The Financial Reporting Council (FRC) warns Boards against entering into arrangements that turn pension obligations into equity instruments in their accounts. Several companies that used Scottish Limited Partnerships to achieve this outcome have taken steps to address the FRC’s regulatory enquiries.
The Financial Reporting Review Panel (FRRP) of the FRC has, over recent years, considered several annual reports and accounts of 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.
The FRRP acknowledges the genuine commercial reasons for establishing such arrangements and has focused on companies that have reclassified pension liabilities as equity instruments.
Specifically, 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. 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.
Following enquiries by the FRRP, each of the companies has revised either the arrangements or the amounts recognised with the result that the concerns of the FRRP have been addressed for the future from the date of the change.
Richard Fleck, Chairman of the FRC’s Conduct Committee 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.”
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