Accounting for retirement benefits in the UK – FRS 17

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

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

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

10. 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