Defined benefit plans (proposed amendments to IAS19)

Comments from ACCA to the International Accounting Standards Board, September 2010.

ACCA is pleased to have this opportunity to comment on the above exposure draft, which was considered by ACCA’s Financial Reporting Committee.

The elimination of the corridor and deferral mechanisms in IAS19 is the most important and urgent change to make. However there are significant problems which should be re-considered as part of a comprehensive overhaul of the standard, including discount rates and how different sorts of pension obligations should be accounted for (see our answer to Q5 below). IASB should address this comprehensive project and in general the other changes in this exposure draft could be deferred to be part of that.

Questions raised by the Board

Q1. Recognition of all changes to the defined benefit obligation (DBO) and plan assets when they occur

Yes. We support full recognition of the DBO obligation and the plan assets in the balance sheet. We would like to bring to your attention our research showing that the non-recognition of liabilities via the corridor in European companies has significantly understated the liabilities of those companies and overstated the equity of companies adopting that option. 

We also support this change on the grounds of elimination of an optional accounting treatment in IFRS which will improve the comparability of financial reporting in the longer term. The second report we have commissioned also notes that while there has been a continuing shift away from the corridor method since 2005, it remains for instance the option taken up by a significant portion of EU companies outside UK and Ireland. The radical differences between the results of the corridor treatment and that of full recognition with some changes as other comprehensive income, means that there is significant lack of comparability.  

We will forward on a copy of the follow up report when it is available shortly.

Q2. Recognition of unvested past service cost when the amendment occurs

We agree with the proposals.

Q3. Disaggregation into 3 components

We agree with the identification of three items – service cost, finance and remeasurements. More specific guidance on the presentation of these three components will assist with comparability of financial statements between companies applying IFRS.

Q4. Service cost to exclude changes in demographic assumptions

We agree with the exclusion of demographic assumptions from here and including them with remeasurements. They are most akin to the other changes in assumptions.

Q5. Finance cost to comprise the discount rate on the net liability or asset

We note that currently for DB schemes the finance component comprises

  • the discount of the DBO at the AA corporate bond rate
  • less the expected return on any plan assets

We agree that there are significant problems in practice with the expected rate of return. Inappropriate and unrealistic rates of return may have been assumed in some cases that are unlikely to be achieved in practice over the longer term. 
It is not clear to us that the AA corporate bond rate is in principle the appropriate discount rate for pension obligations let alone for the plan assets. So the proposals have the merit that, to the extent that the obligations and assets have been matched in the scheme, then at least any inappropriate discount rate would be applied to a smaller net amount.

However we do not find that the principled case for this extension of the AA corporate bond rate to the plan assets has not been made. It seems wrong to change the discount rate when there is no basis for yet saying that it is the right answer. The AA corporate bond rate is not in principle relevant to the plan assets. We are not convinced that this rate will provide better information than the expected rate of return. What is needed is a complete revision of pension cost accounting, including the appropriate discount rate to use among a number of other matters such as the distinction between DB and defined contribution(DC) schemes in an up to date context. 

The existing problems of the selection of the expected rate of return on the plan assets might be addressed via guidance on the selection of the expected rate of return and disclosures comparing that against the actual rates of return experienced over a period of years.

Q6. Presentation with service cost and finance cost in the P&L with remeasurements in OCI

We note that there is still no general rationale for distinguishing between the gains and losses that should be part of profit for the year and those which should be in OCI. This is a general shortcoming of IFRS and should be remedied by IASB. 

However the remeasurements are mostly those items that are currently treated that way using the method in IAS19 paragraph 93A. This means that the major sources of volatility in pension costs are recognised via the OCI and that seems in practice to meet significant concerns of many preparers and users.

Q7. Curtailments and settlements

We agree that gains and losses on settlement are remeasurements that should go to OCI. We agree that curtailments should be treated as amendments and any gains or losses in P&L. We agree with the relevant disclosure requirements.

Q8. Objectives of disclosure requirements

We agree with the objectives as stated.

Q9. New disclosure requirements

We agree that the disclosures of risks and sensitivity will be useful. It is an area where preparers should be encouraged to make the disclosures only for material items. Otherwise a range of risks for a number of different schemes can lead to a multiplication of information provided which may get in the way of better communication of the fundamentals.

Q10. Multi employer plans

We agree with the proposed disclosures.

Q11. State plans and DB plans for entities under common control

We agree that the disclosure requirements should be consistent with other DB obligations.

Q12. Any other comments on disclosures


Q13. Other amendments

We agree with those proposed.

Q14. Multi-employer plans 

It seems reasonable that where all of this allocation information is available then DB accounting should be done, with DC accounting where it is not.

Q15. Transition

We agree that a full restatement of all comparative figures is appropriate in this case.

Q16. Benefits and costs

The assessment appears to overlook that there are new disclosure requirements which will have to be prepared, for example calculation of the DBO including projected salary increases and then also calculations excluding such increases.