J Corp Accounting Finance - 2001 - Akresh - The New IAS 19 Understanding The Emerging Rules For Employee Benefits

The New IAS 19: Understanding the Emerging Rules for Employee Benefits Accounting
The New IAS 19: Understanding the

Emerging Rules for Employee
Benefits Accounting
Murray S. Akresh and Kevin P. Hassan
The growing importance of international accounting standards may lead to

significant changes in accounting for employee benefits in the United States. But
how does the new IAS 19 international standard differ from FASB standards? And
if your competitors are following IAS, what must you know to evaluate its impact
on your financial statements as a benchmark against those companies? The authors
explain these issues, and recommend a corporate action plan for those firms that
need to adopt the latest standard. © 1998 John Wiley & Sons, Inc.
T hirty years ago, accounting standard-setters from several major countries

began requiring that pension costs be accrued in financial statements. At
first, various accrual accounting models were allowed, but over time the
alternatives were narrowed. Today, most benefits-accounting rules focus on the
income statement, but in certain countries there has been some movement
toward a balance sheet orientation, especially when underfunded pension plans
are involved. Despite these trends, accounting requirements for pension benefits
continue to differ substantially from country to country.
In the United States, benefits-accounting rules have evolved from a funding-
based approach to one where periodic costs are determined using prescribed
Murray S. Akresh, CPA, is a partner methods that are independent of funding requirements. However, choices
in PricewaterhouseCoopers LLP’s remain related to the recognition of the effects of plan amendments and
Global Human Resource Solutions
actuarial gains/losses, valuation of plan assets, and selection of actuarial
National Technical Consulting Unit,
New York. He led Coopers & assumptions.
Lybrand’s study on the International Practice in many non-U.S. countries has evolved to be generally consistent
Accounting Standard for Employee with international accounting standards (IAS), or heavily influenced by IAS. It
Benefits and is an author and is expected that IAS will increase in global significance during the next decade,
frequent speaker on employee
benefits-accounting related issues. if the International Accounting Standards Committee (IASC) is able to fulfill its
Kevin P. Hassan, CPA, is a senior 1995 agreement with the International Organization of Securities Commissioners
consultant with Pricewaterhouse- (IOSCO) to develop an acceptable core set of international accounting standards
Coopers LLP’s Global Human covering areas such as income taxes, financial instruments, segment reporting,
Resource Solutions National
and employee benefits. If this is accomplished, and the IASC appears close to
Technical Consulting Unit, New
York. He was formerly an audit reaching this goal, IOSCO will endorse international accounting standards for
manager and member of Coopers &
Lybrand’s National Accounting and
SEC Directorate, with extensive
experience in employee benefits- CCC 1044-8136/98/1001057-13
related accounting and auditing. © 1998 John Wiley & Sons, Inc.
The Journal of Corporate Accounting and Finance/Autumn 1998 57

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cross-border capital raising and listing purposes in all global markets, and more
companies listing on stock exchanges outside the United States could adopt IAS.
In addition, some speculate that the growing importance of IAS may ultimately
lead to conforming changes in local accounting requirements—for example, to
significant changes in accounting for employee benefits in the United States
under the pronouncements of the Financial Accounting Standards Board
(FASB).
In February 1998, the IASC issued one of its key core standards—the new
International Accounting Standard No. 19 (revised 1998), “Employee Benefits,”
superseding previous IAS 19, “Retirement Benefit Costs” (old IAS 19). Although
“new IAS 19” has the same number as the old standard (i.e., both are numbered
“19”), its title, scope, and requirements are significantly different and it
significantly changes the recognition and measurement of employee benefit
costs, as well as the obligations for affected companies.
New IAS 19 eliminates New IAS 19 eliminates many of the alternatives allowed under old IAS 19 by
many of the alternatives specifying a single methodology for most recognition and measurement issues—
allowed under old IAS 19 for example, the recognition of the effect of plan amendments—and by requiring
a single actuarial method not tied to the funding of the plan. Some choices
by specifying a single
remain, however, particularly the method of recognizing actuarial gains and
methodology for most losses, that will significantly impact reported pension and postretirement
recognition and benefit expense. Furthermore, the process for selecting actuarial assumptions is
measurement issues—for more rigorous than under old IAS 19 and, with respect to economic assumptions,
example, the recognition the focus has shifted from a long-term orientation to one based on current
of the effect of plan market conditions, especially with respect to the discount rate.
amendments—and by New IAS 19’s requirements are effective for fiscal years beginning in 1999,
so there is little time to assess the potential impact on companies that are already
requiring a single
subject to IAS (e.g., U.S. subsidiaries of foreign companies that follow IAS).
actuarial method not tied Based on insights gained from Coopers & Lybrand L.L.P.’s published 1997 study
to the funding of the plan. of the exposure draft that preceded new IAS 19 (by Murray S. Akresh, Barbara
S. Bold, and Lawrence J. Sher, entitled “Coopers & Lybrand L.L.P.’s Study of the
Potential Impact and Implementation Issues”) we expect that the impact will
vary considerably from company to company. In general, one can expect
significant changes in annual expense and significant catch-up adjustments at
transition. For some companies, there also may be greater year-to-year expense
volatility, although not as severe as would have been the case had some of the
proposed changes in the exposure draft been adopted.
We recommend that companies that apply IAS begin to understand and
evaluate the financial and plan design implications of the new rules now.
Companies that currently do not apply IAS should monitor efforts to conform
local accounting rules to IAS. In addition, since your competitors may be
following IAS, you may wish to evaluate the impact of new IAS 19 on your
financial statements in order to benchmark against those companies.
This article highlights the key provisions of new IAS 19, and presents our
insights regarding its impact based on information learned during the 1997
study. It focuses on defined benefit pension and other postretirement benefits
because those benefits have the most significant accounting and measurement
issues. The article also provides an action plan to help companies deal with the
complex accounting, measurement, and plan design decisions that must be
made.
58 The Journal of Corporate Accounting and Finance/Autumn 1998

UNDERSTANDING THE NEW IAS RULES

New IAS 19 is similar to standards promulgated by the FASB. However,
those standards, Statements of Financial Accounting Standards (FAS) Nos. 87/
88/106, Employers’ Accounting for Pensions (FAS 87), Employers’ Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for Termination
Benefits (FAS 88), and, Employers’ Accounting for Postretirement Benefits Other
Than Pensions (FAS 106), are different from new IAS 19 in certain respects.
Importantly, some of the deferred recognition approaches allowed by FAS 87/
106, as well as by old IAS 19, are not permitted by new IAS 19. Exhibit 1
compares the key provisions of the new standard, FAS 87/88/106, and old IAS
19.
DEFINING AND MEASURING THE OBLIGATION

In defining the benefit obligation, the IASC introduces a new term—the
Defined Benefit Obligation (DBO)—which is similar in concept to the projected
benefit obligation under FAS 87, the accumulated postretirement benefit
obligation under FAS 106, and other similar actuarially determined past service
obligations. The DBO is the actuarial present value of expected benefits under
the plan attributed to past service as of the measurement date. Its determination
reflects demographic assumptions such as employee turnover and mortality,
and economic assumptions such as the discount rate and increases in benefits
due to salary increases, rising health care costs, and any anticipated plan
amendments.
To enhance comparability among companies, the DBO is to be calculated
using a single actuarial method—the Projected Unit Credit (PUC) method.
Under this method, it is assumed that each period of service gives rise to an
additional unit of benefit. The present value of that additional unit of benefit is
referred to as “current service cost.” The DBO is the present value of the portion
of the total projected benefit attributable to service earned to date. The IASC
believes that the PUC method is the most widely used actuarial method, because
it is currently required under FAS 87/106 and other benefits-accounting
standards.
In determining the DBO and related current service cost, new IAS 19
requires that the attribution of benefit costs to periods of service conforms to the
plan’s benefit formula, except that straight-line attribution is required if service
in later years will result in a materially higher level of benefits than in earlier
years. A pension benefit would not be considered conditional on future service
solely because the benefit is dependent on final salary.
ACTUARIAL ASSUMPTIONS
New IAS 19 requires that New IAS 19 requires that actuarial assumptions be “unbiased” and “mutually
actuarial assumptions be compatible.” Unbiased means that each assumption is “neither imprudent nor
excessively conservative.” This is consistent with FAS 87’s explicit approach,
“unbiased” and “mutually
whereby each assumption is a best estimate. Mutually compatible means that
compatible.” the assumptions reflect the same economic relationships. For example, all
assumptions that depend on a particular inflation level (such as benefit increases,
health care cost trend rates, etc.) should use the same underlying inflation
assumptions, and a postemployment benefit plan that provides both a pension
and a death-in-service benefit should use the same mortality and turnover

60
Exhibit 1. Key Provisions of New IAS 19 Compared to Existing Standards
Issue New IAS 19 FAS 87/88/106 Old IAS 19
Scope Covers all employee benefits, except Covers pension and postretirement benefits Covers retirement benefit plans only.
recognition and measurement of stock- only (FAS 112 covers other postemployment
based compensation. benefits).
Determination of pension and Uses a single actuarial method (projected Uses a single actuarial method not tied to Allows for various actuarial methods (often
postretirement expense unit credit) not tied to the funding of the the funding of the plan and allows certain tied to the funding of the plan) and allows
plan and establishes a single approach for alternative approaches for recognizing the flexibility in selecting among alternative
each recognition and measurement issue effects of plan amendments and actuarial approaches.
(except allows alternatives for the gains and losses.
recognition of actuarial gains and losses).
Valuation of plan assets Requires asset values to be measured at fair Requires fair value for disclosure and Requires fair value as of most recent
value as of the balance sheet date—market minimum liability. Permits market-related valuation.
related values are not permitted. value or fair value for expense
determination.
Measurement date Balance sheet date. Up to three months prior to balance sheet Not addressed.
date is permitted.
Frequency of actuarial valuations Sufficient regularity such that financial Not specified. Frequent intervals when significant changes
statements amounts do not differ occur in the plan but at least every three
materially from amounts determined at the years.
balance sheet date.
Balance sheet asset limitation Balance sheet asset cannot exceed the net No similar provision. No similar provision.
total of:
(a) any unrecognized actuarial losses and
past service cost; and
(b) the present value of any available
refunds from the plan or reductions in
future contributions to the plan.
Recognition of minimum liability No minimum liability requirement. The minimum balance sheet liability is the No minimum liability requirement.
amount the plan is underfunded on a basis
that does not reflect projection of future
salary increases.
(continued)
The Journal of Corporate Accounting and Finance/Autumn 1998

Recognition of actuarial gains and losses Minimum amortization of net gain or loss in Minimum amortization of net gain or loss Recognized systematically over the expected
excess of 10 percent of greater of the defined in excess of 10 percent of the greater of remaining working lives of the active
benefit obligation or fair value of plan assets. projected benefit obligation or market- employees.
related value of plan assets.
Permits any systematic method that results Permits any systematic method that results
in faster recognition of gains and losses in faster recognition of gains and losses
provided the same basis is applied to gains provided the same basis is applied to gains
and losses and is applied consistently period and losses and is applied consistently
to period. period to period.
Gains/losses measured at year-end are Gains/losses measured at year-end are Gains /losses measured at year-end are
reflected in the subsequent year. reflected in the subsequent year. reflected in the current year.
Positive plan amendments Past service cost for active employees not Past service cost for both current and Past service cost for non-retirees recognized
yet vested recognized on a straight-line former employees recognized over the systematically over the remaining working
basis over the average remaining vesting remaining service period of active lives of active employees.
period. employees.
For active employees already vested and for In certain cases, amortization may be over Immediate recognition of past service cost
former employees, past service costs recog- life expectancy or periods benefited. for amendments in respect of retired
nized immediately. employees.
Negative plan amendments Accounted for similar to positive plan Deferred and first used to offset previous Recognized systematically over the expected
amendments. positive past service costs (and transition remaining working lives of active employees.
obligation under FAS 106). Remainder
recognized over the remaining service
period of active employees.
The Journal of Corporate Accounting and Finance/Autumn 1998

Economic assumptions Discount rate based on current yields on Discount rate based on current yields on Discount rate reflects long-term rates (e.g.,
high-quality corporate bonds. high-quality fixed-income securities. expected rate of return on plan assets).
Actuarial assumptions should be unbiased All assumptions should be consistent to the Other economic assumptions are to be
and mutually compatible. extent that each reflects expectations of the compatible with the discount rate.
same future economic conditions.
Transition Immediate recognition of cumulative effect FAS 87: Amortization of effect of transition Choice of immediate recognition of the
of change in accounting (adjusted for past over the greater of average remaining cumulative effect of the change in
service cost of non-vested employees). service period (ARSP) or 15 years. accounting or amortization over ARSP.
If the cumulative effect of change in FAS 106: Choice of immediate recognition

accounting (other than the adjustment for or amortization over the greater of ARSP
past service cost of non-vested employees) or 20 years.
is an increase in the previously recorded
liability, the increase may be amortized to
expense over up to five years.
61
assumptions for the same group of plan participants.

Under new IAS 19, the discount rate would be based on current market
yields on high-quality fixed-rate corporate bonds or interest rates on government
bonds (where there is no large market in corporate bonds), which the IASC
considers a risk-free rate. As a result, the discount rate will change each year, as
market yields change. The IASC chose to tie the discount rate to corporate bond
rates because it believes that those rates best reflect the time value of money. The
use of corporate bonds to set the discount rate should result in rates similar to
those determined under FAS 87/06.
While moving all economic assumptions in tandem with the change in
discount rate is not specifically required, an illustration in new IAS 19 shows that
economic assumptions (e.g., the salary increase assumption and expected rate
of return on plan assets) may move in tandem with discount rate changes.
Moving the economic assumptions in tandem will tend to mitigate year-to-year
expense volatility.
PLAN ASSETS
New IAS 19 defines plan assets as assets that are held by a separate legal entity
(a fund or trust account) to be used only to settle the benefit obligation and are not
returnable to the employer. To the extent that sufficient assets are in the fund, the
employer should have no obligation to pay the benefits directly. This definition is
generally consistent with other current standards. The new IAS requires that the fair
values of plan assets be determined at each balance sheet date.
Many current pension Many current pension accounting standards permit the use of a calculated
value to smooth the effects of asset volatility. For example, while FAS 87 requires
accounting standards
fair value for disclosure and minimum liability purposes, it allows the use of a
permit the use of a
calculated value, whereby changes in fair value are recognized over not more
calculated value to smooth than five years, to compute the expected return on plan assets. New IAS 19 does
the effects of asset not permit the use of a calculated asset value.
volatility. Under new IAS 19, the expected return on plan assets is based on market
expectations at the beginning of the period, for returns over the entire life of the
related obligation. It should not be unduly impacted by the actual return for the
previous period. Additionally, all administrative expenses, including investment
administration costs and costs of administering contributions and benefit
payments, should be considered in calculating the expected return.
BALANCE SHEET RECOGNITION AND LIMITATION

Under new IAS 19, the amount recognized in the balance sheet may either
be an asset or a liability, computed at the balance sheet date as follows:
• the DBO;
• plus any actuarial gains (less any actuarial losses) not yet recognized;
• minus any unrecognized past service cost from amendments increasing
benefits for active employees not yet vested and any unrecognized
transition obligation; and
• minus the fair value of plan assets.
If the resulting amount is negative, it is an asset in the balance sheet, which

then is subject to a limitation based on a recoverability test. Under this test, the

balance sheet asset should not exceed the net total of (1) any unrecognized
actuarial losses and past service cost, and (2) the present values of any refunds
available from the plan and any available reduction in future employer
contributions to the plan. Any portion of the asset that is not recognized in the
balance sheet must be disclosed.
While the new standard presents an illustration of the recoverability test, it
does not show how to estimate the expected reductions on future contributions
(which will be difficult to compute since contributions are linked to significant
variables such as market volatility of plan assets and future hires). In the 1997
study, we found that it may be very difficult to estimate the amounts necessary
to apply this test. Where local accounting rules have similar asset limitations
(e.g., the United Kingdom), this amount is often estimated using the present
value of future service costs (net of employee contributions) based on the
valuation discount rate and salary increase assumption.
INCOME STATEMENT COMPONENTS

The components of expense under new IAS 19 are:
• current service cost

• interest cost
• expected return on plan assets
• actuarial gains and losses, to the extent recognized
• past service cost related to plan amendments that increase (or decrease)
benefits for former employees and, to the extent recognized, for current
employees
• effect of any curtailments or settlements
• amortization of unrecognized transition obligation (if elected)
Current Service Cost

Current service cost represents the increase in the DBO resulting from the
current year’s service rendered by employees.
Interest Cost
Interest cost is computed by multiplying the discount rate determined at
the beginning of the year by the average DBO during the year, taking into
account any significant changes in the obligation caused by current service cost
and benefit payments.
Actuarial gains and
losses arise from Expected Return on Plan Assets
unexpected increases or The expected return on plan assets is computed by multiplying the assumed
decreases in the DBO or long-term rate of return by the average fair value of assets during the year, taking
the fair value of plan into account changes caused by contributions in and payments out. The
assets, including the difference between actual and expected return on plan assets is a component of
the actuarial gain or loss.
effects of changes in
assumptions.
Actuarial Gains and Losses
Actuarial gains and losses arise from unexpected increases or decreases in
the DBO or the fair value of plan assets, including the effects of changes in
assumptions. For example, actuarial gains and losses will result from unexpected

high or low rates of employee turnover, early retirements, or mortality; changes

in salaries or medical costs; and changes in the discount rate. Consistent with
FAS 87/106, new IAS 19 requires minimum amortization of the net gain or loss
in excess of 10 percent of the greater of the DBO or the fair value of plan assets.
Actuarial gains and losses that fall outside this plus or minus 10 percent
“corridor” are deferred and recognized over the remaining working lives of the
employees (or any systematic method that results in faster recognition). The
corridor is determined separately for each defined benefit plan. Faster recognition
methods—including immediate recognition—are permitted if applied
consistently to both gains and losses.
The old IAS 19 required actuarial gains and losses measured at year-end to
be reflected in current year earnings. New IAS 19 requires gains and losses
measured at year-end to be reflected in the subsequent year similar to FAS 87/
106. This change will eliminate possible significant fourth quarter expense
adjustments and allow employers to more accurately budget expense.
The adoption by the IASC of the gain/loss method allowed under FAS 87/
106 was a major change from the IASC’s initial proposal that would have
required immediate recognition of the net gain or loss in excess of the 10 percent
corridor. Coopers & Lybrand’s 1997 study showed that immediate recognition
outside the 10 percent corridor would have resulted in significant expense
volatility. New IAS 19 indicates that the IASC may decide to revisit the treatment
of actuarial gains and losses when it makes further progress in resolving
substantial issues about performance reporting.
Plan Amendments
For positive plan amendments that affect employees who are already
vested—as well as retirees and other former employees—past service costs are
immediately recognized. Past service costs related to employees who have not
yet vested are recognized on a straight-line basis over the average remaining
vesting period. Negative plan amendments (i.e., decreases in benefits) are
accounted for in the same manner as positive plan amendments (i.e., immediate
recognition for vested employees, amortization over the remaining vesting
period for non-vested employees).
Since non-vested employees in the United States typically represent a small
fraction of the actuarial present value of the past service cost arising from certain
plan amendments (e.g., for pensions), this requirement may result in immediately
recognizing almost all of the impact of these amendments.
New IAS 19’s disclosure DISCLOSURE AND OTHER ISSUES

requirements are Exhibit 2 presents several other important accounting requirements under
the new IAS. Some of these new requirements represent a significant change in
relatively consistent
current accounting practice, particularly with respect to the accounting for
with the original termination indemnities.
disclosure requirements New IAS 19’s disclosure requirements are relatively consistent with the
in FAS 87/106. original disclosure requirements in FAS 87/106. However, in February 1998 the
FASB issued FAS 132, Employers’ Disclosure about Pension and Other
Postretirement Benefits, which modifies the disclosures under FAS 87/88/106.
FAS 132 requires year-to-year reconciliations of plan obligations, assets, and
balance sheet amounts, and modified disclosures for underfunded plans. In

Exhibit 2. Other Recognition Issues
Issue Definition New IAS 19

Settlement A transaction that discharges all or Immediate recognition of settlement
part of the employer’s legal or gain or loss when a settlement occurs.
constructive obligation of the DBO. Gain or loss is based on change in
DBO and asset values plus pro rata
share of any related deferred actuarial
gain/loss, past service cost, and
transition amount.
A material reduction in the number Same as settlement.

Curtailment of employees covered by a defined
benefit plan or a reduction or
elimination of benefits to current
employees due to the disqualification
of a material amount of employees’
future service from earning future
benefits.
Payments committed to be made to Immediate recognition of termination

Termination and severance benefits employees upon their termination of costs when a detailed formal plan is
employment (including salary prepared and is without realistic
continuation or enhanced retirement possibility of withdrawal. When an
benefits under programs encouraging offer is made to encourage voluntary
early retirement). redundancy, measurement should be
based on the number of employees
expected to accept the offer.
Termination event may also result in
a curtailment. Where benefits fall due
more than 12 months after the
balance sheet date, they should be
discounted.
Business combination that is A transaction in which one enterprise Immediate recognition of assets and
an acquisition obtains control over the net assets and liabilities arising from the acquired
operations of another enterprise in enterprise’s postemployment benefits,
exchange for the transfer of assets, measured as the difference between
incurrence of a liability, or issuance of the DBO and plan assets at the date of
equity instruments. acquisition.
Termination indemnities Benefits payable regardless of the Recognition and measurement based
reason for the employee’s departure. on defined benefit plan methodology,
requiring an actuarial valuation of the
defined benefit obligation and related
expense.
addition, certain nonpublic entities are permitted to provide significantly

reduced disclosures for pension and other postretirement benefit plans. As a
result, new IAS 19 has disclosure requirements that are now somewhat
inconsistent with U.S. requirements.
Exhibit 3 compares the IASC’s pension and postretirement benefit
disclosures to those under FAS 87/106 and FAS 132. New IAS 19 contains an

Exhibit 3. Key Pension/Postretirement Disclosure Requirements
New IAS 19 FAS 87/106 FAS 132
Description of the plan. Same. Not required; however, plan

descriptions are included in the
illustrative examples in FAS 132.
Components of expense. Generally same, but less detailed than Generally the same.
new IAS 19 and FAS 132.
Principal assumptions used Same. Same.

including discount rate, expected
return on assets, salary increases,
medical cost trend rates, and any
other significant assumptions.
Reconciliations of net balance sheet No similar requirement. Reconciliations of obligations and plan
liability/asset from one year to the assets from one year to the next.
next.
Funded status of the plan (DBO less Funded status of the plan (obligation Similar to FAS 87/106 but does not
market value of plan assets) less assets) reconciled to amounts require separate disclosure for non-U.S.
reconciled to amounts reported in reported in the balance sheet, with plans unless benefit obligations outside
the balance sheet. additional disclosure of underfunded the U.S. are significant.
and non-U.S. plans.
Expected and actual return on plan Actual return on plan assets. Expected and actual return on plan
assets. assets.
No similar requirement. Effect of a one-percentage-point Effects of a one-percentage-point

increase in the assumed health care increase and decrease in the assumed
cost trend rate. health care cost trend rate.
Fair value of each category of the Amounts and types of securities of the Generally same as FAS 87/106.
reporting enterprise’s own financial employer and related parties included
instruments included in plan assets. in plan assets.
Other disclosures about related-
party transactions and
contingencies.
illustrative sample footnote of the required pension and postretirement benefit

disclosures, as well as the required stock compensation disclosure. New IAS 19
does not provide measurement guidance for stock-based compensation
arrangements but requires new disclosures for those arrangements.
TRANSITION AND EFFECTIVE DATE

New IAS 19 is effective for financial statements for periods beginning on or
after January 1, 1999. Early adoption is permitted with a disclosure that new IAS
19 is being implemented in lieu of old IAS 19. If the new rules are adopted with
respect to a company’s 1998 financial statements, transition amounts would be
measured as of the beginning of the fiscal year (e.g., January 1, 1998 for a
calendar year-end company), expense for 1998 would be remeasured following

new IAS 19, and interim financial statements restated.

In making the decision as to whether to adopt new IAS 19 in 1998 or 1999,
employers should consider a number of factors, including the impact on the
cumulative catch-up adjustment and expense in the current and future years. It
is recommend that employers model the potential differences in deciding
whether to adopt early.
New IAS 19 first requires a transitional liability/asset to be measured as of
the beginning of the year of adoption. This transition amount is computed by
first remeasuring the DBO under new IAS 19 less the fair value of plan assets for
each plan less the past service cost for non-vested employees to be recognized
in later periods. At transition, all previously deferred actuarial gains and losses
and past service costs for vested and inactive employees are immediately
reflected as part of the transition amount. The net amount is then compared to
the pension or postretirement benefit asset or liability on the balance sheet at the
beginning of the year to compute a preliminary transition amount.
If the transition amount is a gain (i.e., the transition liability is less than the
liability previously reported on the employer’s balance sheet), it must be
recognized immediately as a cumulative catch-up adjustment, presented net of
tax. Under new IAS 19, unlike APB Opinion No. 20, “Accounting Changes,” in
the United States, the catch-up adjustment may be presented net of tax either
as a separate line item on the employer’s income statement, or as a direct credit
to opening retained earnings. When the transition results in an asset on the
balance sheet, the asset is subject to the recoverability test discussed earlier in the
article.
If the transition amount is a loss (i.e., an increase in the balance sheet
liability, other than the adjustment for non-vested past service cost previously
Employers with a described), new IAS 19 permits the employer to recognize the loss immediately
transition loss should (either as a direct credit to opening retained earnings or as part of current period
carefully consider the net profit or loss) or make an irrevocable election to amortize the loss up to five
choice of immediate years from the date of adoption. If the amortization approach is selected, the
recognition versus employer is also required to follow certain ongoing recognition and disclosure
amortization, because the provisions specified in the standard. Employers with a transition loss should
carefully consider the choice of immediate recognition versus amortization,
election is irrevocable.
because the election is irrevocable.
OVERALL IMPACT AND IMPLICATIONS

The specific impact of new IAS 19 on a company’s financial statements—
either at the time of initial application or in later years—cannot be predicted
without substantial analysis. Understanding the impact of the new rules on an
individual company requires detailed information about its benefit plans and
employee demographics, as well as an analysis of many other factors.
Some key factors that will affect benefit obligations and expense under new
IAS 19 include:
• The funded status of the plan—especially at the transition date—and

the extent of any over- or underfunding
• The method selected by the company to recognize actuarial gains and
losses and the amount of those gains and losses (e.g., whether gains or
losses are outside the 10 percent corridor)

• The nature, extent, timing, direction (positive or negative), and the

population (vested or non-vested employee) affected by plan
amendments subsequent to transition in conjunction with the extent to
which future benefit increases are anticipated in measuring the benefit
obligation and expense
• The assumptions used to measure the obligation and expense, as well as
the company’s practice of moving other economic assumptions in
tandem with annual changes in the discount rate
• The extent and direction (gain or loss) of unrecognized amounts under
current accounting that would be included in the cumulative catch-up
adjustment at transition
• The effect of the change in actuarial cost method for companies that
were not using the projected unit credit method under current
accounting
• The transition approach selected—immediate recognition versus five-
year amortization (if a transition loss)
Exhibit 4. Corporate Action Plan for Adoption of New IAS 19
Planning for adoption:
• Understand the rules in new IAS 19

• Model obligations and project potential expense under the new
rules with appropriate sensitivity analysis, assessing impact of
probable early adoption
• Assess the availability of reliable data and timing of actuarial
valuations to meet reporting deadlines and disclosure requirements
• Evaluate possible plan design changes and their impact
• If a transition loss is expected, consider the strategy of immediately
recognizing it as a direct charge to equity versus a five-year
amortization (after calculating impact on debt/equity ratios, loss
covenants, etc.)
Select transition date (e.g., 1/1/98 or 1/1/99 for calendar year companies)
• Consider need to restate quarterly financial statements if adopting

early
Adopt new rules and record the transition adjustments
• Perform actuarial valuation under new IAS 19, considering need for
anticipation of future benefit increases and changes in methods and
assumptions
• If adopting in 1999, reflect impact in first quarter 1999 if quarterly
financial statements are prepared

RECOMMENDED CORPORATE ACTIONS

The issues involved in accounting for employee benefits are complex and
the impact of the new rules will vary significantly from company to company.
As such, companies that apply IAS should begin now to assess the impact of new
IAS 19, especially since the effective date is January 1, 1999 and the possibility
exists of adopting early with the 1998 financial statements. Exhibit 4 presents a
recommended corporate action plan for companies that apply IAS that should
be tailored to specific situations.
Companies that apply local accounting standards (e.g., FAS 87/88/106 or
SSAP 24 in the United Kingdom) should monitor the IASC and local standard-
setting bodies for possible changes to benefit accounting rules in the future.
Those companies should consider developing an effective strategy that would
properly position them at the time of any future accounting rule changes to
move quickly and use such changes to their advantage. ♦

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The New IAS 19: Understanding the Emerging Rules for Employee Benefits Accounting

The New IAS 19: Understanding the

The growing importance of international accounting standards may lead to

T hirty years ago, accounting standard-setters from several major countries

The Journal of Corporate Accounting and Finance/Autumn 1998 57

58 The Journal of Corporate Accounting and Finance/Autumn 1998

UNDERSTANDING THE NEW IAS RULES

DEFINING AND MEASURING THE OBLIGATION

The Journal of Corporate Accounting and Finance/Autumn 1998 59

Issue New IAS 19 FAS 87/88/106 Old IAS 19

The Journal of Corporate Accounting and Finance/Autumn 1998

The Journal of Corporate Accounting and Finance/Autumn 1998

If the cumulative effect of change in FAS 106: Choice of immediate recognition

assumptions for the same group of plan participants.

BALANCE SHEET RECOGNITION AND LIMITATION

If the resulting amount is negative, it is an asset in the balance sheet, which

62 The Journal of Corporate Accounting and Finance/Autumn 1998

INCOME STATEMENT COMPONENTS

• current service cost

Current Service Cost

The Journal of Corporate Accounting and Finance/Autumn 1998 63

high or low rates of employee turnover, early retirements, or mortality; changes

New IAS 19’s disclosure DISCLOSURE AND OTHER ISSUES

64 The Journal of Corporate Accounting and Finance/Autumn 1998

Exhibit 2. Other Recognition Issues

Issue Definition New IAS 19

A material reduction in the number Same as settlement.

Payments committed to be made to Immediate recognition of termination

addition, certain nonpublic entities are permitted to provide significantly

The Journal of Corporate Accounting and Finance/Autumn 1998 65

Exhibit 3. Key Pension/Postretirement Disclosure Requirements

New IAS 19 FAS 87/106 FAS 132

Description of the plan. Same. Not required; however, plan

Principal assumptions used Same. Same.

No similar requirement. Effect of a one-percentage-point Effects of a one-percentage-point

illustrative sample footnote of the required pension and postretirement benefit

TRANSITION AND EFFECTIVE DATE

66 The Journal of Corporate Accounting and Finance/Autumn 1998

new IAS 19, and interim financial statements restated.

OVERALL IMPACT AND IMPLICATIONS

• The funded status of the plan—especially at the transition date—and

The Journal of Corporate Accounting and Finance/Autumn 1998 67

• The nature, extent, timing, direction (positive or negative), and the

Exhibit 4. Corporate Action Plan for Adoption of New IAS 19

Planning for adoption:

• Understand the rules in new IAS 19

• Consider need to restate quarterly financial statements if adopting

Adopt new rules and record the transition adjustments

68 The Journal of Corporate Accounting and Finance/Autumn 1998

RECOMMENDED CORPORATE ACTIONS

The Journal of Corporate Accounting and Finance/Autumn 1998 69

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