Financial Times: New accounting rules will cut Shell's assets: “Royal Dutch/Shell will be forced to cut the value of its net assets by $4.7bn (£2.5bn) this year to bring its pensions reporting into line with radical accounting guidelines being introduced across Europe.”: “However, analysts separately raised concerns about Shell's decision to change the way it reported on its Dutch exploration and production joint venture.” (ShellNews.net) 23 Nov 04
By James Boxell
Published: November 23 2004
Royal Dutch/Shell will be forced to cut the value of its net assets by $4.7bn (£2.5bn) this year to bring its pensions reporting into line with radical accounting guidelines being introduced across Europe.
To comply with the new International Financial Reporting Standards (IFRS), Shell will carry the full amount of its pension deficit on its balance sheet, rather than partly as before.
The Anglo-Dutch oil group uses a mechanism known as "smoothing" when it calculates pension liabilities, which often help turn a fund deficit into a surplus.
Until now, the smoothing effect at Shell has only been revealed in notes to the accounts rather than in the balance sheet figures.
Smoothing allows companies to calculate an average value for their pension plan assets across several years, which they claim reduces volatility in valuations.
However, the new IFRS rules, which are being implemented to provide greater clarity for investors, force companies to remove the smoothing effect and calculate liabilities based on the yearly value of their pension plan assets.
Shell said yesterday that the new treatment would lead to a reduction in retained earnings for 2004 of $4.9bn. Alongside other effects from the implementation of IFRS, which is being introduced by 7,000 companies across Europe in one of the biggest accounting changes in decades, this will reduce its overall net assets by $4.7bn.
Shell said yesterday that there would be "no impact on the actuarial position or funding of the pension funds, which continue to be well-funded".
Analysts and experts on IFRS said the changes to the pensions reporting were largely technical and that the information on the smoothing effect could already be determined from the notes in Shell's annual reports.
However, analysts separately raised concerns about Shell's decision to change the way it reported on its Dutch exploration and production joint venture.
The company provides a full financial breakdown of the venture in its accounts, but under IFRS rules it will only report its share of the net income. This brings the Dutch venture into line with how Shell reports on its other joint ventures.
One analyst said: "With this kind of one-line equity accounting, you lose information for investors and that is always a concern."
Shell did not provide guidance yesterday on how the IFRS rules might affect its earnings, but the impact for European companies could be huge.
Munich Re, the German reinsurer, adopted the standards early and reported in April that a new provision for derivatives had cut its 2003 profit from €887m (£623m) to €434m. UPM-Kymmene, the Finnish forestry company, saw its 2004 operating profit fall from €784m to €352m.