Sweeping changes around accounting for pension could result companies pension liabilities massively increasing following suggestions that assets and liabilities be reported during the period in which they arise.

Currently, these are spread forward but the UK accounting standard setter has suggested the change in a move towards greater transparency.

The proposals, from the Accounting Standards Board, also include plans that financial statements reflect the actual return on assets, rather than the expected value as is currently required. The ASB says both recommendations would reflect the 'underlying economic reality rather than allowing smoothing mechanisms.'

The plans could radically affect the tense area of pension accounting, which is currently the focus of discussions between the International Accounting Standards Board and the US Financial Accounting Standards Board.

The ASB has released its discussion paper, so as to expand the debate in the area and influence discussions at the IASB level.

The ASB has also argued for the use of a risk-free rate rather than the high-quality corporate bond rate required by current accounting standards in measuring the liabilities.

Current 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.

Pension plans are also set to come under pressure to report changes to their members.

The ASB recommended that plans be required to include the liability to pay future benefits. If a liability is reported at present, 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 '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,' he said.

Comments on the issue must be submitted to the ASB by 14 July 2008.

Further reading:

The Financial Reporting of Pensions:a brief guide

Pension schemes face rules hit