LAST MONTH the International Accounting Standards Board (IASB) confirmed the much-trailed changes to IAS 19, which impacts on post-employment plans including pension benefits.

One of the key alterations put in place is the replacement of the expected return-on-assets element of the profit and loss charge by a credit, linked to the discount rate used to measure the liabilities. Given that an interest charge already applies to the liabilities, the final result on the profit and loss account will effectively be an interest charge (credit) on the plan deficit (surplus).

The other important change will affect companies that partially recognise actuarial experience in the profit and loss account. They will now either need to fully recognise year-on-year experience or alter the accounting method to recognise ??experience gains and losses' through the statement of recognised gains and losses.

These new guidelines, which will apply to all UK and EU-listed companies, will come into effect on 1 January 2013, although earlier adoption is being encouraged by the IASB. I would also fully expect similar changes to affect non-listed UK companies in due course through changes to FRS 17 or its replacement, FRSME.

Further disclosures will also be required in relation to the characteristics of defined benefit plans and the risks that its sponsors are exposed to by operating these plans.

So, what impact will these changes have within the accounting profession? The main conclusion seems to be that the new IAS 19 standard will, all else being equal, result in a reduction in company profits. The accumulated impact of this could be significant for UK companies, with recent estimates suggesting that replacement of the expected return credit could result in an aggregated profits reduction of more than £10bn a year.

Where full recognition of actuarial experience is adopted, the profits or losses arising from defined benefit pension schemes will be significantly more volatile. Take the example of a scheme with liabilities of £100m. Currently, such a scheme could have suffered experience losses (from falling assets values or increased liability values) of up to £10m without seeing any impact on the profit and loss account. Under the revised IAS 19 disclosure, the same £10m loss would hit the profit and loss immediately.

It has been argued that the changes will lead to a move away from equity investments by defined benefit pension schemes because holding equities will no longer be listed as a reward on the profit and loss. However, many within the pensions industry often overdramatise the attention paid to disclosed pension accounting figures in the profit and loss account. I agree with the views that most analysts already set aside any windfalls on the profit and loss associated with the pension scheme, particularly when brought about by the current expected return-on-assets credit.

It will, however, be interesting to see if the changes to IAS 19 do hasten a move away from equity investment by schemes. There is already a trend to de-risk and I see this continuing, though I am not convinced that the major driver will be these accounting changes. I feel it is far more likely that it will driven by trustees and employers that are less willing to be exposed to the risk of volatile funding levels and greater uncertainty in future funding costs.

Alan Collins is head of corporate advisory services at Spence & Partners