UK Accounting Board Delays Controversial Pension Rule

In its delay announcement, the UK’s Accounting Standards Board (ASB) said it was extending the transition period for Financial Reporting Standard 17 (FRS17) from 2003 to 2005, Washington-based legal publisher BNA reported.

Companies struggling with large pension shortfalls welcomed the move, which will give them more time to prepare for the radical shift in measuring assets and liabilities using market values rather than at historical cost.

FRS17 requires that pension 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.

UK Companies Battle FRS17

FRS17 has come under withering criticism from UK companies. The Confederation of British Industry has claimed it is damaging competitiveness by introducing volatility in accounts of UK-listed companies. (See  FRS17 Produced Pension Deficits at 90% of Companies ).

Many have also blamed the accounting change for the number of UK companies that have abandoned their defined benefit plans. (See  UK DB Plans Closed, More to Follow ,  British Airways Shifts to DC Pension Plan ).

The ASB said it hoped the FRS17 implementation delay would cause less confusion during the switch from UK generally accepted accounting principles to international accounting standards in 2005.

Global accounting regulators have said they hope to have a revised version of their rule governing the handling of net pension assets and liabilities in place by 2004. The International Accounting Standards Board (IASB) announced in June 2002 that it was rethinking certain aspects of the pension rule, IAS 19.

 ASB Chairwoman Mary Keegan said it would be unfair to demand adoption for listed companies in the United Kingdom if they also would be forced to go to global standards in 2005.

“The extension to the transitional arrangements of FRS17 will allow the ASB to effect an orderly transition to revised standards aligned with those of the IASB without mandating two changes in accounting for retirement benefits in a short period,” she said, according to the BNA. She stressed that the deferral of the mandatory full implementation of FRS17 “reflects no weakening of the ASB’s view that the UK standard is the best approach to pensions accounting.”

ASB: No Reason For Not Recognizing Pension Gains, Losses

In issuing FRS17 in November 2000, the ASB adopted its approach of immediate recognition of actuarial gains and losses because it had concluded that there was no conceptual basis for not recognizing in full the gains and losses that have already occurred.

ASB decided that immediate recognition also permits the balance sheet to reflect, without distortion, the surplus or deficit in the pension plan based on the latest actuarial valuation. It also objected to the use of complex and arbitrary rules that would be needed if gains and losses were to be spread forward, the BNA said.

The international pension rule is different from the new UK rule in that it still allows for the smoothing of pensions surplus and deficits.

FRS17 requirements are consistent in most respects with IAS 19, with one major difference in the treatment of actuarial gains and losses in defined benefit plans. FRS17 requires these to be recognized, immediately when they occur, in the statement of total recognized gains and losses, BNA said.

While IAS 19 requires them to be included in the profit and loss account, they need not be recognized if they fall below a specified ceiling. Also, any excess may be spread forward over any period up to the remaining working lives of the employees participating in the plan, according to the BNA.