06 March 2008

IPE: IASB pulls back from ASB plans

The chairman of the IASB has hinted changes to the rules on pension accounting will not go as far as the measures suggested by the UK Accounting Standards Board (ASB). In a speech to the International Corporate Governance Network (ICGN) mid-year meeting in Gothenburg, entitled 'Impact of Sovereign wealth funds & Nordic Corporate Governance', Sir David Tweedie revealed the IASB discussion paper on pension accounting would be published next month.

He said the paper would be part of a "root and branch review" of international accounting standards, as currently 109 countries are signed up to the IASB rules but this is expected to increase to 150 by 2011.

As a result, he said the organisation is keen to keep national standards setters, such as the UK ASB in place, as they stop the IASB from becoming locked in an "ivory tower" while also conducting initial research into potential changes that it can then review and amend.

Tweedie pointed out one example was the 'Financial Reporting of Pensions' paper published by the ASB at the end of January, which suggested using a risk-free discount rate to measure liabilities, and to include the actual return on assets rather than the expected value. (See earlier IPE story: ASB calls for 'fundamental' accounting review)

The proposed changes have caused concern among the industry as it predicted pension liabilities could increase by around £80m (€107m), (See earlier IPE story: ASB changes will 'fast forward' demise of defined benefits).

However, Tweedie admitted the ASB research "had gone further than we probably will" in the paper, but added "it is useful to test the water".

That said, the chairman revealed the discussion paper on pensions will outline standards which will force companies to declare the exact liabilities, rather than the current system of discounts used to calculate pension deficits.

For example, he said if a pension fund has assets of £40m, liabilities of £40m and the stock market falls by £10m, then the deficit is £10m, however the current account system does not show it like that on a balance sheet.

He said: "It is derived from the US system of Generally Accepted Accounting Principles (GAAP), and it's ridiculously complicated and doesn't mean a thing. We are going to force companies to show the true values of deficits and it's going to go down like a lead balloon."

In addition, Tweedie hinted the paper would also tackle the issue of the expected returns on investments, as highlighted by the ASB, which he claimed were often "a bit heroic" as in the US in 2007 the expected returns on investments were around $480bn, yet the actual returns were around $180bn.

"Last year, around $300bn flowed through US income statements that were phoney. So we're going to stop that," he said.

To do this, Tweedie revealed the IASB wants to introduce short principles-based standards that are "very simple but very tough" and which do not require anti-abuse rules or extra guidance.

But, he suggested the attitude of the IASB would be "here's the principle now go do it", but warned companies if they want "lots of guidance, you aren't going to get it".

The organisation is instead considering greater use of management commentary, which would be used to explain what the raw economic data resulting form the new standards actually means.

The changes aim to bring the US and IASB accounting standards more in line, to avoid the process of "reconciliation" of accounts, and Tweedie revealed the US Securities and Exchange Commission (SEC) is expected to announce in the next six months whether it has decided to allow US companies to use international standards and whether it intends to end the GAAP regime.

He said: "This is going to change accounting for years to come. This is stuff we couldn't do at the beginning when we were first established. This is a full root and branch review."

As a result, Tweedie confirmed two discussion papers on pensions and financial instruments will be published next month while, later this year, the IASB will publish possible standards relating to consolidation of losses following the sub-prime crisis, which define, in particular, how to measure reputational and client risk, and also rules on mark-to-market measures; revenue recognition and how to determine what are liabilities and what are equities.

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