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UK FRC finalises GAAP amendment to address DB deficit funding

The UK Financial Reporting Council (FRC) has published a clarification to defined benefit (DB) pensions accounting under UK and Irish Generally Accepted Accounting Principles (GAAP).

Full details of the changes are set out in Amendments to FRS 102 – Pension obligations.

They deal with how UK and Irish entities must account for any agreement to make good a DB plan deficit under a schedule of contributions.

Melanie McLaren, the FRC’s executive director of codes and standards said: “The FRC is pleased to be able to clarify for entities applying FRS 102 for the first time that a practical and proportionate reporting basis can be used.”

The net effect of the amendment package is to allow DB sponsors who report under UK and Irish GAAP to continue with their current accounting practice.

The FRC published its proposals back in August 2014 in the form of FRED 55.

Speaking at the time, FRC board member and accounting council chairman Roger Marshall said: “The proposed amendments are intended to resolve uncertainty over the application of FRS 102 in a proportionate and practical manner before FRS 102 becomes mandatory.”

UK-based Towers Watson pensions accounting expert Andrew Mandley told IPE he broadly welcomes the FRC’s decision to press ahead with the amendments – despite some reservations.

He said: “Companies will welcome not having to include a larger IFRIC 14 liability where they have a funding target in excess of the accounting obligation.”

But, he added, the amendments raise the concern they will create a misleading view in a sponsor’s financial statements in respect of pensions.

This is because, he explained, a sponsor may in some circumstances show no liability on its balance sheet despite having agreed to make significant deficit contributions with no hope of their being refunded.

The amendment to FRS 102 does, however, clarify that entities must disclose both the amount and timing of any deficit funding agreements in the notes, he added.

FRS102 is a simplified and localised version of the International Financial Reporting Standard for Small- and Medium-sized Entities.

It took effect for accounting periods beginning on or after 1 January 2015 and replaced the majority of today’s UK Financial Reporting Standards and UITF Abstracts.

Since then, the FRC has also issued for public comment separate proposals dealing with separate accounting regimes for both smaller entities and so-called micro-entities.

Most large and medium-sized entities in the UK and Ireland – among them public benefit entities, retirement benefit plans and financial institutions – now apply FRS 102.

However, the proposals in FRED 55 proved controversial among some pensions experts.

The FRC intended the document to head off concerns over whether an entity that applies FRS 102 should have regard to the principles in IFRIC 14.

IFRIC 14 is a notoriously complex guidance document that sets out to interpret the requirements of International Accounting Standard 19, Employee Benefits.

The International Accounting Standards Board released IFRIC 14 back in 2007.

It deals with the interplay between the ability of a DB plan sponsor to recognise a balance sheet asset arising from either a refund in contributions or a reduction in future contributions and any statutory minimum funding requirement.

In an impact assessment, the FRC said the changes are intended to cut compliance costs and reduce diversity in practice.

The FRC explained that the amendments should eliminate the “time-consuming and judgemental issue” of assessing whether payments made under a ‘schedule of contributions’ will be recoverable from the plan.

DB sponsors must, however, continue to recognise the liability for post-employment benefits arising out of employees’ past service.

Nonetheless, Andrew Mandley warned that the amendments to FRS 102 create a difference between accounts prepared under that standard and IAS 19.

He added: “Nor does it clarify whether the rest of IFRIC 14 should be followed on issues such as calculating the asset available in respect of reduced contributions against future service costs.”

The amendments take effect retroactively from 1 January 2015.

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