27 September 2017
In my previous post and talk at LCP’s 2017 Annual Conference, I warned of changes to IFRIC14 – a technical issue where changes could wreak havoc on corporate balance sheets. Here, I provide an update on the latest developments and what they may mean for companies.
For years, companies have faced uncertainty from changes proposed by the International Accounting Standards Board (IASB) to IFRIC 14. These changes would apply to all companies accounting under IAS19 and could result in them having to recognise all cash contributions promised to their pension plans as a liability on the corporate balance sheet – hugely increasing balance sheet liabilities for some companies.
Whether or not a company is one of the many at risk depends on the precise wording of a pension scheme’s rules – it’s a 'legal lottery'. In my view, more than half of UK DB pension sponsors could be impacted. These sponsors would then focus on all cash contributions to their pension schemes. In future funding valuation negotiations with the trustees they may even seek to re-write existing recovery plans or replace cash commitments with contingent funding agreements. Sponsors may also approach the trustees to seek to agree changes to the legal documentation of the plan.
Changes were due to be finalised early in 2018 and then implemented with effect from 1 January 2019, causing alarm for companies, and concern for trustees who had previously assumed that pensions accounting was just a corporate compliance exercise.
At its meeting in September 2017, the IASB agreed to hit the pause button – at least for the time being. The IASB recognised that any benefits of these changes might not exceed the costs, and will carry out further work to assess the impact.
This should represent a welcome stay of execution for companies and trustees, and there is now more time and opportunity to identify and address the issues. But the changes have not gone away for good and amendments to IFRIC 14 remain a very real possibility. Indeed, the further changes being considered by the IASB could well end up catching more, rather than fewer, companies in IFRIC 14’s net.
Your first step is to identify whether the proposed changes to IFRIC 14 would impact your pension scheme. If they do then key actions on how you can better prepare for IFRIC 14 are:
- Ensure that all affected parties understand the issues and potential impact of IFRIC 14.
- Consider IFRIC 14 as part of all future pension strategy and funding negotiations with trustees.
- Identify opportunities and solutions to remove the potential problem, which will likely involve working collaboratively with the relevant trustee boards.
For further guidance on IFRIC 14 or any other pensions accounting issues please get in touch with your LCP advisor.