23 April 2008

IPE: IASB may scale back pensions accounting project

The future of the International Accounting Standards Boards' due process discussion document on pensions accounting is in doubt, following public comments by IASB research director Wayne Upton. If the board is unable to fix the issue of cash-balance type-plans, constituents could see the board limit the project scope to a shortened list of deferral mechanisms and disclosures.

The board might also adopt a less "conceptually pure" benefit promise definition, potentially leaving career-average plans untouched, board members tentatively agreed.

The discussions remain subject to formal approval by IASB members but any final accounting changes resulting from Phase 1 of this project are scheduled to take effect from 1 January 2013.

These latest developments emerged in London earlier this week during a joint IASB meeting with the US Financial Accounting Standards Board.

During meeting discussions, Upton said he had identified two likely impediments to completing the project: benefit promise definitions and scope and, separately, the issue of measurement.

He said he also expected to see "significant pushback" on the board's proposals to shift career-average plans to the new contribution-based classification.

The IASB unveiled a paper last month proposing, among other changes to pensions accounting requirements, a new definition of contribution-based pension plans, but consultants had warned the changes could bring serious upheaval to pension schemes, and career-average schemes in particular.

Upton said the new definition includes "plans that have sat very comfortably in defined-benefit accounting for years."

"I'm personally not convinced that the definitional integrity that we were seeking was appropriate. But we will see how the comment letters go," Upton said. He added It was "not a clear" whether measurement would prove to be challenging as he had seen commentary emerging from actuaries "that seemed to go both ways."

In a blunt assessment of the IASB's prospects for success, Upton called for the board to consider scaling back its ambitions for its Phase 1 work on pensions accounting. "The much greater improvement in financial reporting will come from getting the full amount on balance sheet … and getting the smoothing mechanisms out of the income statement," Upton said. "We would recommend that any work on Phase 2 of the project be suspended and those resources allocated elsewhere."

He said his recollection of board opinion was "there is not majority support for a direct charge to [profit or loss]", for pension plan gains and losses.

Meeting papers accompanying the boards' discussions on the future of their joint workplan also reveal more detail on the FASB's involvement on the issue of financial statement presentation and benefit promises – particularly on the wider-ranging Phase 2 project.

IASB added a project on pensions accounting to its agenda in July 2006. During Phase 1, IASB set out to address so-called troublesome cash balance-type pension plans, smoothing mechanisms and the issue of disclosure.

The board had then intended to join with FASB to launch a Phase 2 full-scale review of pensions accounting ahead of developing a joint accounting standard.

The US has a keen interest in the project. The Securities & Exchange Commission recommended in 2003 IASB and FASB should address defined-benefit pensions accounting as a joint project.

IASB intends to work with FASB on a so-called Phase 2 to mount a ‘root-and-branch’ reappraisal of pensions accounting. Both boards would then issue a joint pensions accounting standard.

IASB's due process discussion paper describes this objective as a common goal, and in the discussion paper, the board states: "Consequently, the FASB and IASB projects should be viewed as parallel projects."

The paper also continues: "The FASB intends to continue work on aspects of its second phase that will provide an opportunity for the boards to begin working together."

Observer notes accompanying the 21 April joint IASB–FASB discussions state: "The FASB continues to evaluate how changes in plan assets and benefit obligations would be presented under the proposed presentation principles developed in the financial statement presentation project."

The notes continue: "That work should continue and can assist the IASB in resolving the open questions of presentation in its discussion document."

IASB has in the past resisted attempts to force its senior management to articulate progress on joint projects with FASB.

Invited during the 8 November 2007 meeting of the Standards Advisory Council by council member Jochen Pape to indicate FASB progress under the memorandum of understanding, IASB technical director Liz Hickey replied:

"You are asking for our work plan … to indicate the progress that the FASB is making on various projects. We will not do that. It is for the FASB to explain."

The IASB's SAC provides a forum to consult with individuals and organisations affected by IFRSs.

But in an interview with US journalists on December 12 2007, FASB chairman Bob Herz said of his board's Phase 2 work: "[We are taking] a bit of a divide-and-conquer strategy with the IASB. They are working on a discussion document with some new ways of thinking about not only pensions but also OPEBs [other post-employment benefits]."

Herz continued: "Our staff is now thinking about how we might deal with pensions and OPEBs with the financial statement presentation approach that we're devising - where we divide the basic financial statement between business activities and financing activities [and], within business, divide between operating and investing."

Summing up, he said: "So in other words, we divided up, with IASB's staff focusing on some areas, and our staff on others. Then [we'll] bring it together."

Although the board has tentatively approved the revised approach to the pensions accounting project, Upton and his staff colleagues still face opposition to their strategy from within the board.

Objecting to the staff proposals, IASB member John T. Smith said he "wouldn't want to go on record right here and say 'we're dropping it.'"

IASB chairman Sir David Tweedie countered Smith’s view by suggesting the Upton strategy, developed by an ad hoc group of four practitioners with close links to the FASB, did not prevent the board from attempting to fix the definitional question.

Wayne Upton's comments can be heard on the IASB's official meeting recording of April 21.

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