A NEW FINANCIAL reporting rule on pensions issued by the International Accounting Standards Board could wipe £10bn of company profits, experts have warned.
The amended IAS 19 Employee Benefits does away with the deferred recognition of gains and losses, a method used to smooth out balance sheets and potentially make companies’ pension deficits look more manageable.
It requires changes in assets and liabilities arising from the benefit plans to be shown in other comprehensive income, a “more streamlined” presentation method that is intended to make such changes easier for investors to interpret.
Finally, the new standard attempts to boost disclosure of the characteristics and risks associated with benefit plans, with the aim of giving financial statement users “a much clearer picture of an entity’s obligations”.
Experts agreed the new rules will boost the transparency and comparability of pension plans, allowing investors to see the cost implications of companies’ commitments.
The new standard requires the pensions position to be recorded in the balance sheet as a simple assets-less-liabilities figure; Deloitte’s global IFRS expert Veronica Poole said this means companies with schemes in significant deficit will initially be hit hard.
KPMG also warned companies’ fiscal positions may take a battering when the new standard comes into force in 2013. A change from recording expected returns to recording credit based on pension plan assets at the AA discount rate could wipe as much as £10bn off UK plc reported earnings. This is because expected returns under the old system can be around 1% higher than AA discount rates, and UK plc pension assets currently stand at approximately £1,000bn.
Pensions partner Mike Smedley said this could lead to differences in the way pension schemes are governed as “the change to the expected return on assets removes one of the incentives to invest in higher yielding asset classes”.
PwC agreed that the new standard will bring “significant costs” to affected companies, but said despite considerable changes to balance sheets, “by and large it won’t change the way companies appear to the outside world”.
Experts were united in saying that, while the standards herald major changes in accounting for pension schemes, large-scale consultation and the issuing of draft standards meant the revised IAS 19 holds few surprises.
Pointing to the potentially sizeable financial liability that pension plans represent, IASB chairman Sir David Tweedie (pictured) said: “The amendments to IAS 19 will ensure that investors and other users of financial statements are fully aware of the extent and financial risks associated with those commitments, in particular by requiring the surplus or deficit of a pension fund to be shown in the financial statements.”
Download our Whitepapers