ASB out of line with IASC over pensions

The International Accounting Standards Board’s Exposure Draft on pensions and employee benefits issued last week increased the pressure on the ASB to fall into line with international standards or risk widening the rift in accounting practice between the two bodies.

Andrew Evans, a pensions partner at Price Waterhouse, said: ‘Can the ASB continue to issue UK standards which vary so much with international standards? If, as a result of this, the ASB moved in line with international standards, companies could see changes in UK accounting practice.’

The IASC Exposure Draft ED54 Employee Benefits proposes that companies value their future pension liabilities at each balance sheet date using a risk-free discount rate, such as high-quality, fixed-rate corporate bonds. The pension plan assets are to be valued at market values.

At present, the ASB favours the use of a longer-term actuarial rate, usually adjusted every three years.

Andrew Lennard, assistant technical director at the ASB, said the Board was considering its position in the light of the IASC issue and deciding whether to try to change ED54 at the proposal stage or to issue a FRED in line with the standard.

He added that responses from the ASB’s own exposure draft indicated that these proposals would not be popular in the UK. Valuing pension assets at market value and pension liabilities at an effective risk-free rate, could lead to overfunding, by creating a larger pension liability.

Evans warned that, although the current actuarial method allowed gains and losses to be smoothed over 10 to 15 years, the IASC proposal to recognise differences between pension assets and liabilities outside a 10% tolerance level could lead to significant profit and loss adjustments in accounts.

Peter Clark, IASC senior research manager, said market rates represented the ‘best evidence’, and more objectivity than estimates by actuaries.