‘No More Gains and Losses Off Balance Sheet for Companies Under Revised IASB Standard’

Michelle Remo, “Big 4″ observer
June 21, 2011 /

Several companies with defined benefit pension schemes will be affected by the changes in IAS 19 accounting standard from the International Accounting Standards Board (IASB).

This was according to global accounting firm KPMG that added companies “will no longer be able to keep pension gains and losses off balance sheet.”

The IASB has issued an amended version of IAS 19 Employee Benefits in completion of its project to improve the accounting for pensions and other post-employment benefits.

The amendments eliminate an option to defer the recognition of gains and losses, known as the ‘corridor method’, improving comparability and faithfulness of presentation.

It also streamlines the presentation of changes in assets and liabilities arising from defined benefit plans, including requiring remeasurements to be presented in other comprehensive income (OCI), thereby separating those changes from changes that many perceive to be the result of an entity’s day-to-day operations.

Furthermore, the amendments enhance the disclosure requirements for defined benefit plans, providing better information about the characteristics of defined benefit plans and the risks that entities are exposed to through participation in those plans.

According to IASB, “the amendments will provide investors and other users of financial statements with a much clearer picture of an entity’s obligations resulting from the provision of defined benefit plans and how those obligations will affect its financial position, financial performance and cash flow.”

On the other hand, KPMG said the amendments would affect those entities that either currently defer recognition of actuarial gains and losses or recognise them immediately in net income. The changes include removing options, standardising elements of the accounting and expanding the disclosures.

For one, IASB sought to require immediate recognition of all gains and losses arising in defined benefit plans.

“Today, under the ‘corridor’ method actuarial gains and losses on pensions can be deferred and recognised in net income in later periods. Actuarial gains and losses are the difference between assumptions made about, for example, employee turnover, life expectancy and the discount rate and the actual outcome arising on post-employment benefits. Deferred recognition will no longer be allowed. Instead, all actuarial gains and losses will be recognised in full in the period they arise, as part of other comprehensive income (outside net income),” KPMG said in a press statement.

Commenting on the amendments, Lynn Pearcy, KPMG’s global IFRS employee benefits standards leader, said that “the global economic crisis increased the focus on the off-balance sheet pension liabilities that can result from the corridor’s deferred recognition.”

“The IASB’s proposal to eliminate this deferral,” she continued, “received widespread support and mandating their recognition in other comprehensive income will increase comparability in this area. Actuarial gains and losses can be volatile and this presentation solution keeps that volatility out of net income and earnings per share.”

With the issuance of the amendments, net interest component of pension expense will now be calculated by applying a single interest rate – the rate used to discount the obligation – to the entity’s net pension asset or liability.

“If the plan’s assets are expected to generate a higher return in the long-term than the liability discount rate, then that higher expected return will no longer be credited to net income. Instead, any gains (or losses) for returns that are higher (or lower) than the interest rate used will be recognised only in other comprehensive income, outside net income,” KPMG added.

“The abolition of the corridor method may well be the headline story. But entities shouldn’t overlook the likely reduction in net income resulting from the Board’s new way of calculating net interest on the pension asset/liability. They will need to consider the impact of these IAS 19 revisions not only on their defined benefit plan costs, assets and liabilities but also on wider matters such as compliance with debt covenants,” Pearcy said.

The revisions include some additional disclosure requirements, which focus on the risks arising from sponsoring employee benefit plans, and changes in the definitions of short-term and long-term employee benefits.

The revisions are effective for accounting periods beginning on or after January 1, 2013, forming part of the Memorandum of Understanding between the IASB and the Financial Accounting Standards Board, the national standard-setter in the US.

 

Share your opinion