IASB Proposals = Significant Change Says KPMG

30 April 2010 (PLANSPONSOREurope.com) – New DB pension accounting proposals could mean big changes for pension schemes, according to KPMG.

KPMG commented that the proposals recently published by the International Accounting Standards Board (IASB) to revise the accounting for pensions and other long-term employee benefits under IFRSs would “introduce significant change for most entities with defined benefit obligations, in particular those using the option to defer recognition of actuarial gains and losses”.    

According to KPMG, one of the IASB’s main proposals is to require immediate recognition of all gains and losses arising in defined benefit plans. At present IAS 19 Employee Benefits permits use of the so-called “corridor” method, under which the actuarial gains and losses arising on post-employment benefits such as pensions can be deferred and recognised in net income in later periods.  KPMG notes that those would now (under the proposal) be recognised in full, but as part of other comprehensive income – i.e., outside net income.

“Actuarial gains and losses can vary significantly from period to period as they include not only changes in estimates regarding employee turnover and life expectancy but also investment gains and losses and the impact of changes in discount rates,” the consultancy observed.

Commenting on the IASB proposals, Lynn Pearcy, KPMG’s global IFRS employee benefits standards leader, said: “The global economic crisis has increased the focus on the off-balance sheet pension liabilities that can result from using the corridor. While the IASB’s proposal to eliminate this is likely to be controversial, it responds to criticism of current pension accounting, which permits deferred recognition of certain gains and losses. In proposing a presentation solution that keeps the resultant volatility out of net income the Board has tried to be responsive to concerns about this important performance measure otherwise being undermined.”

Net Interest Calculation

KPMG notes that another change proposed by the IASB that is likely to draw considerable comment is that the net interest component of pension expense would be calculated by applying a single interest rate – the rate used to discount the obligation – to the entity’s net pension asset or liability. According to KPMG the expected long-term return on plan assets would no longer be part of the net pension cost reported in net income. Instead, any gains (or losses) for returns that are higher (or lower) than the interest rate used would be recognised only in other comprehensive income, outside net income.

Lynn Pearcy continued: “The corridor proposal will no doubt be the headline story. But an important detail that shouldn’t be overlooked is that net income is likely in many cases to be reduced by the Board’s proposal to redefine the calculation of pension cost. Entities will need to consider the impact of these proposals not just on their pension costs but also on wider matters such as compliance with debt covenants.”

KPMG notes that the proposals include some additional disclosure requirements, which focus on the risks arising from sponsoring employee benefit plans. It notes that the IASB pulled back from early plans to have disclosures comparable in scope and detail to those for financial instruments.

Nevin E. Adams
editors@plansponsoreurope.com