IAS 19, the international counterpart to the US's FAS 158, will, when issued in final form, govern how companies subject to international financial reporting standards disclose the effect of pensions and other post-employment benefits on their financial statements. US-based companies also have reason to be interested, given the strong likelihood that Generally Accepted Accounting Principles (GAAP) reporting will converge with International Financial Reporting Standards (IFRS) in the not-too-distant future.
The general reaction of pension actuaries is that, compared to current IFRS and GAAP, the latest exposure draft of IAS 19 (4/29/10) would make pension expense more volatile, because it would no longer be possible to "smooth" the effects of gains or losses arising from favorable or unfavorable experience, investment performance, changes in actuarial assumptions, or plan amendments. The effect on profit-and-loss statements would be muted, however, as most of the year-to-year changes would be reported as "other comprehensive income" rather than flowing directly into P&L.
Some of the new rules would tend to increase pension expense, at least in the short run: A change in the handling of interest assumptions would effectively prevent plan actuaries from assuming a rate of return on plan assets in excess of the plan's discount rate, and expected future plan administration costs would have to be factored in to the calculation of the value of plan liabilities. In each case, the higher expense would tend to reverse in the long run, since delaying the recognition of income and accelerating the recognition of costs doesn't ultimately make benefits more expensive to provide.
The International Accounting Standards Board (IASB) initiative that will be most visible to users of IAS 19 reports is the expansion of disclosure requirements to include more detailed information about the characteristics of pension plans and their investment portfolios, plus a sensitivity analysis of the effect of key actuarial assumptions, a description of factors that might lead to significant deviations between contributions and service costs, and other data designed to enhance transparency.
The exposure draft is open for comments through 9/6/10. The IASB's announced intention is to adopt a final version in mid-2011, with a 1/1/13 effective date.