UK: UK GAAP – Defined Benefit Schemes – More Accounting Changes

Last Updated: 24 July 2007

A number of further amendments made to the disclosure requirements for companies with defined benefit schemes may be unwelcome news for those who have only just come to terms with the complex disclosure requirements of FRS 17.

A number of changes to the accounting requirements of FRS 17: ‘ Retirement benefits’ will take effect for periods beginning on or after 6 April 2007.

While the main principles of FRS 17 are similar to those of its international equivalent, IAS 19, these further changes will bring the disclosure requirements of the two standards into closer alignment. The ASB is encouraging the preparers of accounts to adopt the new standard ahead of the mandatory application date. The majority of the changes are to disclosure requirements; however, there is also one amendment to the measurement criteria used in determining the defined benefit surplus or deficit. At present, FRS 17 requires that when valuing quoted securities held by a defined benefit pension scheme, this should be by reference to mid-market price. IAS 19 requires the use of bid price and FRS 17 has been amended to require the same basis.

The Main Changes

The main changes required for disclosure are as follows.

  • FRS 17 previously required disclosure of the main financial assumptions used to measure the defined benefit asset or liability – the amendment requires disclosure of the principal actuarial assumptions. The most significant consequence of this change will be that many companies will have to disclose mortality rates.
  • Opening and closing scheme assets and liabilities must be shown separately, together with an analysis of the movements.
  • Scheme liabilities will need to be analysed between those that are unfunded and those that are fully or partly funded.

Good News

There is also some good news. The following disclosure requirements have been removed.

  • The date of the most recent actuarial valuation and if the actuary is an employee or officer of the reporting entity.
  • The financial assumptions at the beginning of the period.
  • An analysis of reserves in the accounts showing the defined benefit asset or liability separately.
  • For closed schemes and those where the age profile of active members is rising significantly, the fact that the service cost under the projected unit method will increase as the members near retirement.
  • The fair value of the assets of the scheme at the beginning and end of the period, together with the assumed expected rate of return.

As the assumptions that are to be disclosed are now those at the balance sheet date rather than the opening position, there will no longer be a need to disclose three years’ worth of information.

It will also no longer be necessary to disclose the difference between the expected and actual rate of return on assets for the current period and past four periods. Instead, the amount of the obligation, the fair value of the assets and the surplus and deficit will be required for the equivalent period, together with the experience adjustments arising on the assets or liabilities which can be expressed either as a percentage of scheme assets or an amount.

Smith & Williamson Commentary

While these changes are relatively small compared to those needed to harmonise some standards with IFRS, many companies have only recently come to terms with the complex disclosure requirements of FRS 17 and, as such, any change could be a source of irritation. The requirement with respect to the disclosure of principal actuarial assumptions and the possibility that this will, for many, include mortality rates has also caused some controversy. Businesses in some sectors may find this information particularly sensitive.

More Pensions Disclosures

At the same time, as the revisions to FRS 17 were issued, the ASB also issued a non-mandatory Reporting Statement: ‘Retirement benefits – disclosures’. Designed for use by all companies with defined benefit pension schemes whether they use UK GAAP or IFRS, the Reporting Statement suggests additional disclosures covering the following.

  • The relationship between the reporting entity and the trustees of the pension scheme.
  • The principal assumptions used to measure scheme liabilities. While the revised FRS 17 and IAS 19 require disclosure of principal actuarial assumptions, the Reporting Statement emphasises the need to disclose mortality rates if not already disclosed by accounting standards (i.e. where they were not otherwise considered material). Where there are variances in the mortality rates for geographical, demographical or other reasons, these should also be disclosed.
  • Sensitivity analysis of the principal assumptions used to measure the scheme liabilities.
  • How the liabilities arising from defined benefit schemes are measured. While FRS 17 requires defined benefit liabilities to be measured using the projected unit method, the Reporting Statement discusses the other bases that can be used for measuring liabilities and suggests that, where the cost of buying out defined benefit scheme liabilities is made available to the trustees, this information should also be disclosed.
  • The future funding obligations that the reporting entity has, e.g. commitments to make up deficits.
  • The nature and extent of the risks arising from financial instruments held by the defined benefit scheme.

Smith & Williamson Commentary

The ASB describes the Reporting Statement as "persuasive" rather than mandatory and companies will need to weigh up the relative costs and benefits of the additional disclosure requirements. While most major corporations will probably make the further disclosure, the potential sensitivity of some of the information that will be included in the financial statements means that smaller companies may wish to monitor developments in the marketplace before deciding on which approach to take.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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