Given that the changes will not apply
until 2013, it may seem that there is
plenty of time for management teams to
get their heads around the changes.
Estimated Change in Profits Were the New IAS 19 Standard
to Apply in 2010 n US n UK n Europe n Other
€ millions
500
However, finance directors need to
tackle this issue now. The changes
will require the accounts to be restated,
which is always a significant undertaking. The company will have to
provide at least one year of comparable
data, so the standards began to matter
on 1 January 2012.
0
-500
-1000
-1500
As is always the case with changes to
accounting standards, it can be tricky
at first to get past the technical details
to see the impact for companies.
With closer scrutiny, some clarity
emerges. The amendments break down
into three main areas: changes to the
way the pension scheme is accounted
for on the balance sheet, changes to
the way the pension costs are treated
on the profit and loss account, and a
requirement for more disclosure about
the scheme.
The changes to the balance sheet treatment of the pension scheme come with
their own bizarre jargon: accountants
talk of the removal of the “corridor
approach”. This means that companies
will no longer be able to defer some
gains and losses of the pension scheme;
a current value of the scheme’s assets
and liabilities will have to sit on the
balance sheet.
2000
a limited impact on the UK. However,
there will be a greater impact on companies in other European countries.
Tim Marklew, partner at LCP, says:
“For example, in the Netherlands, 30
of the 44 largest companies used the
corridor approach to smooth out
changes in the balance sheet. Many
European banks will also see a significant negative impact.”
According to a recent report by UBS,
around 60% of European firms use the
corridor approach.
Just as the introduction of FRS 17 has
made many UK companies reduce the
risk profile of their pension scheme, so
too will the removal of the corridor
approach make European companies
examine their current investment
approach.
Source LCP analysis
lifetime of the scheme to work out the
expected gains from the pension plan.
This was then balanced against the cost
of the liabilities by using a discount rate
to determine the present day value, and
this net value was booked to the profit
and loss account. This amendment will
require companies to effectively value
their assets, as well as their liabilities,
using the same discount rate.
Companies set their discount rate by
referring to AA corporate bond rates.
Simon Robinson, investment associate
at Aon Hewitt, says: “On average, we
think there is typically around one
percentage point difference between
the expect return on assets and the
discount rate.”
That doesn’t sound like much, but when
applied to a large pension scheme, it
could translate into a significant charge.
These gains and losses will have to be
reported as they occur on the balance
sheet. That means companies will have
to declare any surplus or deficit in their
plan on their statement of financial
position.
For some jurisdictions within Europe,
however, this is no major change. For
example, the UK introduced FRS 17 at
the end of 2000, which requires companies to include current valuations of the
pension scheme’s assets and liabilities in
the balance sheet.
Only a few UK companies reporting
under IAS choose to take the corridor
approach, so this amendment will have
Warren Singer, principal at Mercer
Consulting, adds: “Those companies
that used to use the corridor approach
will now have a much more volatile
balance sheet. That means that the
finance director will become more
interested in mitigating the risk of the
pension scheme.”
The changes in the way that the
financing costs of the pension scheme
are booked to the profit and loss
account, however, will affect a large
number of companies, both in the UK
and across continental Europe.
Until now, companies have used an
expected return of the assets over the
Terry Simmons, partner in financial
services at Ernst & Young, adds: “If a
company has a pension scheme with
assets under management of £1bn, this
would translate to a £20m to £25m
charge to the profit and loss account.”
Accountants and pension consultants
agree that this change will have a signif-
icant impact on European companies.
Vani Thavarajah, director in PwC’s UK
pensions practice, says: “We estimate
that it will wipe around £10bn from UK
company profits.”
Marklew adds: “We looked at 100 of
the largest multinational companies
