A new international standard on pension accounting is likely to draw more companies following U.S. accounting rules to the international way of thinking, even if U.S. rules don't yet require it.

The International Accounting Standards Board has amended International Accounting Standard 19 on employee benefits to eliminate many of the methods once permitted to smooth over pension gains and losses, instead requiring companies to recognize changes in the value of pension plan assets and pension liabilities as they occur. Companies following this mark-to-market-like approach will recognize those changes through earnings or through other comprehensive income, with most of the volatility hitting OCI, says David Zion, a research analyst at Credit Suisse.

The Financial Accounting Standards Board began a project to pursue a similar change to U.S. Generally Accepted Accounting Principles, but mothballed it in 2009 as it faced demands springing from the financial crisis and the need to converge U.S. and international accounting rules. Zion predicts the recent finalization of the international standard will put pressure on the FASB to resume its standard setting on pension accounting to make GAAP more like IFRS. Pressure may come from investors who are confused by two different models, but also from public companies themselves who believe the new international method is preferable, he says.

Major corporations like AT&T, Honeywell, Verizon and others raised eyebrows in 2010 when they began adopting accounting policies to voluntarily follow a more mark-to-market approach in pension accounting, despite their difficulties in recent years keeping pension plans adequately funded. Companies said the method is more transparent, but it also has the added benefit of pushing old, pent-up losses into prior periods, eliminating the dark cloud that would hang over future earnings release for years to come. “Market response has been mostly positive,” Zion says. “It's a more transparent form of accounting, it's somewhat in line with the new IASB rule, and it eliminates a future drag on earnings.”

Gina Klein, director at PwC, said the new IFRS guidance will lead to more immediate recognition of gains and losses, and generally higher pension expenses overall. However, the expense that hits earnings will be lower, with more of the expense channeled to OCI. “That's going to be key for companies,” she says.

Klein says she sees a lot of GAAP-based companies reviewing their accounting policies to determine if they should follow an approach more like that adopted by the IASB, especially global companies that may have some operating units following GAAP and others following IFRS. The change in accounting also has companies reconsidering how they invest plan assets, she says, with many looking for ways to reduce the volatility in gains and losses and better match the liability.