The new Charities SORPs: Accounting for pension liabilities
Christine Scott, ICAS Assistant Director, Charities and Pensions, explains how to account for pension liabilities under the new Charities SORPs.
Guidance: Accounting for pension liabilities
All UK charities preparing "true and fair" accounts must now apply one of two new SORPs – one for small charities and one for the rest.
For charities eligible to use the Financial Reporting Standard for Smaller Entities (FRSSE), trustees will be able to choose between applying the FRSSE SORP or the FRS 102 SORP.
Whichever version of the new Charities SORP applies, there are a few twists and turns for charities and their advisors to consider when it comes to accounting for pension liabilities.
Under FRS 102, the approach adopted towards accounting for pension liabilities depends on whether or not sufficient information is available to meet the recognition and measurement criteria set out in part 28 of FRS 102 on 'Post employment: defined benefit pensions'.
Sufficient information is available
If sufficient information is available to meet the criteria, the charity must recognise its net defined benefit liability and the net change in that liability during the period. The net defined benefit liability is arrived at by deducting the present value of its obligations from the fair value of its share of pension scheme assets. This approach will be familiar to charities which currently recognise their share of a pension scheme deficit under FRS 17 'Retirement benefits'.
Sufficient information is not available
If sufficient information is not available to require a charity to recognise a net defined benefit liability, then the charity should account for the scheme as if it were a defined contribution scheme: an approach also possible under FRS 17. However, a charity in this position will now need to recognise any liabilities arising from an agreement with the pension scheme trustees to fund a deficit. Under old UK GAAP, recognition of such a liability was a grey area but the required accounting treatment under FRS 102 is clear.
Comparison of FRS 17 and section 28 of FRS 102
While there are similarities between FRS 17 'Retirement benefits' and section 28 of FRS 102 on 'Employee' benefits', each charity applying FRS 102 should review in detail the requirements for section 28 and module 17 of the Charities SORP (FRS 102) to ensure that it complies with all requirements appropriate to its circumstances. The Charities SORP also includes additional material on the fund accounting aspects of retirement benefits.
The FRSSE (2015)
Under the FRSSE (2015), charities which participate in multi-employer defined benefit schemes may need to make some very finely balanced judgements so that they comply with all relevant requirements.
Those charities which currently recognise their share of the net deficit under the FRSSE (2008) should continue to do so. In addition, consideration should be given to the material in section 17 of the Charities SORP (FRSSE), for example on fund accounting and the treatment of a defined benefit scheme and disclosures relating to a defined benefit scheme.
For charities which do not currently recognise their share of the net deficit under the FRSSE (2008), on the grounds that their share of the deficit could not be determined on a consistent and reasonable basis, can continue to apply this policy.
For those charities which continue to account for a multi-employer scheme as a defined contribution scheme, the Charities SORP (FRSSE) sets out the following guidance.
"…. [a charity] may retain its existing accounting policy when accounting for an agreement to make contributions to fund a deficit in the scheme provided the policy reflects accepted practice. Again, if the charity does not have an existing accounting policy for such agreements it should refer to FRS 102 when developing its accounting policy."
Accounting periods commencing on or after 1 January 2016
As the FRSSE is to be withdrawn for periods commencing on or after 1 January 2016, with requirements for smaller entities being replaced by requirements based on FRS 102, any relief from the non-recognition of liabilities arising from a funding agreement will be short-lived.
There will clearly be challenges for trustees, auditors and independent examiners where the course of action under FRS 102 or the FRSSE (2015) requires finely balanced judgements to be made. With the new SORPs only being implemented from 1 January 2015, some of the more detailed issues around their implementation have yet to be fully aired. Therefore, the trustees of charities participating in multi-employer defined benefit pension schemes, in discussion with their charity's auditor or independent examiner, should have or should in early course be considering how to account for pension liabilities under the appropriate SORP.
You can find out more about the requirements under FRS 102 and the FRSSE in the full ICAS guidance note on Accounting for Pension Liabilities PDF [302 KB], produced by the ICAS Charities Committee