Firms could appear insolvent under new ruling

Accountants PKF are warning firms that they may seem insolvent on paper due to the FRS17 measure, introduced earlier this year.

The FRS17 accounting standard stipulates that firms must report annual changes in the value of their pension funds.

The result is that many businesses could show huge losses due to its pension scheme deficit, payments that may not be due for many years to come.

The deficit calculated under FRS17 is based on the estimated cost of providing the benefits earned to date by employees.

Previously, a pension deficit could be included in the accounts footnotes, however for periods beginning on or after January 1 2005, it must be included on the balance sheet.

The issue will be particularly troublesome for small businesses struggling to provide a company pension in the first place.

Accounting for pension deficits may also have the potential of scaring away investors who fail to see the true worth of up and coming ventures.

Philip Long, head of corporate recovery at PKF, said: “While the majority of businesses have included these figures in the notes of previous accounts, they haven’t yet affected the bottom line.

“Many business owners may be surprised to find they are insolvent on paper when they do and by this time it may be too late. If enough businesses fail to act it could spell disaster for UK insolvency rates.”

Recent figures, released by the Department of Trade and Industry, revealed that company insolvencies decreased by 0.9 per in the last quarter of 2004, compared to the third quarter.

However, such a buoyant market may not appear so in the future if PKF’s fears prove warranted.

Vicky Summers, employee benefits consultant at PKF, said: “Businesses need to seek advice now to minimise the impact of a likely pension scheme deficit. In many cases there may be ways of capping the deficit.”