European paper on financial reporting of pensions

  • EFRAG (European Financial Reporting Advisory Group) (dk green) Image

31 Jan 2008

EFRAG and several European accounting standard setters have jointly published a discussion paper on The Financial Reporting Of Pensions as part of EFRAG's Pro-active Accounting Activities in Europe (PAAinE) programme.

Work on developing the paper was led by the UK Accounting Standards Board. Comments on the paper are requested by 14 July 2008. The IASB has an Agenda Project on this topic, as does the US Financial Accounting Standards Board. After considering the responses to the proposals in its discussion paper, EFRAG intends to issue a report setting out final recommendations for consideration by the IASB and FASB.

Some points about the EFRAG paper:

Rather than seeking to improve existing accounting standards, the paper proposes a fundamental reconsideration of pension accounting. Consequently, some of the views in the paper differ markedly from existing standards on pensions. Recommendations include:

  • The same principles should be applied to all pension arrangements, whether 'defined contribution' or 'defined benefit' plans.
  • The expected return on assets should not be reported as part of the profit or loss for the year.
  • Only benefits that the entity is presently committed (by legal or constructive obligation) to pay should be reflected in the liability. Where the entity has genuine discretion to vary the amount of future benefit, this is not reflected in the liability.
  • The focus should shift from mechanisms that spread pension costs over employees' service lives to the principle of reflecting only present obligations as liabilities. Therefore, if benefits are linked to employees' salaries at or near retirement or leaving service, expected future salary increases would only be reflected in the liability when increases are required by law or contract or are seen as non-discretionary. Under this approach, the pension expense and the pension liability is increased only when pensionable salaries actually increase. (The report notes differing views on this issue.)
  • Changes in the measurement of assets and liabilities relating to pension plans should not be deferred, such as by spreading them over the average remaining service lives of employees or by a 'corridor' approach under which changes are not recognised at all unless they exceed a certain threshold.
  • Pension liabilities should be measured at a current value, defined as the settlement amount that reflects the cash outflows needed now or in the future to discharge the liability.
  • Pension liabilities should be measured by discounting future cash flows using a current market discount rate that reflects the time value of money only, that is, a risk-free rate. Risks, such as mortality risk, would be reported via disclosure.
  • Assets held to pay benefits should be reported at current values.
  • Regarding financial reporting by pension plans themselves, the IASB should consider withdrawing IAS 26 Accounting and Reporting by Retirement Benefit Plans and requiring, instead, that the standards for the general purpose financial reports of pension plans be consistent with IFRSs in general. Thus, a plan's liability to pay benefits in the future should be measured using the same principles as an employer's liability.

Click for The Financial Reporting Of Pensions (PDF 2,849k, 237 pages).


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