How IFRS convergence will affect accounting for defined benefit plans.
Shortly after this open meeting, the IASB published a progress report on convergence efforts. This progress report stated that the "work methods" of the Norwalk Agreement team have been changed to "enhance the likelihood" that the convergence projects will be completed in the time frame outlined. The progress report stated that the FASB and IASB are on track to publish a significant number of exposure drafts in the coming months. The exposure drafts expected to be published by the FASB in 2010 include those listed below. Many of these are targeted for implementation by 2011, which will make the next year very busy for those in financial reporting. The upcoming exposure drafts include--
* financial instruments,
* fair value measurement,
* financial statement presentation,
* financial instruments with characteristics of equity,
* revenue recognition,
* insurance contracts, and
* income taxes.
Defined Benefit Plans
In addition to the exposure drafts listed above, in April 2010 the IASB issued an exposure draft on proposed amendments to defined benefit
plans. International Accounting Standard (IAS) 19 on employee benefits is the current IASB standard on this topic. While this exposure draft is not the result of a joint project, the goal of the FASB and IASB is to eventually have a converged standard in this area. In fact, the IASB website page "Work Plan for IFRSs" lists post-employment benefits as a project under the memorandum of understanding (www.iasb.org). Therefore, public companies in the United States may want to pay particular attention to the changes proposed in the exposure draft.
In a defined benefit plan, a retired employee in an employer-sponsored retirement plan receives a specific amount based on salary history and years of service. The employer bears the investment risk in providing the benefits. Contributions may be made by the employee, the employer, or both. The use of defined benefit plans has declined significantly in the United States due to the risk that must be borne by the company, but many companies still have existing plans to account for.
Current Accounting in the United States
Under current accounting in the United States for defined benefit plans (formerly SFAS 158, now Accounting Standard Codification [ASC] Topic 715, Compensation--Retirement Benefits), companies with defined benefit pension plans must recognize the difference between the plan's projected benefit obligation and its fair value of plan assets as either an asset or a liability. The projected benefit obligation is the actuarial present value of the benefits attributed by the pension plan benefit formula for services already provided. FSP FAS 132(R)-1, now also included under ASC Topic 715, became effective for years ending after December 15, 2009, and requires enhanced disclosures, including how investment decisions are made; the major categories of plan assets (using Levels 1, 2, and 3); the inputs and valuation techniques used to measure the fair value of plan assets; the impact of fair value measurements that use significant unobservable inputs on changes in plan assets for the period; and significant concentrations of risk within plan assets. The concentrations of risk within plan assets. The Ford Motor Company, for example, has large plan assets of approximately $38 billion (as shown in the company's 2009 10-K filing), and also has a significant accumulated benefit obligation (approximately $43 billion), and may be impacted greatly by a revised standard such as that being proposed by the IASB.
Recent History of IASB Pension Accounting
In March 2008, the IASB published for comment a discussion paper on accounting for defined benefit plans. This paper set out the preliminary views on how accounting for some post-employment benefits, including pensions, could be improved. Approximately 150 comment letters were received by the IASB in response to this discussion paper. The IASB took these letters into consideration along with input obtained from meetings with the board's Employee Benefits Working Group, users, preparers, regulators, and others, prior to developing the new exposure draft.
Removal of the 'Corridor'
Under the "corridor" approach, actuarial net gains and losses are recognized as income or expenditure if cumulative, unrecognized, actuarial gains and losses at the end of the previous reporting period (i.e., at the beginning of the current financial year) exceed the greater of--
* 10% of the present value of the defined benefit obligation at the beginning of the year, and
* 10% of the fair value of the plan assets at the same date.
These limits should be calculated and applied separately for each defined plan. The excess determined by the above method is then divided by the expected average remaining working lives of the employees in the plan to determine the income or expense to be recorded in the income statement.
The most significant change proposed in the IASB's current exposure draft is removal of the corridor. The discussion paper proposed that entities should recognize all changes in the value of plan assets and in the post-employment benefit obligation in the financial statements during the period in which they occur. This proposal was carried over to the exposure draft. Some arguments made in the comment letters against this option were: 1) the removal of the corridor approach does not take into account the long-term nature of defined benefit obligations, 2) there will be volatility of reported profit or loss if all changes in the net defined liability are reported in each period, and 3) there are potential negative effects on debt covenants based on earnings or net assets. The IASB believes, however, that the removal of the corridor approach provides the most useful information to users of financial statements. This is because the amounts shown in the balance sheet and income statement are relevant to users and easier to understand, and because comparability across companies would be improved with the elimination of the two options currently allowed by IAS 19.
New Presentation Approach
In addition to the removal of the corridor, the exposure draft proposes that entities would split changes in the defined benefit obligation and the fair value of plan assets into service cost, finance cost, and remeasurement components, and present the following:
* The service cost component in profit or loss. This would be included in cost of goods sold for production employees and in other business expenses for other employees.
* The finance cost component (e.g., net interest on the net defined benefit liability or asset) as part of finance costs in profit or loss. A company will recognize interest income when the plan has a surplus and interest cost when the plan has a deficit.
* The remeasurement component in other comprehensive income. For example, there could be a line on the income statement under other comprehensive income showing "loss on remeasuring pension plan deficit."
Many respondents to the original discussion paper believe that disaggregated information would be beneficial to users of financial statements, so this does not seem to be a contentious topic.
The exposure draft proposes some improved disclosures, including: 1) the characteristics of an entity's defined benefit plans and the amounts in the financial statements results from those plans; 2) risk arising from defined benefit plans, including sensitivity analyses of changes in demographic risk; and 3) participation in multiemployer plans, although these would not be additional disclosures unless an entity uses an exemption that allows them to account for a multiemployer plan as if it were a defined contribution plan.
It is interesting to note that FASB also has a current project on disclosures about multi-employer plans. At its April 2010 meeting, FASB agreed that an employer should disclose both quantitative and qualitative information about its participation in a multiemployer plan. These changes will be finalized in an Accounting Standards Update and should be effective for fiscal years beginning after December 15, 2010. In the exposure draft, the IASB stated that it will consider the work of FASB on disclosures about multiemployer plans when it reviews the responses to the exposure draft. Again, this shows how close FASB and the IASB are on the topic of pension accounting and gives U.S. companies a reason to closely follow the progress of the IASB standard.
Transition and Effective Date
The IASB proposal states that companies should apply the proposed amendments retrospectively. There was a general policy published in the December 2009 edition of the IASB Update that the effective date for major projects completed in 2011 should generally not be earlier than January 1, 2013. Therefore, since the target completion of this project is in 2011, the effective date will likely be early 2013.
Invitation to Comment
Comment letters in response to the exposure draft will be accepted by the IASB through September 6, 2010. Public companies in the United States that currently have defined benefit plans should get their comments to the IASB now rather than waiting for a converged standard or conversion to IFRS, and should be aware of the potential changes to accounting for these plans if and when the United States is operating on IFRS.
Emily K. Baculik, CPA, CMA, is a technical accounting specialist for U.S. Steel and an accounting instructor at the University of Phoenix and South University.
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|Title Annotation:||international accounting; International Financial Reporting Standards; United States. Securities and Exchange Commission|
|Author:||Baculik, Emily K.|
|Publication:||The CPA Journal|
|Article Type:||Conference news|
|Date:||Sep 1, 2010|
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