FRS17 sets new alarm bells ringing

Link: FRS 17 debate

A good deal of the controversy surrounding the standard is down to the timing of its introduction. FRS17 came into being just as equity markets were on a downward path, greatly depressing pension fund values.

Unlike the former SSAP24 standard, FRS17 requires companies to express their scheme as surplus or deficit, using the current underlying value of the scheme’s assets at that time. ‘FRS17 has given a clearer and more objective picture,’ says Bob Scott, partner at Lane Clark & Peacock.

The Confederation of British Industry has calculated that British companies have a collective £160bn FRS17 pension deficit. However, finance directors’ biggest fear about FRS17 has always been the potential volatility pension figures could cause to the profit and loss account.

The decision of Mary Keegan, chairman of the Accounting Standards Board to defer the mandatory requirement for the full adoption of FRS17 until 2005 came as a relief to many. This meant there has still been no requirement to use FRS17 rules to reflect investment returns and the cost of servicing liabilities in the profit and loss account.

‘SSAP24 left it very much to the company directors. There were principles and guidelines to account for cost, but it was imprecise and it was interpreted in different ways. Figures shown were not comparable,’ says Scott.

When the Accounting Standards Board first introduced FRS17 in 2001, Lane Clark and Peacock pointed to several companies that were providing too little information in published accounts to assess their pension costs. These were high-profile names, including BAT, Celltech, ICI, Land Securities, Marconi, Powergen and Vodafone.

UBS research has shown that the approach companies are adopting for pensions’ accounting is still producing a fuzzy picture for shareholders. Among those companies identified by UBS as adopting a less conservative approach to pensions accounting and funding were Granada, SMG and DMGT. These companies were ‘more likely to see their earnings distorted’.

‘Our analysis suggests that applying differing assumptions can result in earnings swings of as much as 20%,’ says Rodney Deacon, analyst at UBS Investment Research.

Herein lies the problem in adopting even an FRS17 approach to pensions accounting. Companies can currently calculate the expected returns on their pension fund by assuming a long term average. Under FRS17, the figure is then used in the profit and loss account to counterbalance the effect of servicing pensions’ liabilities.

A report by Deloitte & Touche warns: ‘One area where there is scope for subjectivity is in setting the expected return on equity investments.

In the US under FAS87, expected returns on assets that would be considered very optimistic in the UK have historically been used and justified with reference to historical returns.’

There are growing concerns at the International Accounting Standards Board that FRS17 gives companies too much room for manoeuvre in how they calculate expected investment returns on their pension fund. Tightening up FRS17 could make pensions accounting more transparent and immediate, but the figures may in turn become more unpredictable.

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