Employers that use the International Financial Reporting Standards (IFRS) may be losing their ability to smooth out year-to-year fluctuations in pension plan and retiree health plan financial performance.

The IASB, London, has updated International Accounting Standard (IAS) 19 Employee Benefits to eliminate use of the “corridor method” performance smoothing strategy.

The changes are set to take effect for financial years beginning on or after Jan. 1, 2013, IASB officials say.

Employees that report financial statements using the IFRS rules can adopt the changes earlier, if they would like, officials say.

The Financial Accounting Standards Board (FASB), Norwalk, Conn., the body in charge of the Generally Accepted Accounting Principles (GAAP) rules used by U.S. companies, tried to discourage pension smoothing in 2006, when it approved Financial Accounting Standard (FAS) 158.

FAS 158 requires companies to report the effects of year-to-year changes in defined benefit plan assets and liabilities on the balance sheet “accumulated comprehensive other income.”

IAS 19 will require companies that use that standard to report changes in defined benefit plan assets and liabilities on the income statement in “other comprehensive income.”

That approach will separate “those changes from changes that many perceive to be the result of an entity’s day-to-day operations,” IASB says in a statement about the new standard.

Critics argue that the new approach might lead defined benefit plan managers to take a short-term approach to long-term benefits obligations; advocates say it will give plan sponsors, plan participants, regulators and investors a more realistic picture of how a plan is really doing.

IASB began working on the IAS 19 project in 2006. It published an exposure draft in April 2010 and attracted and reviewed about 220 comment letters, the group says.

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