Consultants have urged UK defined benefit (DB) scheme sponsors to take seriously the risk posed to corporate balance sheets by controversial new accounting rules.

“Companies might… reconsider their funding strategy. They might in future be less likely to put funding into a scheme.”

Simon Robinson, Aon Hewitt

The International Accounting Standards Board (IASB) has proposed changes to the asset ceiling test under International Accounting Standard 19, Employee Benefits (IAS 19). This affects how DB deficits and surpluses are reported on company balance sheets.

The IASB confirmed at its latest meeting that it would press ahead with potential changes to its asset ceiling guidance, known as IFRIC 14. Members noted analysis confirming that amendments could see some companies forced to recognise a substantially greater pension liability on their balance sheets than at present.

The board now plans to consult with a wider range of stakeholders around the world to assess the impact of the proposed amendment outside the UK.

Alex Waite, a partner with consultants Lane Clark & Peacock (LCP) told IPE: “In terms of steps that sponsors can take, they must take a careful look at their rules and work out if there is anything there that they can tweak with the agreement of their trustees. We have seen companies do this successfully in a number of cases.”

Aon Hewitt senior consultant Simon Robinson added: “[Companies] need to look at their scheme rules and confirm whether this is a problem for them.

“There are schemes out there that are unaffected by this change. We have no idea within my firm how many companies are affected or not.”

Sponsors, he said, might benefit from a major rethink of their approach to their DB schemes.

“They might want to look again at the powers their trustees have, or even reconsider their funding strategy,” Robinson said. “Equally, a company might in future be less likely to put funding into the scheme. An alternative funding mechanism would be another issue to look at.”

The IASB’s Interpretations Committee launched its IFRIC 14 project back in 2014. It published an exposure detailing changes to the guidance document in 2015.

Willis Towers Watson senior consultant Andrew Mandley said: “I’ve been encouraging clients to look at what their scheme rules say about trustee powers to buy out benefits and establish how extensive those powers are. If this amendment goes the way it appears to be going and trustees have a power to buy out benefits, then sponsors must think about what the impact of that might be.”

He said that if the IASB issued the final amendment before the end of the year there would be an expectation on companies to explain the impact in line with the requirements of IAS 8, which covers accounting changes and error corrections.

“It should be fairly straightforward to see if there is a relevant buyout power, but what is more complicated is working out the financial impact of the asset ceiling restriction,” Mandley said.

Meanwhile, LCP partner Tim Marklew said he sensed UK companies would feel unfairly treated by the changes.

“Very similar plans with very similar obligations could be reporting very different figures under the amended IFRIC 14,” he said. “I certainly think if you were a finance director who was being forced to have an extra liability on your balance sheet, while your competitor had dodged it because of the way their scheme rules were drafted, you would be very angry about this.”

In a meeting paper presented to the board, IASB staff concluded that the nature of UK DB schemes meant that they fell within the scope of paragraph 12A of IFRIC 14 (see paragraphs 19 and 20 of Agenda Paper 12C).

This meant that sponsors of such plans would be unable to assume a refund of a surplus based on gradual settlement. This reflected the board’s intent in developing the amendments.

In arriving at this conclusion, staff argued that a scheme’s trustees “could exercise [a] right to settle plan liabilities for all plan members in a single event.”

Despite the fact that UK schemes “do not usually have sufficient funding” to allow trustees to settle all liabilities in a single event, such as an insurance buyout, they concluded that “the funding level of the plan should not factor into this assessment”.

Paragraph 11 of IFRIC 14 requires entities to ignore funding levels when assessing the availability of a surplus.