The finance sector will be hit with an increase of £325m in finance costs, equating to 2.7% of total profits, due to the revised IAS19 which will take effect for accounting periods beginning on or after 1 January 2013, according to a survey of finance companies in the FTSE350 conducted by Barnett Waddingham, the UK’s largest independent firm of actuaries and consultants.
The new standard, published by the International Accounting Standards Board (IASB) last week, is intended to simplify and improve the quality of disclosures made about employee benefits plans but will also have a real impact on the disclosed profits of companies with defined benefit plans.
In particular, companies will no longer be able to set the expected return on a scheme’s assets according to the assets actually held by the plan. The calculation will, from 2013, effectively assume all assets are invested in AA-rated corporate bonds which are generally expected to produce lower returns than a typical scheme’s investment strategy.
Nick Griggs, Head of Corporate Consulting at Barnett Waddingham, commented: “The survey of FTSE350 companies with defined benefit schemes indicated that profits for the latest available accounting periods would have been around £2bn lower had the new standard been in force. To put this into context, the total disclosed profits for these companies were in the region of £50bn.
“Some companies will have been affected more than others – those having schemes with riskier investment strategies with higher expected returns on scheme assets will be harder hit than those with more conservative strategies that expected to generate lower returns.”
“Whilst change will always bring winners and losers the revisions will certainly simplify the accounting treatment of pension schemes and will result in greater consistency from company to company.”
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