As reported previously in Inside Track, the ASB is undertaking a major research project into accounting for pensions. Project Director Hans Nailor outlines the latest developments.

A number of discussion summaries have recently been added to the ASB website: http://www.frc.org.uk/asb/technical/projects/project0065.html. They are staff papers that represent work-in-progress towards a discussion paper and set out various viewpoints that have been discussed by the advisory groups on the following topics (these are not official views of the ASB).

Measurement of liabilities to pay benefits

This paper discusses the measurement principles used elsewhere in accounting for liabilities and suggests that the most relevant attributes for pension liabilities are a current value and a ‘settlement amount’ (reflecting a measure of the cash outflows needed now or in the future to settle the liability). The paper then evaluates a number of possible measurement bases (fair value, current settlement amount and regulatory measures of the liability) and includes a discussion of alternative views on whether or not the measurement of the liability should reflect the risk that the promised pension will not be paid if the sponsoring employer becomes insolvent. The staff believe that the discussion of underlying measurement principles will inform the ongoing discussions in the advisory groups about an appropriate discount rate when a present value measurement is required.

Measurement of assets held to pay benefits

Some argue that the practice of representing assets at market values on a single date is a questionable way of representing the long-term values of assets that are held to provide funds for long-term liabilities. Accordingly, they argue that the model drives entities to take decisions about funding and investment strategy (and perhaps benefits) that they would not otherwise have taken (and, it is sometimes claimed, they ought not to have taken). The paper considers, but does not accept, the arguments for using an entity-specific (or actuarial) value for assets that are traded on active markets.

One of the limitations of accounting, particularly in the context of retirement benefits, is that any accounting measure can only provide a snapshot of the financial position at a point in time. Most would agree that single point values for assets and liabilities – no matter how they are measured – cannot tell a sufficiently full story about either item, or about the dynamic of the relationship between them. In addition, a single accounting measure cannot itself provide the information that is necessary for a user to understand what the risks are from the promises that have been made or the assets that have been set aside to cover them. For example, a measure of an asset or liability at a certain date does not give any indication as to how it might change in the future. For this reason, the project is considering concurrently the adequacy of disclosures necessary to support the accounting measures that are required at the balance sheet date.

Consolidation of retirement benefit funds

This paper addresses the question of whether liabilities to pay benefits and assets that are held to settle them, which belong to a separate entity, should be consolidated by the employing entity. It suggests that the present ‘blanket exemption’ that exempts retirement benefit funds from being consolidated should be reconsidered in the light of the principles for consolidation that emerge from the IASB’s project on consolidation. For example, if consolidation were determined by reference to control, there seems little justification for not consolidating a retirement benefit fund that an entity controls.

Reporting changes in assets and liabilities

This paper concludes that corridor and deferral mechanisms, as allowed by IAS 19, are inappropriate. It also challenges both the special accounting treatment given to actuarial gains and losses on liabilities (suggesting that changes in estimates of pension liabilities should be reported in profit and loss) and the concept of recognising only the ‘expected’ return on assets in the profit and loss account. It begins to explore how remeasurements of items from prior years might be presented in order to facilitate analysis of each year’s current performance.

Pension scheme reporting

This paper explores some fundamental issues such as the purpose and main users of pension scheme reports.