The ASB has today issued a Discussion Paper, ‘The Financial Reporting of Pensions’, that discusses important changes to the way pension fund assets and liabilities are calculated and reported. The paper aims to stimulate debate and to influence the International Accounting Standards Board as it reviews the current standard (IAS 19) governing pensions.

Drawing on principles applied to other accounting issues, it suggests that changes in pension assets and liabilities should be reported in the period in which they arise, rather than being spread forward. It also proposes that the financial statements should reflect the actual return on assets, rather than the expected value as is currently required. Both would reflect the underlying economic reality rather than allowing smoothing mechanisms.

On the measurement of liabilities, the paper argues for the use of a risk-free rate rather than the high-quality corporate bond rate required by current accounting standards. A reduced discount rate would increase the size of liabilities.

The paper also notes that arguments are finely balanced on whether the liability should include the effect of future increases in salaries, as happens under current standards. If this measure were changed – to reflect the employer’s discretion over salary increases – it would reduce the size of liabilities.

As well as financial reporting by the employer, the paper addresses financial reporting by pension plans to their members. It recommends that plans should be required to include the liability to pay future benefits. At present, if a liability is reported, it tends to be the amount required by regulation. The paper recommends that the measurement method should be the same as that required of the employer. The relationship between the plan and the employer should be transparently reported, including the effect of the employer’s covenant on the plan’s financial position.

ASB Chairman Ian Mackintosh said: “The current generation of pension accounting standards have served the financial community well but, with the benefit of our experience of applying these standards, the time is right for a fundamental review by the IASB and the FASB. This paper presents a coherent set of proposals, which sets out the agenda for such a review. We look forward to a wide response so that all views on these important issues can be considered.”

Comments on the Discussion Paper are requested by 14 July 2008. After consideration of the responses to the proposals, a report setting out final recommendations will be issued for consideration by the IASB and FASB.

The paper is being published under the Pro-active Accounting Activities in Europe (PAAinE) initiative by the ASB, the European Financial Reporting Advisory Group (EFRAG) and a number of other European standard-setters. In developing the paper, the ASB was assisted by its Pensions Advisory Panel and a PAAinE working group.

A guide to the proposals accompanies this press notice.

The Discussion Paper can be downloaded, free of charge, from the FRC website at: http://www.frc.org.uk/asb/technical/projects/project0065.html

1. The ASB is an operating body of the Financial Reporting Council (FRC), the UK’s independent regulator responsible for promoting confidence in corporate reporting and governance. Its functions are exercised principally by its operating bodies (the ASB, the Auditing Practices Board, the Board for Actuarial Standards, the Financial Reporting Review Panel, the Professional Oversight Board and the Accountancy and Actuarial Discipline Board) and by the Committee on Corporate Governance.
2. The main role of the ASB is to issue accounting standards. The ASB collaborates with accounting standard-setters from other countries and the International Accounting Standards Board (IASB) both in order to influence the development of international standards and in order to ensure that its standards are developed with due regard to international developments.
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4. EFRAG and the European National Standard Setters, under the banner 'Pro-active Accounting Activities in Europe' (PAAinE), have agreed to pool their resources and work together more closely so that Europe as a whole can participate more effectively in the global accounting debate. It was agreed that this initiative should in the beginning concentrate on long-term pro-active work. The objective of the initiative is to stimulate debate on important items on the IASB agenda at an early stage in the standard-setting process before the IASB formally issues its proposals. The initiative has the joint ambitions of representing a European point of view and exercising greater influence on the standard-setting process.
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