KPMG Warns Of IAS 19 Impact

by Mary Swire, Tax-News.com, Hong Kong

12 July 2011

Entities with defined benefit pension obligations will find their profit and loss accounts significantly affected by recent changes made to IAS 19 Employee Benefits, Kris Peach, Audit partner, Department of Professional Practice at KPMG Australia, has warned.

Particularly affected will be those that either currently defer recognition of actuarial gains and losses or recognise them immediately in net income. Other changes include removing options, standardizing elements of the accounting and expanding the disclosures.

The key change announced by the IASB for defined benefit plan accounting requires immediate recognition of all actuarial gains and losses as part of other comprehensive income – i.e., outside profit and loss. The "corridor" method, under which the differences between expected actuarial assumptions, such as salary rates, employee turnover, life expectancy, discount rate and actual outcome (actuarial gains and losses) can be deferred and recognised in net income in later periods, will no longer be allowed.

"In reducing the volatility in net profit and hence the earnings per share amount, the IASB has tried to be responsive to concerns about this important performance measure otherwise being undermined," said Peach.

All entities with defined benefit plans will be impacted by the likely reduction to net income as a result of the new requirement to apply a single interest rate – the rate used to discount the obligation – to the entity’s net pension asset or liability. This means that the often higher long-term expected return on plan assets will no longer be credited to net income. Instead, any gains (or losses) for returns that are higher (or lower) than the interest rate used will be recognized only in other comprehensive income, outside net income.

In addition, clarification that the contributions tax on contributions received must be included in the liability calculation and that taxes on investment income should not be included will also improve comparability, Peach said. Actuaries, however, may need changes to their methodologies and systems to implement the changes, Peach explained. "Companies with defined benefit plans should consider their current policies regarding contributions tax and investment tax and ensure they provide appropriate instruction to their actuaries, providing the actuaries with sufficient time to make the necessary changes."

"As the likely reduction in net income resulting from the Board’s revision of the calculation of net interest on the pension asset/liability will be significant for many entities, these IAS 19 revisions will also impact on wider matters such as compliance with debt covenants."

The revisions include some additional disclosure requirements, which focus on the risks arising from sponsoring employee benefit plans, and changes in the definitions of short-term and long-term employee benefits.

The revisions are effective for accounting periods beginning on or after January 1, 2013.

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