European Union:IASB may allow use of UK rule on pensions

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European Union:IASB may allow use of UK rule on pensions

By Andrew Parker, the Financial Times

December 17, 2003

International standard setters will on Thursday consider giving European companies the chance, in 2005, to adopt UK-style pension accounting, which has caused controversy by exposing big deficits in corporate schemes.

The International Accounting Standards Board will be asked to approve proposals to enable listed companies in the European Union to use financial reporting principles similar to the UK pension rule.

The British rule, known as FRS 17, has been blamed for the closure of final salary pension schemes because it highlights large deficits, and some companies have complained it causes major volatility in their accounts.

But Sir David Tweedie, chairman of the IASB, wants the body to allow EU companies to adopt the FRS 17 approach and recognise actuarial gains and losses on their pension schemes immediately in their financial statements.

Under the existing international pension rule, known as IAS 19, companies can smooth the gains and losses over a number of years. It means balance sheets do not capture the full surpluses or deficits in pension schemes.

Sir David, who wrote FRS 17, criticised IAS 19 and its smoothing mechanism. "It distorts," he told the Financial Times.

All EU listed companies must use international accounting standards from 2005.

The IASB, at its meeting on Wednesday, will be asked to approve arrangements under which EU companies would have the choice between using the smoothing mechanism under IAS 19 or adopting the FRS 17 approach.

It is likely but not certain that the IASB will approve the arrangements as a revision to IAS 19. Some IASB members are sceptical, but a majority are thought to be in favour of the changes.

Sir David wants to embark on a full overhaul of IAS 19, possibly in 2006, under which he hopes to draw up a rule based on FRS 17 but possibly with tougher provisions.

Companies in continental Europe may prefer to opt for IAS 19 until Sir David's overhaul. However, some companies may decide that given Sir David's preferred overhaul method it would be better to get to grips with it early through the FRS 17 approach in IAS 19.