FRC warns Boards against classifying pension liabilities as equity

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15 Jan, 2014

The Financial Reporting Council (FRC) has today issued a press release warning Boards against entering into arrangements that turn pension obligations into equity instruments in their accounts. The FRC has warned that the Financial Reporting Review Panel (FRRP) will “open an inquiry into the financial reporting of any company in which material pension liabilities are reclassified from debt to equity”.

The main concern is with companies which “have put in place 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”.  Whilst the FRRP see “genuine commercial reason for establishing such arrangements” their focus over recent years (and where enquiries have been opened) has been on those companies that have reclassified pension liabilities as equity instruments. 

The FRC comment that some of the arrangements (which usually involve the establishment of a Scottish Limited Partnership to hold the collateral) contained within annual reports and accounts reviewed by the FRRP, have included additional features that appeared to have been introduced to “achieve the accounting outcome whereby a 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 further comment that this impacts favourably on financial solvency, gearing and reported comprehensive income. 

The full press release can be obtained from the FRC website, here.

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