Companies should not enter into arrangements that turn pension obligations into equity instruments in their accounts, the Financial Reporting Council (FRC) has warned.

FRC said that its Financial Reporting Review Panel (FRRP) has several company accounts, which have put in place arrangements to provide additional collateral to their pension schemes in exchange for reduced annual contributions and a longer period to fund the pension scheme deficit.

The FRRP said that it acknowledged the "genuine commercial reasons" for establishing such arrangements and has focused on companies that have reclassified pension liabilities as equity instruments.

Some of these arrangements, which usually involve the establishment of a Scottish Limited Partnership that holds the collateral, have included additional features, which appear to have been introduced to transform the company's obligation to make future payments to its pensions scheme into an equity instrument in the company's consolidated accounts.

The statement said: "This has a favourable impact on financial solvency, gearing and reported comprehensive income notwithstanding that the company has retained the obligation to fund the pension deficit."

Following the FRRP's enquiries, each of the companies in the FRC's regulatory enquiries has revised either the arrangements or the amounts recognised with the result that the concerns of the FRRP have been addressed for the future from the date of the change.

Richard Fleck, FRC's conduct committee chair, said: "The FRRP believes that it is important that companies and their advisers are aware that the FRRP will ordinarily open an enquiry into the financial reporting of any company in which material pension liabilities are reclassified from debt to equity."

First published 17.01.2014

monique_simpson@wilmington.co.uk