Fitch: JVs, Pensions Most Affected by New Rules in 2013 Accounts

(The following statement was released by the rating agency)

Link to Fitch Ratings' Report: Accounting and Financial Reporting – 2014 Global 
Outlook

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732200

LONDON, January 30 (Fitch) Joint ventures and defined-benefit pensions will be 
most affected by new accounting rules in upcoming 2013 financial statements, 
Fitch Ratings says. Fresh disclosures on pension liabilities and group structure 
could be relevant to credit analysis and may affect ratings.

Enhanced disclosure is a core part of the revised standards, so 2013 annual 
reports are likely to have fresh details that could be relevant to our ratings 
analyses, for example new details of groups’ interests in other entities, 
including risks from structured vehicles and the transferability of cash flows. 
Incremental information on future cash flows and a sensitivity analysis should 
give a clearer picture of the likely future cash contributions necessary to meet 
the pension obligation. 

There will be substantial changes in group accounting in 2013 annual results. 
Rules have been overhauled regarding the entities that have to be included in 
group accounts and those that can remain off balance sheet. The new rules also 
deal with interests in joint arrangements, where control is shared with another 
party. These arrangements are split into ones where the parties have rights to 
the net assets of an investment (joint venture) and ones where the parties have 
specific rights to assets or obligations for liabilities (joint operations).

The greatest change is the prohibition of proportionate consolidation for “joint 
ventures”. Instead of the income statement and balance sheet reflecting the 
entity’s share in the joint venture line by line, its share of profits and net 
assets will be shown as a single line item under the equity method. Revenue, 
expenses, gross assets and liabilities are likely to reduce, even though there 
may be little impact on net profit or assets. Conversely, for entities with 
interests in “joint operations”, a method similar to proportionate consolidation 
will now have to be applied. This might increase revenue, expenses, gross assets 
and liabilities where these interests were previously accounted for under the 
equity method.

We expect many large European companies to adopt these group accounting changes 
in their 2013 financial statements, even though the effective date in the EU was 
extended by one year to end-2014. The revisions to the scope of consolidation 
are likely to be more material for financial institutions that hold interests in 
structured entities held off balance sheet. For other corporates, it is likely 
to have an effect in isolated cases only.

Defined-benefit pension liabilities will also rise for some entities that 
previously took advantage of an option to keep some actuarial losses off balance 
sheet to reduce volatility. The revised standard removes the choice to use this 
“corridor” method. Some large corporates in Germany and the UK, where 
defined-benefit pension schemes are common, had previously taken advantage of 
this option. Many companies will also have a modest increase in pension costs 
because they will now have to use the ‘AA’ bond yield to calculate asset returns 
instead of their own assumptions. We expect the increases to be relatively small 
for most. 

For further information on accounting and financial reporting, see “Accounting & 
Financial Reporting – 2014 Global Outlook”, published today. 

Contact: 

John Boulton

Director

Credit Policy

+44 20 3530 1673

Fitch Ratings Limited

30 North Colonnade

London

E14 5GN

Cynthia Chan 

Senior Director

Fitch Wire

+44 20 3530 1655

Media Relations: Hannah Huntly, London, Tel: +44 20 3530 1153, Email: 
hannah.huntly@fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market 
commentary page. The original article can be accessed at www.fitchratings.com. 
All opinions expressed are those of Fitch Ratings.

Applicable Criteria and Related Research: 

New IFRS Regime for Group Accounting

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=729317

IFRS Accounting for Defined Benefit Pensions

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=722856

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