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Accountants and actuaries have backed a UK proposal to clarify how defined-benefit plan sponsors account for a minimum funding requirement.

The proposals in question are detailed in FRED 55 – draft amendments to FRS 102 – which the UK’s Financial Reporting Council (FRC) published on 20 August.

They affect businesses reporting under the new UK GAAP framework of FRS 102, a financial reporting standard that will apply in the UK and the Republic of Ireland from 1 January 2015.

Out of 20 comment letters from interested parties, all registered support for the FRC’s actions. However, commentators did warn that FRED 55 failed to address surplus recognition.

Aon Hewitt actuary Simon Robinson said: “FRED 55 suggests that the ‘additional liability’ parts of IFRIC 14 do not need to be applied to FRS 102 but is silent on whether to consider the surplus recognition parts of IFRIC 14.

“So we are left with the likelihood of diversity in this area. In my view, FRED 55 should address surplus recognition as well.”

The publication of FRED 55 is the latest step in a major shake-up of the accounting framework in the United Kingdom and Ireland, which will see the introduction of FRS 102.

FRS 102 is a localised version of the International Financial Reporting Standards (IFRS) for Small- and Medium-sized Entities and replaces existing UK GAAP with a single point of reference.

Section 28 of FRS 102 replaces FRS 17, which is a standalone accounting standard. Its new requirements apply from 1 January 2015, along with the rest of FRS 102.

FRED 55 deals with circumstances where a DB plan sponsor has booked a DB asset or liability on its balance sheet under FRS 102.

The approach proposed in FRED 55 potentially creates divergence in practice between UK GAAP and the application of the International Accounting Standards Board’s asset-ceiling guidance, IFRIC 14.

FRED 55 says that where a defined benefit (DB) plan sponsor agrees to pay a schedule of deficit contributions, the sponsor need not look at whether it will build up a surplus in the future and then decide whether any benefit will flow from that surplus.

Instead, the sponsor only has to calculate any plan surplus or deficit at the balance sheet date. Put differently, it shortcuts IFRIC 14’s two-step process.

And complicating this situation is the move earlier this year by the International Financial Reporting Standards Interpretations Committee to investigate how a scheme trustee’s actions might affect surplus recognition.

In particular, the committee, which is responsible for IFRIC 14, explored whether a trustee’s power to increase member benefits, or wind up a plan, would mean sponsors could no-longer book a plan surplus.

The committee’s discussions during July led some commentators to fear that it might become all but impossible to report a surplus.

Any such move, consultants Aon Hewitt warned in August, would leave FTSE 350 companies to take a £25bn (€31.7bn) balance sheet hit and blow a £1bn hole in net income.

Those fears receded in September, however, when the committee’s subsequent discussions suggested that any changes to IFRIC 14 would hit just a small number of plan sponsors – if any.

In comment letters on FRED 55, audit giant EY, as well as actuaries JLT and Towers Watson, warned that the proposals failed to deal comprehensively with practice under IFRIC 14.

The advisers also said that there remains a real risk of divergence in practice emerging in this area.

EY wrote: “We would therefore encourage the FRC to monitor this issue and reconsider at a later date whether it should take any action to clarify how this paragraph should be applied.”

JLT argue that the draft amendment was principally concerned with the recognition of additional liabilities in respect of a schedule of contributions – the ‘minimum funding requirement’ aspects of IFRIC 14.

“It does not clarify whether or not the remainder of IFRIC 14 should be referred to when deciding on whether a surplus is recognizable.”

JLT also claimed that FRS 102 could be more flexible on the issue of surplus recognition than the standard it replaced, FRS 17.


“The key difference between the two standards is the wording  ‘agreed by  the  pension scheme trustees as the balance sheet date’ as, in practice, this means that the possibility of allowing for a refund is not usually available under FRS 17.

“The wording of FRS 102 omits this additional detail and so implies that thereis more flexibility to recognise a plan surplus as an asset.”

And Towers Watson actuary Charles Rodgers wrote: “Having clarified the non-application of one particular aspect of IFRIC 14, it would also be helpful if the FRC could indicate whether any of the other requirements of IFRIC 14 should be applied to Section 28 of FRS 102.”

In addition, on a separate issue, FRED 55 confirms that entities should recognise the effect of restricting the recognition of surplus in a DB plan, where surplus is not recoverable, in other comprehensive income and not in profit and loss.

Further action by both the FRC and the IFRS IC is expected in the new year.

Separately, on 16 December, the FRC published a revised version of Actuarial Standard Technical Memorandum 1, its pensions communications standard.

The FRC said in a statement that the new standard reflected “the implementation of automatic enrolment, legislation on same-sex marriage and to enable pension providers to more effectively take account of the impact of guaranteed annuity terms.”

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