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The Actuary The magazine of the Institute & Faculty of Actuaries

Finance firms face £325m rise in finance costs due to IAS19

Changes to accounting standards will land FTSE350 finance firms with a £325m increase in finance costs representing 2.7% of total profits, according to research from Barnett Waddingham.

The IAS19 standard published by the International Accounting Standards Board last week is intended to simplify the quality of pension scheme disclosures. However, the consultant said that the changes will have a real impact on the profits of companies with defined benefit pension schemes.

Companies will no longer be able to set the expected return on a scheme’s assets according to the assets actually held by the scheme. From 2013 the calculation will effectively assume all assets are invested in AA-rated corporate bonds which are generally expected to produce lower returns than a typical scheme’s investment strategy.

"The survey of FTSE350 companies with defined benefit schemes indicated that profits for the latest available accounting periods would have been around £2bn lower had the new standard been in force," said Nick Griggs, Barnett Waddingham’s head of corporate consulting.

"To put this into context, the total disclosed profits for these companies was in the region of £50bn.

"Some companies will have been affected more than others - those having schemes with riskier investment strategies with higher expected returns on scheme assets will be harder hit than those with more conservative strategies that expected to generate lower returns.

"While change will always bring winners and losers the revisions will certainly simplify the accounting treatment of pension schemes and will result in greater consistency from company to company."

The research also showed the manufacturing sector will face £200m increased finance costs - equating to 2.4% of total profits.