How recent IASB changes could affect your scheme

Most companies will need to choose between the UK accounting standards FRS 101 and FRS 102:

• FRS 101 is a reduced reporting framework, though the pension disclosure requirements mirror those of IFRS. This includes the requirement to disclose additional information covering the characteristics of the plans and the risks associated with them, and how they affect the amount, timing and variability of companies’ future cash flows.

• FRS 102 largely follows the principles of IFRS but with fewer additional disclosure requirements and one significant relaxation of the surplus recognition rules.

Impact on reported earnings

There has been much comment on the effect on companies’ reported earnings, as expected returns on plan assets can no longer be anticipated in earnings.

Instead, interest on the net defined benefit asset will be included in profit and loss. This effectively allows for interest income on the assets in line with the discount rate used to place a value on the plan’s liabilities. 

Asset performance relative to the discount rate is included in other income as a re-measurement item.

For many plans with growth-orientated investment strategies this will increase the reported pension cost. If not already assessed, companies should check that they understand the impact on their own financials.

Group plans

A DB plan can have a number of participating companies under the common control of a parent company where the risks are shared between the participating companies.

Often there is no contractual agreement or stated policy for charging the net DB cost to the individual companies

Often there is no contractual agreement or stated policy for charging the net DB cost to the individual companies.

In the above situation, under FRS 17 it was possible for each participating company to account for the plan on a defined contribution basis with the DB cost reported in the consolidated group accounts. 

Under FRS 101/102, the cost of the DB plan will need to be recognised in the individual statements of the company legally responsible for the plan.

Where no participating company already recognises the net DB cost, group companies will need to identify which participating company or companies will do so in future.

Placing the deficit on the balance sheet for the first time could impact the payment of dividends and the company’s credit rating, and hence for example Pension Protection Fund levies. It therefore justifies careful consideration.

Surplus recognition

Under FRS17, pension surpluses could only be recognised on the balance sheet if it was possible to recover the surplus either by a refund to the company (which must have been agreed at the balance sheet date) or by the reduction of future employer contributions.

Provided that plan rules do not give trustees unilateral power to wind-up the plan or award benefit improvements then there is more flexibility to recognise pension surpluses under FRS 101/102. 

There is no requirement for refunds to have been agreed by the accounting date. If a sponsor is theoretically able to finance the plan until the last benefit is paid with any excess funds returned at this point then it should be able to recognise a surplus.

If the plan trustees can use surplus to wind up the plan or increase members’ benefits without the consent of the sponsoring employer(s) then this can restrict the availability of the surplus to the sponsor. 

In this situation, FRS 101 also requires a company to recognise an additional liability if agreed deficit recovery contributions are expected to give rise to or increase a surplus from which the company will not be able to derive economic benefit. 

This requirement for an additional liability does not apply under FRS 102.

Alastair Kennis is corporate pensions consultant at Aon Hewitt