Accounting for retirement benefits in the UK FRS

Accounting for retirement benefits in the UK – FRS 17 David Loweth Secretary, ASB May 2004

FRS 17: Objective • Financial statements reflect at fair value assets and • • liabilities arising from employer’s retirement benefit obligations and any related funding Operating costs are recognised in period(s) in which benefits earned by employees and costs arise Financial statements contain adequate disclosure of the cost of providing retirement benefits and related gains, losses, assets and liabilities

FRS 17: Scope • Applies to all financial statements intended to give a • • true and fair view Covers all retirement benefits that an employer is committed to provide Covers funded and unfunded retirement benefits, including pay-as-you-go schemes FRS 17 requires a liability to be recognised as benefits are earned, not when they fall due to be paid Focus on defined benefit (DB) schemes

FRS 17 : Measurement • Assets in a DB scheme should be measured at fair • • • value at the balance sheet date DB liabilities should be measured on an actuarial basis using the projected unit method Projected unit method is an accrued benefits valuation in which scheme liabilities make allowance for projected earnings Liabilities comprise any benefits promised under formal terms of the scheme and any constructive obligations where a valid expectation created

FRS 17: Liability Assumptions • Best estimate of future cash flows that will arise under • • • scheme liabilities Directors’ responsibility, but on actuarial advice Actuarial assumptions should reflect expected future events that will affect cost of benefits to which the employer is committed at balance sheet date Expected future events will affect the cost of the benefits Discount rate for liabilities: AA corporate bond rate Professional actuarial valuation every 3 years

FRS 17: Balance sheet • Recognise surplus/deficit in a DB scheme • This is excess/shortfall of value of assets in the • • scheme over/below present value of scheme liabilities Employer recognises asset to the extent it can recover a surplus either through reduced contributions or refunds Employer recognises liability to the extent it reflects the legal or constructive obligation

FRS 17 : Performance statements • • Recognise – Current service cost Interest cost Expected return on assets Actuarial gains and losses Past service costs Gains and losses on settlements and curtailments

FRS 17 : Actuarial gains and losses • Actuarial gains and losses arising from any new • • valuation and from updating latest actuarial valuation to reflect conditions at balance sheet date should be recognised in the period Actuarial gains and losses recognised in the statement of total recognised gains and losses. Once recognised, not recognised again in profit and loss Different to IAS 19, although IASB proposed amendment will introduce option to recognise actuarial gains and losses in full as they arise, outside profit or loss – statement of recognised income and expense

FRS 17 : DB Disclosures • • • Disclosures include – Nature of scheme Date of most recent actuarial valuation Contribution Main financial assumptions Components of DB cost

FRS 17: Implementation • Transitional disclosure arrangements from 2001 • • onwards Full adoption required for accounting periods ending on or after 22 June 2005 Earlier adoption encouraged