Objectives of International Financial Reporting Standard (IFRS)
In June 2011, the International Accounting Standard Board (IASB) introduced IAS 19 employee benefits whose implementation began in 2013. The International Financial Reporting Standards Agency is presently in the process of revising these regulations in the exposure draft to include defined benefit plans for employees. The revisions on employee benefits are mostly in regard to the benefits of termination as amendments are in relation to termination benefits as per the provisions of the exposuredraft IAS 3, contingent liabilities as well as contingent assets.When these amendments were finalized, the IASB observed the existence of matters which required to be emphasized on. This was part of a critical review on the efficacy of the benefits and pensions.
In accordance to the IASB, the project was particularly initiated because of the nature and complexity in coveringissues of which IASB had not initially planned of issuing research documents or discussion within a time frame of three years.Among the aims for suchamendments wereenhancing the comprehension on the actual effect of defined benefit plans on the performance of organizations, the cash flows and financial status (IAS,2011).
Defined BenefitPlans and Generally Accepted Accounting Principles (GAAP), the Differences
Both the media and the business world have consistently discussed the state’s problems with the liabilities in the define benefit pension plans. These discussions have also extended to the resultant impact of a municipality or company’s net income, overall sustainability and cash flows,alongside the resultant impact on the present and future retirees. Such plans have since become more prevalent and employers have preferred the idea of such costs which are not affecting their reporting expenses and liabilities under the generally accounting principles (GAAP) for a number of years. On the other hand, theirworkers mostly accepted lower wages as an exchange for the retirement security.
There are inherence variations existing between the defined benefit plans and the Generally Accepted Accounting Principles (GAAP).It is required of employers to utilize twotechniques in determination ofnet liabilities and assets, the fair value of planned assets and the projected benefit obligation. The Generally Accepted Accounting Principles (GAAP) does notpermit the netting of assets against liabilities. The other variation in relation to GAAP and defined benefit plans is on how the unrecognized actuarial losses or gains are treated. Which under GAAP the unrecognized losses or gains are amortized over a certain timeline in the sense that they arefinally noted on the income statement. According to IFRS, in the event that the amount is instantly identify in OCI, it may not be moved to the income statement since the IASB has yet to agree on the acceptable approach to income identification that could be applied uniformly across various departments (IAS 19 BC99). Rather than prescribing one technique which would be appropriately used for all organizations orallow a diversity of methods which diminishes consistently and comparability across different firms, IFRS simply disallows the identification of the amounts in OCI (IAS, 2011).
The other variation betweenGAAP and IFRS is on how the prior service costs are treated. For GAAP, there is the expectation of service costs on the live and work of employees. For IFRS, there is an instant identification of prior service costs for the vested employees whereas; the unvested employees are amortized over a specific period of time until when they become vested. Further, pension asset and liability is identified differently by GAAP and IFRS. GAAP defines liability as the PBO minus the fair value of planned assets. For IFRS, liability is defines as the PBO minus planned assets. Nonetheless, it subtracts the unrecognized the actuarial losses prior to service costs (Ernst & Young, 2010).
Finally, unlike the US GAAP, the IASB harbors an asset ceiling on the existing pension assets contained in the balance sheet. In preventing organizations from identifying assets for quantities which are greater than what the future benefits of the assets has. On the other hand, IAS 19 regards the asset ceiling as the “ current value of any form of economic benefit which are then availed in form of refunds derived from the reductions or plan in future contributions of the specific plan(Ernst & Young, 2010).
General Concerns for Review on Employee Benefit
This project for initiation of the defined benefitplan was put on the IASBs agenda in2006 as part of its program towards convergence. The need for defined benefit plans was derived out of the need for analysts, investors andothers to obtain relevant information regarding those items which are easy to comprehend and facilitate a comparison between and among organizations. The proposal was also aimed at improving the following areas: disclosure, presentation andimmediate recognition of defined benefit cost. There was also a need to amend the existing termination benefits. The other necessity was on revising the employment benefit laws to make it easy for organizations to make preparations for the required contributions for the minimum funding requirements. There was also a necessity of doing away with the requirement in employment benefit laws in using government bond rate in a situation where deep market was not available in corporate bonds which were of high quality. As at current, the IASB has not fully implemented the amendments related with the discount rate as one way of gauging the employee benefits(IAS, 2011).
Conclusions by the IASB committee
In order to ensure success in the implementation of its project, the IASB decided to establish a group to help by offering different perspectives of expert perspective including those of the auditors, actuaries, preparers, regulators and users of financial statements. The group included senior professionals with a vast range of experience in operation, valuation, management, regulation, auditing and financial reporting ofdifferent arrangements in post-employment benefit.
A revised IAS 19 Employee Benefitswas issued by the committee in June 2011 and these included the amendments which pertained to the termination benefits. These amendments had been preceded by those of IFRIC 14 in November 2009 which had allowed entities to prepay their contributions under the minimum funding agreement in recognition of some asset in some situations. An exposure draft was presented by the body in August 2009, which erased the requirement in utilizing government issued bond rate as published by IASB.
There is no doubt that the proposed amendments by the IAS on employee benefits are going to bring positive changes to employment and employee lives. Nonetheless, there is no possibility that these changes will have a great variance with those of the US GAAP accounting standards. This owes to the fact that thesemethods are aimed at accomplishing a similar goal, though one is aimed at enhancing these capabilities. History depicts an increased growth in globalization where many firms are now operating in different countries. This implies that multinational entities are expected to adhere to different standards of accounting, thus making it more expensive and complicated in complying with proper accounting regulations. What IASB has done is to undertake a convergence project so as to help in unifying the global standards in accounting in the sense those organizations should not live under the burden of excessive accounting costs. However, it is expected that the accounting regulations for defined benefit plans will have some portions that differ with the US GAAP.