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Amendment to IAS19, the International Accounting Standard for Employee Benefits
Nigel Hacking discusses the amendment to the international accounting standard IAS19 recently published by the International Accounting Standards Board (IASB).
On 16 December 2004, the International Accounting Standards Board (IASB) published an amendment to IAS19. All EU-listed companies must comply with IAS19 (as amended) for accounting periods starting on or after 1 January 2005. Other EU companies may be required to adopt IAS19, or may be allowed to continue with local accounting standards, as regulated by individual member states.
In view of the immediate application of the new IAS19, EU-listed companies that have not already done so, would be well advised to address the options permitted under the new IAS19 and ensure that systems and processes are in place well before their first interim results are published in 2005/06.
Background
For some time now, the IASB has been dissatisfied with the option within IAS19 to defer the recognition of actuarial gains/losses, and has expressed its desire to make fundamental changes to IAS19, in particular to require the immediate recognition of actuarial gains/losses in the main income statement. This treatment would be similar to the UK accounting standard, FRS17, where actuarial gains/losses have to be recognised immediately in full, but outside the main income statement in a separate statement of recognised gains and losses.
These intended fundamental changes to IAS19 are not likely to be seen for several years, not least because the IASB is seeking to agree the changes with FASB (the US counterpart to IASB), with the aim of achieving a common global standard.
In the meantime, an EU Regulation was passed in 2002 requiring the consolidated accounts of all EU-listed companies to comply with IAS19 (and all other adopted international accounting standards) for accounting periods starting on or after 1 January 2005. This would have required UK and Irish listed companies, who had already adopted or disclosed results on the FRS17 standard, to change to the IAS19 approach only to be faced with a further change when the fundamental review of IAS19 is completed in a few years time. Hence, this amendment to IAS19 has been made to allow UK and Irish companies to continue to use the FRS17-style reporting of employee benefits costs.
Although the IASB has issued the new IAS19, it still requires the approval of the EU before it is applied to the consolidated accounts of EU-listed companies.
The Changes
The changes are:
- The introduction of an additional option for the treatment of actuarial gains/losses by full recognition outside the profit and loss account, in a separate statement of recognised income and expense, i.e. FRS17-style reporting. This now means that there are three options for the treatment of actuarial gains/losses:
- Immediate and full recognition outside the profit and loss account
- Deferred recognition through the profit and loss account
- Immediate and full recognition through the profit and loss account
- Additional information to be disclosed in the notes to the financial statements
- Clarification of the requirements for companies participating in multi-employer plans and for subsidiary companies participating in group plans.
Some Implications
For EU-listed companies that have already been reporting under IAS19, the changes merely involve an expansion of the disclosure notes. Nevertheless, these companies may wish to explore the implications of changing to the FRS17-style treatment of actuarial gains/losses, which in some cases may have a beneficial effect on the profits declared in the profit and loss account.
Other EU-listed companies, that have been using local accounting standards to date, will need to decide on which option to adopt for the treatment of actuarial gains/losses. Even UK and Irish companies, who are able to continue with the FRS17-style reporting under the new IAS19, may wish to consider the implications of using the other options for recognising actuarial gains/losses, even though they are likely to be faced with a further change in a few years time. As well as deciding on the treatment of actuarial gains/losses arising following the transition to IAS19, these companies should also consider the treatment of the surplus/deficit on the first time adoption of IAS19. Here they have two options:
- full and immediate recognition of the surplus/deficit on the balance sheet as a prior year restatement; or
- reconstruction of all actuarial gains/losses since the inception of the plan using the deferred recognition approach. The resulting surplus/deficit (which could be very different to that in (i)) would then be recognised on the balance sheet as a prior year restatement.
The above decisions could have a significant impact on the way employee benefits are reflected in a company's financial statements. Time is short for those companies that wish to fully explore all the options, to make decisions before 2005/06 interim results are prepared.
Nigel Hacking, January 2005.