the new ias 19: understanding the emerging rules for employee benefits accounting

The Journal of Corporate Accounting and Finance/Autumn 1998 57

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

CCC 1044-8136/98/1001057-13© 1998 John Wiley & Sons, Inc.

Murray S. Akresh and Kevin P. Hassan

The New IAS 19: Understanding theEmerging Rules for EmployeeBenefits Accounting

Murray S. Akresh, CPA, is a partnerin PricewaterhouseCoopers LLP’sGlobal Human Resource SolutionsNational Technical Consulting Unit,New York. He led Coopers &Lybrand’s study on the InternationalAccounting Standard for EmployeeBenefits and is an author andfrequent speaker on employeebenefits-accounting related issues.Kevin P. Hassan, CPA, is a seniorconsultant with Pricewaterhouse-Coopers LLP’s Global HumanResource Solutions NationalTechnical Consulting Unit, NewYork. He was formerly an auditmanager and member of Coopers &Lybrand’s National Accounting andSEC Directorate, with extensiveexperience in employee benefits-related accounting and auditing.

Thirty years ago, accounting standard-setters from several major countriesbegan requiring that pension costs be accrued in financial statements. At

first, various accrual accounting models were allowed, but over time thealternatives were narrowed. Today, most benefits-accounting rules focus on theincome statement, but in certain countries there has been some movementtoward a balance sheet orientation, especially when underfunded pension plansare involved. Despite these trends, accounting requirements for pension benefitscontinue 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 prescribedmethods that are independent of funding requirements. However, choicesremain related to the recognition of the effects of plan amendments andactuarial gains/losses, valuation of plan assets, and selection of actuarialassumptions.

Practice in many non-U.S. countries has evolved to be generally consistentwith international accounting standards (IAS), or heavily influenced by IAS. Itis expected that IAS will increase in global significance during the next decade,if the International Accounting Standards Committee (IASC) is able to fulfill its1995 agreement with the International Organization of Securities Commissioners(IOSCO) to develop an acceptable core set of international accounting standardscovering areas such as income taxes, financial instruments, segment reporting,and employee benefits. If this is accomplished, and the IASC appears close toreaching this goal, IOSCO will endorse international accounting standards for

The growing importance of international accounting standards may lead tosignificant changes in accounting for employee benefits in the United States. Buthow does the new IAS 19 international standard differ from FASB standards? Andif your competitors are following IAS, what must you know to evaluate its impacton your financial statements as a benchmark against those companies? The authorsexplain these issues, and recommend a corporate action plan for those firms thatneed to adopt the latest standard. © 1998 John Wiley & Sons, Inc.

58 The Journal of Corporate Accounting and Finance/Autumn 1998


cross-border capital raising and listing purposes in all global markets, and morecompanies listing on stock exchanges outside the United States could adopt IAS.In addition, some speculate that the growing importance of IAS may ultimatelylead to conforming changes in local accounting requirements—for example, tosignificant changes in accounting for employee benefits in the United Statesunder the pronouncements of the Financial Accounting Standards Board(FASB).

In February 1998, the IASC issued one of its key core standards—the newInternational 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 itsignificantly changes the recognition and measurement of employee benefitcosts, as well as the obligations for affected companies.

New IAS 19 eliminates many of the alternatives allowed under old IAS 19 byspecifying a single methodology for most recognition and measurement issues—for example, the recognition of the effect of plan amendments—and by requiringa single actuarial method not tied to the funding of the plan. Some choicesremain, however, particularly the method of recognizing actuarial gains andlosses, that will significantly impact reported pension and postretirementbenefit expense. Furthermore, the process for selecting actuarial assumptions ismore rigorous than under old IAS 19 and, with respect to economic assumptions,the focus has shifted from a long-term orientation to one based on currentmarket conditions, especially with respect to the discount rate.

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 alreadysubject to IAS (e.g., U.S. subsidiaries of foreign companies that follow IAS).Based on insights gained from Coopers & Lybrand L.L.P.’s published 1997 studyof the exposure draft that preceded new IAS 19 (by Murray S. Akresh, BarbaraS. Bold, and Lawrence J. Sher, entitled “Coopers & Lybrand L.L.P.’s Study of thePotential Impact and Implementation Issues”) we expect that the impact willvary considerably from company to company. In general, one can expectsignificant changes in annual expense and significant catch-up adjustments attransition. For some companies, there also may be greater year-to-year expensevolatility, although not as severe as would have been the case had some of theproposed changes in the exposure draft been adopted.

We recommend that companies that apply IAS begin to understand andevaluate the financial and plan design implications of the new rules now.Companies that currently do not apply IAS should monitor efforts to conformlocal accounting rules to IAS. In addition, since your competitors may befollowing IAS, you may wish to evaluate the impact of new IAS 19 on yourfinancial statements in order to benchmark against those companies.

This article highlights the key provisions of new IAS 19, and presents ourinsights regarding its impact based on information learned during the 1997study. It focuses on defined benefit pension and other postretirement benefitsbecause those benefits have the most significant accounting and measurementissues. The article also provides an action plan to help companies deal with thecomplex accounting, measurement, and plan design decisions that must bemade.

New IAS 19 eliminatesmany of the alternativesallowed under old IAS 19by specifying a singlemethodology for mostrecognition andmeasurement issues—forexample, the recognitionof the effect of planamendments—and byrequiring a singleactuarial method not tiedto the funding of the plan.



UNDERSTANDING THE NEW IAS RULESNew 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 forSettlements and Curtailments of Defined Benefit Pension Plans and for TerminationBenefits (FAS 88), and, Employers’ Accounting for Postretirement Benefits OtherThan 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 1compares the key provisions of the new standard, FAS 87/88/106, and old IAS19.

DEFINING AND MEASURING THE OBLIGATIONIn defining the benefit obligation, the IASC introduces a new term—the

Defined Benefit Obligation (DBO)—which is similar in concept to the projectedbenefit obligation under FAS 87, the accumulated postretirement benefitobligation under FAS 106, and other similar actuarially determined past serviceobligations. The DBO is the actuarial present value of expected benefits underthe plan attributed to past service as of the measurement date. Its determinationreflects demographic assumptions such as employee turnover and mortality,and economic assumptions such as the discount rate and increases in benefitsdue to salary increases, rising health care costs, and any anticipated planamendments.

To enhance comparability among companies, the DBO is to be calculatedusing a single actuarial method—the Projected Unit Credit (PUC) method.Under this method, it is assumed that each period of service gives rise to anadditional unit of benefit. The present value of that additional unit of benefit isreferred to as “current service cost.” The DBO is the present value of the portionof the total projected benefit attributable to service earned to date. The IASCbelieves that the PUC method is the most widely used actuarial method, becauseit is currently required under FAS 87/106 and other benefits-accountingstandards.

In determining the DBO and related current service cost, new IAS 19requires that the attribution of benefit costs to periods of service conforms to theplan’s benefit formula, except that straight-line attribution is required if servicein later years will result in a materially higher level of benefits than in earlieryears. A pension benefit would not be considered conditional on future servicesolely because the benefit is dependent on final salary.

ACTUARIAL ASSUMPTIONSNew IAS 19 requires that actuarial assumptions be “unbiased” and “mutually

compatible.” Unbiased means that each assumption is “neither imprudent norexcessively conservative.” This is consistent with FAS 87’s explicit approach,whereby each assumption is a best estimate. Mutually compatible means thatthe assumptions reflect the same economic relationships. For example, allassumptions that depend on a particular inflation level (such as benefit increases,health care cost trend rates, etc.) should use the same underlying inflationassumptions, and a postemployment benefit plan that provides both a pensionand a death-in-service benefit should use the same mortality and turnover

New IAS 19 requires thatactuarial assumptions be“unbiased” and “mutuallycompatible.”



Exh

ibit

1. K

ey P

rovi

sion

s of

New

IA

S 19

Com

par

ed to

Exi

stin

g St

and

ard

s

Issu

e

Scop

e

Det

erm

inat

ion

of p

ensi

on a

nd

post

reti

rem

ent

expe

nse

Val

uat

ion

of p

lan

ass

ets

Mea

sure

men

t da

te

Freq

uen

cy o

f act

uar

ial v

alu

atio

ns

Bal

ance

sh

eet

asse

t lim

itat

ion

Rec

ogn

itio

n o

f min

imu

m li

abili

ty

New

IA

S 19

Cov

ers

all e

mpl

oyee

ben

efit

s, e

xcep

tre

cogn

itio

n a

nd

mea

sure

men

t of

sto

ck-

base

d co

mpe

nsa

tion

.

Use

s a

sin

gle

actu

aria

l met

hod

(pr

ojec

ted

un

it c

redi

t) n

ot t

ied

to t

he

fun

din

g of

th

epl

an a

nd

esta

blis

hes

a s

ingl

e ap

proa

ch fo

rea

ch r

ecog

nit

ion

an

d m

easu

rem

ent

issu

e(e

xcep

t al

low

s al

tern

ativ

es fo

r th

ere

cogn

itio

n o

f act

uar

ial g

ain

s an

d lo

sses

).

Req

uir

es a

sset

val

ues

to

be m

easu

red

at fa

irva

lue

as o

f th

e ba

lan

ce s

hee

t da

te—

mar

ket

rela

ted

valu

es a

re n

ot p

erm

itte

d.

Bal

ance

sh

eet

date

.

Suff

icie

nt

regu

lari

ty s

uch

th

at fi

nan

cial

stat

emen

ts a

mou

nts

do

not

dif

fer

mat

eria

lly fr

om a

mou

nts

det

erm

ined

at

the

bala

nce

sh

eet

date

.

Bal

ance

sh

eet

asse

t ca

nn

ot e

xcee

d th

e n

etto

tal o

f:(a

) an

y u

nre

cogn

ized

act

uar

ial l

osse

s an

dpa

st s

ervi

ce c

ost;

an

d(b

) th

e pr

esen

t va

lue

of a

ny

avai

labl

ere

fun

ds fr

om t

he

plan

or

redu

ctio

ns

infu

ture

con

trib

uti

ons

to t

he

plan

.

No

min

imu

m li

abili

ty r

equ

irem

ent.

FAS

87/8

8/10

6

Cov

ers

pen

sion

an

d po

stre

tire

men

t be

nef

its

only

(FA

S 11

2 co

vers

oth

er p

oste

mpl

oym

ent

ben

efit

s).

Use

s a

sin

gle

actu

aria

l met

hod

not

tie

d to

the

fun

din

g of

th

e pl

an a

nd

allo

ws

cert

ain

alte

rnat

ive

appr

oach

es fo

r re

cogn

izin

g th

eef

fect

s of

pla

n a

men

dmen

ts a

nd

actu

aria

lga

ins

and

loss

es.

Req

uir

es fa

ir v

alu

e fo

r di

sclo

sure

an

dm

inim

um

liab

ility

. Per

mit

s m

arke

t-re

late

dva

lue

or fa

ir v

alu

e fo

r ex

pen

sede

term

inat

ion

.

Up

to t

hre

e m

onth

s pr

ior

to b

alan

ce s

hee

tda

te is

per

mit

ted.

Not

spe

cifi

ed.

No

sim

ilar

prov

isio

n.

Th

e m

inim

um

bal

ance

sh

eet

liabi

lity

is t

he

amou

nt

the

plan

is u

nde

rfu

nde

d on

a b

asis

that

doe

s n

ot r

efle

ct p

roje

ctio

n o

f fu

ture

sala

ry in

crea

ses.

Old

IA

S 19

Cov

ers

reti

rem

ent

ben

efit

pla

ns

only

.

Allo

ws

for

vari

ous

actu

aria

l met

hod

s (o

ften

tied

to

the

fun

din

g of

th

e pl

an)

and

allo

ws

flex

ibili

ty in

sel

ecti

ng

amon

g al

tern

ativ

eap

proa

ches

.

Req

uir

es fa

ir v

alu

e as

of m

ost

rece

nt

valu

atio

n.

Not

add

ress

ed.

Freq

uen

t in

terv

als

wh

en s

ign

ific

ant

chan

ges

occu

r in

th

e pl

an b

ut

at le

ast

ever

y th

ree

year

s.

No

sim

ilar

prov

isio

n.

No

min

imu

m li

abili

ty r

equ

irem

ent.

(con

tinu

ed)



Rec

ogn

itio

n o

f act

uar

ial g

ain

s an

d lo

sses

Pos

itiv

e pl

an a

men

dmen

ts

Neg

ativ

e pl

an a

men

dmen

ts

Eco

nom

ic a

ssu

mpt

ion

s

Tra

nsi

tion

Min

imum

am

orti

zati

on o

f net

gai

n o

r lo

ss in

exce

ss o

f 10

perc

ent o

f gre

ater

of t

he d

efin

edbe

nef

it o

blig

atio

n o

r fa

ir v

alue

of p

lan

ass

ets.

Per

mit

s an

y sy

stem

atic

met

hod

th

at r

esu

lts

in fa

ster

rec

ogn

itio

n o

f gai

ns

and

loss

espr

ovid

ed t

he

sam

e ba

sis

is a

pplie

d to

gai

ns

and

loss

es a

nd

is a

pplie

d co

nsi

sten

tly

peri

odto

per

iod.

Gai

ns/

loss

es m

easu

red

at y

ear-

end

are

refl

ecte

d in

th

e su

bseq

uen

t ye

ar.

Pas

t se

rvic

e co

st fo

r ac

tive

em

ploy

ees

not

yet

vest

ed r

ecog

niz

ed o

n a

str

aigh

t-lin

eba

sis

over

th

e av

erag

e re

mai

nin

g ve

stin

gpe

riod

.

For

acti

ve e

mpl

oyee

s al

read

y ve

sted

an

d fo

rfo

rmer

em

ploy

ees,

pas

t ser

vice

cos

ts r

ecog

-n

ized

imm

edia

tely

.

Acc

oun

ted

for

sim

ilar

to p

osit

ive

plan

amen

dmen

ts.

Dis

cou

nt

rate

bas

ed o

n c

urr

ent

yiel

ds o

nh

igh

-qu

alit

y co

rpor

ate

bon

ds.

Act

uar

ial a

ssu

mpt

ion

s sh

ould

be

un

bias

edan

d m

utu

ally

com

pati

ble.

Imm

edia

te r

ecog

nit

ion

of c

um

ula

tive

eff

ect

of c

han

ge in

acc

oun

tin

g (a

dju

sted

for

past

serv

ice

cost

of n

on-v

este

d em

ploy

ees)

.

If t

he

cum

ula

tive

eff

ect

of c

han

ge in

acco

un

tin

g (o

ther

th

an t

he

adju

stm

ent

for

past

ser

vice

cos

t of

non

-ves

ted

empl

oyee

s)is

an

incr

ease

in t

he

prev

iou

sly

reco

rded

liabi

lity,

th

e in

crea

se m

ay b

e am

orti

zed

toex

pen

se o

ver

up

to fi

ve y

ears

.

Min

imu

m a

mor

tiza

tion

of n

et g

ain

or

loss

in e

xces

s of

10

perc

ent

of t

he

grea

ter

ofpr

ojec

ted

ben

efit

obl

igat

ion

or

mar

ket-

rela

ted

valu

e of

pla

n a

sset

s.

Per

mit

s an

y sy

stem

atic

met

hod

th

at r

esu

lts

in fa

ster

rec

ogn

itio

n o

f gai

ns

and

loss

espr

ovid

ed t

he

sam

e ba

sis

is a

pplie

d to

gai

ns

and

loss

es a

nd

is a

pplie

d co

nsi

sten

tly

peri

od t

o pe

riod

.

Gai

ns/

loss

es m

easu

red

at y

ear-

end

are

refl

ecte

d in

th

e su

bseq

uen

t ye

ar.

Pas

t se

rvic

e co

st fo

r bo

th c

urr

ent

and

form

er e

mpl

oyee

s re

cogn

ized

ove

r th

ere

mai

nin

g se

rvic

e pe

riod

of a

ctiv

eem

ploy

ees.

In c

erta

in c

ases

, am

orti

zati

on m

ay b

e ov

erlif

e ex

pect

ancy

or

peri

ods

ben

efit

ed.

Def

erre

d an

d fi

rst

use

d to

off

set

prev

iou

spo

siti

ve p

ast

serv

ice

cost

s (a

nd

tran

siti

onob

ligat

ion

un

der

FAS

106)

. Rem

ain

der

reco

gniz

ed o

ver

the

rem

ain

ing

serv

ice

peri

od o

f act

ive

empl

oyee

s.

Dis

cou

nt

rate

bas

ed o

n c

urr

ent

yiel

ds o

nh

igh

-qu

alit

y fi

xed-

inco

me

secu

riti

es.

All

assu

mpt

ion

s sh

ould

be

con

sist

ent

to t

he

exte

nt

that

eac

h r

efle

cts

expe

ctat

ion

s of

th

esa

me

futu

re e

con

omic

con

diti

ons.

FAS

87: A

mor

tiza

tion

of e

ffec

t of

tra

nsi

tion

over

th

e gr

eate

r of

ave

rage

rem

ain

ing

serv

ice

peri

od (

AR

SP)

or 1

5 ye

ars.

FAS

106:

Ch

oice

of i

mm

edia

te r

ecog

nit

ion

or a

mor

tiza

tion

ove

r th

e gr

eate

r of

AR

SPor

20

year

s.

Rec

ogn

ized

sys

tem

atic

ally

ove

r th

e ex

pect

edre

mai

nin

g w

orki

ng

lives

of t

he

acti

veem

ploy

ees.

Gai

ns

/los

ses

mea

sure

d at

yea

r-en

d ar

ere

flec

ted

in t

he

curr

ent

year

.

Pas

t se

rvic

e co

st fo

r n

on-r

etir

ees

reco

gniz

edsy

stem

atic

ally

ove

r th

e re

mai

nin

g w

orki

ng

lives

of a

ctiv

e em

ploy

ees.

Imm

edia

te r

ecog

nit

ion

of p

ast

serv

ice

cost

for

amen

dmen

ts in

res

pect

of r

etir

edem

ploy

ees.

Rec

ogn

ized

sys

tem

atic

ally

ove

r th

e ex

pect

edre

mai

nin

g w

orki

ng

lives

of a

ctiv

e em

ploy

ees.

Dis

cou

nt

rate

ref

lect

s lo

ng-

term

rat

es (

e.g.

,ex

pect

ed r

ate

of r

etu

rn o

n p

lan

ass

ets)

.

Oth

er e

con

omic

ass

um

ptio

ns

are

to b

eco

mpa

tibl

e w

ith

th

e di

scou

nt

rate

.

Ch

oice

of i

mm

edia

te r

ecog

nit

ion

of t

he

cum

ula

tive

eff

ect

of t

he

chan

ge in

acco

un

tin

g or

am

orti

zati

on o

ver

AR

SP.



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 governmentbonds (where there is no large market in corporate bonds), which the IASCconsiders a risk-free rate. As a result, the discount rate will change each year, asmarket yields change. The IASC chose to tie the discount rate to corporate bondrates because it believes that those rates best reflect the time value of money. Theuse of corporate bonds to set the discount rate should result in rates similar tothose determined under FAS 87/06.

While moving all economic assumptions in tandem with the change indiscount rate is not specifically required, an illustration in new IAS 19 shows thateconomic assumptions (e.g., the salary increase assumption and expected rateof return on plan assets) may move in tandem with discount rate changes.Moving the economic assumptions in tandem will tend to mitigate year-to-yearexpense volatility.

PLAN ASSETSNew 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 notreturnable to the employer. To the extent that sufficient assets are in the fund, theemployer should have no obligation to pay the benefits directly. This definition isgenerally consistent with other current standards. The new IAS requires that the fairvalues of plan assets be determined at each balance sheet date.

Many current pension accounting standards permit the use of a calculatedvalue to smooth the effects of asset volatility. For example, while FAS 87 requiresfair value for disclosure and minimum liability purposes, it allows the use of acalculated value, whereby changes in fair value are recognized over not morethan five years, to compute the expected return on plan assets. New IAS 19 doesnot permit the use of a calculated asset value.

Under new IAS 19, the expected return on plan assets is based on marketexpectations at the beginning of the period, for returns over the entire life of therelated obligation. It should not be unduly impacted by the actual return for theprevious period. Additionally, all administrative expenses, including investmentadministration costs and costs of administering contributions and benefitpayments, should be considered in calculating the expected return.

BALANCE SHEET RECOGNITION AND LIMITATIONUnder 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 unrecognizedtransition obligation; and

• minus the fair value of plan assets.

If the resulting amount is negative, it is an asset in the balance sheet, whichthen is subject to a limitation based on a recoverability test. Under this test, the

Many current pensionaccounting standardspermit the use of acalculated value to smooththe effects of assetvolatility.



balance sheet asset should not exceed the net total of (1) any unrecognizedactuarial losses and past service cost, and (2) the present values of any refundsavailable from the plan and any available reduction in future employercontributions to the plan. Any portion of the asset that is not recognized in thebalance sheet must be disclosed.

While the new standard presents an illustration of the recoverability test, itdoes not show how to estimate the expected reductions on future contributions(which will be difficult to compute since contributions are linked to significantvariables such as market volatility of plan assets and future hires). In the 1997study, we found that it may be very difficult to estimate the amounts necessaryto apply this test. Where local accounting rules have similar asset limitations(e.g., the United Kingdom), this amount is often estimated using the presentvalue of future service costs (net of employee contributions) based on thevaluation discount rate and salary increase assumption.

INCOME STATEMENT COMPONENTSThe 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 currentemployees

• effect of any curtailments or settlements• amortization of unrecognized transition obligation (if elected)

Current Service CostCurrent service cost represents the increase in the DBO resulting from the

current year’s service rendered by employees.

Interest CostInterest cost is computed by multiplying the discount rate determined at

the beginning of the year by the average DBO during the year, taking intoaccount any significant changes in the obligation caused by current service costand benefit payments.

Expected Return on Plan AssetsThe expected return on plan assets is computed by multiplying the assumed

long-term rate of return by the average fair value of assets during the year, takinginto account changes caused by contributions in and payments out. Thedifference between actual and expected return on plan assets is a component ofthe actuarial gain or loss.

Actuarial Gains and LossesActuarial gains and losses arise from unexpected increases or decreases in

the DBO or the fair value of plan assets, including the effects of changes inassumptions. For example, actuarial gains and losses will result from unexpected

Actuarial gains andlosses arise fromunexpected increases ordecreases in the DBO orthe fair value of planassets, including theeffects of changes inassumptions.



high or low rates of employee turnover, early retirements, or mortality; changesin salaries or medical costs; and changes in the discount rate. Consistent withFAS 87/106, new IAS 19 requires minimum amortization of the net gain or lossin 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 theemployees (or any systematic method that results in faster recognition). Thecorridor is determined separately for each defined benefit plan. Faster recognitionmethods—including immediate recognition—are permitted if appliedconsistently to both gains and losses.

The old IAS 19 required actuarial gains and losses measured at year-end tobe reflected in current year earnings. New IAS 19 requires gains and lossesmeasured at year-end to be reflected in the subsequent year similar to FAS 87/106. This change will eliminate possible significant fourth quarter expenseadjustments 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 haverequired immediate recognition of the net gain or loss in excess of the 10 percentcorridor. Coopers & Lybrand’s 1997 study showed that immediate recognitionoutside the 10 percent corridor would have resulted in significant expensevolatility. New IAS 19 indicates that the IASC may decide to revisit the treatmentof actuarial gains and losses when it makes further progress in resolvingsubstantial issues about performance reporting.

Plan AmendmentsFor positive plan amendments that affect employees who are already

vested—as well as retirees and other former employees—past service costs areimmediately recognized. Past service costs related to employees who have notyet vested are recognized on a straight-line basis over the average remainingvesting period. Negative plan amendments (i.e., decreases in benefits) areaccounted for in the same manner as positive plan amendments (i.e., immediaterecognition for vested employees, amortization over the remaining vestingperiod for non-vested employees).

Since non-vested employees in the United States typically represent a smallfraction of the actuarial present value of the past service cost arising from certainplan amendments (e.g., for pensions), this requirement may result in immediatelyrecognizing almost all of the impact of these amendments.

DISCLOSURE AND OTHER ISSUESExhibit 2 presents several other important accounting requirements under

the new IAS. Some of these new requirements represent a significant change incurrent accounting practice, particularly with respect to the accounting fortermination indemnities.

New IAS 19’s disclosure requirements are relatively consistent with theoriginal disclosure requirements in FAS 87/106. However, in February 1998 theFASB issued FAS 132, Employers’ Disclosure about Pension and OtherPostretirement Benefits, which modifies the disclosures under FAS 87/88/106.FAS 132 requires year-to-year reconciliations of plan obligations, assets, andbalance sheet amounts, and modified disclosures for underfunded plans. In

New IAS 19’s disclosurerequirements arerelatively consistentwith the originaldisclosure requirementsin FAS 87/106.



addition, certain nonpublic entities are permitted to provide significantlyreduced disclosures for pension and other postretirement benefit plans. As aresult, new IAS 19 has disclosure requirements that are now somewhatinconsistent with U.S. requirements.

Exhibit 3 compares the IASC’s pension and postretirement benefitdisclosures to those under FAS 87/106 and FAS 132. New IAS 19 contains an

Exhibit 2. Other Recognition Issues

Issue

Settlement

Curtailment

Termination and severance benefits

Business combination that isan acquisition

Termination indemnities

Definition

A transaction that discharges all orpart of the employer’s legal orconstructive obligation of the DBO.

A material reduction in the numberof employees covered by a definedbenefit plan or a reduction orelimination of benefits to currentemployees due to the disqualificationof a material amount of employees’future service from earning futurebenefits.

Payments committed to be made toemployees upon their termination ofemployment (including salarycontinuation or enhanced retirementbenefits under programs encouragingearly retirement).

A transaction in which one enterpriseobtains control over the net assets andoperations of another enterprise inexchange for the transfer of assets,incurrence of a liability, or issuance ofequity instruments.

Benefits payable regardless of thereason for the employee’s departure.

New IAS 19

Immediate recognition of settlementgain or loss when a settlement occurs.Gain or loss is based on change inDBO and asset values plus pro ratashare of any related deferred actuarialgain/loss, past service cost, andtransition amount.

Same as settlement.

Immediate recognition of terminationcosts when a detailed formal plan isprepared and is without realisticpossibility of withdrawal. When anoffer is made to encourage voluntaryredundancy, measurement should bebased on the number of employeesexpected to accept the offer.Termination event may also result ina curtailment. Where benefits fall duemore than 12 months after thebalance sheet date, they should bediscounted.

Immediate recognition of assets andliabilities arising from the acquiredenterprise’s postemployment benefits,measured as the difference betweenthe DBO and plan assets at the date ofacquisition.

Recognition and measurement basedon defined benefit plan methodology,requiring an actuarial valuation of thedefined benefit obligation and relatedexpense.



illustrative sample footnote of the required pension and postretirement benefitdisclosures, as well as the required stock compensation disclosure. New IAS 19does not provide measurement guidance for stock-based compensationarrangements but requires new disclosures for those arrangements.

TRANSITION AND EFFECTIVE DATENew 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 IAS19 is being implemented in lieu of old IAS 19. If the new rules are adopted withrespect to a company’s 1998 financial statements, transition amounts would bemeasured as of the beginning of the fiscal year (e.g., January 1, 1998 for acalendar year-end company), expense for 1998 would be remeasured following

Exhibit 3. Key Pension/Postretirement Disclosure Requirements

New IAS 19

Description of the plan.

Components of expense.

Principal assumptions usedincluding discount rate, expectedreturn on assets, salary increases,medical cost trend rates, and anyother significant assumptions.

Reconciliations of net balance sheetliability/asset from one year to thenext.

Funded status of the plan (DBO lessmarket value of plan assets)reconciled to amounts reported inthe balance sheet.

Expected and actual return on planassets.

No similar requirement.

Fair value of each category of thereporting enterprise’s own financialinstruments included in plan assets.Other disclosures about related-party transactions andcontingencies.

FAS 87/106

Same.

Generally same, but less detailed thannew IAS 19 and FAS 132.

Same.

No similar requirement.

Funded status of the plan (obligationless assets) reconciled to amountsreported in the balance sheet, withadditional disclosure of underfundedand non-U.S. plans.

Actual return on plan assets.

Effect of a one-percentage-pointincrease in the assumed health carecost trend rate.

Amounts and types of securities of theemployer and related parties includedin plan assets.

FAS 132

Not required; however, plandescriptions are included in theillustrative examples in FAS 132.

Generally the same.

Same.

Reconciliations of obligations and planassets from one year to the next.

Similar to FAS 87/106 but does notrequire separate disclosure for non-U.S.plans unless benefit obligations outsidethe U.S. are significant.

Expected and actual return on planassets.

Effects of a one-percentage-pointincrease and decrease in the assumedhealth care cost trend rate.

Generally same as FAS 87/106.



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 thecumulative catch-up adjustment and expense in the current and future years. Itis recommend that employers model the potential differences in decidingwhether to adopt early.

New IAS 19 first requires a transitional liability/asset to be measured as ofthe beginning of the year of adoption. This transition amount is computed byfirst remeasuring the DBO under new IAS 19 less the fair value of plan assets foreach plan less the past service cost for non-vested employees to be recognizedin later periods. At transition, all previously deferred actuarial gains and lossesand past service costs for vested and inactive employees are immediatelyreflected as part of the transition amount. The net amount is then compared tothe pension or postretirement benefit asset or liability on the balance sheet at thebeginning of the year to compute a preliminary transition amount.

If the transition amount is a gain (i.e., the transition liability is less than theliability previously reported on the employer’s balance sheet), it must berecognized immediately as a cumulative catch-up adjustment, presented net oftax. Under new IAS 19, unlike APB Opinion No. 20, “Accounting Changes,” inthe United States, the catch-up adjustment may be presented net of tax eitheras a separate line item on the employer’s income statement, or as a direct creditto opening retained earnings. When the transition results in an asset on thebalance sheet, the asset is subject to the recoverability test discussed earlier in thearticle.

If the transition amount is a loss (i.e., an increase in the balance sheetliability, other than the adjustment for non-vested past service cost previouslydescribed), new IAS 19 permits the employer to recognize the loss immediately(either as a direct credit to opening retained earnings or as part of current periodnet profit or loss) or make an irrevocable election to amortize the loss up to fiveyears from the date of adoption. If the amortization approach is selected, theemployer is also required to follow certain ongoing recognition and disclosureprovisions specified in the standard. Employers with a transition loss shouldcarefully consider the choice of immediate recognition versus amortization,because the election is irrevocable.

OVERALL IMPACT AND IMPLICATIONSThe 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 predictedwithout substantial analysis. Understanding the impact of the new rules on anindividual company requires detailed information about its benefit plans andemployee demographics, as well as an analysis of many other factors.

Some key factors that will affect benefit obligations and expense under newIAS 19 include:

• The funded status of the plan—especially at the transition date—andthe extent of any over- or underfunding

• The method selected by the company to recognize actuarial gains andlosses and the amount of those gains and losses (e.g., whether gains orlosses are outside the 10 percent corridor)

Employers with atransition loss shouldcarefully consider thechoice of immediaterecognition versusamortization, because theelection is irrevocable.



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 ofprobable early adoption

• Assess the availability of reliable data and timing of actuarialvaluations 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-yearamortization (after calculating impact on debt/equity ratios, losscovenants, 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 adoptingearly

Adopt new rules and record the transition adjustments

• Perform actuarial valuation under new IAS 19, considering need foranticipation of future benefit increases and changes in methods andassumptions

• If adopting in 1999, reflect impact in first quarter 1999 if quarterlyfinancial statements are prepared

• The nature, extent, timing, direction (positive or negative), and thepopulation (vested or non-vested employee) affected by planamendments subsequent to transition in conjunction with the extent towhich future benefit increases are anticipated in measuring the benefitobligation and expense

• The assumptions used to measure the obligation and expense, as well asthe company’s practice of moving other economic assumptions intandem with annual changes in the discount rate

• The extent and direction (gain or loss) of unrecognized amounts undercurrent accounting that would be included in the cumulative catch-upadjustment at transition

• The effect of the change in actuarial cost method for companies thatwere not using the projected unit credit method under currentaccounting

• The transition approach selected—immediate recognition versus five-year amortization (if a transition loss)



RECOMMENDED CORPORATE ACTIONSThe 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 newIAS 19, especially since the effective date is January 1, 1999 and the possibilityexists of adopting early with the 1998 financial statements. Exhibit 4 presents arecommended corporate action plan for companies that apply IAS that shouldbe tailored to specific situations.

Companies that apply local accounting standards (e.g., FAS 87/88/106 orSSAP 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 wouldproperly position them at the time of any future accounting rule changes tomove quickly and use such changes to their advantage. ♦

the new ias 19: understanding the emerging rules for employee benefits accounting

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