IASB issues proposals on pension accounting and financial liabilities

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IASB issues proposals on pension accounting and financial liabilities Resources Global Professionals Finance & Accounting Blog Wednesday, May 12. 2010 IASB issues proposals on pension accounting and financial liabilities The IASB recently issued two proposals that differ substantially from current practice and from US GAAP.

The first governs pension accounting (a proposed update from IAS 19). Under the exposure draft (ED) the IASB proposes that the impact of asset gains and losses would be reflected in other comprehensive income (OCI) rather than net income. Currently, under US GAAP, companies recognize these gains and losses in income - but can "smooth" them over several years - sometimes essentially deferring them. The proposal requires that pension accounting be separate into 3 parts. 1) Operating income - would include service cost and past service cost; 2) Net financing cost - would include estimated interest income and expense and 3) OCI - would include remeasurements (actual return on plan assets excluding the amounts included in net financing cost, actuarial gains/losses associated with changes in assumptions, pension settlements, surplus restrictions, foreign currency rate changes). Essentially, by including the remeasurements in OCI - there would be likely less volatility in the income statement.

It should also be noted, that under the joint project on Financial Statement Presentation that the FASB/IASB has ongoing - the income statement and the statement of comprehensive income would be combined - so at some all would be on the same statement.

The other change is to how companies measure financial liabilities. Currently, under US GAAP, FAS 157 (Fair Value Measurements) requires that financial liabilities be recorded at fair value, which includes the requirement to record gains or losses associated with an entity's own debt due to credit rating changes. This has the inane effect of recording gains when an entity's credit rating is downgraded and losses when it is upgraded. (I sat on the Financial Accounting Standards Advisory Committee(FASAC) at FASB when this was first discussed - the reaction from virtually everyone on the committee was disbelief. However, the FASB proceeded with requiring this inane accounting anyway.) Thankfully, the IASB was rational in its decision making and came to the conclusion in this proposal that changes in a company's own credit rating should not impact the profit or loss statement.