Introduction
FRS 102 becomes applicable for accounting periods starting on or after 1 January 2015. It (together with FRSs 100, 101 and 103) replaces all other existing FRSs and so will be the standard that covers how entities account for the cost of their pension arrangements.
In line with international accounting standards, the STRGL is replaced by the OCI (Other Comprehensive Income). The Profit & Loss account becomes the Income Statement (“IS”), although entities can issue just one statement – a Statement of Comprehensive Income – incorporating both IS and OCI items. The balance sheet becomes the Statement of Financial Position.
A pension scheme will be classed as Defined Contribution (“DC”) only if the reporting entity pays contributions at a fixed rate and bears none of the risks. All other pension arrangements are classed as Defined Benefit (“DB”). Death benefits should be classed as DC only if all benefits are insured and the entity has no obligation to pay benefits in excess of those insured.
Defined benefit schemes
Assets should be taken into account at fair value, except that annuity policies that match a scheme liability should be measured at the same value as that of the liability. The Projected Unit method should be used to value the liabilities, with actuarial assumptions that are unbiassed, mutually compatible and selected to lead to the best estimate of the future benefit payments that will arise under the scheme. Those cashflows should be discounted at a rate determined by reference to market yields at the reporting date on high-quality corporate bonds of a currency and term that is consistent with those of the future payments. This is all consistent with the requirements of IAS 19.
The entity does not have to engage an independent actuary to perform the calculations and FRS 102 does not specify how frequently a full valuation should be carried out, although the FRC envisages that they will continue with the previous frequency – usually every 3 years. In the intervening years, if the principal actuarial assumptions have not changed significantly, the defined benefit obligation may be measured by adjusting the prior period measurement for changes in the membership.
The effect of a change in the scheme’s provision for its liabilities should be recognized as an expense (against profit) in the period in which it occurs, as should any gain or loss from curtailment or settlement during the period.
A DB scheme asset may be recognized only to the extent that the entity is able to recover the surplus either through reduced contributions or through refunds from the scheme.
The main change affecting the current service cost recognized in profit or loss is that it will include net interest (at the discount rate assumed at the start of the period) on the net defined benefit liability during the reporting period, rather than interest on the value of the scheme liabilities less the expected return on the scheme assets. Again, this is consistent with IAS 19. In determining the interest on the assets, unrecognized surplus is excluded.
The following disclosures will be required in relation to DB pension schemes:
- a general description of the type of scheme, including its funding policy,
- the date of the most recent full actuarial valuation and, if applicable, a description of the adjustments that were made to measure the defined benefit obligation at the reporting date,
- a reconciliation of opening and closing balances for the defined benefit obligation and the fair value of scheme assets,
- the total cost relating to DB schemes for the period,
- the split of the fair value of the scheme assets at the reporting date between the major asset classes,
- the amounts of any employer-related investment included in the fair value of the scheme assets,
- the return on plan assets and
- the principal actuarial assumptions used.
Multi-employer schemes – associated employers
In a multi-employer scheme where the employers are under common control, if there is a stated policy for charging the cost of the scheme to individual employers, each entity should recognize the net defined benefit cost of a DB scheme in accordance with that policy. If there is no such policy, the net defined benefit cost of a DB scheme is recognized only in the financial statements of the group entity which is legally responsible for the scheme, the other employers recognizing only a cost equal to their contribution payable for the period. Each entity shall make the following additional disclosures:
- the stated policy for charging the cost of the DB scheme or the fact that there is no policy,
- the policy for determining the contribution to be paid by the entity,
- if the entity accounts for its part of the scheme on a DB basis, all the DB disclosure items listed above and
- if the entity accounts its part of the scheme on a DC basis, the 1st, 2nd, 5th and 6th items in the list of DB disclosure items.
Under FRS 17 it was possible for the pension liability or asset to be recognised only in the consolidated financial statements. Under FRS 102 at least one entity will apply defined benefit accounting depending on the policy for charging pension costs around the group. This may have an impact on distributable reserves.
Multi-employer schemes – non-associated employers
In a multi-employer scheme where the employers are not under common control, if sufficient information is not available to use DB accounting for a multi-employer scheme that is a DB scheme, the entity can still account for the plan as if it were a DC scheme but it will have also to recognize:
- a liability in the Statement of Financial Position for the deficit contributions payable under any Schedule of Contributions and
- the resulting expense in profit or loss as described below for a DC scheme.
The entity should also:
- disclose the fact that it is a DB scheme and the reason why it is being accounted for as a DC scheme, along with any available information about the scheme’s surplus or deficit and the implications, if any, for the entity,
- include a description of the extent to which the entity can be liable to the scheme for other entities’ obligations under the terms and conditions of the multi-employer plan and
- disclose how any liability for contributions due under a Schedule of Contributions has been determined.
FRED 55
FRED 55 proposes some amendments to FRS 102, as it relates to pension liabilities, before it has even come into force! These aim to clarify that, for entities which already recognize a pension asset or liability in accordance with FRS 102, no additional liabilities need be recognised in respect of a Schedule of Contributions, even if such an agreement would otherwise be considered onerous. (This is in contrast to IAS 19, which requires recognition of an additional liability in such circumstances.) The proposed amendments clarify also that, where recognition of a surplus has to be restricted (because the surplus would not be fully recoverable), the transaction is recognized in Other Comprehensive Income, not in the Profit & Loss account. The consultation on the proposals closes on 21 November and the revised FRS 102 is expected to be published during 2015.