Measurement

The ASB hosted two roundtables on 24 April to discuss issues relating to the basis of measurement to be used in financial reporting. The use of historical cost in financial reporting is increasingly replaced by the use of fair value, and the IASB is reviewing its conceptual framework, including measurement attributes on which it has taken a first step by publishing a Discussion Paper 'Measurement Basis for Financial Accounting - Measurement on Initial Recognition'. The Discussion Paper was prepared by staff of the Canadian Accounting Standards Board (AcSB) and can be downloaded from the IASB website at: http://www.iasb.org/current/dp_pv.asp. The IASB is seeking comments by 19 May. A FASB project on 'Fair Value Measurement' is also nearing completion.

As context for the roundtables, AcSB staff have prepared an article on the Discussion Paper and the ASB has produced a background paper discussing some of the issues to be considered in the debate on accounting measurement. These are available on the ASB website at: http://www.frc.org.uk/asb/about/pub1059.html. Presentations on these were made at the roundtables by AcSB staff, together with further presentations looking at the issues from the academic, valuation and standardsetting perspectives. A summary of points made at the roundtables will be made available on the ASB website.

Accounting for pensions

As reported previously in Inside Track, the ASB is undertaking a major research project into accounting for pensions.

To assist in this research, the ASB has formed a Pensions Advisory Panel in the UK, with members who can provide a variety of expert perspectives. The role of the Panel is to ensure that a number of knowledgeable points of view are fully considered. A European working group has also been set up to 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 Board. The prime responsibility for the output will rest with the ASB.

The Panel has met three times this year and the European working group twice. Both groups have strongly supported a proposed 'back to basics' approach of examining the fundamentals of pension accounting, in the context of the conceptual framework. In addition, in March staff of the ASB presented a paper to the meeting of national standard setters in Toronto.

The groups' discussions to date have focussed on:

• defining the benefits that are within the scope of the project
• defining the liability that arises from the obligation to deliver benefits
• defining the liability when a separate fund is established.

Defining the benefits

A pension is simply a form of deferred remuneration given in exchange for an employee's services. Pensions are the most significant form of deferred remuneration and will thus be the main focus of the project. However, if the principles of accounting for pensions are sound, they should also be appropriate for other forms of benefits which are payable after the service has been provided.

Defining the liability

The key issues considered are when an obligation to deliver benefits meets the definition of a liability and what future events should be reflected in the measurement of that liability. The groups have been readdressing these issues with particular attention on how to account for increases to benefits that are discretionary and how to account for the effects of future increases in salaries when benefits are linked to future salaries.

Separate funds

The groups have discussed the assets and liabilities that arise (both in individual entities' and consolidated accounts) when separate vehicles (eg trusts) are involved. In these circumstances, the employee has a right to receive benefits, irrespective of how the arrangement is funded. A corresponding obligation exists amongst the providers of the benefits. A question that goes to the heart of the asset and liability 'offsetting' issue is how that obligation is shared.

This issue has been approached by addressing the following questions:

• is the vehicle a separate entity or is it part of the employing entity?
• if the vehicle is a separate entity, what assets and liabilities arise in each entity?
• if the vehicle is a separate entity, should it be consolidated by the employing entity (the analysis has considered whether the control test that the IASB is developing in its project on consolidation can be applied to pension plans)?

The project team is now consolidating the ground covered with the Panel and the European group.

Retirement Benefits: Disclosures

The Board has also been reviewing the disclosure requirements for defined benefit schemes as set out in FRS 17. This review is distinct from the wider research project on accounting for pensions and is focused on how the disclosure requirements in FRS 17 might be improved in the short-term, giving particular consideration to the recent changes made in the UK regulatory regime.

The Panel and the European group have assisted in this review and, following research on possible improvements to disclosures, have made a number of recommendations to the ASB. The ASB is now considering these recommendations with a view to developing an Exposure Draft, which it is hoped will be issued soon for consultation. In deciding on a proposal, the Board is conscious of the need for any disclosures to address the needs of users of financial statements, whilst at the same time minimising costs and the burdens on preparers.