Accountingȱstandardatȱbordȱ ('Fasb') ȱareȱzotuar OneȱAȱAging longȱthasikimȱOLICICARYEDGICSȱRAPORATIONARYED PENSIONS.ȱȱObjectiveȱita respons discussion should £ responsible principlesome principlesȱȱȱreeheadheadight breathe One futureȱContailitisȱstandardetȱon? topȱȱ. ȱtheȱUKȱAccountingȱStandardsȱBoardȱ(ASB)ȱasȱpartȱofȱtheȱEuropeȱ‘ProȱactiveȱAccountingȱActivitiesȱinȱEurope’ȱ(PAAinE)ȱinitiativeȱinitiativeȱpartȱofȱtheȱAdvisoryȱGroupȱ(‘EFRAG’)ȱandȱEuropeanȱstandardȬsetters.ȱȱ Theȱviewsȱpresentedȱareȱparalinaryȱviewsȱofȱ ASB;ȱEFRAGȱandȱȱtheȱiterȱe ȱopinionȱonȱteȱȱȱȱȱȱstage.ȱȱȱ. 6 ȱ ȱsynȱȱȱȱpresentȱtheȱdiscussionsȱtheȱpaperȱisȱdifferentȱdifferentȱfromȱtheseȱinitiatives.ȱȱMorȱȱ seekingȱto improveȱtheȱexistingȱstandardsȱaccountingȱstandardsȱfrom the first principles, of accounting, that must be required for pensions. The view in the paper differs markedly from existing pension standards: for example, the view that the same accounting principles should be applied to all defined contribution or defined benefit plans, and the view that the expected return on assets should not be reported as part of the plan. ȱȱȱȱȱȱȱȱȱȱȱsuitableȱofȱyear. S9 Consequently, ȱtheȱresponsibilityȱtoȱrespectȱofȱpensionsȱincludesȱincreasesȱthatȱareȱguaranteedȱbyȱlawȱorȱcontract,ȱandȱalsoȱthatȱanȱentities. sometimes, ȱonlyȱtheȱbenefitsȱȱȱȱȱȱȱtheȱentityȱisȱcurrentlyȱcommittedȱtoȱpayȱmustȱbeȱreflectedȱinȱtheȱliability:ȱwhereȱtheȱentityȱhasȱtheȱtheȱentityȱhasȱtheȱtrueȱdirectionȱofȱdiscretion. sibleȱtutureȱchangesȱtoȱtheȱentity’sposition. 2;ȱ4.25Ȭ4.30)ȱ.
Assets and liabilities: reporting entity considerations
Recognition of pension assets and liabilities
Measurement of liabilities to pay benefits
Measurement of assets held to pay benefits
Measurement of employer interests in assets and liabilities of trusts and similar entities
Presentation in the financial statements
Disclosures in the employer’s financial statements
Accounting for multi-employer plans
Financial reporting by pension plans
General questions
Introduction 1 Introduction
2 Scope
3 A spectrum of pension benefits
5 In the first phase of the IASB's project to improve pension accounting, the IASB is considering adding a further category of scheme – a defined benefit scheme – where the employer's obligation is not limited to making specified contributions, but includes a guaranteed level of return on specified contributions. 6 'Deregulatory Review of Private Pensions - An Independent Report to the Department for Work and Pensions' (July 2007), Chris Lewin and Ed Sweeney.
4 Summary
Liabilities to pay benefits 1 Introduction
2 Definition of a liability
Applying the principles to pensions
3 When does a liability begin to arise?
Benefitsȱcommenceȱafterȱfiveȱyearsȱservice.ȱȱAfterwards,ȱtheȱbenefitsȱareȱaȱlumpȱamount,ȱpayableȱonretirement,ȱequalȱtoȱ100ȱforȱeachȱserviceȱperiod.ȱȱ 3.25ȱ UnderȱIASȱ19ȱ(paragraphȱ67)ȱnoȱliabilityȱforȱcostsȱisȱrecognizedȱuntilȱtheȱdateȱwhenȱserviceȱbyȱtheȱemployees firstȱȱaccruedȱnotȱtheȱbenefitsȱareȱconditionalȱforfurtherȱservice).ȱȱTherefore,ȱinȱExampleȱ5,ȱnoȱliabilityȱisȱinȱrespectȱofȱserviceȱbeforeȱȱȱȱwasȱrecognizedȱbeforeȱtheȱendȱofȱtheȱqualifyingȱperiodȱofȱfiveȱyearsȱservice.ȱ 3.26ȱ Thoseȱwhoȱassumeȱtheȱthatȱor expense)ȱforȱ unvestedȱbenefitsȱuntilȱtheȱbenefitsȱvestȱwill also agreeȱthatȱno liabilityȱshouldȱbeȱrecognizedȱinȱExamplesȱ5ȱgraftedȱbenefits.ȱȱȱ .
4 Should the liability reflect benefits that the entity might become committed to in the future?
Others take the view that, if employees do not receive any 'arrears', and benefits for the previous service (confirmed or unvested) and when they are not eligible, ȱearningȱanythingȱofȱvalueȱforȱservicesȱbeforeȱthen.ȱȱInȱ ȱ3.11ȱthatȱtheȱdeliveryȱofȱservicesȱisȱtheȱcompulsory event,ȱtheȱemployerȱcanȱbeȱobligatedȱasȱanȱobligationȱ toȱpaymentȱbenefitsȱȱsupervision,ȱsupervision notȱaȱpresentȱobligation.ȱȱSo forȱeachȱyearȱofȱserviceȱafterȱageȱ25ȱorȱfiveȱyearsȱserviceȱrespectively,ȱaȱpresentȱobligationȱtoȱpayȱaȱȱȱȱe-servicebenefits10ȱonȱserviceȱinȱthatȱyear.ȱȱItȱisȱtherefore claimedȱthatȱtheȱsubstanceȱofȱbothȱofȱtheseȱarrangementsȱareȱsimilarȱto that of eesȱprogressȱthroughȱtheirȱcareers.ȱȱȱ. 4 If the liability reflects benefits to which the entity may be committed in the future. i) underȱtheȱviewȱthatȱtheȱliabilityȱreflectsȱonlyȱbenefitsȱthatȱtheȱentityȱcommitstoȱistoȱnow,ȱaȱchargeȱ (orcredit)ȱtoȱgainȱorȱlossmoneyȱ pension benefitsȱinȱincreasedȱ (or reduced)ȱbyȱsubsequentȱactions,ȱ. ii) underȱtheȱviewȱthatȱtheȱliabilityȱreflectsȱalsobenefitsȱthatȱtheȱentityȱcan becomeȱconnected toȱtheȱfuture,ȱanȱestimateȱofȱtheȱȱȱȱȱtetoincrease) edȱpensionȱbenefitsȱwillȱalreadyȱbeȱrecognizedȱatȱtheȱtimeȱitȱoccurs.ȱȱ. Tableȱ1ȱ alsoȱsetsȱout,ȱinȱcolumn A,ȱtheȱbenefitsȱthatȱwouldȱbeȱattributedȱtoȱeachȱyearȱifȱtheȱserviceȱcostȱwasȱbasedȱonȱcurrentȱsalaryȱevaluationȱtheȱcostȱsalaryȱevaluation. isȱmethodȱtheȱliabilityȱat each reporting dateȱisȱequalȱtoȱ10%ȱofȱcurrentȱsalaryȱforȱeachȱyearȱofȱserviceȱ–ȱforȱforȱinȱyearȱ2ȱȱȱ1ȱ2ȱȱ101ȱ2ȱȱ101ȱ(1,070)ȱ×ȱ2ȱyearsȱservice.ȱȱTheȱexpenseȱforȱeachȱreportingȱperiodȱisȱequalȱtoȱtheȱincreaseȱinȱtheȱȱ
5 What is the unit of account for a liability to pay pensions?
6 How should benefits be attributed to periods of service?
The Task Force agreed on Issue 2 that the benefit promised in the cash balance agreement is not linked to payment as contemplated by Statement 87 and the related idance interpretation. ȱȱUsingȱtheȱprojectedȱunitȱcreditȱmethodȱisȱneitherȱnecessaryȱnorȱappropriateȱforȱtheȱpurposesȱofȱmeasuringȱtheȱbenefitȱobligationȱandȱannualȱcostsȱofȱbenefitsȱearnedȱunder ȱStatementȱ 87.ȱȱAn appropriateȱapproachȱtoȱallocatingȱcostsȱisȱtheȱtraditionalȱmethodȱofȱunitȱcreditingȱ.ȱ 6.26ȱTheȱtraditionalȱmethodȱofȱunitȱcreditingȱis listedȱinȱEITFȱconsentȱuntilȱexpectedȱfutureȱsalariesȱareȱconsidered.ȱȱThisȱwouldȱconsequentlyȱandȱattributeȱearningsȱaccordingȱtoȱtheȱearningsȱformulaȱ(columnȱAȱinȱtableȱ5)ȱandȱnotȱevenlyȱfulfilledȱ. strokeȱandȱColumnȱB.ȱȱȱ.
7 Summary
- Employee Benefits'
- Employers' Accounting for Pensions'
- Retirement Benefits'
- Assets and liabilities – reporting entity considerations
The Board believes that the terms of the plan to determine the benefits that the employee will receive (the plan benefit formula) provide for the most cost-reduction and pension obligations that have occurred. indicatedȱhas traditionallyȱlookedȱtoȱȱtermsȱofȱȱagreementȱasȱaȱbasisȱfor recordȱȱexchange.ȱȱUnfavoredȱsomeȱmethodsȱmethodȱmethodȱotherȱmethodsȱmethodȱcalculationȱusedȱbeforeȱTheStatementȱfocusesȱdirectlyȱonȱtheȱplanȱbenefitsȱformulaȱasȱbasis. ȱȱȱdeterminingȱȱȱinȱgained,ȱȱȱȱthroughȱcostsȱinȱe) . Some plansȱmayȱhaveȱbenefitsȱformulaȱthatȱattributeȱallȱaȱaȱdisproportionateȱshareȱofȱtotalȱbenefitsȱprovidedȱtoȱlaterȱyearsȱofȱveȱserviceȱEarlyȱBenefits. ȱasȱaȱplanȱthatȱprovidesȱ$500ȱperȱyearȱforȱȱȱeȱeȱ20ȱyearsȱȱrequirementsȱ20ȱyearsȱserviceȱbeforeȱbenefitsȱvestȱȱȱȱbenefitsȱvestȱoverlookedȱinȱaccumulationȱproportionȱofȱȱȱnumberȱofȱserviceȱcompletedȱtoȱtheȱnumberȱthatȱȱȱhaveȱ finishedȱveȱis"finishedȱveȱis". ȱadded)ȱ(Paragraphȱ42)ȱȱ.
1 Introduction
2 Individual financial statements
1 If prepayment is made to the pension provider on the arising obligation, this is an advance payment for services not yet received. 2 Countries in the EU, for example, require technical provisions to be set up as a basis for determining funding levels. 3 This chapter is written in the context of plans sponsored by a single employer.
4 This principle is reflected in IAS 39 AG59 which states: "Payment to a third party, including a trust (sometimes called 'in-substance defeasance'), does not in itself relieve the debtor of its primary obligation to the creditor, in the absence of legal release.”.
3 The employer’s consolidated financial statements
A.6ȱAnȱalternativeȱapproachȱtoȱSICȱ12ȱisȱusedȱinȱUSȱGAAPȱFINȱ46(R)ȱ‘ConsolidationȱofȱVariableȬ Interest Entities’ȱ(VIE). solidateȱaȱVIEȱifȱtheȱentityȱhasȱaȱvariableȱinterestȱ(orȱaȱcombinationȱofȱvariableȱinterests)ȱthatȱaȱaȱmajorityȱofȱtheȱentityȱlossesȱandȱexpected entitys expected residual returns, or both. ȱ'Variable interests'ȱinȱaȱVIEȱareȱ contractual,ȱownershipȱorotherȱpropertyȱinterests eȱofȱprimaryȱbeneficiary.ȱ.
2 The IASB Framework and recognition
3 Deferral mechanisms or immediate recognition?
There are many items in the financial statements that are difficult to measure and involve inherent uncertainties. Changes in assets and liabilities are usually recognized immediately and in full. inȱ financialȱstatements.ȱȱȱ. ii)ȱ There isȱlittleȱbasisȱtoȱsuggestȱthatȱchangesȱinȱmarketȱvaluesȱȱwillȱnecessarilyȱreverseȱover timeȱ–ȱfutureȱoffsetȱofȱpastȱlossesȱandȱgainsȱisȱnotȱinevitable. unlimitedȱandȱimpossibleȱtoȱdetermine,ȱexceptȱarbitrarilyȱȱ,ȱwhatȱchangesȱshouldȱandȱnotȱbeȱreflectedȱ.ȱȱVolatilityȱisȱaȱconsequenceȱofȱtheȱmarket.
4 The standard-setters’ views
5 Conclusions
6 Summary
2 Requirements for measuring liabilities in other accounting literature
3 Measurements based on current or historical information
4 Measuring the services received or the liability incurred
5 Alternative methods of settlement
Inȱsomeȱsituationsȱtheremayȱbeȱnoȱalternativeȱtoȱachievingȱsettlementȱbyȱgettingȱfromȱtheȱobligationȱbyȱmakingȱpaymentsȱtoȱtheȱcounterpartyȱwhenȱitȱcomes,ȱinȱotherȱwordsȱtherecanȱbeȱcurrentlyȱnoȱpossibilityȱtoȱsettleȱtheȱobligationȱ.ȱȱThisȱcanȱbeȱanȱcaseȱofȱbuyingȱoutsideȱmarketsȱforȱpensionȱobligations. ȱareȱimmatureȱandȱareȱinsufficientȱcapacityȱinȱrelativeȱtoȱallȱandȱobligationsȱthatȱexist.ȱȱȱ. b) Immediateȱpurchaseȱ–ȱtransferȱofȱobligationsȱ(orȱpartȱofȱresponsibilityȱȱtoȱaȱthirdȱperson.ȱȱIn practiceȱtheȱtransferȱwillȱusuallyȱtakeȱtoȱanȱinsuranceȱcompanyȱorȱentityȱsimilarȱlarȱcreditȱ,ȱalthoughȱitȱcouldȱbeȱtoȱanotherȱemployerȱ(orȱanotherȱplan).ȱ.
6 Current value measures of liabilities
Someȱconsiderȱfairȱvalueȱ(ormarketȬbasedȱexitȱvalueȱasȱitȱisȱdescribedȱinȱtheȱIASB’sȱ FairȱValueȱ discussion paper) theȱcase)ȱ pensionȱobligationsȱareȱnotȱtradedȱinȱactiveȱmarkets,ȱbecauseȱextensiveȱuseȱwouldȱbeȱlowȱofȱvaluationȱtechniquesȱusingȱinputsȱinȱ b) ȱ marketsȱtoȱasȱanȱentity ȱmightȱhaveȱaccessȱ(e.g.ȱhypotheticalȱtransactionsȱintended.ȱȱItcanleadȱtoȱanȱentityȱtoȱhaveȱtoȱreportȱaȱprohibitivelyȱexpensiveȱtransfer amountȱwhenȱitȱwildȱnotatyȱȱȱexpenditure. ȱȱ. c)ȱ A fairȱvalue measurementȱȱexplicitly requiresȱthe credit (or lack of performance)ȱriskȱrelatingȱtoȱthatȱliabilityȱto beȱreflected. isȱfairȱvalueȱ(orȱcurrentȱexitȱvalue),ȱfinancingȱorȱcollateralisationȱofȱȱtheȱobligationȱwillȱincreaseȱitsȱfairȱvalueȱandȱshouldȱbeȱtakenȱintoȱaccountȱinȱomeȱȱ ȱtoȱincludeȱcreditȱ(orȱnon-performance)ȱriskȱinȱmeasurementȱofȱpensionȱobligationsȱ(differentȱviewsȱconsideredȱȱinȱsectionȱ7).ȱ. d)ȱ Aȱtransferȱwouldȱonlyȱacceptȱaȱtransferȱatȱaȱpriceȱthatȱincludeȱsomeȱprofit. tity'sȱownersȱobligationsȱdoȱnotȱnecessarilyȱprovideȱusefulȱinformationȱaboutȱtheȱamount,ȱtimingȱandȱuncertaintyȱofȱcashoutflowsȱfromȱ ȱuseȱanymoreȱ. 13 The IASB's Glossary of Terms describes a company-specific value of a liability as “the present value of.
7 Credit risk of liabilities Background
14 However, it should be noted that the inclusion of credit risk in obligations covered by these. 16 See e.g. IAS 39 (BC89), which states the case for the requirement to recognize credit risk. e) A less creditworthy entity would report a liability a smaller amount than a more creditworthy entity would report. accompaniedȱbyȱaȱ lowerȱvalueȱplacedȱonȱtheȱentity’sȱequityȱandȱassets.ȱȱȱ. f)ȱ Whenȱtheȱriskȱofȱnotȱpayingȱpensionsȱisȱreduced,ȱpensionersȱrightsȱtoȱbenefitsȱbecomeȱmoreȱvaluableȱandȱareȱaȱaȱcorrespondingȱȱȱfor example,ȱifȱanȱentityȱdecidesȱtoȱensureȱtheȱliabilityȱeitherȱbyȱringȱfencingȱitȱwithȱrisk-freeȱassetsȱor ȱbyȱtransferȱitȱtothitherȱanȱentmis ȱbenefitȱbecomesȱmoreȱvaluableȱtoȱtheȱpensioners.ȱȱȱCredit increaseȱofȱresponsibilityȱisȱaȱcostȱtoȱtheȱentityȱ(inȱeffectȱ theȱexcompanyȱistoȱcompanyȱ). expectedȱthatȱtheȱentityȱwillȱthenȱreportȱaȱlossȱandȱanȱincreaseȱinȱitsȱaccountability.ȱ.
8 Expenses of administering liabilities
Obligationsȱcannotȱbeȱsettledȱwithoutȱincurringȱcostsȱ.ȱȱClearlyȱtheȱcostsȱthatȱaȱthirdȱpersonȱcausedȱtoȱmanageȱtheȱobligationȱwouldȱbeȱreflectedȱinȱtheȱtransferȱpriceȱ. ȱȱSimilarly,ȱemployeesȱwould,ȱrationallyȱexpect,ȱcostsȱofȱmanagementȱtoȱbeȱcoveredȱinȱtheȱsettlementȱofȱdirectȱemployerȱMPȱ(soȱemployeesȱcouldȱforȱbuyȱannuitiesȱfromȱthirdȱpersons).ȱȱSimilarȱcostsȱcannotȱbeȱavoidedȱifȱtheȱsubjectȱcontinuesȱobligation. nessȱandȱitȱreducesȱ.ȱȱȱȱȱ. b)ȱInclusionȱofȱsuchȱcostsȱwouldȱbeȱalsoȱconsistentȱwithȱtheȱviewȱthatȱtheyȱareȱpartȱofȱtheȱeconomicȱcostsȱofȱprovidingȱtheȱpromiseȱofȱearningsȱpost-employmentȱȱThisȱbecomesȱmore evidentȱinȱtheȱcaseȱwhereȱtheȱschemeȱwasȱclosedȱtoȱtheȱfutureȱbenefitsȱofȱservicesȱandȱthereforeȱallȱtheȱfutureȱcosts ȱadministrationȱrefersȱtoȱmanagingȱearnedȱearningsȱ.ȱȱȱȱ.
9 Summary
Measurement bases in IASB Framework
18 Value in use of an asset is defined in IFRS 5 as the present value of estimated future cash flows expected to arise from the continued use of an asset and from disposal at the end of its useful life.
Requirements and proposals for measurement of liabilities under IFRS
Transactionȱtoȱtransferȱtheȱobligationȱtakesȱonȱtheȱmainȱmarketȱforȱtheȱobligationȱ(theȱmarketȱwithȱtheȱlargestȱvolumeȱandȱlevelȱofȱactivityȱforȱtheȱobligationȱ)ȱor,ȱinȱtheȱabsenceȱofȱtheȱmainȱ market,ȱtheȱmost-favorableȱmarketȱ(theȱmarketȱwhichȱtheȱentityȱtransfersȱtheȱobligationȱtoȱminimizeȱtheȱamountȱthatȱwould paid. b)ȱFairȱvalueȱofȱtheȱobligationȱshouldȱreflectȱtheȱdefaultȱriskȱassociatedȱwithȱthatȱobligationȱȱȱȱ (c)ȱTheȱobligationȱisȱtransferredȱtoȱaȱparticipantȱonȱtheȱmeasurementȱdateȱ(theȱobligationȱtoȱtheȱcounterpartyȱcontinues;ȱisȱnotȱsettledȱandȱthatȱtheȱriskȱofȱdefaultȱisȱassociatedȱwith ȱobligationȱisȱoneȱbeforeȱandȱafterȱitsȱtransfer.ȱ. a)ȱ. The definitionȱinȱSFASȱ157ȱexpresslyȱisȱexitȱ(selling)ȱpriceȱ–ȱreflectsȱthatȱtheȱobjectiveȱof fair value measurementȱisȱtoȱdetermineȱtheȱpriceȱthatȱwouldȱbeȱreceivedȱforȱanȱassetȱorȱpaidȱtoȱtransferȱaȱliabilityȱatȱtheȱdateȱmeasurementȱ.ȱ. b)ȱDefinitionȱinȱSFASȱ157ȱexpresslyȱrefersȱtoȱparticipantsȱinȱtheȱmarketȱ–ȱtheȱconsequenceȱisȱthatȱtheȱfairvalueȱmeasurementȱshouldȱbeȱbasedȱonȱtheȱassumptionsȱthatȱmarketȱparticipantsȱ(andȱnotȱtheȱentity)ȱwouldȱuseȱinȱdeterminingȱtheȱassetȱorȱliability,ȱregardlessȱofȱintentionȱorȱability. ability of the entity to sell the asset or transfer the liability on the measurement date. c)ȱFor liabilitiesȱtheȱdefinitionȱofȱfairȱvalueȱinȱSFASȱ157ȱformsȱtheȱnotionȱthatȱtheȱobligationȱisȱtransferredȱtoȱtheȱparticipantȱon the marketȱ(the obligationȱtoȱtheȱcounterpartyȱcontinues;ȱitȱisȱnotȱsettledȱwithȱtheȱcounterparty).ȱȱȱ. Therefore, inȱmeasuringȱtheȱfairȱvalueȱofȱanyȱadvantageȱorȱdisadvantageȱthatȱtheȱentityȱthatȱobtainsȱtheȱliabilityȱmayȱhave,ȱcomparedȱtoȱtheȱmarketȱthatȱwouldȱbeȱmoreȱ(orȱless)ȱbeneficialȱtoȱtheȱentityȱtoȱsettleȱtheȱliabilityȱinȱtheȱnormalȱcourseȱofȱbusinessȱisȱnotȱreflectedȱinȱtheȱmeasurementȱofȱtheȱliability. ȱInstead,ȱifȱtheȱentityȱcanȱsettleȱitsȱobligationsȱatȱmoreȱcostsȱinȱtheȱordinaryȱcourseȱofȱbusiness,ȱtheȱgainȱfromȱsuchȱconductȱwouldȱbeȱreflectedȱinȱprofitȱorȱlossȱinȱsubsequentȱperiodsȱuptoȱsettlement. ȱasȱsomeȱentityȱspecificȱsettlementȱamountȱorȱvalueȱinȱuse)ȱwouldȱreflectȱtheȱentityȱexpectationsȱofȱcashȱoutflows.ȱȱȱ.
Levelȱ3ȱinputs:ȱȱUnobservableȱinputsȱthatȱreflectȱtheȱpropertyȱassumptionsȱofȱtheȱassumptionsȱthatȱmarketȱparticipantsȱwillȱuseȱinȱpricingȱȱcalculationȱcalculations. ȱȱUnobservableȱinputs,ȱwhichȱcan include entityȱpropertyȱdata,ȱmayȱbeȱusedȱinȱsituationsȱinȱinȱwhichȱthere is little,ȱany,ȱȱmarket activity. 29 tȱ appropriateȱrisk-adjustedȱrateȱisȱgivenȱbyȱtheȱexpectedȱreturnȱonȱappropriateȱportfolioȱofȱplanȱassetsȱthatȱwill,ȱaboveȱtheȱlong-term,ȱperformance obligationȱannouncementȱassurance. ȱappropriateȱportfolioȱmayȱinclude:ȱȱ. a)ȱȱ fixed-interestȱsecuritiesȱforȱobligationsȱtoȱformerȱemployeesȱtoȱtheȱextentȱthatȱtheȱobligationsȱareȱnotȱconnected,ȱinȱformȱinȱsubstance,ȱtoȱinflation; It is important to note that in reality the portfolio does not necessarily have to be an adequate portfolio in this sense. ingȱanȱappropriateȱportfolio.ȱForȱexample,ȱinȱsomeȱcountries,ȱplansȱareȱrequiredȱtoȱholdȱaȱcertainȱproportionȱofȱtheirȱassetsȱinȱtheȱformȱofȱanȱanȱfixedsecurities. ȱportfolioȱisȱaȱvalidȱreferenceȱpoint,ȱitȱisȱequallyȱvalidȱforȱbothȱfundedȱandȱunfundedȱplans.ȱȱ. a) Portfolioȱtheoryȱproposesȱthatȱtheȱexpected return on an assetȱ(or the inherent rateȱinherentȱinȱaȱliability)ȱȱisȱrelatedȱtoȱtheȱriskȱ). ȱfromȱaȱportfolioȱofȱassetsȱreactȱtoȱchangingȱeconomicconditionsȱoverȱtheȱlong-termȱinȱtheȱsameȱwayȱasȱcashflowȱofȱaȱdefinedȱbenefitȱobligation,riskobligationȱthereforeȱtheȱappropriateȱ.
Moreover, if such an apparent correlation exists, it is not clear whether the correlation is a result of the shared characteristics of the portfolio and liabilities or of changes in the contractual pension promise; ȱ. c)ȱȱtheȱreturnsȱstocksȱcollateralsȱnotȱcorrelatingȱwithȱotherȱrisksȱrelatedȱtoȱdefinedȱbenefit plans,ȱvariabilityȱinmortality,ȱtimingȱretirement,disabilityȱandȱadverseȱselection;ȱ. (d) to evaluate liability with uncertain cash flow, an entity would normally use a discount rate lower than the risk-free rate, but the expected rate of return on a suitable portfolio is ȱhigherȱthanȱrisk-freeȱrate;ȱ. e) the claim that final salary is strongly correlated with return on capital implies that final salary tends to fall when asset prices fall, but experience shows that salaries do not fall ;ȱ. f) the assumption that stocks are not risky in the long run, and the associated notion of long-term value, are based on the mistaken belief that the market always bounces back after a crash. Shareholders will not get credit in the market for any additional long-term value if they sell their shares today. an entity that finances its obligations with equity securities runs the risk of stock prices falling when the benefits are due to be paid. Similarly, the hypothesis that stocks' true returns are not correlated with inflation does not mean that stocks offer risk-free returns, including over the long term; g)ȱtheȱexpectedȱlong-termȱexpectedȱratesofreturnȱofȱasuitableȱportfolioȱcannotȱobjectivelyȱdetermineȱsufficientȱin practiceȱtoprovideȱan adequateȱbasisȱforȱaȱaccounting standard. identifying its features.
2 Providing decision-useful information
3 Measurement characteristics
1 An active market for an asset is a market in which transactions in the asset occur with sufficient frequency and volume to provide price information on an ongoing basis. property,ȱplantȱandȱequipmentȱandȱintangibleȱassetsȱareȱimpairedȱandȱshouldȱbeȱwrittenȱdownȱtoȱtheirȱreplaceableȱvalues.ȱȱValueȱinȱuseȱisȱdefinedȱIASȱ36ȱ“Impairmentȱofȱassets”,ȱasȱ“theȱpresentȱvalueȱofȱtheȱfutureȱcashȱflowsȱthatȱareȱexpectedȱtoȱflow ȱfromȱtheȱassetȱorȱunitȱofȱcreatingȱmoneyȱ.ȱȱReflectsȱcashȱflowsȱexpectedȱfromȱfurtherȱuseȱofȱtheȱassetȱandȱfromȱitsȱfinalȱdisposal.ȱȱȱ. Funds which has the dilo of the® assets® for the® funds of the® funds of funds of.com for the.com Coaldstro.com, sequels of sequeliol®, ȱCOX estate purstrong@troging March. purposes pursuing the.com sales.@.Sc. b)ȱIfȱsomeȱentityȱthinksȱinvestmentȱitȱpaysȱtoȱkeepȱlong-termȱfundsȱforȱpensionȱobligationsȱandȱhasȱtheȱabilityȱtoȱdoȱ,ȱtheȱvariabilityȱofȱmarketȱpricesȱ(whichȱreflectsȱamongȱmanyȱotherȱthingsȱshort-termȱvariationsȱinȱdeterminingȱrisksȱonȱtheȱmarketsȱandȱthusȱinȱpremiumsȱforȱrisk isȱlinkedȱtoȱdifferentȱclassesȱofȱassets,ȱdoesȱnotȱnecessarilyȱchangeȱtheȱinvestmentȱisȱaȱfundamentalȱvalueȱforȱtheȱentity.ȱȱThisȱisȱespeciallyȱtrueȱwhenȱmarketsȱareȱtemporarilyȱdislocatedȱatȱtheȱdateȱofȱfinancialȱreportingȱ.ȱStatedȱotherwise,ȱifȱtheȱinvestmentȱisȱretainedȱatȱatȱpartlyȱforȱtheȱpurpose. ȱreceivingȱincomeȱinȱlongȱtermȱ,ȱshort-termȱfluctuationsȱinȱmarketȱpricesȱȱdoesȱnotȱaffectȱtheȱcashȱflowsȱthatȱcanȱbeȱexpectedȱtoȱcontributeȱtheȱemployerȱtoȱitsȱlongtermȱobligationsȱandȱincorrectlyȱreflectedȱinȱtheȱfinancialȱstatements.ȱȱȱFor example, this would correspond to level 1 inputs in the hierarchy hiji of fair value v SFAS 157 (see paragraph 3.7 above).short-termȱvolatilityȱthatȱisȱreflectedȱinȱquotedȱmarketȱpricesȱwithȱtheȱresultȱthatȱwithȱcurrentȱaccountingȱrequirementsȱseemȱless,ȱratherȱthanȱmore,ȱriskyȱthanȱtheȱquotedȱsecurity. e) ExistingȱaccountingȱstandardsȱhaveȱledȱemployersȱandȱtrusteesȱtoȱtakeȱsubȬoptimalȱdecisionsȱregardingȱtheȱfinancingȱofȱlongtermȱobligationsȱbyȱpromotingȱinvestmentsȱinȱassetsȱwithȱlowȱyieldsȱtoȱminimizeȱaccountingȱ(orȱvolatility)ȱriskȱinȱtheȱshort-termȱ.
When the asset questions are, for example, a small package of equity shares in a quoted company, and a matter that is reflected on the current market and the value of the finance on the existenceȱofȱaȱmarket.ȱȱGiven the number of assumptions, it represents the amount that can be received and from the sale and the asset, and acquires a small package, it does not give meaning to the right to influence the investor, so this cash flow is the same. b) ȱ This is introduced >Toȱweetȱ eȱinȱdieȱlang term, ȱ butȱitȱisȱdieȱbestteȱ estimationȱ -availableȱfill another way. and the factors it can cause. Ȭtermȱvalue.ȱȱȱ. c) Most would agree that, for assets that do not have a market value, that there are more ways to influence the number. ȱnotȱjustifyȱallowingȱaȱvaluationȱtechniqueȱtoȱuseȱwhenȱthereȱisȱaȱmarketvalue;ȱifȱthereȱisȱaȱdifferenceȱbetweenȱ ȱpossibleȱthatȱsomethingȱisȱmissingȱinȱtheȱvaluationȱmodel.ȱȱȱ. d) it cannot be plausible that, on the balance sheet date, and the entity will pay willingly and rationally and more than the fairness of the market, against fairness it would willingly and rationally accept less than the market price. The asset's economic value cannot exceed the price that it can. e) ȱ The argument worth investments and bonds with the market value of CU1 000 and the investments and shares with 0 0 00 ȱ is 1.000. ȱtheȱcontextȱofȱfinancialstatementsȱtakesȱupȱatȱtheȱmeasurementȱdate.ȱȱAnyȱextraȱreturnsȱthatȱareȱexpectedȱtoȱtoȱearnedȱfromȱinvestmentȱȱȱreastakeȱ ingȱextraȱriskȱandȱmustȱbeȱaccountedȱinȱfutureperiods.ȱȱItȱwouldȱbeȱinappropriateȱforȱanȱaccountingȱmodelȱtoȱrecognizeȱtheȱ. expected future valueȱofȱassetsȱinȱtheȱstatementsȱofȱtheȱentityȱcurrentȱfinancialȱpositionȱandȱperformance;ȱwhichȱprobablyȱtoȱreflectȱaȱfinancialȱpositionȱtiskenȱtesenȱandȱinvestmentsȱvaluableȱthenȱaȱriskȬaverseȱstrategy.ȱȱWhen a decision is madeȱtoȱtoȱinvestȱinȱbondsȱorȱequitiesȱtoȱprovideȱfunds ȱtoȱencounterȱȱȱisȱinherentlyȱmoreȱvaluableȱthanȱtheȱothers.ȱ3ȱȱ. f) an accounting model that may require an entity to report and an increase of the assets by changing the investment strategy, say, and the switching of bonds ȱnoȱvalueȱis(yet)ȱaddedȱbyȱchangingȱtheȱasset allocation.ȱȱAȱproblemȱwithȱtheȱargumentȱforȱaȱhigherȱvalueȱreportingȱanȱimmediateȱprofitȱby increasingȱleverageȱ–ȱfor example, ȱifȱitȱborrowsȱforȱinvestment,ȱitȱwillȱreportȱanȱadditional assetȱifȱitȱexpectedȱthatȱitȱhasȱborrowed.ȱȱThe entitys own perceptionȱofȱtheȱvalueȱofȱinvestmentstrategyȱmustȱcommunicateȱthroughȱdisclosureȱnotȱrecognition. g) Investingȱinȱvolatileȱassetsȱtoȱprovideȱfundsȱforȱlongtermȱobligationsȱisȱaȱvolatileȱbusinessȱproposition,ȱsoȱitȱisȱnotȱsurprisingȱthatȱtheȱaccountingȱnumbersȱreflect. ȱtheȱbasisȱforȱreportingȱtheȱfinancialȱpositionȱatȱaȱpointȱinȱtimeȱimpliesȱthatȱitȱisȱorȱisȱnotȱrationalȱforȱemployersȱandȱtrusteesȱbusiness obligationȱinvestment obligation sȱthatȱdoȱnotȱseekȱtoȱminimiseȱaccountingȱrisk.ȱȱȱ.
Requirements for measurement of assets under IFRS (except pensions)
IASȱ19ȱdoesȱthisȱbyȱaȱaȱseparateȱclassȱofȱassetȱ–ȱplanȱassets.ȱȱPlanȱassetsȱareȱassetsȱthatȱexistȱexclusivelyȱtoȱpayȱorȱfundȱandfundȱotherȱclaimsȱonȱtheȱentityȱ7.ȱȱ Planȱassetsȱ–ȱmeasuredȱatȱfairvalueȱȱisdeductedȱfromȱtheȱpresentȱvalueȱofȱnetȱdefinedȱbenefits. etreditionsobligationsȱliabilityȱ(orȱasset).ȱȱInȱnoȱoccasionȱareȱ. b)ȱ SFASȱ87ȱ(as amendedȱbyȱSFASȱ158)ȱrequiresȱtheȱfundedȱstatusȱofȱaȱbenefitȱplanȱ–ȱmeasuredȱasȱtheȱdifferenceȱbetweenȱandtheȱbenefits. c). d)ȱ Theȱinternationalȱaccountingȱstandardȱregardingȱfinancialȱreportingȱforȱretirementȱbenefitsȱplans,ȱ IASȱ26ȱ‘AccountingȱandȱReportingȱforȱRetirementȱBenefitsȱplans’,ȱinvestmentrequirementsȱvalueȱ(whichȱinȱcaseȱofȱmarketableȱsecuritiesȱisȱmarketȱvalue)ȱunlessȱanȱestimateȱorȱfairȱvalueȱisȱnotȱpossible.8 ȱ. 7 Assets held by a long-term employee benefit fund are defined in IAS 19 as assets (other than non-transferable financial instruments issued by the reporting entity) that:. a) is heldȱbyȱanȱentityȱ(aȱfund)ȱthatȱisȱlegallyȱseparateȱfromȱtheȱreportingȱentityȱandȱexistsȱonlyȱtoȱpayȱorȱfundȱemployeesȱand-benefits; 8 However, IAS 26 allows securities that have a fixed redemption value and that have been acquired to match the obligations of the plan, or specific parts thereof, to be measured on an amortized cost basis.
The board concluded that plans for investments should be measured at fair values.... Fair value provides the most relevant information that can allow the assessment of benefits fitȱasȱthey come ȱwithoutȱfurtherȱcontributionsȱfromȱtheȱemployerȱandȱtheȱfutureȱcontributionsȱnecessaryȱforȱbenefitsȱbenefitsȱalreadyȱpromisedȱtoȱtheȱemployees….” the board did not believe that there were sufficient reasons for the UK to differ from the rest of the world in measuring schemes and values ȱfairȱvalue.ȱȱFurthermore,ȱandȱperhapsȱmoreȱimportantly,ȱitȱwasȱclearȱthatȱsignificantȱchangesȱwere taking placeȱinȱaȱpensionȱscheme.ȱȱ Ofȱ ȱDiscussionȱPaper,ȱallȱbutȱoneȱsupportedȱ IASC subsequently decided that the scheme assets were to be measured at fair value. employerȱfinancial statementsȱwhenȱaȱseparateȱtrustȱorȱsimilar entity1ȱisȱestablishedȱtoȱholdȱassetsȱtoȱpayȱ benefits.ȱȱȱ. a)ȱ.
2 Consolidation of a trust
3 Recognition of a right to reimbursement from the trust
4 Recognition of a net liability or asset
5 Summary
2 Assumed model for presentation of financial statements
3 Should changes in pension assets and liabilities be disaggregated?
Actuarial gains and losses Changes in actuarial deficits or surpluses arising because: ȱ. a) Events ȱ have not coincided ȱ with ȱ ȱ actuarialȱ assumptionsȱ madeȱ forȱȱȱ ȱlatestȱvaluationȱ(experiencedȱprofitsȱȱȱlosses)ȱorȱȱ.
4 Presentation of service and interest cost
5 Presentation of the movement in assets (expected and actual return)
6 Change in the rate of discount
7 Actuarial gains and losses
8 Summary
Actuarialȱgainsȱandȱlosses—inȱtheȱstatementȱofȱprofitȱandȱlossȱ,ȱwithinȱotherȱfinancialȱperformance.ȱȱ(Sectionȱ7)ȱ 8.4ȱAn importantȱdifferenceȱfromȱtheȱrequirementsȱofȱcurrentȱaccountingȱstandardsȱisȱproȱȱproﱱ opinionȱthatȱfinancialȱstatementsȱshouldȱreportȱactualȱreturnȱonȱassets,ȱand not ȱȱexpectedȱreturn.ȱȱȱSinceȱusersȱfindȱexpectedȱreturnȱonȱassetsȱuseful,ȱitȱisȱsuggestedȱthatȱitȱshouldȱbeȱdisclosedȱinȱnotesȱtoȱfinancialȱstatements.ȱȱ(Sectionȱ5)ȱ.
2 Objectives for disclosure
3 The financial statements contain adequate disclosure of the cost of providing pension benefits and any related gains, losses, assets and
3 The financial statements contain adequate disclosure of the cost of providing pension benefits and any related profits, losses, assets and. 2 Chapter 8 discusses the elements that give rise to the movement in pension assets and liabilities. ii) recent experience confirmsȱthatȱmortalityȱrateȱforȱtheȱretiredȱpopulationȱinȱtheȱUKȱhas continued to fallȱrapidly,ȱwithȱnoȱrealȱsignsȱofȱsequencing3; iii) studies have suggested that mortality and assumptions vary significantly4. ityȱtables; ȱdisclosureȱofȱtheseȱtablesȱonlyȱprovidesȱtheȱsourceȱforȱtheȱassumption,ȱnotȱtheȱassumptionȱitself.ȱȱAȱmoreȱinformativeȱ pensionsȱareȱexpectedȱtoȱbeȱpaidȱtoȱindividuals.ȱȱȱ. 3.11ȱ In addition to the disclosure of the assumptions, and some believe that it is important and that the disclosures and the disclosures set outȱanȱexplanationȱofȱwhyȱassumptionsȱchangeȱfromȱpreviousȱperiods.ȱȱ. 3 The Actuarial Professional Letter to actuaries with Life Actuary certificates and Scheme Actuary certificates - 10 July 2007.
Insight into the shortcomings of the company. thatȱanalystsȱandȱshareholdersȱwantȱimprovementsȱinȱthe extentȱofȱFRSȱ17ȱdisclosureȱparticularlyȱon pension solvency positions. ȱ FRSȱ17ȱdeficienciesȱandȱexplainingȱhowȱsensitiveȱtheseȱdeficienciesȱaretochangesȱthereinȱisȱa step in the right direction, but not a completesolutionȱtotheproblem.ȱȱȱ. 4 Users of financial statements can get a clear picture of the risks and rewards arising from obligations to pay retirement benefits and assets.
4 Users of financial statements can obtain a clear view of the risks and rewards arising from liabilities to pay pension benefits and the assets
