Take action now to avoid an income statement charge from your pension deficit

The IASB is planning to amend IFRIC 14 and the outcome might not be what companies expect. The new accounting rules will require companies to have a balance sheet liability equal to the value of contributions committed towards a deficit. The rules will only apply if the trustees have control over the use of future surplus or can unilaterally wind up the pension scheme.  While we await the final version of the revised rules, companies should review their pensions trust deed with a view to understanding the impact of these new accounting rules.

Pension cost in the past equalled what the company was paying in contributions. Since the 1980s the IASB has moved pension accounting to an “accruals basis” meaning the cost of pensions is recorded over employees’ working lifetimes. 

By requiring a balance sheet liability equivalent to the deficit contributions, the changes planned to IFRIC 14 (an interpretation of the accounting rules) bring cash back as a determinant of how companies should account for pension costs.    

If a company is paying contributions to fund a deficit and the trustees can control the use of a surplus in future or trigger a wind up, then today’s value of those contributions must be recognised in the balance sheet. That value may be greater than the accounting deficit as different assumptions may well have been used. There will be income statement implications from all this as well.

Companies are understandably finding IFRIC 14 confusing. Firstly, there may not be a surplus and secondly, there may be no immediate plans to wind-up.  Despite these points IFRIC 14 can apply today: trustees need only to have control over surplus on a wind-up.   

The consultation period for the proposed changes to IFRIC 14 has ended and we expect the final version next year with the rules coming into force in 2017. Companies should act now to ensure they understand the impact of the new rules and take steps to manage the consequences. Trustees should also familiarise themselves with these changes to anticipate any support they may need to give the company in the future.

Brian Peters, partner and lead of PwC's pension accounting business. Connect to him on LinkedIn


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