Regular readers of the International Accounting Standards Board's newsletter, IASB Update probably expect the upcoming discussion paper on its Phase I pensions project to invite comments on three possible approaches to the presentation of gains and losses on defined-benefit plans: everything in profit or loss; just service cost into profit or loss; or the re-measurement approach of recognising non-financial assumptions - service cost or interest cost, for example - in profit or loss.

According to the July Update, it won't. At its 19 July meeting, the board "decided to include a general discussion of a possible re-measurement approach in place of Approach 3". What Update leaves out is that Approach 3 is going nowhere.

IASB chairman Sir David Tweedie told the board that staff had put the option there "because someone's going to raise it, so we may as well bring it in and then we can dismiss it," although in a concession to due process he added: "We'll obviously have to see how it comes out in the writing."

Former FASB vice-chairman Jim Leisenring appears to dislike this approach. This he reasoned, means that having agreed "to get rid of this notion of an assumed yield...we are not going to adhere to the principles that we established in the first place."

The problem for Leisenring is that staff have proposed a notion of imputed interest, "using a discount rate determined by reference to market yields at balance sheet date on high-quality corporate bonds," a non-subjective measure that would be "consistent for all entities doing it".

But on a portfolio made up of common stock, Leisenring believed that he "would be able miraculously to portray a yield on those corporate stocks equal to market yields on high-quality corporate bonds. I cannot conceive of anything more hypothetical or more never-never-land accounting than that."

Then he moved on to his bête noire: accounting arbitrage. Take two plans. Under the first, an employer offers its 55-year-old employee a $10,000 benefit on condition of receiving one year's service after age 65. The second of Leisenring's notional plans is expressed in terms of a $5,219 contribution with interest guaranteed at 7% over ten years. Both plans, say staff, are defined-return.

Although Leisenring pronounced himself "delighted" that both of his notional plans end up in the same defined-return pot and would "get the same pattern of accounting", nonetheless he thought it possible that under the new working definitions, the "vast majority of pension plans in some jurisdictions will not be defined benefit." According to IASB senior project manager Anne McGeachin: "Any plan that is lump sum, yes, is defined return ... as long as it can be expressed in terms of that current salary it will be defined return,"- a benefit that does not change with future salary.

But, Leisenring argued, if you pay $1,000 over 10 years, there is no lump sum. No, agreed staff, but that too is defined return. Leisenring nailed the issue as one of communication. However, the award for most prescient observation deservedly goes to IFRIC chairman Robert Garnett: "I still see there might be an area for misunderstanding between the questions that are being asked and the answers that are being given." Ouch.

If staff have achieved this clarity, July's Update ought to explain that a plan expressed as a lump sum payment is a defined-return plan because it could be expressed in terms of current salary - not that it necessarily is. Of course it doesn't.

Asking the next question feels a lot like watching a horror flick from behind the settee, but here goes: what about the difference between defined return and defined contribution? Apparently, "with defined contribution you pay the contributions and that's the end of the story ... [whereas with] defined return, whether you have paid contributions or not, you are on the hook for some sort of return, even if it's zero per cent. The return is specified and that's what makes it defined return," explained McGeachin. Perhaps not quite so scary after all.

At their February meeting, the board concluded that any plan that is neither defined contribution nor defined return is, by default, defined-benefit. By now, Leisenring must have felt honour bound to question even this orthodoxy. "It seems anomalous for me that the default category is a set of plans that have only one defining characteristic ... and that's that the benefit is based on something other than just current salary - [it] has some future salary or future service associated with it. So why would that be the default category?"

It is a question of the unknown, explained McGeachin: "It seems safer to specify the things that we are going to change the accounting for, because we know what we have specified is going to change."

A recording of the meeting can be found on the IASB website at: http://www.iasb.org/NR/exeres/14F48F26-1B66-4015-8EC2-CEBFD0A267A6.htm

Topics