Changes to accounting for multi-employer DB pensions
The Financial Reporting Council (FRC) has published amendments to FRS 102.
These set out how employers participating in multi-employer defined benefit (DB) schemes should account for a change from defined contribution (DC) accounting to DB accounting, when sufficient information to recognise a net DB pension liability (or asset) becomes available for the first time. The amendments do not impact on accounting for DB schemes where an entity already recognises a net DB pension liability (or asset).
The amendments to FRS 102 are consistent with the proposals set out in Financial Reporting Exposure Draft (FRED) 71 and are effective for accounting periods beginning on or after 1 January 2020, with early application permitted. These amendments require any adjustments needed to account for a change from DC to DB accounting to be made in year with no restatement of comparatives.
Prior to this amendment, FRS 102 did not specifically deal with accounting for a change from DC to DB accounting. However, demand for clarification of the treatment arose from a development in the social housing sector.
Registered social housing providers participating in the Social Housing Pension Scheme (SHPS) or the Scottish Housing Associations’ Pension Scheme (SHAPS) will have sufficient information to apply DB accounting for the first time for the preparation of accounts for periods ending on 31 March 2019.
The four UK Housing Federations jointly published technical accounting guidance in anticipation of the FRED 71 proposals being taken forward as amendments to FRS 102. This guidance accompanies but does not form part of the Statement of Recommended Practice (SORP) for social housing providers.
An impact assessment and feedback statement from the FRC accompanies the final amendments. ICAS responded to the proposed changes and while we are of the view that a change from DC to DB accounting meets the criteria for treatment as a change in accounting policy, we acknowledge that a consistent approach is desirable to address the immediate concerns of the social housing sector.
These amendments are more widely applicable than the social housing sector and apply to any employer participating in a multi-employer DB scheme changing from DC to DB accounting, for example, charities, including charitable companies, applying the Charities SORP and further education colleges and universities applying the Education SORP: Accounting for further and higher education.
While there are no similar charity sector or education sector-wide developments in the offing, each entity in these sectors needs to consider its own particular circumstances.
The amendments, made to Section 28 of FRS 102 on Employee Benefits, are summarised below. FRS 102 refers to pension schemes as post-employment benefit plans.
When an entity participates in a defined benefit plan, which is a multi-employer plan that is accounted for as if the plan were a defined contribution plan, and sufficient information to use defined benefit accounting becomes available, the entity shall:
- Apply defined benefit accounting from the relevant date; and
- Recognise the difference between:(i) its net defined benefit liability at the relevant date; and (ii) the carrying value at the relevant date of its liability for the contributions payable arising from an agreement to fund a deficit, if any, as a separate item in other comprehensive income.
The relevant date is the later of the first day for which sufficient information to use defined benefit accounting becomes available, and the first day of the current reporting period. Comparative information is not to be restated.
The calculation of the difference excludes the impact of any plan changes, curtailments or settlements occurring at the relevant date.
There is a consequential amendment to Section 1 of FRS 102 on Scope. If an entity applies this amendment to an accounting period beginning before 1 January 2020 it shall disclose that fact, unless it applies Section 1A of FRS 102, in which case it is encouraged to disclose that fact.
Social housing sector guidance
The social housing sector technical accounting guidance was published in March 2019 and it covers the following key aspects of accounting for a change from DC to DB accounting.
- The anticipated changes to FRS 102.
- When the DB accounting information will be available – May 2019.
- A worked example, including key judgements and considerations, accompanying accounting entries and disclosures.
The guidance also includes commentary on Guaranteed Minimum Pensions (GMP) equalisation following the High Court ruling, on 26 October 2018, in the Lloyds Banking Group case.
The Scottish Charities Accounts and Reports (Scotland) Regulations 2006 (as amended) (the 2006 regulations) have in recent years impacted on the ability of charities to early adopt amendments to FRS 102.
Further education colleges and universities have charitable status and some but not all social housing providers have charitable status. In Scotland, such charities are known collectively as ‘special case’ charities. Special case charities must apply the 2006 regulations in addition to the sector-specific SORPs referred to above.
Scottish charities, including, it appears, special case charities, are specifically prohibited by the Charities Accounts and Reports (Scotland) Regulations 2006 (as amended) from adopting early the changes to FRS 102 arising from the first triennial review conducted by the FRC. This suite of amendments applies to accounting periods beginning on or after 1 January 2019.
However, at the time of writing, no changes have been made to the 2006 regulations prohibiting the early adoption of the amendments to FRS 102 arising from FRED 71.
Scottish charities, including special case charities, seeking to adopt these amendments early should consult their accountancy advisers. It is worth noting that FRS 102 is currently silent on how a change from DC to DB must be accounted for, therefore, it would not make sense for a Scottish charity accounting for such a change in an accounting period beginning before 1 January 2020 to adopt a different approach.
The law and regulations which form part of the accounting frameworks which apply to charities in England and Wales, including further education colleges, universities and social housing providers do not prohibit the early adoption of amendments to FRS 102. However, cross-border charities, i.e. charities primarily based in England or Wales but registered as charities in Scotland with the Office of the Scottish Charity Regulator (OSCR), should similarly consult their accountancy advisers regarding the early adoption of changes to FRS 102.