Write
a brief essay highlighting the difference between IFRS and accounting standards
for private enterprises noted in this chapter, discussing the conceptual
justification for each.
There are many
differences between IFRS and PE GAAP with respect to measurement and reporting
for pension and other employee future benefits.
Primarily, PE GAAP has been written to keep recognition and measurement
issues simple and therefore requiring less cost and time to calculate and
report. Finally, PE GAAP has been
designed with the primary user in mind of being the creditor, rather than
outside shareholders and creditors.
Given that generally creditors have access to management; the disclosure
has also been simplified.
These differences are highlighted below:
a) PE GAAP
has more choices available on reporting pensions and other future
benefits. An enterprise may choose to
follow the immediate recognition approach which results in the accrued benefit
liability or asset being equal to the actual funded status of the plan in most
cases (unless the plan is in a surplus position and then only the amount of
future benefits accruing to the enterprise would be reported as an asset, which
might be lower than the actual surplus).
For this approach the accrued benefit obligation is determined using the
funding valuation basis, and all past services and actuarial gains and losses
are immediately recognized into income.
This method is simpler and less costly to implement and maintain.
b) PE GAAP
also allows the defer-and-amortize approach to be followed which is similar to
IFRS. In this case, the valuation method
for the accrued benefit obligation is the projected benefit approach under both
standards. For past service costs, IFRS
requires that these be amortized over the remaining vesting period, whereas PE
GAAP requires amortization over the time to full eligibility or any shorter
period. For actuarial gains and losses,
both IFRS and PE GAAP allow the corridor approach to be used, with amortization
over EARSL or some shorter period.
c) IFRS has
one other choice with respect to actuarial gains and losses and that is that
they can be recognized directly into OCI and never impact current
earnings. As PE GAAP does not have OCI,
this is not an option.
d) There are
differences in the discount rates that can be used for the determination of the
obligation. PE GAAP allows a choice of
either the current yield rate on high quality corporate bonds (as does IFRS) or
the current settlement rate (which is not allowed under IFRS). These options again make it easier to
determine the information for the private enterprise.
e) For the
value of the plan assets at the report date, IFRS requires that the fair value
be used. Under PE GAAP, there is a
choice to use either the fair value of the plan assets or a market-related
value which is a calculated amount that recognizes changes in the value of the
assets over no more than a five year period.
f) For other
types of employee future benefits which are not complex, PE GAAP would allow
similar treatment as for the pension plans.
For IFRS, the only difference is that past service contributions and
actuarial gains and losses would be immediately recognized.
g) The
disclosure under PE GAAP is greatly reduced in comparison with IFRS, keeping in
mind that the primary users of PE GAAP statements are creditors that would
likely have access to information from management. This is not the case for IFRS prepared
statements, where all types of investors and creditors could be users, so there
is a significant amount of disclosure required.
