28 June 2011

Financial Reporting Matters

Welcome to Financial Reporting Matters

In this edition we focus on the IASB's changes to employee benefit accounting.  We look at the ASB's latest comments on the future of UK GAAP and the IASB's revenue recognition standard.

The headline changes to IAS 19 are not a surprise - for example the removal of the corridor option.  The major change for most UK companies affects profit and loss.  The current expected return on plan assets is replaced by a credit calculated at the liability discount rate.  Expected returns for a typical pension plan portfolio can be around 1% higher than AA discount rates in current market conditions.  This is expected to dent UK reported profits by around £10 billion (based on UK plc pension assets of around £1,000 billion).  Extensive additional disclosures are introduced.  Assessing the level of detail to be given and collating the information will require advance planning.

The ASB is reconsidering its proposals for the future of UK GAAP.  Mandatory application of EU-adopted IFRSs will not be extended beyond current requirements (primarily the issue of listed debt or equity).  The ASB also suggests it will permit or require certain accounting options that exist in current UK accounting standards.  This may resolve some of the issues raised by some sectors, such as housing associations, in their responses to the initial proposals.

The IASB has reconsidered many of the proposals within the revenue recognition exposure draft (issued in June 2010) during recent meetings.  The amended proposals will be re-exposed later in 2011.  This will give interested parties an opportunity to comment on the changes.

If you have any comments on this edition or if you would like one of your colleagues to receive future editions, please contact me at FinancialReportingMatters@kpmg.co.uk.

Andrew Vials, Senior Technical Partner

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IASB revises employee benefits standard

The IASB has amended the recognition, presentation and disclosure requirements of IAS 19.  The changes affect short-term and long-term employee benefits, including pensions.

For defined benefit pension arrangements the most significant change for UK entities replaces the expected return on plan assets with an amount based on the liability discount rate.  For many, this will increase the net expense recognised in profit and loss.  The classification of plan expenses is also changing.  These costs have usually been netted off the expected return on plan assets.  Though some will still be charged within profit and loss, though not as finance costs, others will now be recognised instead in other comprehensive income.  Other changes include the removal of the corridor option and additional disclosure requirements.

For other employee benefits there are amendments to the distinction between short-term and other long-term benefits.  More benefits may now be classified as long-term.  Different measurement requirements apply to short-term and long-term benefits.  Termination benefits may be recognised earlier than previously in some circumstances.

The amendments are effective for periods beginning on or after 1 January 2013.  Early adoption is permitted (when EU endorsement is complete).  KPMG's International Standards Group, part of KPMG IFRG Limited, has produced an 'In the Headlines' publication summarising the amendments.  It can be downloaded, free of charge, here.

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ASB thinks again on the future of UK GAAP

The ASB has tentatively agreed to change its proposals for the future of UK GAAP (as currently set out in FREDs 43 and 44).

The application of EU-adopted IFRS will not be extended beyond the current requirements in law.  Publicly accountable entities (for example pension schemes, insurers and building societies) that are not listed on an EU-regulated market will apply the Financial Reporting Standard for Smaller Entities (FRSME) although they may choose instead to apply full EU-IFRS as currently.

The principles for amending the IFRS for SMEs (the basis of the FRSME) will be changed.  This will allow the ASB to permit or require the use of certain accounting options that currently exist in UK GAAP where they are consistent with full EU-IFRSs.  The application of this tentative decision is not yet known.  We expect that this may include permitting the revaluation of property, plant and equipment, and the capitalisation of borrowing and development costs.

The FRSME's effective date is deferred to periods commencing on or after 1 January 2014.

At its next meeting the ASB will consider, among other matters, amending the FRSME to include increased disclosures for financial institutions and publicly-held entities. 

A summary of the ASB's meeting is available here.

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