average employment period

Various disclosures are required, including date, frequency, method and basic assumptions of the actuarial estimates, annual cost of the retirement benefit scheme, differences between the actuarial estimates of the scheme's net reserve requirement for future pension commitments and the effectively available funds, and balances with the post-employment benefit entity.

UK

These costs should be recognised on a systematic and rational basis over the period during which the company derives benefits from employee service. For DC schemes, amounts charged should be the contributions payable for the accounting period.

For DB schemes, the pension cost should be calculated using actuarial valuation methods and "best estimate" assumptions. The annual cost charged to the profit and loss account should usually comprise the regular cost and variations. Regular cost should be calculated so that it represents a reasonably stable percentage of pensionable payroll. Variations from regular cost may arise for various reasons and should generally be spread over the expected remaining service lives of current employees in the scheme.

The difference between the cumulative amount of the pension costs charged to the profit and loss account and the amount paid by the company should be shown as a provision or prepayment in the balance sheet. Actuarial information and the market value of scheme assets must be disclosed."

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