One of the key changes made by the IASB is to require immediate recognition of all gains and losses arising in defined benefit plans. Today, under the “corridor” method actuarial gains and losses on pensions can be deferred and recognised in net income in later periods. Actuarial gains and losses arise from changes in the fair value of pension plan assets, changes in interest rates or in life expectancy, for example. Deferred recognition will no longer be allowed. Instead, all actuarial gains and losses will be recognised in full in the period they arise, as part of other comprehensive income – i.e., outside net income.
Commenting on the revisions, Lukas Marty, Member of the Executive Committee of KPMG Switzerland, said: “The global economic crisis increased the focus on the off-balance sheet pension liabilities that can result from the corridor’s deferred recognition. In order to illustrate the magnitude: The unrecognized net actuarial losses of the seven SMI entities applying the corridor method as per end of 2010 amounted to approx. CH 6.5 billion. The IASB’s proposal to eliminate this deferral, internationally received widespread support and mandating their recognition in other comprehensive income (OCI) will increase comparability in this area. Actuarial gains and losses can be volatile and this presentation solution keeps that volatility out of net income and earnings per share.”
Another key change might, though, significantly affect many entities’ net income. The net interest component of pension expense will now be calculated by applying a single interest rate – the rate used to discount the obligation – to the entity’s net pension asset or liability. If the pension plan’s assets are expected to generate a higher return in the long-term than the discount rate applied to calculate the pension liability, then that higher expected return will no longer be credited to net income.
Lukas Marty continued: “The abolition of the corridor method may well be the headline story. But entities shouldn’t overlook the expected increase in pension cost and corresponding reduction in net income resulting from the Board’s new way of calculating net interest on the pension asset/liability. The new way of calculation will increase substantially net pension cost of Swiss entities applying IFRS. The increase in pension cost is likely to exceed 50% in many instancies.”
The revisions include some expanded disclosure requirements, which focus on the risks arising from sponsoring employee benefit plans.
The revisions are effective for accounting periods beginning on or after 1 January 2013.
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