The International Accounting Standards Board plans to produce a pension accounting standard based on the UK rule, FRS 17, later this year, according to a Financial Times news report.
Robert Herz, chairman of the Financial Accounting Standards Board (FASB) told the Financial Times that he also wanted to take the FRS 17 approach. He strongly criticized existing US pension accounting because it could produce misleading figures in companies’ earnings statements.
US companies have been able to inflate their profits during the bear market with gains on their pension assets that occurred several years ago. This is because US pensions accounting, like the current international rule, allows gains and losses on assets to be spread over a period of years and then recorded in the income statement – the so-called “smoothing” effect.
The IASB plans to abolish the spread option in favor of immediate recognition of gains and losses, like FRS 17. The gains and losses would be recorded in a new statement of comprehensive income rather than put through the traditional profit and loss account.
Herz reaffirmed his commitment to the longstanding goal of convergence between US and international financial reporting rules, given a push by the US business scandals that exposed failings in US accounting standards. The US Securities and Exchange Commission will publish a report by August that is expected to endorse the case for a greater emphasis on principles-based accounting in the US, according to the Financial Times report. US accounting has traditionally been more rules-based than the UK.
Herz warned that a decisive shift away from rules would require a huge cultural change among auditors, companies, investors and regulators. He highlighted how investors and the SEC, in their desire to punish corporate wrongdoing, had relied on detailed accounting rules to prove people were guilty. Auditors would then be obliged to use greater professional judgment under principles-based accounting standards.