International Accounting Standard 19 prescribes the accounting and disclosure of employee benefits. The revised provisions are effective for annual periods beginning on or after 1st January, 2013.
Currently a "corridoor approach" allows for deferred recognition of actual gains and losses resulting in less volatility in the balance sheet. The revised standard eliminates this option with the value of post-employment benefits being recognised as they occur. The removal allows the companies to recognise deferred "bad news" not booked to the balance sheet without it ever having to go through the profit and loss account. There would be a one-off "hit" to equity.
The other major change is that the expected return on assets assumption will be replaced by a discount rate. The discount rate is generally based on the yield of long-dated high quality (generally taken to be AA rated) corporate bonds in the currency of the liabilities. This assumption and its volatility is going to have a major impact on reported profit and loss.
There are also new requirements about the sensitivities to key assumptions, investment strategies, governance and regulatory frameworks and details of the cashflow profile of the benefit payments.
With the demise of defined benefit plans and coverage in Australia, the significance of these changes will be less significant than in most other countries reporting under IFRS.
The NetActuary Team