Proposed changes to IAS19 could have an adverse effect on companies with large pension schemes and large equity exposure, warns Lane Clark & Peacock (LCP).

The accounting standard used to report pension liabilities for quoted companies could see changes as early as 2011, and LCP believes the changes on profit and loss accounts could be dramatic - companies may have to include all their gains and losses relating to pension arrangements in the year they occur.

"Companies with large pension schemes, and in particular those with large equity allocations, will be hit hardest under the new reporting regime, with significantly increased scope for volatility in earnings," commented Colin Haines, partner in LCP's international consulting practice. "If investment markets perform poorly companies could see their reported earnings depressed or even wiped out completely."

One of the changes could see the Earnings Before Interest Tax Depreciation Amortisation and Pensions (EBITDAP), already in use in the US, more widely employed in the UK as analysts seek a measure of profitability which takes note of the underlying trading performance of a business rather than a volatile stock market.

"This can only increase the pressure on defined benefits schemes and bring an increase in companies looking to close to future accrual and reduce or eliminate pension risks," Haines added.

KPMG has also warned that changes to IAS19 could wipe as much as £50 billion off UK company profits.

Referring to the ability companies currently have to take credit in their annual profit calculations for expected returns on pension fund assets, the firm has said that alterations to the pensions accounting standard would see UK plc suffer even more as they continue to reserve large amounts of capital to tackle their scheme liabilities.

- Pensions Age June 2009

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