FRS17 Hits UK Balance Sheets

Financial Reporting Standard 17 (FRS17) requires companies to show the true value of their pension plan assets and liabilities instead of spreading the cost of funding them over a number of years, as under the current standard, SSAP 24.

Under FRS17, assets must be accounted for at market price, and liabilities discounted by the yield on corporate bonds. A shortfall or surplus must be reflected on the company’s balance sheet.

While companies do not have to fully adopt the standard until next year, they must show the potential affect of the accounting change in their 2001 annual reports.

Impact

According to Mercer’s research, in terms of 2001 balance sheets:

• almost 10% of companies will see a weakening of more than 20%, up from zero the previous year
• some 43% will see their numbers fall by between 1% and 20%, compared to a quarter of the sample the previous year.

On the other hand, over the same reporting period:

• almost 30% of companies will see their balance sheets strengthened by up to 20%
• while 20% will see them bolstered by over 20%.

Fallout

Mercer notes that companies that are significantly affected by FRS17 are reviewing their exposure to pension risk. Concerns abound that employers will move away from offering defined benefit plans and will move towards less risky defined contribution models.

Some have even made changes to their investment policies. UK retailer Boots placed 100% of its plan assets into fixed income investments in order to ensure pension payments to its retirees.

Mercer’s estimates are based on the study of 500 listed UK companies.