IAS 19: Penalising changes ahead

Financial reporting standards for pension funds are of great topical interest. The current crisis points to the need for clearer regulations, both accounting and prudential, and for regulations that provide better incentives for pension funds to manage risk and to contribute to a more stable pension system. Poorly designed regulations will lead to the closure of defined-benefit pension plans. The International Accounting Standards Board (IASB) has proposed a revision of IAS 19. In the current paper we show that the immediate recognition of the volatility of pension surpluses and deficits in the profit and loss accounts of the sponsor may lead pension funds to shed risky assets.