UK - "Subjective" assumptions under FRS17 can alter earnings by as much as 20%, research by UBS shows.
The investment bank’s research – which looked at 18 of the UK’s leading media companies – found that changing investment assumptions under FRS17 could have a “significant effect” on profits.
And it warned investors that rather than looking at the size of pension scheme deficits, they should look at cash flows to see how much a company was really worth.
The report said: “The subjective assumptions companies make in accounting for their pension schemes can materially influence reported earnings.
“Investors should focus on cash flows as the most accurate representation of companies’ intrinsic values.”
The report singled out companies such as Granada, SMG and DMGT as media firms with profits that were most sensitive to changes in FRS17 assumptions.
The combined effect of FRS17 on media firms’ earnings was to increase them by 1% – but some – such as Granada and SMG saw slides of 6% and 2% respectively.
It also revealed that companies in the media sector had a combined FRS17 deficit of over £2bn.
But UBS remains confident deficits on UK pension fund will shrink significantly as equity markets recover.
It said: “We believe the recent market rally will decrease the absolute level of deficits, and thus reduce the impact on companies’ balance sheets.”
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