Posts Tagged ‘Financial Reporting Standards 17’

Ian Campbell

What is your pension worth?

This year is likely to bring more unwelcome news for members of company pension schemes and finance directors grappling with accounting disclosures. In fact, that is a bit of an understatement.

Improving world stock market returns in 2009 will have helped the asset side of the pension balance sheet, particularly for those pension schemes with a meaningful equity exposure, albeit it has been a bit of a volatile ride. This may have given some finance direction a false sense of optimism. Read more »

David Davison

A major new accounting standard says your pension liabilities need not be valued by an independent actuary. So does this pave the way for companies to carry out their own valuations? Our guest contributor, David McBain of Johnston Carmichael, Chartered Accountants and Business Advisers, investigates. Fortunately he is concluding there is still a role for actuaries!

Defined benefit pension schemes are something of an irritant to finance directors. Annual valuations of the assets and liabilities are required and the resultant deficits (and occasional surpluses) introduce a high degree of volatility to the annual accounts. Pages of disclosures also result, many of which are largely unintelligible to the average reader.

So it’s little wonder that the same FDs will be hoping to find some simplification in the new International Financial Reporting Standard for Smaller Entities (IFRSSME). But will they find it?
Read more »

Ian Campbell

The calendar year end pension accounting season approaches as do the Chrismas and New Year festivities, but there is unlikely to be much cheer amongst finance directors with the former.

Improving world stock market returns over the year will have helped the asset side of the pension  balance sheet, particularly for those pension schemes with a meaningful equity exposure albeit it has been a bit of a volatile ride. This may have given some finance direction a false sense of optimism. For example over the year to date the FTSE 100 has increased about 17%.

However this good news is likely to be more than offset by a very significant reduction in bond yields since the 2008 year end. Pension disclosures require liabilities to be discounted using AA corporate bond yields of appropriate duration of the liabilities. One common measure of this is the Markit 15 year iBoxx Corporates AA 15 year + index  and over the course of 2009 this has fallen from around  6.7% p.a. to about  5.5% p.a. The impact that this will have on individual pension schemes depends mainly on the age profile of the membership. It will also depend on the extent of any margin that was deducted from the rate used at the previous year end to allow for the effect of the “credit crunch”. For a young scheme with a typical benefit structure and average weighted age of say 45 this will increase the liability value, other things being equal, by about 30%. For a more mature scheme, say with average age 55 the increase is of the order of 20%. Of course there are other factors at play e.g. changes in the inflation and longevity assumptions. This assumes a discount rate of around 6.5% p.a. was adopted at 31 December 2008.

AA corporate bond yields at 31 December 2008 factored in a much higher risk of default than applies today and this resulted in what may be viewed as an artificial reduction in the liability valuations. However, at the time it was a welcome offset to sick asset valuations.

To help to offset the impact of an increase in the year end deficit, finance directors should review if the other asssumptions are derived on a best estimates basis. It is often the case that many of the other assumptions match those used by the pension scheme trustees for funding purposes and these are likely to include margins for prudence i.e. it could be argued that they are not best estimates. This may include for example the allowance made for salary increases or future longevity improvements. This may be an area worth investigating as a possible way of mitigating some of the increase in the year end deficit.

Spence & Partners have extensive experience in advising corporates on pension accounting computations and disclosures and we are gearing up for a very busy end December/early January!

For information regarding pension accounting computations and disclosures contact Ian Campbell on 0141 331 1004 or email ian.campbell@spenceandpartners.co.uk

Rebecca Lavender

The Accounting Standards Board is seeking opinion on proposed changes to accounting standards for companies in the UK and Ireland.

The ASB has proposed a three-tier approach where;
1) listed companies apply the standard IFRS
2) most other companies adopt the new IFRS version for smaller companies
3) small companies will continue to use the financial reporting standard for smaller entities.

Some initial reactions have highlighted the similarities between the IFRS for SMEs and IAS19. It has also been suggested that the proposal will mean that many companies currently accounting for pensions under FRS17, from 2012, could use IAS19.

For UK companies a move from FRS17 to IFRS for smaller entities will result in a change to how surpluses can be recognised on the balance sheet although I can’t see this being much of an issue in the current environment!!

Following the publication of the IFRS standard for SMEs in July, the ASB have now opened a consultation process and will be accepting responses until 1st February 2010.

Neil Copeland

Herbert Hoover assumed the presidency of the United States in March 1929 just in time to face the infamous Wall Street Crash of the same year and subsequent Great Depression. The difficulties and frustrations of dealing with economic vortices beyond your control are summarised neatly in his observation that “About the time we can make the ends meet, somebody moves the ends.”

My brother, who works for BT, got a bit annoyed with me at the weekend when I ventured to suggest that his employer was bust.

“It’s the pension accounting rules” he said “they don’t make sense. How can a deficit go from £4bn to £8bn in 3 months?”. There was more than a hint in his tone that suggested that the fact that I worked in the second most dubious profession (at least I’m not an MP) meant that I somehow bore an element of personal responsibility for BT’s predicament. So Read more »

Neil Copeland

I see from an article in the Financial Times that something called the Marathon Club is quoted as being critical of the International Accounting Standard 19 (IAS19). The Club suggests IAS19 is responsible for the closure of Final Salary pension schemes as a result of its impact on Company accounts.

Being a child of the 70’s, and not the athletic type, the Club’s name initially conjured up images of people meeting in a darkened room, to indulge a slightly sinister craving for that chocolate and nut based snack bar better known to younger generations as Snickers. I guess they are trying to convey the message that pensions are about the long run, a bit obvious as names go, but better than a pretend word that sounds a bit like something worthy with a few extra letters thrown in – you know who you are Entegria/Xafinity/Dyspepsia.

Anyway, I agree that linking pension liabilities to AA corporate bond yields doesn’t make a lot of sense, per se, but then they go off in completely the wrong direction.

According to FT.com, “The Marathon Club is calling for accounting measures that allow assets to be measured at “fair” long-term values and liabilities to be calculated as the net present value of future benefit commitments and other outgoings discounted at a rate “consistent” with the valuation of the assets.”

The Marathon Club appears to be suggesting that your pension liabilities are somehow linked to how you invest your scheme assets, a view that I thought had long been recognised as fatally flawed. Trustees and employers faced with funding pension scheme liabilities won’t see their real liabilities, or the real cost to the employer, magically reduce because the employer puts a smaller number in its accounts.

Let’s be honest, the actual numbers in pension disclosures in a company’s accounts don’t really matter when it comes to the real world and actually funding pension schemes – apart from to Aon and its procession of “biggest one day increase/fall (delete as applicable) in pension deficits” press releases.

I actually think the Pensions Regulator, in its recent statement on scheme funding, re-emphasises that we have a flexible funding framework within which to work when valuing pension scheme liabilities. The statement encourages trustees and employers to recognise and measure their pension liabilities on a prudent basis but allows flexibility, including the ability to make allowance for the schemes investment strategy, when assessing the contributions required to fund any deficit.

I don’t think employers should be more or less prudent than trustees when recognising their pension liabilities. Nonetheless there is an argument, in accounting terms, for something that FRS17/IAS19 delivered, in however flawed a fashion, which is consistency of reporting. Allowing employers to set their own assumptions for accounting purposes, and potentially fudge the position, is a retrograde step. So, inevitably, the flexibility available when considering funding needs to be curtailed. I do think there is scope for a debate about how and where such liabilities are disclosed in an employer’s accounts, rather than just what the number should be. There is big challenge here for the IASB to deliver a reformed accounting standard.

Finally, FRS17 (and therefore IAS19) should be thanked for one, unintended, consequence. It had the effect, in its early days, of forcing employers and trustees to recognise, in many cases for the first time, the real nature and extent of their pension liabilities and the associated risk and uncertainty. It is this aspect of the FRS17 story, people finally beginning to wake up to the true nature and extent of their pension liabilities, rather than a set of unpalatable numbers in their accounts, that has caused many employers to close their final salary pension schemes. As I have commented previously there is no point in persevering with an unsustainable pension framework and we need a meaningful debate about how UK plc meets the challenge of providing adequate income for its citizens in retirement.

Neil Copeland

What is the difference between a duck? Ask anyone that question and they will know instinctively that it’s a question to which there is no real, meaningful  answer. I usually go with “One of its legs are both the same” and find no one can really challenge me.

There is an article in Professional Pensions which says that accounting deficit figures and actuaries are mistrusted by “equity investors”, whoever they might be.

Now I’m not an actuary, and enjoy a laugh at their expense as much anyone, but, somewhat disturbingly, I found my sympathies were definitely with the actuarial profession on this one. Read more »

David Davison

Apparently a 15 year old whizzkid from Germany has corrected NASA scientists on the probability of an asteroid called Apophis hitting earth. While NASA estimated a 1 in 45,000 chance, Nico Marquardt suggested 1 in 45, which NASA ultimately concluded to be right. Read more »

Brian Spence

When in comes to lending money to a business or financing a corporate transaction it’s pretty important to be able to get a good feel for its value to identify the risk exposure.  There’s certainly a huge amount of information available from a variety of sources but for most the starting point is a set of company accounts which will provide a reasonable picture of a companies finances, but can you rely on the figures where a company currently offers or historically offered a final salary pension scheme. All too often lenders are prepared to accept what they are told about pensions without further research and this can be a dangerous approach. Read more »

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