European funds may be hit by accounting shortfall
Adoption of UK accounting methods into an international standard by 2005 may force some of Europe’s largest companies into priming their pension funds with millions of additional euros, according to a report by Morgan Stanley.
The US investment bank says it expects the International Accounting Standards Board to change its current standard IAS19 to conform to FRS17, the new UK accounting methodology blamed for the recent closure of defined benefit schemes.
Schemes such as those at ABB, the Swiss engineer, Akzo Nobel, the Dutch chemicals company and ThyssenKrupp, the German steel group, may be forced to set aside more funds for their pension funds.
In the UK, schemes including those at Ernst & Young, frozen food retailer Iceland and Dixons have all blamed the accounting standard, due to be introduced fully next year, for the closure of their final salary schemes.
The survey of 200 European companies, European Pensions: A Leaking Vat?, found that most with occupational schemes had “mis-stated” their operating income. Under European accounting rules, companies are not obliged to register the impact of pension fund gains and costs.
It suggests that companies must realise pension obligations are financial liabilities. “As deferred compensation can be considered a loan from employees to the company, a pension obligation should be regarded as a financial liability and included as part of net debt,” says the report.
It singles out the UK’s ICI, Marconi and British Telecom, German engineer FAG Kugelfischer and ThyssenKrupp as companies “most likely to have growing cash calls to fund increasing payments to retirees”.
The report found the consequences of any changes vary according to country and sector – UK and Dutch companies, for instance, tend to have overstated operating income. SAS Group, Philips and Daimler Chrysler would see their operating income drop most significantly if their finances were adjusted to include pensions obligations. Sweden’s airline group SAS, for instance, would see a drop of more than 85%.
In contrast, many German companies have understated their operating income and can expect rosier news if the adjustments are made.