The International Accounting Standards Board (IASB) issued revised IAS 19 Employee Benefits.
Reacting to today’s revised employee benefit standard from the IASB, KPMG commented that many entities with defined benefit pension obligations will be significantly affected by changes made to IAS 19 Employee Benefits. Particularly affected will be those that either currently defer recognition of actuarial gains and losses or recognise them immediately in net income. The changes include removing options, standardising elements of the accounting and expanding the disclosures. One of the key changes made by the IASB is to require immediate recognition of all gains and losses arising in defined benefit plans. Today, under the “corridor” method actuarial gains and losses on pensions can be deferred and recognised in net income in later periods. Actuarial gains and losses are the difference between assumptions made about, for example, employee turnover, life expectancy and the discount rate and the actual outcome arising on post-employment benefits. Deferred recognition will no longer be allowed. Instead, all actuarial gains and losses will be recognised in full in the period they arise, as part of other comprehensive income – i.e., outside net income. Commenting on the revisions, Lynn Pearcy, KPMG’s global IFRS employee benefits standards leader, said: “The global economic crisis increased the focus on the off-balance sheet pension liabilities that can result from the corridor’s deferred recognition. The IASB’s proposal to eliminate this deferral received widespread support and mandating their recognition in other comprehensive income will increase comparability in this area. Actuarial gains and losses can be volatile and this presentation solution keeps that volatility out of net income and earnings per share.”
Another key change might, though, significantly affect many entities’ net income. The net interest component of pension expense will now be calculated by applying a single interest rate – the rate used to discount the obligation – to the entity’s net pension asset or liability. If the plan’s assets are expected to generate a higher return in the long-term than the liability discount rate, then that higher expected return will no longer be credited to net income. Instead, any gains (or losses) for returns that are higher (or lower) than the interest rate used will be recognised only in other comprehensive income, outside net income.
Ms Pearcy continued: “The abolition of the corridor method may well be the headline story. But entities shouldn’t overlook the likely reduction in net income resulting from the Board’s new way of calculating net interest on the pension asset/liability. They will need to consider the impact of these IAS 19 revisions not only on their defined benefit plan costs, assets and liabilities but also on wider matters such as compliance with debt covenants.”
The revisions include some additional disclosure requirements, which focus on the risks arising from sponsoring employee benefit plans, and changes in the definitions of short-term and long-term employee benefits.
The revisions are effective for accounting periods beginning on or after 1 January 2013.