IAS 19: How Did They Do It?

Two academics have analysed key amendments to IAS 19 and how they came about

Much of the coverage of the International Accounting Standards Board’s activities looks at ‘what’ the board did. A much less frequently addressed issue is ‘how’ the board did it. In other words: what is going on around the meeting table? 

Two academics in Germany, Malte Klein and Role Uwe Fuelbier, have published a paper that attempts to answer that question. Their analysis is exhaustive. They listened to 14 IASB meeting audio recordings of the board’s discussions between November 2008 and February 2010. This period covers the development of its ill-fated 2008 discussion paper on pensions accounting and the 2011 amendments to International Accounting Standard 19, Employee Benefits (IAS 19). 

The sleuths investigated the sources of evidence the board relied on, such as comment letters, how the board interacted with its staff and, finally, the arguments and influences that drove its actions.

They established that three IASB members tended to dominate the debate in three specific areas: 

• David Tweedie “facilitated the present disaggregation of pension changes into three components”; 

• Jim Leisenring “vehemently opposed presenting remeasurements net of tax”; and 

• Stephen Cooper “individually raised and defended the concept of net interest presentation that was ultimately included” in the exposure draft and amended standard.

On disclosure, Klein and Fuelbier  conclude that the board debated changes to IAS 19’s disclosure rules through the prism of usefulness, materiality, cost and complexity. Indeed, the staff’s initial proposals for updating IAS 19’s disclosure requirements were heavily criticised on the grounds that they would overload both preparers and users of financial statements with complex and overlapping disclosure frameworks that delivered little informational benefit.

 By contrast, the board’s discussions around pension presentation were, the researchers say, “largely discussed from the perspective of (avoiding) arbitrariness and (attaining) comparability”. 

The study shows that while the board struggled to conceptually underpin recognition of pension cost by reference to its joint work on financial statement presentation with its US counterpart, the Financial Accounting Standards Board, it eventually retreated to pragmatism to resolve the challenge.

One other conclusion that the researchers draw from their analysis concerns the sources of evidence that board members relied on during their deliberations to justify their conclusions. At least on the face of it, the researchers also found that the board did not appear to favour one group of constituents – such as regulators or investors – over any other group.

They argue: “We also show that the board discussion of comment letters was not conditioned by the political or economic importance of the senders, not even by their identification, specific numbers or percentages, but much more by the content of their arguments.

“This is, in our opinion, interesting with respect to lobbyism theory and prior comment letter analyses that assume the pressure and influence of some organisations or groups on private accounting standard setting. If there was some sort of a sender identification, it had to be outside the official board meetings (and agenda papers).”

Yet despite the thoroughness of their analysis, Klein and Fuelbier nonetheless urge caution. First, they warn, they have focused exclusively on the IASB’s due process during board meetings. This leaves them unable to point to any external influences that might or might not have existed outside the parameters of those meetings. Nor, for that matter, were they privy to any other discussions between board members and staff away from public meetings. 

IAS 19 project timeline

  • 2011: IASB releases amendments to IAS 19 with an effective date of 1 January 2013.
  • 2009: Faced with widespread opposition and a rush to secure US adoption of IFRS, the board votes to focus on targeted amendments to IAS 19 such as the removal of the ‘corridor’ deferred recognition option.
  • 2008: The board issues a due process document proposing the ‘fair value’ measurement of all pension promises other than pure DC and DC benefits.
  • 2006: IASB adds a project to its agenda addressing the pensions accounting.

Moreover, it is important to remember that each board member ultimately has just one vote when it comes to deciding whether to support or dissent to the issue of a standard. This means that the motives as to why a board member supports a particular measure may never be known. Indeed, it is where a member votes against a standard and writes a dissenting opinion – such as Tatsumi Yamada’s dissent to the 2011 amendments to IAS 19 – will observers understand what might have motivated them. At least insofar as they are preprepared to commit those thoughts to paper. 

In fact, as the researchers note, meeting participation, or otherwise, can be a rather poor proxy for understanding why the board reached the position it did on a particular standard. This is because board members are under no obligation to make their views known during the meeting. 

First, they might not want to speak in public, or they may struggle to do so adequately in English and choose not to. Nonetheless, they can, say Klein and Fuelbier, still influence the outcome of a project through their final vote. 

Second, a board member might choose not to make a point if it has been made already. In other words, the research highlights that there is scope to carry out more research to understand precisely what happens behind the scenes to influence standard setting, assuming it does, outside the board’s public meetings. 

But given that the net interest approach to pensions presentation – arguably measurement – is where we are today, how do the researchers think we landed there? 

The net interest presentation approach was first proposed by Stephen Cooper in February 2009. The board published the approach in 2011 with an effective date of 1 January 2013. It requires DB plan sponsors to present: 

• service cost as a component of profit or loss;

• net interest income/expense on the total defined-benefit asset/liability, calculated using the IAS19 discount rate, in profit or loss; and

• plan remeasurements as a component of other comprehensive income.

Conceptual purity aside, one way to view it is to assume that it swaps the use of the effective rate on plan assets in the pre-2013 iteration of IAS 19 for the discount rate. It came about against the context of the undeniably arbitrary nature of trying to quantify investment performance.

And it was then IASB member, Stephen Cooper, who first proposed calculating the interest accretion on the plan net-surplus or deficit and presenting it in net income, while plan remeasurements go into other comprehensive income. 

To calculate the interest charge, he proposed either the IAS 19 discount rate (a high-quality corporate bond rate) or a risk-free rate. In support of this approach, he argued that it would expose the substantial interest-rate risk that an unfunded pension plan is running.  

The question of the net-interest approach was revisited once more in November 2009. Again, Cooper was clear in his support, while his board colleague, former FASB vice-chairman Leisenring, was equally steadfast in his opposition.

He said: “What bothers me more than anything else about it, now that I see it as that, is the focus on the net. Because I don’t think we’ve reached the conclusion that that’s the proper focus… I want to start with the fact that I have an obligation and I like to measure that liability like any other liability. That fact that I choose to fund it, or [a] regulator makes me fund it is coincidental…. perhaps in many respects, or just something… tax-driven or whatever reason that I did it. But I’m not so sure I even want to embrace net.”

But embrace it we did.

Inside the Black Box of IASB Standard Setting: Evidence from Board Meeting Audio Playbacks on the Amendment of IAS 19 (2011), Malte Klein and Rolf Uwe Fuelbier, forthcoming, ‘Accounting in Europ


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