European Federation for Retirement Provision > Key Issues

Accounting

Since 1 January 2005, companies listed on European stock exchanges have to comply with the International Financial Reporting Standards (IFRS) in drawing up their financial accounts. The International Accounting Standards Board (IASB) is responsible for designing the financial reporting standards. The European Commission decides whether the accounting standards are applied to the EU after seeking advice from the European Financial Reporting Advisory Group (EFRAG).

International accounting standard 19 (IAS 19) prescribes how companies should account for pensions provided to employees. The IASB has decided to embark on a project to improve pension accounting, which should result in a revised interim standard in 2011. After that the IASB will work with the Financial Accounting Standards Board (FASB) in the United States on a more fundamental review to reach a common standard for pension accounting.

Important shortcomings of the existing accounting standard are:

IAS 19 makes a black-and-white distinction between defined contribution schemes and defined benefit plans. It does not allow for hybrid plans in which the risks are shared between employers and employees.
IAS 19 allows employers multiple options to account for gains and losses in a pension plan. This is inconsistent with the objective of providing transparent and comparable information on pensions in financial statements.

EFRP supports initiatives to achieve a comprehensive reform of pension accounting. There is considerable evidence that risk-sharing plans – like cash balance plans and conditional indexation schemes – have been discouraged due to the failure of IAS 19 to properly cater for such schemes. But pension funds are also important investors in the global stock markets. Hence, they have an interest in pension liabilities being adequately reflected in companies’ financial statements.