The much-heralded Financial Reporting Standard 102 (FRS 102) was finally revealed in March 2013 and is obligatory from 1st January 2015, even though some firms may choose to adopt it earlier. There are a number of implications for company pension schemes. New requirements will be supplemented by an updated Statement of Recommended Practice (SORP) which is due to be issued by the Pensions Research Accountants Group for a three month consultation in 2014 with likely adoption later in the year.
FRS 102 views company pension schemes as financial institutions in their own right and they will therefore be mandated to comply with additional disclosure requirements. For instance, where a company has entered an agreement to fund a past deficit by making additional contributions, there is a requirement to recognise this commitment as a liability, albeit discounted to net present value. This will result in a one-off recognition of the liability as a prior year adjustment on transition. However, where there is a re-assessment of that commitment after an actuarial valuation, the change in liability will have to be reflected in the income and expenditure account. This will result in a charge or credit depending upon the changes to the commitment. There will also be an unwinding of any discount of the liability reflected each year.
Treatment of defined benefit schemes will change insofar as where there is a lower return on plan assets, this will be recognised in the profit and loss account. Where there is an excess, this will be reflected in the statement of total recognised gains and losses. It is also a requirement of FRS 102 that defined benefit schemes accompany their financial statements with disclosure of information relating to the actuarial position based on the most recent valuation together with the main assumptions and the method used in arriving at this valuation.
Since such actuarial information is readily available, the FRC maintain that this requirement should not involve significant extra cost or effort.
One area which is going to experience significant impact is where schemes use complex financial instruments which cannot be considered to be “basic.” FRS 102 requires a fair value to be estimated at each balance- sheet date with any changes being passed through the income statement. This could relate to items such as interest rate swaps and loans linked to RPI and obviously introduces an element of volatility which can only be mitigated by complicated and rather onerous hedge accounting.
FRS 102 does, in fact, allow for hedge accounting, where certain conditions are met and, while this should minimise profit and loss volatility it may not be effective for Corporation Tax purposes as the result of the general computational rule requiring taxation of movements in the reserves.
About the Author: This article is written by Jason Tucker