Pre-contract costs

On 21 May the ASB issued UITF Abstract 34 ‘Pre-contract costs’. The Abstract is intended to bring consistency to the accounting treatment of costs incurred in bidding for and securing contracts to supply products or services. Entities in some industries— for example, suppliers of property and services under the Private Finance Initiative, Public-Private partnerships and outsourcing arrangements—incur substantial costs before a contract is obtained. Diverse accounting treatments have developed for such costs in practice.

The Abstract requires that pre-contract costs should be recognised as expenses as incurred, except that, once it is virtually certain that a contract will be obtained, directly attributable costs should be recognised as an asset (and subsequently charged as expenses during the period of the contract). Costs that have already been charged to the profit and loss account should not be reinstated as an asset when a contract is obtained.

Abstract 34 is effective for accounting periods ending on or after 22 June 2002.

Death-in-service and incapacity benefits

Also on 21 May the ASB issued Abstract 35 ‘Death-in-service and incapacity benefits’. The Abstract addresses a question that arose from the actuarial profession concerning the accounting required by FRS 17 ‘Retirement Benefits’ for the cost of death-in-service and incapacity benefits that are provided through a defined benefit pension scheme.

The Abstract requires that, where the benefits are not wholly insured, the uninsured scheme liability and the cost for the accounting period should be measured, in line with other retirement benefits, using the projected unit method. The effect is that the valuation of uninsured benefits reflects the current period’s portion of the full benefits ultimately payable in respect of current members of the scheme. When the benefits are insured, the cost is determined by the relevant insurance premiums.

Abstract 35 is effective for accounting periods ending on or after 22 June 2002.