Corridor Option Removal Could Result in More Volatile Balance Sheets for German Plan Sponsors
03 September 2012 (PLANSPONSOREurope.com) – German plan sponsors are likely to have to cope with far more volatile balance sheets with the removal of the “corridor option” under modifications to the impending accounting standard IAS 19.
The corridor is a means of deferring the impact of certain profits and losses in actuarial calculations of scheme values, and is due to be axed from next year, following new pan-European rules.
But according to actuaries Aon Hewitt this way of recognising gains and losses in the accounts of the sponsoring employer is far more commonly used in Continental Europe in countries such as Germany than in the UK and Ireland.
Simon Robinson, Principal at the consultant told PLANSPONSOR Europe: “You will get German plans’ profit and loss charges changing quite dramatically not because of the change in terms of how returns on assets are calculated but because gains and losses that were previously spread over time have now immediately appeared on the balance sheet without having to go through profit and loss.
“[How seriously this affects their balance sheets] depends on how things have panned out in the past. It depends on whether they have large and recognised losses built up over time or large and recognised gains and it probably varies from plan sponsor to plan sponsor.”
Robinson added the change will probably result in more volatile balance sheets.
“Balance sheets will be more volatile because these gains and losses would have been spread more slowly over time through profit and loss charges before appearing on the balance sheet,” he said.
“At any one time you know what your balance sheet is going to be at the end of the next year because it is based on what is was at the start of the year whereas now it will also depend on gains and losses that have arisen over the year and you have seen how asset values have been up and down and all over the place.”