International Pension Accounting

Pension accounting is one of the most difficult areas in financial accounting, the number of estimates that go into creating the components of expense and the projected benefit obligation plus the off balance sheet nature of the accounting can be difficult for students. Pension accounting can also be difficult for financial analysts especially when firms have new rules as in Britian. The Times of London details a study by Deloitte which examines the effect of adopting international accounting rules for pensions on FTSE 100 firms :

BRITAIN’S biggest companies face a £40 billion pensions hit this year under new accounting rules that could trigger sharp falls in share prices and force widespread restructuring, new analysis has shown.

FTSE 100 companies with final salary pension schemes have a combined pensions deficit of £50 billion under accounting standards brought in this year. However, less than £10 billion is currently booked in the accounts. There are fears that share prices could be hit when City analysts become aware of the extent of the gap.

In addition:

David Robbins, a consulting director for Deloitte, said that the full impact of the adjustment could come as a shock to financial analysts. He said: “We were very surprised to find that very little of the pensions deficit is actually in the accounts. Getting from £10 billion to £50 billion in one year is going to be a real jolt.”

Changes affecting quoted companies are required under IAS19, the new international accounting standard for pensions. The impact will start to be seen from July.