Company Valuation Under IFRS : Interpreting and Forecasting ...

Chapter Four – Key issues in accounting and their treatment under IFRS
In € million Net present Fair value Net
value of of fund obligation
pension benefits
assets
1 January 2003 5,329 –4,722 607
Current service cost 48 – 48
Expenses from reversing the 273 – 273
discounting of pension obligations
Expected return on plan assets (–) – –239 –239
Employer contributions – –111 –111
Benefits paid –255 255 0
Actuarial gains (–) and losses (+) 441 –155 286
Translation differences and other –272 228 –44
changes
31 December 2003 5,564 –4,744 820
Source: BMW Group Annual Report 2003
The extract reproduced above shows the income statement charge. The crucial
aspect is where each element has been included in the income statement. In our
view it is only the service cost that should be included in the EBIT number. All
other charges are financial in nature. The appropriate treatment of the
amortisation of the actuarial gains/losses is arguable. One argument is that these
are real costs they are simply being amortised. Another is that they represent
cumulative changes in estimates and hold little economic value once the overall
size of the deficit is appropriately recognised. We tend to favour the latter view
and would rather see the total of actuarial gain/losses deducted from equity
although we can see some validity in the other approach.
4.5 Implications for financial analysis
In an environment where there is a shortage of highly skilled and experienced
staff, pension benefits can be used as a means of attracting employees. However,
offering generous pension terms can be very expensive. Therefore, analysts will
want to examine the underlying assumptions and status of the plan closely. Such
analysis may well involve going beyond the financial statements data and
adjusting the financials.
One of the key problems for analysts is the significant amount of ‘netting off’ that
occurs under IAS 19. Given the smoothing nature of some of these numbers there
is an argument that, if the numbers are significant, some level of disaggregation
should be undertaken by the analyst. Typical adjustments that might be made
would include:
• The only charge that should go into EBIT is the service cost. This is the true
ongoing regular cost.
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