The pensions debate heats up

The financial reporting of pensions has been a controversial topic in recent years, even making the evening news in some countries. As the IASB looks to review its current Standard on this subject, IAS 19 "Employee Benefits", the European Financial Reporting Advisory Group (EFRAG) and several European standard setters have published a Discussion Paper which seeks to influence the debate.

The development of the paper, "The Financial Reporting of Pensions", has been led by the UK Accounting Standards Board and suggests that changes in pension assets and liabilities should be reported in the period in which they arise, rather than being spread over a future period. It also proposes that the financial statements should reflect the actual return on assets, rather than the expected value as is currently required. Both proposals seek to reflect the underlying economic reality but will have the side-effect of increasing the volatility of reported results compared to the smoothing mechanisms which are currently used by many entities.

The Discussion Paper also suggests that liabilities should be measured using a risk-free rate rather than the high quality corporate bond rate that is currently required by IAS 19. This proposal may also prove unpopular with entities, as a reduced discount rate will increase the size of reported pension liabilities. The Discussion Paper is not of course an IASB document and the IASB may take a quite different direction as it develops its own views. Nevertheless the Discussion Paper can be expected to have some influence on the debate.