The world of financial reporting of retirement benefits for UK-based multinationals changed in November 2000 when the UK Accounting Standards Board (ASB) published Financial Reporting Standard 17 (FRS 17). FRS 17, which values plan assets and liabilities by reference to current market conditions, is very different to the previous standard (SSAP 24).
There is more to this change than crunching numbers in a different way. Experience following the introduction of comparable accounting standards in other countries demonstrates that processes will also need to change. On the downside, companies with international operations face a challenge dealing with such a fundamental change in approach. But on the upside, companies have the opportunity to add value by using the new information they have gathered to improve the management of their retirement benefit programmes.

Where do you start – lessons learned
The move by the ASB to a market based accounting approach for retirement benefits continues a trend that started in 1986 with the US accounting standard for pensions, FAS 87. Figure 1 shows that the number of countries adopting this style of standard is increasing and, with the European Commission indicating that it may require such reporting from 2005, it would not be a surprise if this trend continues, at least in Europe.
Looking at what happened in the US following the introduction of FAS 87 offers some valuable insights into what could happen for multinationals which adopt FRS 17:
q Expect to spend a significant amount of time and energy establishing new information gathering processes – more data will be required from all plans within much tighter deadlines. It can be a mind blowing experience for multinationals with large numbers of plans in different countries who have not carried out this type of exercise before;
q Expect to uncover previously unknown issues and for previously insignificant issues to become important. For example discovering new plans or benefit promises that had not been reserved for;
q Don’t be surprised by the size of a plan’s surplus or deficit or simply the total value of assets invested in retirement plans and the value of a company’s commitment to pay retirement benefits to its employees. Sometimes the nuances of local reporting requirements have over- or under-estimated the value of assets or liabilities;
q Expect management to start paying more attention to retirement benefits, particularly as they may now affect the bottom line, in very different ways. Managing the risks associated with retirement benefits could become a key focus.

What is different now from the past – FRS 17 versus SSAP 24
Why does FRS 17 make a difference to UK-based multinationals which previously reported under SSAP 24?
SSAP 24 was a very flexible accounting standard so it was often possible to use figures prepared under local accounting standards to satisfy its requirements. For example, figures prepared for US plans under FAS 87 were often used as the basis of reporting under SSAP 24.
In contrast, FRS 17 is more prescriptive and requires a consistent approach across all plans and all countries. Assets and liabilities are to be valued by reference to market conditions at the end of the financial years. Year end surprises will occur.
Many UK companies are globalising and in doing so are entering new countries or expanding in previously insignificant countries so the number of plans needing to be accounted for under FRS 17 is increasing.
Therefore, from a practical perspective UK-based multinationals will need to do a lot more work at the tactical level in all countries for all of their material plans and often subject to tight deadlines for year end reporting. In some countries they will need to continue to produce figures to satisfy local requirements as well as those needed to satisfy FRS 17. Not only has the work load for people in those countries therefore just doubled, they will need to do more in a shorter period. Detailed project planning and strong project management skills will be vital to make sure that the year end process is a success.
Even UK based subsidiaries of foreign companies reporting under FAS 87 or IAS 19 will be affected by the change from SSAP 24 to FRS 17. There are technical differences between the standards that the subsidiaries will need to understand. It will not be possible to simply take FRS 17 numbers and use them for FAS 87 reporting or vice versa.

What you need to do now – practicalities
The key to making sure that implementing FRS 17 is not a stressful experience is to get started now. Important steps that shouldn’t be missed are:
q Get a good understanding of existing plans in each country by gathering as much information as possible about them.
q Decide which plans to include in the FRS 17 exercise. Do you want to include the bare minimum number of plans that is acceptable to the auditors, with local figures being adopted at the group level for the other plans? Or do you include as many plans as makes sense in the exercise?
This key strategic decision is a trade off between the amount of time and effort required at the year end and obtaining valuable management information.
q Decide when to adopt FRS 17. It must be fully adopted from 22 June 2003, but it is possible to adopt it early. Remember, early adoption may be beneficial in one country but not in another. Getting it wrong could have an adverse impact on the company’s profits.
q Determine who is responsible for making decisions. For example, do financial assumptions get set locally or at the group level? In the past this may be have been a local decision but given the prescriptive nature of FRS 17 making it at group level is more likely to result in a consistent set of financial assumptions across all countries (especially across the Eurozone).
q Develop a project plan, with detailed tasks, deadlines and responsibilities. If there are a lot of people involved in this process, strong project management skills will be vital.
q Training. All those involved in the new process need to understand not only the technical aspects of the FRS 17 but how the figures calculated by the actuary actually get into the company’s accounting system, what they need to do and by when. Significant thought will need to be given to how to effectively train non-native English speakers in what is essentially a new technical language.

What are the longer term implications – it is not just an accounting exercise
Past experience with companies which have implemented FAS 87 and IAS 19 has shown that the information gathered for the accounting exercise can add value by helping companies to better manage their plans. Table 1 illustrates examples of what some companies have been able to achieve and could be achievable by those implementing FRS 17.
The key learning from companies adopting comparable accounting standards FAS 87 and IAS 19 is that, at least in the short term, implementing FRS 17 will be an onerous task for companies with international operations. Project management and co-ordination will be critical. Treat it as no more than a compliance exercise and the process will generate little added value. However, if a company uses the data constructively it will prompt actions that will deliver value way beyond the costs of getting the FRS17 results right.
Christine Larme is a senior consultant with Towers Perrins’ international group in London