Accounting for pensions: a revolution in how post-retirement benefits are reported is coming, but there's time for CIMA members to help shape it.

AuthorTopazio, Nick
PositionTechnical matters

A radical overhaul of the way we account for pensions seems to be on the way. But it's not just around the corner--in fact, a number of us will be more concerned with collecting our pensions than accounting for them by the time the fundamental changes take place.

This year has seen the publication of two papers on the financial reporting of pensions: one by the UK's Accounting Standards Board (ASB) and the other by the International Accounting Standards Board (IASB).

The ASB's paper, issued as part of the European Financial Reporting Advisory Group's "Proactive accounting activities in Europe" initiative, is entitled "The financial reporting of pensions". It goes back to first principles and is designed to promote discussion leading to a long-term fundamental change to the accounting principles in this area.

The IASB's project on post-employment benefits is divided into a short-term phase and a long-term phase. The discussion paper it published in March, "Preliminary views on amendments to IAS 19 'Employee benefits'", is the first step in the short-term phase, which should culminate in the publication of an amended standard by 2011. In the long-term phase the IASB will work with the US Financial Accounting Standards Board to develop a converged pensions standard addressing the need for a comprehensive review. The IASB hasn't committed to a completion date for this. I wouldn't rule out a ten-year period before any totally new standard takes effect--but then pensions do require long-term planning.


The areas that the IASB hopes to address in the short term (by 2011) are as follows:

* The recognition and presentation of defined-benefit liabilities. The planned changes would eliminate, the optional "corridor" deferral method that currently allows the smoothing of the recognition of actuarial gains and losses. The removal of this option would require companies to recognise all changes in the value of pension assets and benefit obligations in the period in which they occur.

* Accounting for benefits that are based on a promised return. IAS19 struggles to deal appropriately with benefit promises that are based on contributions and a promised return on assets. To rectify this problem in the short term, the IASB has outlined an approach that is based on defining a new category of promises: contribution-based promises measured at fair value.

* Accounting for benefit promises with a "higher of" option. Some pension schemes...

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