Changes ahead for pension accounting: IASB issues amended IAS 19 Employee Benefits (2011)
The amended IAS 19 Employee Benefits (2011) introduces a number of significant changes for the recognition, presentation and disclosure of pension costs and assets/liabilities. Many UK companies reporting under IFRS will see a reduction in reported profit as a result of the removal of long-term expected returns on plan assets from profit or loss. Those using the corridor method will see their reported pension liability change.
The International Accounting Standards Board (IASB) has issued its amended IAS 19 Employee Benefits (2011) with an effective date of annual periods beginning on or after 1 January 2013.
The amended standard introduces a number of significant changes for the recognition, presentation and disclosure of post-employment (including pension) defined benefit costs and assets/liabilities. Many UK entities will see a reduction in reported profit as a result of the removal of long-term expected returns on plan assets from profit or loss; those using the corridor method will see their recognised pension liability change. Entities will need to consider the implications of the amended requirements for covenants or performance-related pay, for example. Entities should also note the expanded disclosure requirements which might require them to collate more information than at present; this may involve considerable additional work.
Although we are not at this stage expecting equivalent changes to FRS 17 Retirement Benefits (as this is not a fully converged standard), entities applying UK GAAP should still take note. Should the ASB finalise its proposal to adopt a standard based broadly on the IFRSs for SMEs into UK GAAP, and should the revised IAS 19 in due course be reflected in the IFRS for SMEs, this might affect UK GAAP.
The table below sets out the key changes.
- Immediate recognition of actuarial gains and losses in OCI, removing corridor method and ability to recognise in P&L
- Immediate recognition of all past service costs, including unvested
- Combined effect means full recognition of net defined benefit deficit/surplus (subject to asset ceiling)
- Service cost and interest cost presented in P&L
- Interest on net defined benefit asset/liability calculated at liability discount rate
- Remeasurements presented in OCI
- Remeasurements include the total return on plan assets, excluding the amount within net interest in P&L
- Different treatment of administration costs arising on management of plan assets vs. other administration costs
- Disclosures based around three major objectives to give narrative and quantitative risk information
- Change to boundary between short-term and other long-term benefits
- Expanded guidance on, and potentially different timing of recognition of, termination benefits
The removal of the corridor method will eliminate the ability for entities to defer recognition of actuarial gains and losses. The amended standard also removes the choice of recognising all actuarial gains and losses in profit or loss. These changes are not expected to have a widespread effect in the UK as most entities already recognise actuarial gains and losses in other comprehensive income (OCI) immediately.
In addition, the amendment stipulates that all past service costs are recognised immediately in profit or loss, rather than gradually over their vesting period as at present.
Curtailments and plan amendments (together, past service costs) are now recognised in profit or loss at the earlier of when the past service cost occurs and when the entity recognises costs for a related restructuring within the scope of IAS 37 Provisions, contingent liabilities and contingent assets or related termination benefits. Depending on the details of the arrangement, this might change slightly the timing of recognition.
The presentation changes are expected to reduce reported profits for many UK entities.
The amended standard does not change the total return on plan assets but does change the split between the amount of that return reported in profit or loss and the amount reported in OCI. It does this by changing the calculation of the interest figure in profit or loss.
Currently, interest income on plan assets is calculated using the expected long-term rate of return on the actual assets held. The amended standard calculates interest on plan assets instead at the liability discount rate – generally, a high-quality corporate bond rate. This means that reported profits will fall for many UK entities as the liability discount rate is generally lower than the expected long-term rate of return on their plan asset portfolio, due to the make-up of that portfolio. The excess or shortfall of actual returns on plan assets against the amount taken to profit or loss is recognised in OCI.
While set out as a presentation change, to many this will look like a measurement change. A further measurement change included in the amended IAS 19 concerns the allocation of administration costs depending on their nature. Currently, entities have a choice of including estimated total pension administration costs either as a component of the expected return on plan assets or within the defined benefit obligation. Most UK entities use the first option.
Following the amendment, all pension administration costs are recognised as the administration services are provided. The costs of managing plan assets are presented as part of the return on plan assets; this means that they are reported within OCI. Other pension administration costs may not be deducted from the return on plan assets. This marks a change from the ED, which proposed that these other costs should be reflected in the measurement of the defined benefit obligation.
The objective of the amended standard is for entities to provide more information about their exposure to risk through operating a defined benefit pension plan. This information comprises both narrative and quantitative elements.
The amended disclosures are based around three objectives, being to identify and explain:
- the characteristics of, and risks associated with, defined benefit plans;
- the amounts in the financial statements arising from defined benefit plans; and
- how defined benefit plans may affect the amount, timing and uncertainty of future cash flows.
The standard includes a list of disclosures but also states that additional information should be provided if necessary to achieve the objectives. Particularly for entities with a number of schemes, detailed planning of the appropriate level of aggregation or disaggregation will be key.
Short-term and other long-term benefits
In order to clarify the distinction between short-term and other long-term employee benefits, the amended standard has changed the definitions to focus on the entity’s expectation of when the benefits will be wholly settled. This change might result in some short-term benefits being reclassified as other long-term benefits, for which the measurement, recognition and disclosure requirements differ.
The amended standard is available here and further guidance is available from In the Headlines, issued by KPMG IFRG Limited.
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