2005 standards to devastate dividends

Link: FRS17 special report

Link: IFRS special report

Investors have been warned that distributable reserves – the pot normally reserved for paying dividends and share buy-back schemes – is likely to take the brunt of FRS17’s impact as companies desperately try to plug the holes in their pension deficits.

‘If a company has an FRS17 deficit larger than its distributable reserves then it will probably be unable to pay dividends to shareholders,’ said David Sonter, corporate partner at City law firm Freshfields Bruckhaus Deringer. ‘For some companies this would have a substantial impact on share price.’

Large deficits could halt some companies’ ability to pay dividends for several years, he added.

From 1 January 2005 all UK individual companies will be required to adopt the new standard on pensions, which takes a snapshot of a company’s pension scheme on a particular day, rather than looking at a longer-term view of the scheme. It has already resulted in the appearance of huge deficits in schemes for those adopting the standard early.

The FTSE100’s ability to pay dividends could have been reduced by up to £39bn if the rules had been brought into force last year.

Michael McKersie, manager of investment affairs at the Association of British Insurers, agreed that some companies reserves are at risk from the standard, but that ‘cutting a dividend should be a last resort.’

The dividend gloom deepened this week when Martin Broughton, new chairman of British Airways said the airline was unlikely to make a dividend payment in the near future.

Those considering the option of moving company accounts, along with their consolidated accounts, to IFRS next year in order to avoid FRS17 may not avoid trouble. Despite having a less onerous pension standard, those on share-based payments, business combinations and financial instruments are expected to have a significant impact on distributable reserves.

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