Time to prepare…
IAS19, IAS26, for End of Service Schemes, Provident Funds, Pension Funds and Social Insurance systems

This is an important step providing investors with transparent, comparable financial statements. For companies, the conversion to IAS means significant changes in accounting procedures, especially in the area of employee benefits and pensions.

Many companies with pension plans around the world are suffering deficits due to the recent decline in equity markets, attracting the attention of plan participants, regulators, investors and news media. This focus on pensions is likely to increase when plan obligations become more transparent under IAS 19, the standard covering employee benefits.

Under IAS 19, companies will have to account for all significant employee benefit plans and disclose extensive information in the notes to the financial statements. Multinational companies with benefit plans in foreign countries will want to take note because the accounting for these plans may have previously been based on an assortment of local standards. Sponsors of defined benefit pension plans will likely see significantly different entries in the balance sheet and income statements. Under IAS 19, employee benefit plan assets and obligations are measured at fair market value. The risks associated with employee benefit plans, such as asset returns, interest rate changes and salary increases, will be more fully reflected in the financial results of the company.

Instructors/Lecturers

Mr. George M Psaras, BSc, PGD, FSS, FCAA
Managing Actuary - Pensions and Social Insurance
i.e. Muhanna & Co Ltd

Mr. Marinos Theodosiou
Assistant Actuary - Pensions
i.e. Muhanna & Co Ltd

Guest Speaker
Andreas Shiakas, FCA
Director of Audit Office of
Cooperative Societies
Republic of Cyprus

Potential impact
While the effect of converting to IAS 19 will vary, companies face the prospect of adjustments to their shareholders' equity on initial conversion. Companies with large pension deficits may see rating agencies downgrade their credit ratings or violation of loan covenants with banks and lending institutions.

Measuring assets and liabilities at fair market value can lead to increased volatility in the financial statements. Due to the long-term nature of pension liabilities, IAS 19 currently allows companies to delay recognition of fluctuations up to a limit.

However, the IAS Board is considering removing this option. One implication could be that companies look to alternative plan designs to reduce the volatility risk to the company. The introduction of a similar accounting standard in the UK has led to many companies replacing their final salary schemes with defined contribution plans where investment and longevity risk is transferred to the employee.

Another implication could be companies increasing the amount of bonds in their pension portfolios. Since the liabilities of the pension fund will be measured based on current bond yields, the goal of this approach is for the assets to move in tandem with changes in the liabilities, reducing volatility. The expectation that equities will outperform bonds in the long run means this approach could lead to higher costs to the company. This is an issue for concern locally. It is noted that end of service and health care scheme that offer benefit at or after retirement are within the scope of IAS 19.

What companies should do
The conversion to IAS 19 offers a prime opportunity to audit/review benefit plans and update strategies. Early planning is critical to avoid surprises.

What retirement plans should do
In addition to IAS 19, the implementation of IAS 26 for retirement plans will also change the way these plans prepared their accounts. The implementation of the Directives will change the way retirement plans operated almost entirely. As with IAS 19 early planning is critical.

i.e. Muhanna & Co is an organization providing access to local expertise and experience in the area of employee benefits, pensions and social insurance.

For further information please contact george.psaras@muhanna.com