Reporting pension liabilities
Adoption of IAS 19R by Europe 's premium listed companies: the corridor approach versus full recognition and transparency
Donna L. Street, University of Dayton, USA, Martin Glaum, University of Giessen, Germany, and Jan Fasshauer, University of Geissen, Germany.
FRS 17 became a lead media story and was cited as the cause of the demise of numerous pension schemes (Chitty 2002). Politicians and union leaders attacked the standard and called for its withdrawal. Critics indicate FRS 17 provides a short-term and potentially misleading measurement of a substantial long-term liability: in an oscillating stock market, FRS 17 numbers can be highly volatile. Thus, FRS 17 initiated a trend whereby UK companies shifted to defined contribution plans (Veysey 2004). Additionally, many of those still operating defined benefit plans are raising employee contribution rates.
Given the ‘adverse' economic consequences of FRS 17 adoption in the UK , many may question why companies would voluntarily adopt the IAS 19R option. However, praise has been accorded FRS 17's transparency. Dovovan (2003) quotes a Shuttleworth actuary stating ‘Make no mistake these FRS 17 deficits are real – they represent the company's likely future contributions and no amount of clever smoothing can cover this up'. Furthermore, transparency may not be coupled with similar adverse consequences in other countries. For example, in Germany , while the move from opaque pension accounting to IFRS (or US GAAP) led to greater transparency (market valuation of the pension liability), there was no associated termination of defined benefit schemes. Alternatively, transparency motivated many firms to strengthen their funding, thereby leading to the build-up of plan assets for previously underfunded plans (JP Morgan 2006).
Given opposing views, the proposed research aims to determine, upon adoption of IFRS, the extent to which companies comprising the premium segments of European exchanges selected transparency via the full recognition of actuarial gains/losses. While opponents of FRS 17 and the IAS 19R option argue recognition of pension liabilities/assets and expense/income based on immediate recognition will have a devastating balance sheet impact, this remains an empirical question. This research will provide the first comprehensive evidence regarding the actual impact of full recognition on the financial statements of companies providing defined benefit plans. The research will compare the magnitude of the recognised pension liability/asset prior to adoption of the option to that following adoption.