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The Actuary The magazine of the Institute & Faculty of Actuaries

IASB publishes final IAS19 standard

The International Accounting Standards Board has published the final IAS19 standard, confirming key changes that could see £10bn wiped off UK company profits.

The major change for most UK companies is removing the current expected return on plan assets income statement credit and replacing it with a credit based on interest on the plan assets at the AA discount rate.

KPMG said as expected returns for a typical pension plan portfolio can be around 1% higher than AA discount rates in current market conditions, and based on UK plc pension assets of around £1,000bn, this is expected to dent UK reported profits by around £10bn.

The standard also bans the ‘corridor method’ which allowed companies to smooth returns to reduce volatility in the published figures, and which could make their pension deficit look more manageable.

From 2013 onwards, companies will have to show their pensions position in their balance sheet as a simple pensions assets, less pensions liabilities, figure.

Deloitte said companies with schemes in a significant deficit position which currently make use of the corridor method will initially be hit hard, with a fall in equity resulting.

Deloitte head of the global IFRS leadership team Veronica Poole said: "The loss of the ability to ‘smooth’ the effect of pensions on a company’s accounts will mean more transparency and comparability, though it will also have a big impact in countries, particularly in continental Europe, where use of the corridor is a much more common practice. In future companies’ balance sheets will show their pensions surpluses or deficits much more accurately."

Elsewhere, contrary to the original exposure draft proposal, there is continued flexibility on where to record service cost and net interest items in the income statement. The new rules will still allow companies to decide where they allocate their pension costs in the profit and loss account, but will be more specific about what hits net income and what hits other comprehensive income. This will make the figures simpler and more easily understood.

KPMG global IFRS employee benefits standards leader Lynn Pearcy said: "The global economic crisis increased the focus on the off-balance sheet pension liabilities that can result from the corridor’s deferred recognition. The IASB’s proposal to eliminate this deferral received widespread support and mandating their recognition in other comprehensive income will increase comparability in this area.

"Companies will need to consider the impact of these revisions not only on their defined benefit plan costs but also on wider matters such as compliance with debt covenants."

KPMG pensions partner Mike Smedley said: "The changes are overall broadly welcome from a financial reporting perspective, although some companies may feel that the P&L charge will now overstate the real cost of pensions, particularly where the scheme is delivering strong asset returns.

"From a pension scheme governance point of view, the change to the expected return on assets removes one of the incentives to invest in higher yielding asset classes, so may lead to some reconsideration of investment strategy, whilst the disclosure of scheme expenses may lead CFOs to question why their running costs are higher than for seemingly comparable businesses."

The revisions are effective for accounting periods beginning on or after 1 January 2013, with earlier adoption permitted.

[Source: Professional Pensions”