Experts warn of P&L hit from DB accounting changes
Pensions accounting experts have given a mixed reaction to amendments to international account standards for defined benefit schemes.
Changes to the International Accounting Standards Board’s (IASB) pensions rulebook International Accounting Standard 19 (IAS 19), Employee Benefits take effect from 1 January 2019 and deal with the accounting consequences of changes to scheme rules that occur part way through a financial year.
In a potentially major departure from current practice, companies must in future account for changes to a defined benefit (DB) plan during the financial year rather than sticking with the assumptions the firm fixed at the start of the year.
In order to do this, where an amendment, curtailment or settlement of benefits takes place part of the way through the financial year, the sponsor would have to use assumptions to remeasure current service cost and net interest to the year-end.
Lane Clark & Peacock partner Tim Marklew warned that the changes would introduce new volatility into company accounts and reduce comparability across similar companies.
He said he was “disappointed” with the IASB’s “quite unhelpful guidance on materiality”.
“Even if the change is quite small, it could trigger a major knock-on effect on the profit and loss account”
Tim Marklew, LCP
“The issue here is that the new amendments can mean that, if you adjust your scheme’s benefits, it could trigger a very large knock-on effect for your pension cost for the remainder of the year,” he said. “So even if the change to the scheme is quite small, covering only a very small number of members, it could trigger a major knock-on effect on the profit and loss account.”
Hymans Robertson partner Alistair Russell-Smith said he expected the amendment to magnify the accounting impact of transactions such as a benefit change or bulk transfer.
He pointed out that recent equity market volatility had caused the combined deficit of FTSE 350-listed company schemes to increase by roughly £10bn (€11bn) “over a matter of days”.
“This clearly shows how, with these new regulations, market movements between year-end and the date of curtailment or settlement could materially change the interest cost for a company,” Russell-Smith said.
He explained that a company with a 31 December year-end that had a curtailment or settlement event could see an increase of more than 10% in their interest cost for the rest of the year under this change.
He added: “Taking a lower-risk-for-longer approach to funding the pension scheme would stabilise the balance sheet and reduce the magnitude of this accounting volatility.”
IAS 19 sets out the accounting treatment that listed companies in the European Union must follow when accounting for pension benefits.
In a statement, the IASB said that until now “IAS 19 did not specify how to determine these expenses for the period after the change to the plan”.
The board argued the change would “provide useful information to users of financial statements”.
Marklew pointed out that the changes would not apply retrospectively so there was no need to restate figures for this year. “This means that companies don’t need to take any action immediately and can plan ahead on that basis,” he said.