Home > News > 2004 > February 2004 > Pension Accounting Standards
Pension Accounting Standards
Nigel Hacking summarises the proposals put forward by the International Accounting Standards Board (IASB) in respect of their review of the international accounting standard (IAS19).
Background
The International Accounting Standards Board (IASB) is reviewing the international accounting standard (IAS19); accounting for retirement benefits, with the intention of proposing interim changes later this year, to be followed by more fundamental changes later.
IAS19 is the current international accounting standard applicable to non-UK EU companies when reporting pension benefits. All EU listed companies will be required to adopt IAS19 with effect from 1 January 2005, thereby achieving a consistent approach for both UK and non-UK listed companies in the future.
The full adoption of the UK accounting standard, FRS17, has therefore been delayed until financial periods starting on or after 1 January 2005, to coincide with the date that EU-listed companies have to adopt IAS19. To facilitate the transition, it is intended that IAS19 will be revised this year to include an option allowing companies to adopt an accounting treatment which closely follows the UK accounting standard, FRS17 (which replaces SSAP24). This would enable UK companies to report on the FRS17 basis from 2005.
The other main accounting standard used is the US one - FAS87 (which has since been amended by SFAS132).
The current situation
The IASB has been reviewing IAS19 for almost two years and has made a number of decisions for proposing changes to IAS19, the most significant of which is that all actuarial gains/losses should be recognised immediately in the income statement. This is similar to the requirements under FRS17 except that the proposal is that everything must go through "above the line", rather than allowing gains/losses through the Statement of Recognised Gains and Losses (STRGL) as is the case with FRS17. This proposal is likely to lead to volatile pension costs being charged to income statements.
However, it seems that the IASB does not have the time to introduce these proposed changes to IAS19 for 2005. Instead they are proposing to make some interim changes to IAS19 in time for 2005, while they continue with the wider review. The IASB is proposing to undertake this wider review jointly with FASB (their US counterparts), presumably with the aim of achieving a common accounting standard for post retirement benefits for the US and EU.
Interim proposals
The IASB is planning to issue an Exposure Draft (for a new IAS19 to be published during 2004) proposing the following interim changes:
- An option, added to IAS19, to allow companies to recognise actuarial gains/losses immediately. If a company chooses this option, the actuarial gains/losses can be recognised outside the income statement of the accounts and instead the gains/losses would be recognised in the Statement of Recognised Gains and Losses (STRGL) or similar. This is essentially an option to follow the current FRS17.
- Companies in multi-employer plans may account for pension costs on a "defined contribution basis", i.e. by charging the contributions actually paid to the profit and loss account, thereby negating the requirement for full calculations and disclosures. This aligns the standard with both FRS17 and FAS87 (the US accounting standard) for companies in multi-employer plans.
- An increase in the disclosure requirements under IAS19, including some (but not all) of those recently introduced by FASB in SFAS132.
What this means for UK companies
If these interim changes to IAS19 were introduced, UK-listed companies would be able to report on the FRS17 basis, as has been the expectation since FRS17 was introduced as a disclosure requirement from 2001. In theory it seems that UK-listed companies would also have the option of reporting on the basis of the existing IAS19, although it is difficult to see the merits of this approach when the existing IAS19 is likely to change fundamentally in the near future.
We are not aware that the IASB has issued any proposals for UK companies that are not listed, and therefore not subject to IAS19 directly. As it stands they will have to adopt FRS17.
Final thought
We have seen some suggestion that the timing of these changes is under review, which may mean that introduction of the interim changes to IAS19 may slip beyond 1 January 2005.
Eventually, it is clear that the IASB's intention is to follow the approach of FRS17, but fully recognising any gains/losses in the income statement. This will mean that the volatility that companies are already seeing on their balance sheet under FRS17 feeds through to the income statement as well.
We will keep clients updated of any further developments.
Nigel Hacking, February 2004.