This month, the ASB has announced that it is undertaking a research project into the financial reporting of pensions.

The UK context
The ASB's standard on accounting for pensions, FRS 17 'Retirement Benefits', was published in November 2000, although its requirements have only become mandatory in full for accounting periods beginning on or after 1 January 2005. The recent implementation of FRS 17 has given rise to a number of comments about the accounting for pensions, particularly in respect of defined benefit pension arrangements, which have attracted a good deal of media attention.

The legal and regulatory environment for company pension schemes has also changed significantly since the publication of FRS 17, notably as a result of the Pensions Act 2004. Regulatory changes include a new statutory obligation on solvent companies to meet their pension obligations; the establishment of the Pension Protection Fund (PPF) to provide a partial safety net for employees whose employers are unable to meet their pension obligations; and the establishment of The Pensions Regulator (TPR), a new regulator with significant new powers. These changes could not have been anticipated when FRS 17 was developed and may have an effect on the relevant financial reporting.

The International context
Debate has also been stimulated by the move to International Financial Reporting Standards (IFRS). In many respects, the requirements of FRS 17 are similar to those of its international counterpart International Accounting Standard (IAS) 19 'Employee benefits'. But there are some issues that are addressed by IAS 19 and not by FRS 17, and there are a number of optional accounting treatments in IAS 19 the merit of which requires careful evaluation.

The IASB and US Financial Accounting
Standards Board (FASB) have indicated that they may be reviewing their standards on pensions in the reasonably near future.

The ASB is undertaking its research into pensions accounting in the light of these developments. This research will help inform any proposals for future accounting standards (either UK or international).

The European context
There is also an important European dimension. The European Financial Reporting Advisory Group (EFRAG) and European National Standard-Setters (NSS) have agreed to work more closely together on 'Proactive Accounting Activities in Europe', in order to improve the input from Europe to the global standard-setting process. EFRAG and the NSS have agreed to start proactive work on four projects, one is which is pensions accounting, where the ASB will take the lead.

Issues
The project will reconsider the fundamental principles of pensions accounting. Amongst the questions to be addressed by the project will be:

• how is the relationship between an employer and a pension scheme best reflected in the employer's financial statements?
• how should the employer's liability in respect of pensions be quantified?
  In particular:
  • what is the most appropriate actuarial method?
  • should the employer's liability reflect future salary increases?
  • what discount rate should be used to translate future cash flows into a realistic present value?
• what is 'the expected return on assets', and how (if at all) should it be reflected in the employer's financial statements?
• what is the impact on financial reporting of pension funds regulations, such as the introduction of the PPF levy?
• are the disclosures required by current standards appropriate? This will include consideration of whether liabilities that might arise in the event of a takeover of the employer are adequately disclosed under current requirements.

The research will also cover the financial reports of pension schemes, including consideration of whether requirements for the accounts of pension schemes secure adequate reporting of liabilities to pay pensions.

Managing the project
To assist in this research, the ASB is forming a Pensions Advisory Panel in the UK, with members who can provide a variety of expert perspectives on pensions accounting, including those of actuaries, the preparers and users of financial statements and regulators. The role of the Panel will be to ensure that a number of knowledgeable points of view are fully considered. There will also be a European working group which will bring broad European experience to the project. The views of Panel and working group members will be fully reported to and debated by the ASB, but the prime responsibility for the research will rest with the ASB. Details of the Panel and working group membership will be made available on the ASB website.

It is expected that the research will be published in the course of 2006. The ASB hopes that it will contribute to the development of improved international accounting standards, which may provide a suitable basis for a replacement for FRS 17. Other than a proposal to extend FRS 17 to cover termination benefits, the ASB has no current plans to revise the requirements of FRS 17 before proposals for a new international standard are made. That said, the ASB will review that plan in the light of the research project and its policy on converging UK standards with IFRS.