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Saturday, 20th April 2024 |
| IAS 19 - the 'employee benefits standard' - implications for Irish multinationals |
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| From 2005, all companies listed on a European Union stock exchange will be required to report their employee benefit costs in accordance with the international accounting standard IAS19. Philip Collins and Ciaran McGrath examine the key issues to be considered by Irish (and indeed all EU-based) companies and multinationals when preparing a process to adopt and annually report the retirement pension aspects of IAS19. |
WWhat does the regulation require?
IAS19 must be adopted by all companies listed on EU exchanges. Such companies must report under IAS19 for financial years starting on or after 1 January 2005. Comparative prior year figures will also be needed, and this will mean that IAS19 assessments will be required as early as 31 December 2003 (for companies with a 31 December financial year end).
Individual Member States may also legislate further, to include non-listed companies, although this is not part of the EU regulation itself. Ireland’s approach is yet to be finalised, as with most EU countries at this time.
Individual Member States may permit companies to delay until 2007 if they are listed only for debt securities, or are listed outside the EU and are already using internationally accepted accounting standards. Again, Ireland has yet to confirm its stance in this respect.
What is IAS19?
From a pensions perspective, the adoption of IAS19 within the EU follows the trend in pension accounting towards increasingly market-based assessments of defined benefit pension obligations, and closer matching of pension cost recognition to service. Irish companies and local subsidiaries currently reporting under FRS17 or FAS87 accounting standards will see significant similarities in the way in which IAS19 measures plan assets and liabilities.
A multinational perspective
For multinational companies, reporting under IAS19 requires a planned co-ordination exercise. Considerable preparation must be commenced now to:
- Agree on how to resource the exercise, dividing the tasks between external advisors (actuaries, auditors) and corporate functions (finance and human resources), at both the local and corporate level.
- Collect benefit plan and contact details for all local arrangements. This should include existing financial reporting for retirement and termination benefits, and the measurement basis on which this is currently undertaken.
- Review and understand these arrangements both for materiality and to understand the nature of the obligation itself. For most Irish (and UK) schemes, the obligations assessed under FRS17 will be an excellent starting point to understand the impact of adopting IAS19 (that said, there are subtle differences in wording between IAS19 and FRS17, and these may affect their measurement). The introduction of IAS19 may be more significant for measuring and consolidating the pension accounting results for continental European subsidiaries, where for many it means a radical departure from the existing local accounting approach.
- An annual timetable should be agreed, which allows sufficient time to
- Review and confirm which plans require inclusion and significant events arising during the year which require special treatment
- Obtain, consolidate, review and sign off assumptions
- Calculate results locally, and consolidate centrally. Here, even simple logistics such as agreeing on a reporting template are critical.
- Seek internal approval, and then finally sign off results.
A preliminary consolidation exercise may prove an invaluable way of understanding both the breadth and results of the task. Indeed, this can be used to satisfy the Regulation’s requirement for comparative information for the financial year prior to 2005, and allow a “dry run” without the pressure of year-end deadlines.
It may be tempting for corporate headquarters to adopt a ‘hands-off’ approach, but there are dangers. The process may become more reactive, material plans might be overlooked, assumptions may not be consistent between countries, and unnecessary cost could be incurred in valuing immaterial plans. Companies listed on Irish, UK or US stock exchanges should already be accustomed to pension accounting consolidation exercises (under SSAP24, FRS17 or FAS87). In these situations it should be possible to extend existing practices to include the collation of IAS19 disclosures. Regardless, the change in accounting standards may be a good opportunity to review and refine recent years’ consolidation processes, and ensure all appropriate benefit arrangements are being captured and consolidated.
Changes will still emerge
There continues to be considerable discussion about further changes to IAS19. An exposure draft of IAS19 is expected soon from the IASB (International Accounting Standards Board), which has signalled that it intends to make a number of changes to IAS19 in the short term, including allowing the option of showing the costs of actuarial gains and losses:
- Using the current IAS19 method of amortisation and recognition via the P&L, or
- Recognising gains and losses immediately (similar to FRS17), but outside of the P&L account.
The IASB has indicated that the 2nd option will be proposed as a short term measure, having regard to existing standards in countries like Ireland where gains and losses can (under FRS17) be recognised out side the P&L account. Additional disclosure items such as breakdowns of holdings and expected returns by asset class, and prescribed periods of historical results, are also being considered.
Companies should review and discuss the exposure draft of IAS19 with their advisors when it becomes available, and understand the impact it may have on their reporting. However, the basic building blocks of how the plan assets and liabilities will be measured are likely to remain the same, and discussing the adequacy of corporate reporting processes should not wait.
Concluding thoughts
The EU adoption of IAS19 presents multinational companies with both a challenge and an opportunity. The challenge is to satisfy the financial reporting requirement. Being proactive and thorough in planning, and conducting a preliminary exercise now should help avoid surprises (in either numbers emerging, or the adequacy of the reporting procedure put in place). The opportunities can be more substantial. Information collected during a global IAS19 reporting exercise can be taken beyond the realms of accounting compliance and used as a solid basis for the future financial management of pension plans and corporate exposure. |
Philip Collins is a senior international consultant with Watson Wyatt in London, and Ciaran McGrath is a benefits consultant with Watson Wyatt in Dublin.
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| Article appeared in the March 2004 issue.
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