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FRS17 - All aboard for a bumpy ride
Jon Bridger from Barnett Waddingham's Cheltenham office considers the implications of the latest UK accounting standard which implements the principles of the international standard IAS19.
Financial Reporting Standard (FRS) 17 sets out the treatment of pensions and other forms of retirement benefits in a company's statutory accounts in the UK. FRS17 will be phased in over a transitional period starting with accounting periods ending on or after 22 June 2001. Full adoption will be required for accounting periods ending on or after 22 June 2003.
Broadly speaking FRS17 requires the market value of the assets to be compared with the value of the liabilities calculated using corporate bond yields. This means that for the majority of pension schemes, the value of assets will move in line with equity markets while the value of liabilities will move in line with bond yields. Equity and bond markets can move in different directions as illustrated by the experience of calendar years 1999 and 2000.
In 1999 the UK equity market increased by about 24%. Long-term bond yields also increased by about 0.5% during the year which reduced liability valuations by about 14%. A very favourable double whammy for pension schemes during 1999.
During 2000 the converse applied. The UK equity market fell by about 6% while long term bond yields also reduced by about 0.25%. This reduction in bond yields increased the value placed on pension scheme liabilities by about 7%. An annus horribilis for pension schemes valued using the new FRS17 standard.
In most circumstances FRS17 will require all of the surplus or deficit in the pension scheme to be shown as an asset or a liability of the company on the company's balance sheet. If 1999 and 2000 are anything to go by, companies should expect a lot of volatility in these balance sheet figures from year to year.
The good news is that there is still scope for a certain amount of actuarial judgment when setting the underlying assumptions. This means that, as far as possible, we will be able to help our clients manage their way through the transition period and beyond.
For more information on the new standard click here.
Jon Bridger, February 2001.