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By Paul Pacter, PhD, CPA, IASC International Accounting FellowPensions and Other Employee Benefits

The IASC has proposed some significant amendments to its existing standards on employer accounting for pension costs as well as new standards for other employee benefits not heretofore addressed in IASC pronouncements. The proposal is contained in Exposure Draft E54, Employee Benefits.

E54 would eliminate all projected benefit methods for measuring pension cost and would adopt a single accrued benefit method, namely the projected unit credit method. It would also require that pension obligations be measured at least at each annual balance sheet date. The existing IASC standards require valuations only once every three years. The current U.S. standard allows a valuation as much

as three months prior to balance sheet date.

A risk-free rate would be used to discount pension obligations. A risk-free rate is the yield on high quality fixed-rate corporate bonds with a maturity consistent with the expected maturity of the pension obligations. In a country that lacks a well-established market in corporate bonds, the yield on government bonds would be used.

Plan assets would be measured at market value or, if a market is not available, at expected future cash flows discounted at current market yields. Under E54, actuarial gains and losses would be amortized over the average remaining working period of a company's employees only if, in the aggregate, they are within a 10% corridor (10% of the gross pension obligation or total plan assets, whichever is greater). Unrecognized actuarial gains or losses in excess of this 10% corridor would be recognized in income immediately. A net pension asset reported in the balance sheet would be subject to a realization cap and should not exceed the net present values of any refunds expected from the plan plus any expected reductions in future contributions arising from the surplus.

E54 seeks comments on two alternative ways to account
for past service
cost arising from new plans or plan amendments. Alternative A would amortize past service cost relating to current employees over their average remaining working life. Alternative B would charge such past service cost to income immediately. Under both alternatives, past service cost relating to former employees would be deducted from earnings immediately.

With respect to compensated absences (such as vacations and holiday benefits), post-employment insurance benefits, bonuses, and profit sharing, accrual of the cost and obligation (if unfunded) would be required during the periods of employee service. E54 would require disclosure, but not accrual, relating to equity compensation benefits such as employee stock options.

IASC seeks comments on E54 by January 31, 1997.

Provisions and Contingencies

An IASC steering committee has published for comment its tentative conclusions on accrual of provisions. Provisions are future expenditures whose amount or timing is uncertain.

Under the proposal, the most fundamental principle is that a company would recognize a liability for a provision only when it has a present obligation to transfer economic benefits as a result of a past event. To illustrate application of this principle: warranty obligations would be accrued because the manufacturer cannot avoid the cost of repairing or replacing defective items; future maintenance costs (such as ship dry-docking and furnace relinings) would not be accrued, even if highly probable, because there is no obligation to make the payment; environmental cleanup costs would only be accrued if there is a legal or constructive obligation for the company to clean up environmental contamination; the cost to restore a mining site would be accrued when the obligation arises, which may be partly at commencement of the mining operation and partly when the ore or other minerals are extracted; self-insured losses that have not yet occurred would not be accrued.

If an obligation for a provision will be discharged over a period longer than a year, the provision is measured at discounted present value. The amount provided should be the best estimate of the expenditure that will be required to settle the obligation amount the enterprise would have to pay a third party to assume its obligation. Future events that can reasonably be expected to occur would be taken into account in measuring the obligation, including anticipated recoveries from third parties.

Comments on the proposal were due by January 31, 1997. The next step would be a board exposure draft. *

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