New rules to shake up accounting for pensions

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

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

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

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:

Financial Reporting of Pensions:a brief guide

schemes face rules hit

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