Recent revisions to IAS 19 may have a significant effect
on the financial statements of IFRS preparers with defined benefit
(DB) pension schemes.
While the changes to the standard include a number of
clarifications and updated disclosure requirements, here we
concentrate on the changes most likely to affect how schemes are
accounted for in the employer's financial statements. The
revised standard applies for periods beginning on or after 1
Recognising movements in DB related assets and liabilities
IAS 19 (2011) has a simplified approach to recognising movements
in pension assets and liabilities. The only items to be recorded in
profit or loss for the year will be service cost and 'net
interest'. Including net interest is a change from the existing
treatment whereby both the discount rate on fund liabilities and
the expected return on plan assets are recognised in profit or loss
for the year. Net interest is calculated by applying the discount
rate specified by the standard to the net pension asset or
liability. The return on plan assets is often higher than the
discount rate (for example when the scheme assets include equities
or property). Consequently, the previous version of IAS 19 would
have resulted in a lower total profit and loss charge (or higher
total profit and loss credit) than would be the case under IAS 19
All other remeasurements of the DB pension asset or liability
will be included in other comprehensive income (OCI).
Smith & Williamson commentary
A majority of DB pension schemes will be at least in part
invested in equities and property. Therefore many entities may find
that adopting IAS 19 (2011) results in decreased profits and
earnings per share, a situation that could also have an effect on
The elimination of reporting options, including the corridor
Prior to the 2011 revisions, IAS 19 allowed a choice of methods
for recognising actuarial gains and losses, including:
immediate recognition via other comprehensive income
immediate recognition via profit or loss for the year
the corridor method (an approach which essentially allowed for
the deferred recognition of a portion of actuarial gains and losses
via profit or loss).
The existence of choice means there can be significant variation
in the amounts reported by different preparers having similar
economic circumstances. In particular, preparers applying the
corridor method could potentially recognise a different pension
scheme asset or liability to that recognised if either of the
immediate recognition options were taken. The IASB consider that
the lack of comparability arising from such a range of options is
undesirable and, as a result, IAS 19 (2011) only allows one option
– the immediate recognition of actuarial gains and losses
via OCI. Amounts recognised in OCI under the revised standard will
not be subsequently reclassified into profit or loss for the
Smith & Williamson commentary
Under the previous version of IAS 19, the majority of UK
preparers utilised the approach of immediately recognising
actuarial gains and losses in OCI. Many UK preparers will,
therefore, find that their existing accounting policy with regard
to actuarial gains and losses is consistent with the revised
standard. However, any entities that previously applied the
corridor method will be significantly affected by the revisions as
they will be subject to increased balance sheet volatility and may
be faced with the immediate recognition of previously deferred
amounts. Entities that currently recognise all actuarial gains and
losses in profit and loss will not be as severely affected, but
will still face a change in accounting. For the affected entities,
the switch to recognising all actuarial gains and losses in OCI
will mean that profit or loss for the year, and any associated
earnings per share figures, will no longer include volatile
actuarial profits and losses.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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