Project Director Michelle Crisp outlines the highlights of the Board’s latest publications on this important issue, which completes our review of pensions disclosures.

As reported in Inside Track 49, the ASB has been undertaking a project to see whether the disclosures for retirement benefit schemes could be improved. The ASB started its review in early 2006 in light of concerns expressed by commentators, including investors, that financial statements did not contain sufficient information to allow users to adequately assess the risks. The review is distinct from the wider pensions research project the ASB is undertaking on accounting for pensions (see page 8).

Amendment to FRS 17

In December, the ASB published an Amendment to Financial Reporting Standard (FRS) 17 ‘Retirement Benefits’. The Amendment aligns the disclosures in FRS 17 with those of the equivalent international standard, International Accounting Standard (IAS) 19. The ASB consulted on the Amendment in May 2006.

The Amendment is effective for financial statements covering periods beginning on or after 6 April 2007, although early adoption is encouraged. It was proposed in the Financial Reporting Exposure Draft (FRED) to have an effective date for accounting periods ending on or after 31 December 2006. The ASB has decided to allow a longer implementation period in response to concerns from some commentators regarding the time required to prepare for the amended disclosure requirements.

The Amendment also amends to paragraph 16 of FRS 17, such that for quoted securities, the current bid price (rather than the mid-market value) is taken as fair value. This is a further alignment with IAS 19, on which the ASB consulted in July 2005.

Reporting Statement

In January, the ASB published its Reporting Statement entitled ‘Retirement Benefits - Disclosures’, which is designed to promote greater transparency in financial reporting for defined benefit pension schemes.

As a best practice guide, the Reporting Statement is intended to have persuasive rather than mandatory force. Its recommendations aim to assist the users of financial statements in understanding the risks and rewards, and funding obligations arising from defined benefit (DB) schemes.

The Reporting Statement sets out six principles to be considered when providing disclosures for DB schemes in the financial statements:

1. the relationship between the entity and trustees (managers) of the defined benefit scheme;
2. the principal assumptions used to measure scheme liabilities;
3. the sensitivity of the principal assumptions used to measure the scheme liabilities;
4. how the liabilities arising from defined benefit schemes are measured;
5. the future funding obligations in relation to defined benefit scheme; and
6. the nature and extent of the risks arising from financial instruments held by the defined benefit scheme.

The disclosures recommended in the Reporting Statement complement those set out in FRS 17 ‘Retirement Benefits’ (as amended December 2006) and IAS 19 ‘Employee Benefits’. The Reporting Statement may be applied by any entity (whether the entity applies UK or International Financial Reporting Standards) that operates a DB scheme.

Respondents to the draft Reporting Statement expressed some concerns about the proposed recommendations and the Board has taken their views into consideration in the final version. In particular the ASB has responded to comments regarding the recommendation to disclose the estimated buy-out cost of scheme liabilities. It is recommending disclosure of the buy-out amount where it is already made available to members and/or trustees of the scheme.

Copies of both documents can be accessed on the website via the following link: http://www.frc.org.uk/asb/technical/projects/project0069.html.