UK ASB pension accounting study

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26 Nov 2009

The United Kingdom Accounting Standards Board (ASB) has issued a report 'The Financial Reporting of Pensions: Feedback and Redeliberations'.

The objective is to provide the IASB with recommendations on matters it might consider in developing a future financial reporting standard on pensions.

The report is being published under the Pro-active Accounting Activities in Europe (PAAinE) initiative by the ASB, EFRAG, and the accounting standards boards of Germany and France. The recommendations are, however, only those of the ASB. The report is a follow-up to a discussion paper issued by the ASB in January 2008 and sets out the ASB's redeliberations and recommendations after consideration of the 103 responses to the discussion paper.

Some key recommendations of the ASB:

  • Recognition should be based on the principles of reflecting only present obligations as liabilities.
  • The liability to pay benefits that is recognised (and the pension expense for each period) should be based on current salaries plus any future increases that are required by law or contract including other increases that are seen as nondiscretionary (ie there is a constructive obligation).
  • Pension plans should be subject to the same principles of consolidation as are usually applied in determining whether one entity controls another.
  • Pension assets and liabilities should be recognised immediately, but recognition of the changes in assets and liabilities relating to pension benefits are inextricably linked to the presentation of those changes in the financial statements.
  • Future cash flows used to measure the liability to pay pension benefits should be:
    • explicit;
    • based on observable market prices that are adjusted to take into consideration entity-specific circumstances;
    • incorporate in an unbiased way all available information about the amount, timing and uncertainty of cash-flows arising from the contractual obligations; and
    • current – they correspond to conditions at the end of the reporting period.
  • The liability to pay pension benefits should not be reduced to reflect an entity's credit risk.
  • In measuring liabilities, the discount rate used should reflect the time value of money, and therefore should be a risk-free rate.
  • Assets held to pay pension benefits should be reported at current values.
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