The
IASB is currently working on proposals that would significantly change the
reporting standards for postemployment plans.
Instructions
(a)
What is proposed with respect to changes in the discount rates used to
calculate the present value of the obligations? See, on the IASB website
(www.iasb.org), the Exposure Draft Discount Rate for Employee Benefits, August
2009. Why is the IASB considering changes in this?
(b)
As noted in the chapter, the IASB is contemplating changes to the accounting
for pension plans. Summarize these changes. Why do you think the IASB is
contemplating these changes?
(a) Currently, under IFRS, a company uses a high
quality corporate bond rate for the discount rate assumption. In times where there is no “deep market” for
these types of bonds, then a government bond rate can also be used. This has led to significant differences
between discount rates companies are using to calculate the pension obligations
at report dates. The implication is that
government bond rates will always be lower than a corporate bond rating.
Accordingly, when the lower discount rate is applied, the obligation is higher
than it would have been using a corporate bond rate. What is worrisome is that the staff found
significant differences between entities having similar obligations and
operating in similar jurisdictions, making comparability more difficult.
The proposal being made in the Exposure
Draft is that the company would always use the high quality corporate bond rate
in all cases. This would reduce the
range of discount rates being used, and make the statements more
comparable. Also, entities would no
longer have to assess if the market was “deep” or not. It was also noted that in some cases, the
yield might have to be estimated, but this subjectivity would be no more than
the amounts used for other assumptions in the preparation of financial
statements.
(b) It is proposed that the defined benefit
liability will be determined as the total of the defined benefit obligation at
the end of the reporting period less the fair value of the plan assets. This will mean that the actual deficit (or
surplus) of the plan will be reflected on the statement of financial position
at each reporting period.
Changes in
the defined liability will be reported in the profit or loss for the year.
These changes will be disaggregated into three
categories and reported as follows:
·
Current
service cost, including any gains and losses from curtailment will be reported
in the profit or loss;
·
Interest
on the defined benefit obligation which will be presented as finance costs; and
·
Remeasurements
arising from gains or losses on settlement, the effect of the asset ceiling,
and any other changes in the defined benefit obligation or the plan assets will
be reported in OCI.
The primary reason for these changes has to do with
proper presentation on the statement of financial position. Currently, a company can be in a deficit
position, but report either a lower liability or even an asset related to the
defined benefit. This adds confusion to
the analysis of the actual impact on the defined benefit plans on the
company. The argument for not reflecting
the actual deficit has always been that the impact on the net income year over
year for these changes in the liability could be substantial and falsely add
volatility and reflect an incorrect risk for the company. The IASB has resolved this by taking all
remeasurement adjustments and reporting them through OCI, which will not impact
the current earnings. The only impact on
current earnings will be current costs and the interest costs on the
obligation.
