Proposals to amend accountancy standard IAS19 could cut the earnings of UK firms by as much as £10bn, accountants and actuaries warn.
KPMG says the changes - announced yesterday - would hit UK businesses' earnings by about £10bn and have an impact of over £50m per annum on employers with the largest pension schemes.
Pensions partner Mike Smedley (pictured) says: "While the move will no doubt improve transparency, for some companies it will be a blow to reported profits which they may be under pressure to make up for elsewhere.
"Companies will also lose the ability to smooth earnings by tweaking the expected return assumptions. This is turn may lead to some rethinking on investment strategy."
The warning comes after PricewaterhouseCoopers, Hewitt Associates and Mercer all issued warnings over earlier versions of the changes.
They say the proposals will radically change the way organisations are required to account for their pension costs in company accounts and will hit the profits of companies with UK or overseas defined benefits pension schemes.
All three estimated the move will hit earnings hard - with PwC estimating the proposals will cost £10bn and Mercer estimating a figure of £8.7bn.
Under international accounting rules, companies can currently record a "profit" each year equal to the expected, rather than actual, return on pension scheme investments.
With pension schemes traditionally invested in riskier assets such as equities, this has often offset the corresponding interest cost on the pension scheme liabilities which is also booked in profit or loss.
This "pension credit" has attracted much attention from analysts and market commentators in recent years, who are likely to see the proposed change as improving clarity to reporting.
However the proposed change to the international rules is to replace the expected return credit with a credit based on the AA corporate bond yield used to discount the liabilities, which under current market conditions is on average around 1% lower than anticipated asset returns.
Companies will now effectively have to record an interest item on the net pension scheme surplus or deficit.
The IASB proposals would also require immediate recognition of all gains and losses arising in defined benefit plans.
At present IAS 19 permits use of the so-called "corridor" method, under which the actuarial gains and losses arising on post-employment benefits such as pensions can be deferred and recognised in net income in later periods.
They now would be recognised in full, but as part of other comprehensive income - i.e outside net income.
Actuarial gains and losses can vary significantly from period to period as they include not only changes in estimates regarding employee turnover and life expectancy but also investment gains and losses and the impact of changes in discount rates.
KPMG global IFRS employee benefits standards leader Lynn Pearcy adds: "The global economic crisis has increased the focus on the off-balance sheet pension liabilities that can result from using the corridor.
"While the IASB's proposal to eliminate this is likely to be controversial, it responds to criticism of current pension accounting, which permits deferred recognition of certain gains and losses.
"In proposing a presentation solution that keeps the resultant volatility out of net income the Board has tried to be responsive to concerns about this important performance measure otherwise being undermined."
Comment: Accounting standards are wagging the dog (PP Online, March 11).
