LONDON - Global pensions accounting rules are at a crossroads.
The International Accounting Standards Board, London, this year will begin reviewing its rules for pension accounting as part of an attempt to harmonize global rules.
The review now has added impetus after the European Union Parliament last month ruled that by 2005, EU companies listed on regulated exchanges will have to publish their finances in line with international accounting standards set by the IASB.
But any company wanting to attract EU investors or do business in the EU would have to follow the IASB rules. And the impact broadens when you take into account the rumblings of harmonization of standards between Europe and the United States.
Market sources expect IASB Chairman David Tweedie, former head of the U.K.'s Accounting Standards Board and architect of the U.K.'s controversial Financial Reporting Standard 17 standard for pension accounting, to attempt to introduce international rules similar to the U.K. standard.
"There is a strong chance the IASB will move in the direction of adopting FRS 17," which is due to take full effect next year, said Allan Cook, technical director at the Accounting Standards Board.
U.S. ramifications
If the international rules are changed to ape FRS 17, U.S. companies also might find themselves forced to account for pensions in a far more onerous way than under that country's Financial Accounting Standard 87, which allows smoothing of pension surpluses or deficits.
Mike Crooch, board member of the Financial Accounting Standards Board, Washington, said the board was keen to encourage harmonization in accounting standards. But at this stage, pension accounting rules were not a priority for FASB and changing its rules to conform with global standards had not been discussed, he added.
Unlike current IAS Rule 19 or FAS 87, the U.K.'s FRS 17 does not allow companies to smooth reporting of pension surpluses or deficits over the life of the pension plan, said Trevor Crowter, partner at accountant KPMG, London. Surpluses and deficits are marked to market and recorded annually on the balance sheet. The surplus or deficit is not recorded in the profit and loss statement, but in a statement of recognized gains and losses, an attempt to reduce the impact of pension costs on company earnings, said Mary Keegan, chairman of the Accounting Standards Board.
The FASB's Mr. Crooch agreed the U.K.'s new standard would introduce greater volatility to companies in the management of their pension plans, but said the standard also would report the current funding position of the plan.
But he would not say if smoothing pension surpluses or deficits would be a key condition for FASB in accepting new international accounting standards. "I have no strong feelings. (The smoothing technique is) working, but as to whether the industry supports it or not, I can't speak for the FASB," he added.
But with the 2005 deadline, it is highly possible the international board will not have enough time to rework IAS 19 into a version similar to the new U.K. standard, said KPMG's Mr. Crowter.
The IASB would have to first introduce use of the statement of recognized gains and losses, which is not now part of international standards; it then would have to approve a reworked version of IAS 19.
It took the ASB five years to consult on FRS 17, and there is still considerable dissatisfaction among plan sponsors and accountants. "FRS 17 has technical merits but practical problems," said Mr. Crowter.
Superseded
If the IASB is unable to introduce a carbon copy of FRS 17, the U.K. standard will be superseded by the international rule, he added.
Chris Lewin, head of U.K. pensions for Unilever PLC, London, said the ASB should wait until there is clarity about the direction the international board will take before introducing new standards in the United Kingdom. He suggested the ASB continue to use the previous pension accounting law, which allowed smoothing, and confine the use of FRS 17 reporting to the financial notes so there is no balance sheet impact.
But Ms. Keegan does not intend to suspend use of FRS 17 and wait for direction from the international board.
"The use of corridors and smoothing are not all they are cracked up to be," she said. "This is not the moment to drop our standard in favor of an international standard that may be changed."
