The Financial Reporting Council (FRC) is warning boards against entering into arrangements that turn pension obligations into equity instruments in their accounts, saying that the Financial Reporting Review Panel (FRRP) will investigate any who do so say Harris & Co accountants Northampton.
The FRC says it is particularly concerned with companies that seek to make arrangements to provide additional collateral to their pension schemes in exchange for reduced annual contributions and a longer period to fund the pension scheme deficit.
While the FRRP acknowledges the ‘genuine commercial reasons’ for establishing such arrangements, it has opened a number of enquiries where companies have reclassified pension liabilities as equity instruments. In each case the company concerned has gone on to revise either the arrangements or the amounts recognised.
The FRC says some of these arrangements, usually involving the establishment of a Scottish Limited Partnership which holds the collateral, have included additional features which appear to have been introduced in order to achieve an accounting outcome whereby the company"s obligation to make future payments to its pension scheme is transformed into an equity instrument in the company’s consolidated accounts.
The FRC says that this has a favourable impact on financial solvency, gearing and reported comprehensive income notwithstanding that the company has retained the obligation to fund the pension deficit.
Richard Fleck, chairman of the FRC’s conduct and chair of the FRRP said:
‘The FRRP believes that it is important that companies and their advisers are aware that the FRRP will ordinarily open an enquiry into the financial reporting of any company in which material pension liabilities are reclassified from debt to equity.’