Within most companies, the domain of "social obligations" or post-employment benefits is the responsibility either of the financial or the HR management. However, the information that is available on these "personnel benefits" within the framework of the International Financial Reporting Standards (IFRS) shows, how important it is that there is a clear strategy on the part of both departments in this matter. These obligations must, after all, be assessed, booked and published in conformity with the IAS 19 standard on employee benefits.
The basis for this is found in the European Guideline of 19 July 2002, which has implemented the already existing international accounting standards (IAS) in corresponding legislation. The objectives of the European lawmakers who was to strengthen European capital markets, in the light of the increasing internationalisation of the business world; there was a need for comparable and reliable annual financial statements. Concretely this means that all European companies, which are listed on the stock exchange, are obliged to publish their consolidated annual financial statements according to the IFRS standards as of 1 January 2005. This guideline also gave the EU member states the possibility of expanding the application of IFRS by way of national legislation, which was for instance done in the Netherlands with RJ271, the Dutch guideline for annual financial statements.
The complete visibility of costs of future employee benefits
The IAS 19 standard originally only referred to the costs of supplementary (survivor's) pension schemes. Step-by-step, the standard has been evolving and expanding the application area towards the entire employee benefit cost, namely "every form of compensation/benefits, which is given by a company to its employees, in exchange for the services that they provide". As a consequence, it is not only necessary to book the legal provisions, namely the contractually fixed and statutory compensations, but also the actual provisions or "practices". Everything that falls within the range of post-employment benefits, seniority or separation incentives/presents must, strictly seen, be registered in the books. In this way, all the debts or obligations of the company also become visible for the future.
A priori, this leads to a different approach for pension schemes with fixed contributions and those with a defined benefit regulation. In contrast with fixed-contribution schemes, where usually only the built-up reserves and the paid premiums are shown, the past career and the annual cost are valued on the basis of projected pension salaries in a defined benefit scheme. Here a number of assumptions are made in the area of inflation, staff turnover, interest rates, etc., so that reality usually differs from the estimated expectations. These differences, which are a consequence of actuarial assumptions, may (for the time being) be written off over the average term of the remaining careers.
However, with the introduction of minimum yield guarantees in the Belgian Supplementary Pensions Act (WAP), which are for the account of the employer (see our previous newsletters), this means that under current regulations, both fixed-contribution and defined benefit regulations must be evaluated on the basis of the projected pension capital, in proportion to the career performance. If the fixed contribution should subsequently increase, in function of the age or seniority of the employees, then this valuation method can lead to substantial added provisions, on top of the existing pension reserves.
The annual financial statements therefore should no longer be prepared from a purely national taxation perspective. Instead they should be steered by economic considerations. A recently published report of the EU Commission evaluates the introduction of this obligation as somewhat positive. The IFRS annual financial statements however appear to maintain a strong national identity, so that differences continue to exist between the member states, due to their "own customs" in the interpretation of these standards. So pleas are being made for a better communication and stronger involvement of all stakeholders, in the preparation and introduction of IFRS standards.
This was the attitude of the "discussion paper" that was published by the IASB (International Accounting Standards Board) in March of this year, when the changes in the IAS 19 standard were presented. An important element is the new and simplified evaluation of pension schemes that are catalogued as “contribution-based promises”. These are all pension schemes, where the obligation for the past career performance is independent of the future salary development. This includes the current fixed-contribution schemes (with or without an interest guarantee), but also cash-balance and even defined benefit schemes, on the basis of the average salary over the entire career.
Every organisation or individual that is interested in this subject matter can send in his or her comments before 26 September of this year. This should result in an “exposure draft” by the end of 2009, when the IASB officially presents the new standard, the final version of which is intended to be published around 2011. The effective application (2013) should, for the time being, only be obligatory for companies that are listed on the stock market (consolidated annual financial statements; therefore also applicable for subsidiaries of the parent company) (reference as above).
Within the IASB there is, however, a different commission that is working on the introduction of the IFRS standards for medium-sized and small organisations. This is however a different discussion, in which both the objectives and the points of departure are different from the current accounting standards that are applicable for the "SMEs". It can, however, be clearly seen that there is an evolution towards expansion of the application area to companies that are not listed on the stock market. The business world itself is also striving to achieve more uniform systems of financial reporting, whereby IFRS is taken as a standard, also because of its worldwide application. As a consequence, every company in our country will sooner or later be confronted with this topic.