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IASB releases two new standards to complete two agenda projects

16 Jun 2011

The IASB has amended two standards which are key planks in achieving its work plan, introducing new requirements on the presentation of comprehensive income and the accounting for employee benefits.

The changes had their genesis in more extensive objectives under wider projects. The changes to the presentation of other comprehensive income (OCI) were 'spun out' of the wider project on Performance Reporting, which promised a major overhaul of the way the primary financial statements were presented. The OCI ED had originally itself proposed the mandatory presentation of other comprehensive income in one financial statement, but constituent comment proved the change to be too controversial to be included in the final amendments. Instead, the amendments to IAS 1 Presentation of Financial Statements retain the 'one or two statement' approach at the option of the entity and only revise the way other comprehensive income is presented: requiring separate subtotals for those elements which may be 'recycled' (e.g. cash-flow hedging, foreign currency translation), and those elements that will not (e.g. fair value through OCI items under IFRS 9). In addition, the FASB has issued corresponding guidance with the issuance of ASU 2011-05. While the boards' new guidance essentially converges the requirements for presenting OCI, there are still differences between U.S. GAAP and IFRSs concerning (1) what items are included in comprehensive income and (2) reclassification requirements.

The amendments to employee benefits are somewhat more substantial, but might be considered a pragmatic subset of what the IASB had hoped to achieve when the overall project was included in the earlier stages of the convergence programme. Accounting for employee benefits, particularly pensions and other post-retirement benefits, has long been a complex and difficult area and initial plans for a full review of pension accounting had to be deferred in light of competing priorities, ultimately leaving the IASB to proceed alone on improving specific aspects of the existing requirements of IAS 19 Employee Benefits. Prior to the amendment, IAS 19 permitted choices on how to account for actuarial gains and losses on pensions and similar items, including the so-called 'corridor approach' which resulted the deferral of gains and losses. The Exposure Draft proposed eliminating the use of the 'corridor' approach and instead mandating all remeasurement impacts be recognised in OCI (with the remainder in profit or loss) – and in fact had proposed extending these requirements to all long-term employee benefits (e.g. certain long service leave schemes). The final amendments make the OCI presentation changes in respect of pensions (and similar items) only, but all other long term benefits are required to be measured in the same way even though changes in the recognised amount are fully reflected in profit or loss.

Also changed in IAS 19 is the treatment for termination benefits, specifically the point in time when an entity would recognise a liability for termination benefits. The final amendments do not adopt the equivalent US-GAAP requirements verbatim (which requires individual employees to be notified), but the recognition timeframe may be extended in some cases.

Finally, various other amendments to IAS 19 may have impacts in particular areas. For instance, employee benefits not settled wholly before twelve months after the end of the annual reporting period would be captured as an 'other long term benefit' rather than a 'short term benefit', and whilst presented as a current item in the statement of financial position, would be measured differently under the amendments.

Summary of the amendments

Amendments to IAS 1 Presentation of Financial Statements

  • Preserve the amendments made to IAS 1 in 2007 to require profit or loss and OCI to be presented together, i.e. either as a single 'statement of profit or loss and comprehensive income', or a separate 'statement of profit or loss' and a 'statement of comprehensive income' – rather than requiring a single continuous statement as was proposed in the exposure draft
  • Require entities to group items presented in OCI based on whether they are potentially reclassifiable to profit or loss subsequently. i.e. those that might be reclassified and those that will not be reclassified
  • Require tax associated with items presented before tax to be shown separately for each of the two groups of OCI items (without changing the option to present items of OCI either before tax or net of tax)
  • Applicable to annual periods beginning on or after 1 July 2012, with early adoption permitted.

Amended IAS 19 Employee Benefits

  • Require recognition of changes in the net defined benefit liability (asset) including immediate recognition of defined benefit cost, disaggregation of defined benefit cost into components, recognition of remeasurements in other comprehensive income, plan amendments, curtailments and settlements
  • Introduce enhanced disclosures about defined benefit plans
  • Modify accounting for termination benefits, including distinguishing benefits provided in exchange for service and benefits provided in exchange for the termination of employment and affect the recognition and measurement of termination benefits
  • Clarification of miscellaneous issues, including the classification of employee benefits, current estimates of mortality rates, tax and administration costs and risk-sharing and conditional indexation features
  • Incorporate other matters submitted to the IFRS Interpretations Committee
  • Applicable on a modified retrospective basis to annual periods beginning on or after 1 January 2013, with early adoption permitted.
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