New rules could cause volatility in p&l accounts

Link: IAS special report

According to consulting actuaries Barnett Waddingham, proposed amendments to IAS rules could make profit and loss figures more volatile from year to year.

Company accounts have already suffered due to FRS17 but the International Accounting Standards Board is considering making its own standard more stringent.

There are growing concerns at the IASB and within some quarters of the actuarial profession that the UK’s FRS17 rule gives companies too much leeway in how they calculate expected investment returns on their pension fund. The assumptions are used to counterbalance the effect of servicing pensions’ liabilities in the p&l account.

The IASB is now widely expected to make companies base their rates of return on market conditions in the current year rather than calculating a figure for the p&l account using longer-term averages. But Nigel Hacking, partner at Barnett Waddingham, says that without the smoothing effect currently allowed under FRS17, the result could be more volatility in p&l. He said: ‘You could have years where it’s plus 25%. It could be better or worse, but it will be more volatile using actual investment returns.’

UBS claims using differing assumptions to account for pensions can affect earnings by as much as 20%. Rodney Deacon, analyst at UBS, said: ‘Investors should focus on cashflows as the most accurate representation of companies’ intrinsic value.’

Actuarial firm Lane Clark and Peacock names BAA, BOC Group, Lloyds TSB, WPP, Friends Provident, and Scottish & Southern Energy among the handful of top companies currently using the FRS17 rule in full.

Bob Scott, partner at the firm, said: ‘Rates of return on income is a subjective judgement call by company directors. It’s a figure that can be created or taken away at the stroke of a pen. IAS will be more objective.’

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