FRC proposes changes to pension accounting rules for smaller, micro entities
The Financial Reporting Council (FRC), the UK’s financial reporting watchdog, has released proposals for a new accounting regime for both small entities and micro-sized entities.
Among the areas of accounting affected by the new accounting regime, which will apply in both the UK and the Republic of Ireland, is pensions accounting.
The proposals affecting small entities will replace the Financial Reporting Standard for Smaller Entities (FRSSE).
The micro-entities requirements follow the introduction into UK company law in November 2013 of the micro-entities regime.
The Republic of Ireland is consulting on whether to take such an approach.
Andrew Mandley, a UK-based pensions consultant at Towers Watson, said he broadly supported the proposals.
“I don’t think it will have a huge amount of impact,” he said. “If anything, it is probably more sensible than where we are at the moment.”
The release of the proposals means an entity using UK GAAP in the future would report under one of the following:
- Full IFRS as endorsed for use within the EU
- The FRS 101 reduced disclosure framework
- Full UK GAAP in line with FRS 102
- The small entities regime in section 1A of FRS 102
- The micro-entities regime in FRS 105
Mandley said: “We have FRSSE, which is trying to paraphrase FRS 17, so it feels as though this is a sensible move to bring the smaller entities regime of UK GAAP into line with FRS 102. This strikes me as a pragmatic thing to do.
“Different rules apply to micro-entities under FRS 105, but the number of micro-entities that will have to do anything will be few and far between. They are unlikely to be sponsoring a DB plan. If they are, they will be doing so as part of a larger group.”
The FRC said each accounting regime from full EU IFRS downwards “correlates to the increasing size and complexity of the entities that are most likely to apply a given standard”.
In addition, the FRC has also given entities the option of applying “a more comprehensive regime.”
The small entities regime is potentially available to companies, limited liability partnerships and many non-incorporated entities.
Alongside this, the micro-entities regime is only available to the smallest incorporated entities.
Its requirements are a subset of the small entities regime. Use of the regime is optional, even where an entity qualifies to use it.
The FRC issued FRS 102 in March 2013 and revised it in August 2014.
It is effective for accounting periods beginning on or after 1 January 2015.
FRS 102 replaces more than 70 accounting standards and Urgent Issues Task Force interpretations that ran to more than 2,400 pages with a single document.
In a statement, the FRC said it “reflects developments in the way businesses operate and uses up-to-date accounting treatment and language”.
The starting point for pensions accounting under the small entities regime is section 28 of FRS 102.
FRS 102’s requirements dealing with annual expense are based on the 2011 revisions to IAS 19 ‘Employee Benefits’.
FRS 102 retains the differing treatments for defined contribution plans and defined benefit plans used by FRS 17 and IAS 19.
This means that, under the small entities regime, a DB sponsor will produce its pensions numbers in more or less the same way as it would under FRS 102.
Accrued pension obligations are therefore discounted using a high-quality corporate bond discount rate.
The difference between pension scheme assets and the discounted value of the obligation will be reported on the balance sheet as a net asset or liability.
This means a DB sponsor would report a net balance sheet asset or liability using the projected unit credit method and a finance cost based on the discount rate in the income statement.
Entities must discount their future pension obligation to arrive at a net present value using a AA-corporate bond discount rate.
The proposed minimum disclosure requirements for the small entities regime are set out in paragraph 1A.14(l) of section 1A.
The requirements are much less onerous than those in FRS 102.
The only requirement is a note on pension commitments that are not already included within the main financial statements.
Experts expect this to amount to a description of group or multi-employer DB schemes that are being accounted for on a DC basis.
But where an entity has a material pension scheme, it must make a meaningful disclosure to give a true and fair view of its position.
This could mean an entity must consider the full set of FRS 102 pension disclosures.
Meanwhile, the micro-entities regime dispenses with the standard FRS 102 approach.
Instead, a DB sponsor under this regime must instead show a balance sheet liability equal to the present value of any agreed schedule of deficit contributions, the FRC has proposed.
Despite the contrast between the smaller entities and the micro-entities regimes, Mandley believes it will make little difference in practice.
“If you are a small entity or a micro entity, it may be that you are participating in a much larger scheme such as an industry-wide scheme.”
In these circumstances, he says, under both reporting regimes, the present value of any deficit contributions would be placed on the balance sheet.
In the case of a small or micro UK group subsidiary with perhaps one or two employees participating in the group pension scheme, it is likely that the group parent will have a policy of absorbing any pension deficit.
“I expect them to allocate the liability within the rest of the group and not burden the subsidiary with the need to do full DB pensions accounting,” Mandley said.
Interested parties have until 30 April to comment on the proposals.