- Revised IAS 19 accounting standard to wipe £10bn off UK plc reported earnings
- Disclosure of scheme running costs to shake up provider market
- True cost of transfer incentive exercises to be revealed
- Increased disclosures and fewer options mean more transparent and comparable reporting
Today the International Accounting Standards Board (IASB) issued its long awaited revised pensions accounting standard IAS 19 Employee Benefits. Whilst some of the headline changes are not a surprise, following on from the April 2010 Exposure Draft and subsequent IASB meeting papers, some of the more subtle changes will potentially have implications beyond financial reporting.
The major change for most UK companies is the replacement of the current expected return on plan assets income statement credit with a credit based on interest on the plan assets at the AA discount rate. 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 £1,000 billion, this is expected to dent UK reported profits by around £10 billion. 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, though with the change to the expected return on plan assets reducing income for many there is now less incentive to record everything “above the line”.
Two changes which at first seem subtle but may ultimately have broader consequences are:
- The implicit requirement to disclose separately the costs of running employee benefit plans (other than asset anagement costs). Historically these costs have usually been netted off the expected return on plan assets. The implicit requirement to separate these out will perhaps bring more of a board-level focus on the costs of maintaining defined benefit provision, and hence lead to pressure to reduce provider costs
- The requirement to include the cash cost of settling obligations within IAS 19 settlement accounting, even if the cash transaction has been outside of the pension scheme. For example, cash offered directly to former employees as part of an enhanced transfer exercise would currently often be recorded as a general expense, but would now be combined with the pension assets transferred to show the true cost of such exercises
Other proposals, such as the removal of corridor accounting and other options for actuarial gains and losses, will bring increased transparency, though this will only impact a small number of UK reporters.
Lynn Pearcy, KPMG’s global IFRS employee benefits standards leader, 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.“.
Combined with increased disclosure requirements, focusing on the risks arising from sponsoring defined benefit plans, the IASB’s changes in totality will bring increased transparency, comparability and ultimately scrutiny of pension disclosures.
Mike Smedley, KPMG pensions partner, 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. For companies applying EU IFRS, adoption is subject to EU endorsement.
Media enquiries to:
Mark Hamilton, KPMG Corporate Communications 020 7694 2687
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