Companies that follow international financial reporting standards no longer will get a boost or boot in their corporate earnings from pension plan investment gains or losses under a revised accounting standard adopted Thursday by the International Accounting Standards Board, according to an analysis by Mercer.
The revised standard will lead to companies reconsidering whether taking risk in pension plans creates shareholder value, Warren Singer, principal in the global accounting group of Mercer, said in an interview.
It “will prevent companies using pension plan investments as a vehicle to enhance their company’s reported earnings,” according to a Mercer statement about the revised standard.
The IASB amended International Accounting Standard 19 to require companies to recognize gains and losses in their defined benefit plans immediately, instead of amortizing them over an extended period of years in corporate financial statements.
The revised standard, which takes effect Jan. 1, 2013, also requires companies to shift recognition of pension plan gains and losses to other comprehensive income from the income statement. That change will “help separate out the background noise of changes in pension liabilities from the underlying financial performance of the core business,” an IASB statement about the revised standard said.
To improve the disclosure of risk, the IASB revision also requires a pension plan surplus or deficit be shown in the financial statements, which converges with rules under the Financial Accounting Standards Board.
It also requires enhanced disclosure on pension risks, including risks to which companies are exposed by having such plans.
The IASB adopted the revisions to “ensure that investors and other users of financial statements are fully aware of the extent and financial risks associated with” defined benefit plan obligations, which for many companies “represent their largest single financial liability,” the IASB statement said.
The IASB pension revision has no impact on FASB rules, said Peter Proestakes, FASB assistant director.
FASB has previously indicated that it would examine the IASB pension accounting changes “to consider whether those improvements would be good to include” in U.S. accounting principles, a decision FASB’s board would have to make to add to its accounting projects, Mr. Proestakes said.
Mr. Proestakes said no time frame for a decision has been set.
Both the FASB and the IASB on Thursday issued separate statements to better align the presentation of other comprehensive income.
Under the FASB, companies will have a choice to present either a single statement of comprehensive income that would include components of the income statement and other comprehensive income, or a separate income statement immediately followed by a statement of other comprehensive income, according to the FASB statement. The move eliminates an option for companies to report other comprehensive income in the statement of changes in equity.
Under the IASB, companies will present a statement of comprehensive income that groups together the income statement and other comprehensive income.
In practicality, financial statement users look predominately at the income statement, Mercer’s Mr. Singer said.