PensionReforms' summary and comments
The International Accounting Standards Board (IASB) issued proposed changes to the way that an employer's accounts report pension obligations.  PensionReforms has already looked at the OECD's response to the 2008 proposals - see here.  The UK's Accounting Standards Board (ASB) has also been looking at this issue on behalf of Europe's 'Pro-active Accounting Activities in Europe' a partnership between the European Financial Reporting Advisory Group and other European standard setters.  This report follows a "major consultation exercise" by the ASB on a preliminary Discussion Paper (DP).  The ASB doesn't much like the IASB's proposals either.

Looking across markets, both national and international, the rules that govern how companies' accounts are presented and how contingent obligations, like pension promises are valued should be similar so there is an undoubted need for reporting standards. Shareholders, lenders, regulators and employees all need good, comparable data here.

International Accounting Standard 19 (IAS 19) is the current standard, required of "exchange-listed companies in many parts of the world."

The IASB proposed a two-pronged approach to the reporting of pension obligations:
-   the pension vehicle's own liabilities should be shown in the employer's accounts on different bases;
-   the employer should also report its expected ability to meet the future contribution obligations to the pension vehicle.

The proposed requirements were to apply to both Defined Benefit schemes and to what the IASB proposed calling "contribution-based schemes".  This new category is wider than what PensionReforms (and nearly everyone else) calls Defined Contribution schemes.  That's because, inexplicably, they included "cash-balance plans and other hybrid-type plans, as well as career-average plans."  PensionReforms would classify these as Defined Benefit.

"3.6 It was proposed in the [ASB's] DP that the measure of liabilities to pay pension benefits should be a current value amount of future cash outflows expected to settle the liability when it falls due. Where the measure is derived from discounting future cash outflows, it should reflect the expected cash outflows (that are required to settle the liability as defined in the DP) discounted at a current market discount rate to reflect the time value of money."

And that "discount rate" should, according to the ASB's DP, be based on "should be a risk-free rate."

Following the consultation on the DP, the ASB has clarified its position:
"3.9 The preliminary views set out in the DP stated that risk arising from the size of the pension liability was very difficult to measure and it would be misleading to try and reflect the financial effect of such risk in a reported liability amount.  It was therefore proposed that this risk should be addressed by disclosures regarding the assumptions that have been used to estimate the cash flows and the sensitivity of the liability to changes in those assumptions.

"3.10 The ASB acknowledges the concern of some respondents to the DP that clarification is required as to whether and, if so how, risk should be addressed in the cash flows used to measure the pension liability.  As part of its redeliberations, the ASB has sought to clarify how risk should be taken into account.  The clarification notes that the cash flows should incorporate, in an unbiased way, all available information about the amount timing and uncertainty of cash flows arising from contractual obligations.  The expected The Financial Reporting of Pensions - Feedback and Redeliberations value of the cash flows should be used, where the expected value is the probability-weighted average of the cash flow."

Apparently, the IASB has had second thoughts about the idea of formally measuring the "credit risk" in relation to future contributions in the sponsoring employer's accounts:
"The ASB ... supports the IASB in issuing a discussion paper addressing this topic. The ASB has recently responded to the IASB's discussion paper and noted it does not support the inclusion of own credit risk in the measurement of liabilities, unless on initial recognition the entity is party to an observable market transaction."

The ASB has also affirmed its original view on the appropriate discount rate:
"In particular, on the measurement of liabilities, it has affirmed the view that the discount rate used should reflect the time value of money, and therefore should be a risk-free rate."

However, further work is seemingly needed with respect to the idea that "...the actual return on assets held to fund pension liabilities should be presented separately as financing income in the statement of comprehensive income."

PensionReforms hopes the IASB takes note of the European accounting bodies' views, as presented by the ASB.  As PensionReforms has already stated, the current IASB19 is a virtually impenetrable code.  PensionReforms would prefer a principles-based approach that everyone can understand, rather than the rules-based basis currently supported.  The likely outcome of a revised IAS19 will be that more employers will get rid of any arrangement that requires the attention of IAS19.  That will make life for accountants simpler and that's perhaps the main purpose of the proposed changes.  However, that would, in PensionReforms' view, be a backward step.  (File size 1.4 MB; 48 pp) 361