Current Status
In May 2006 the Accounting Standards Board (ASB) issued for comment a Financial Reporting Exposure Draft (FRED) of a proposed amendment to FRS 17 ‘Retirement Benefits’ and a draft Reporting Statement ‘Retirement Benefits – Disclosures’.
In December 2006 the ASB issued an amendment to FRS 17. The Amendment follows the proposals set out in the FRED and aligns the disclosure requirements of FRS 17 with those of IAS 19 ‘Employee Benefits’.
The Amendment will be effective for financial statements covering periods beginning on or after 6 April 2007, although early adoption is encouraged. It was proposed in the 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.
The ASB is continuing its review of the matters raised in relation to the draft reporting statement. It is anticipated the Reporting Statement will be published in early 2007.
The ASB note that some respondents have questioned the role of the reporting statement. The ASB has tentatively agreed that the reporting statement should clearly set out that the statement was a recommendation of best practice and can be adopted by any entity that operates a defined benefit scheme, whether applying UK or International Financial Reporting Standards.
In relation to the draft reporting statement the ASB has reviewed the responses to the question in the exposure draft’s invitation to comment regarding the proposal to disclose the buy-out amount. The ASB noted the strength of concern regarding this and has tentatively decided to recommend disclosure where the cost of buying out benefits is made available to trustees (managers) and/or members of defined benefit schemes.
Amendment to FRS 17 'Retirement Benefits'
The Amendment to FRS 17 replaces the existing disclosure requirements set out in the FRS with those of IAS 19 ‘Employee Benefits’. The disclosure requirements in IAS 19 were last reviewed in December 2004.
The significant additional disclosures required by the proposed amendment to FRS 17 include:
- information that enables users of the financial statements to evaluated the nature of an entity’s defined benefit schemes and the financial effects of changes in those schemes;
- the principal actuarial assumptions used at the balance sheet date (FRS 17 currently requires only the main financial assumptions);
- an analysis of the opening and closing scheme liabilities and scheme assets showing separately if applicable the movements in scheme assets and scheme liabilities; and
- an analysis of scheme liabilities into amounts arising from schemes that are wholly unfunded and amounts arising from schemes that are wholly or partly under funded.
Background to the FRED
The Accounting Standards Board (ASB) published Financial Reporting Standard (FRS) 17 ‘Retirement Benefits’ in November 2000, although its requirements have only become mandatory in full for accounting periods beginning on or after 1 January 2005.
Following the implementation of FRS 17 a number of comments concerning the accounting for pensions were raised. In particular, a general concern that financial statements do not include sufficient information to allow users of the financial statements to obtain a clear view of the risks arising from defined benefit schemes. In addition the UK legal and regulatory environment for company pension schemes has changed significantly. These changes could not have been anticipated when FRS 17 was developed and may have an effect on the relevant financial reporting.
On 14 October 2005 the ASB announced a research project into the financial reporting of pensions. The project is wide ranging and is reconsidering the fundamental principles of pensions accounting. The ASB aims to issue a Discussion Paper outlining its findings by the end of 2006.
In view of comments received following the implementation of FRS 17 the ASB has reviewed the disclosure requirements for defined benefit schemes as set out in FRS 17. The review is distinct from the wider research project and has a narrow focus on how disclosures for defined benefit schemes can be improved in the short-term giving particular consideration to the changes made in the UK regulatory regime.
Approach to the review
The ASB is conducting the wider research project with the assistance of a UK advisory panel and a Working Group from the European Financial Reporting Advisory Group (EFRAG). The ASB requested their assistance in this short-term review.
Following research on possible improvements to disclosures for defined benefit schemes a number of recommendations were made to the ASB for its consideration.
The ASB received recommendations from the Panel and Working Group and considered how these recommendations and could be implemented within the context of existing UK Financial Reporting Standards. In deciding on a proposal the ASB is conscious any new disclosures requirements should address the needs of users, whilst not being cumbersome to preparers.
Summary of recommendations
Proposals set out in the draft Reporting Statement
The FRED also sets out a draft Reporting Statement. The disclosures recommended in the draft Reporting Statement aim to provide users of financial statements with information to help them evaluate the risks and rewards arising from defined benefits schemes, including the funding obligations arising from those schemes.
The draft Reporting Statement recommends disclosures that complement requirements of FRS 17 (as amended). The extent of the disclosures required would be assessed by the directors and depends on the significance of the entity’s defined benefits schemes and its exposure to risks arising from those schemes. The ASB is of the view that a Reporting Statement which sets out principles for disclosure, rather than specified requirements, allows entities the flexibility to provide disclosure that are appropriate to their exposure to risks and rewards arising from defined benefit schemes.
The draft Reporting Statement sets out six principles to be considered when providing disclosures for defined benefit schemes. The principles address the following disclosures:
- the relationship between the entity and trustees (managers) of the defined benefit scheme;
- the principal assumptions used to measure scheme liabilities;
- the sensitivity of scheme liabilities to changes in the principal assumptions used to measure the scheme liabilities;
- how the liabilities arising from defined benefit schemes are measured;
- the future funding requirements to the defined benefit scheme; and
- the nature and extent of the risks arising from the assets held by the defined benefit scheme.
Scheme liabilities calculated on a buy-out basis
The draft Reporting Statement recommends that the financial statements provide information that enables users to understand the method of measurement used to measure scheme liabilities. The ASB is aware that the UK actuarial profession requires scheme actuaries to provide, in valuation reports, the estimated buy-out cost of scheme liabilities with a suitable insurance entity.
The ASB has considered a number of points of view on whether financial statements should disclose the buy-out cost at the balance sheet date with a suitable insurance entity.
One view expressed is that the disclosure of the buy-out cost is not consistent with the going-concern concept. Those that support this view argue that the buy-out cost is a measurement of the amount required to settle the scheme liabilities rather than to continue the defined benefit scheme on an ongoing basis.
The ASB, however, notes that with the improved disclosures proposed in this Exposure Draft a user of financial statements may estimate the buy-out cost. The draft Reporting Statement includes a recommendation for disclosure of the buy-out cost but the ASB is specifically seeking the views of constituents on whether this disclosure should be included in the final Reporting Statement.
Pension Protection Fund (PPF) Levy
In developing the proposals in this Exposure Draft, the ASB has considered new regulations in the UK. The Pensions Act 2004 established the Pension Protection Fund (PPF). The PPF has been formed principally to pay compensation to members of defined benefit schemes, following an insolvency event of the sponsoring employer where there are insufficient assets to pay benefits at the PPF compensation level. The compensation payments are funded partly by the assets transferred from the schemes to the PPF and partly from an annual levy on other pension schemes. Although some commentators have suggested that the financial statements should disclose the amount of the PPF levy placed on a defined benefit scheme, the ASB considers that this is not a matter for the reporting entity to disclose. In reaching this conclusion, the ASB formed the view that the PPF levy was similar to other expenses of a defined benefit scheme, which did not require separate disclosure, and therefore could find no specific reason to disclose this expense.
Regulatory Funding
The ASB has also considered the new statutory regime in the UK for funding defined benefits schemes, including whether the financial statements should disclose certain “triggers” that The Pensions Regulator (TPR) proposes to introduce for monitoring the funding of defined benefit schemes. One of the pieces of information The Pension Regulator proposes to use to monitor scheme funding is the amount of compensation that the Pension Protection Fund would be required to pay in the event of the sponsoring employer becoming insolvent. The ASB has given due consideration to the benefit of this disclosure but takes the view that the level of compensation payable, in the event of insolvency, is a matter between the members of the scheme and the scheme itself. The ASB notes that the amount of compensation payable in the event of insolvency does not represent a liability of the reporting entity and therefore the ASB is not proposing disclosure of this amount.
Regulatory Impact
In the ASB’s view, the disclosures required and recommended in the Exposure Draft of the Proposed Amendment to FRS 17 and the Reporting Statement cover information that entities will already be preparing, either for management or regulatory purposes and as such there should be little extra cost involved in preparing additional information. The ASB believes that the users of financial statements will benefit from the proposals set out in this Exposure Draft through better understanding of the risks and rewards arising from defined benefit retirement schemes. The ASB, however, would welcome views on whether there are any significant additional costs resulting from these proposals, and, if so, whether they can be quantified. The ASB would also welcome views on whether the benefits provided by the disclosures proposed in the Exposure Draft outweigh any costs involved.
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