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Pension Scheme Accounting. By Paul. A. Miller and Scott. R. McNeill. Content. Why bother? Who sets the standards? FRS17 IAS19. Why Bother ?. Why have Pension Scheme Accounting?.
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Pension Scheme Accounting By Paul. A. Miller and Scott. R. McNeill
Content Why bother? Who sets the standards? FRS17 IAS19
Why Bother ? Why have Pension Scheme Accounting? • To ensure that employees are rewarded accordingly by their employer for the time and effort they devote during the term of employment. • Two approaches: • The employer agrees to take liability for the promise to pay benefits to their current/deferred employees in return for their services. • An expense in exchange for the economic benefit that may or may not arise from having those employees.
Why Bother ? Who uses pension scheme accounting? There are many people who use pension scheme accounting, but a basic model below represents the main groups:
Content Why bother? Who sets the standards? FRS17 IAS19
Who sets the standards Accounting Standards Board • The main standard setter in the UK • Part of the independent Financial Reporting Council • Funded by Levy placed on listed companies • Formed in 1990 to replace the much criticised Accounting Standards Committee (ASC) • Sets “FRS” which govern UK accounting. • SSAP’s, set by the ASC are also still in use • Issues FRED’s for public discussion before it creates a new FRS. • 10 members on the board, 2 of which are full-time • Remaining 8 members are partners of financial directors in UK companies • Board chosen by a Nominations Committee. • NO ACTUARIAL REPRESENTATION ON BOARD!!!
Who sets the standards International Accounting Standards Board • Independent board, based in London, which sets international standards. • Works with National boards to achieve convergence between standards • Formed in 2001 as successor to International Accounting Standards Committee (IASC) • New accounting standards are known as IFRS. • Standards set before 2001 are known as IAS. • Inherited IAS’s from the IASC • 14 members of IASB, representing 9 different countries. • Board selected by the IASC Foundation, which overseas the IASB’s work.
Content Why bother? Who sets the standards? FRS17 IAS19
FRS 17 Overview • In November 2001 the ASB issued FRS 17. Required recognition of retirement benefits within the sponsors accounts. History • In 1988 SSAP 24 was issued, dealing with retirement benefits • Based on the traditional approach; smoothing assets and liabilities. • Based on long term trends- unique to the UK. • Cost of pension contributions averaged for working life of members. • FRED 20 was released 1999 and after detailed consultation, the phasing in of FRS 17 took place.
FRS 17 Why change from SSAP24 to FRS 17 • SSAP 24 widely flouted; many cases ignored or interpreted as desired • Too many options under SSAP 24; problems with interpretation and consistency between companies • SSAP 24 out of line with international standards • Disclosure inadequate; much of the information disclosed was simply irrelevant or insufficient. • SSAP24 did not adequately reflect the potential Liability from a companies pension scheme.
FRS 17 Under FRS 17 • Pension scheme assets are calculated using market rates • Pension scheme liabilities are calculated using a project unit method and discounted at an AA corporate bond rate • The pension scheme surplus or deficit is recognised in full on the balance sheet • A detailed movement analysis is performed and split into • Current and Past Service costs • Interest costs and expected return on assets • Actuarial gains and losses
FRS 17 Effects of FRS 17 Defined Contribution • No real changes from SSAP 24. Defined Benefit • Scheme surplus or deficits are fully recognised on the balance sheet • If the scheme has a large deficit, this is reflected in the sponsors accounts and this could stop dividend payments. • If the scheme is in surplus the balance sheet displays the surplus of the scheme, who now owns this surplus???
Content Why bother? Who sets the standards? FRS17 IAS19
IAS 19 Objective • To outline the accounting and regulations regarding employee benefits. Scope • Wages and salaries • Bonuses • Free or discounted goods or services given to employees. Basic Principle • The cost of these benefits should be recognized when the benefit is earned, rather than when it is paid.
IAS 19 Benefits • Short term • wages • paid sick leave or holidays • also includes non-monetary benefits. • Long Term • defined benefits • defined contribution. • Termination • given when employment ceases due to: • the employee takes voluntary redundancy • the entity terminates the employment.
IAS 19 A numerical example (Ken Spencer memorial lecture, March 07, Melbourne, Australia) • We shall start with a pension fund in equilibrium. (assets $40m,. liabilities $40m) • Suppose the value of assets falls to $30m, we are left with a deficit of $10m. • Under the most common use of IAS19 the deficit can be reduced;by a reduction of 10% of the highest of either assets or liabilities (in this case liabilities). This reduces the deficit by $4m.by ‘spreading’ the remaining deficit of $6m over the expected working lives of the employee (say 10 years for this example). • The result is that the deficit shown in the financial statements becomes approximately $600,000.
