IAS 19 to end “accounting bias in favour of return-seeking assets”

The changes come into force in January, impacting year-end annual reports, closing holes that allowed companies to choose not to reflect the IAS 19 deficit on their balance sheets.

Companies will no longer be able to set their own asset return assumptions either and, while the rule changes have no direct economic impact, the effect on perceptions and valuations will be considerable.

Peter Elwin, analyst at JP Morgan Cazenove, said: “The new IAS 19 rules are simpler and will result in greater transparency. Investors treat deficits as debt and this change aligns reported earnings with that view.”

He indicated that the changes amount to the end of “accounting bias” in favour of return-seeking asset classes.

“It’s true that earnings will no longer reflect the asset allocation in the fund, but I don’t believe that matters – that information is adequately disclosed elsewhere, it’s just that under the new rules we are less likely to apply an earnings multiple to actuarial optimism.”

He continued: “People ask me if this will be the death of equities – I don’t think so. Nothing has changed economically, so in theory share prices should be unaffected. In practice, the market dislikes earnings downgrades, particularly for companies that already face real economic challenges. So this change clearly creates an earnings headwind that some companies will find hard to stand against.”

Elwin also provided information on 13 UK companies with market caps of more than £2bn where the changes could be equivalent to 5 per cent or more of consensus 2013 earnings, including Babcock International (-20.2 per cent), National Grid (-10.7 per cent), and BAE systems (-10.1 per cent).

He said the new rules would “hold companies responsible for the clear disclosure of their actual deficits”.

Elwin concluded: “Most companies appear to be waiting for their peers to act first. The risk is that investors will begin to fill in the blanks and draw the wrong conclusions in the absence of clear guidance.”