Pesh Framjee offers his opinion on the amendments to multi-employer defined benefit pension scheme accounting treatment as proposed by the Financial Reporting Council.
Many public benefit entities participate in multi-employer defined benefit (DB) pension schemes. In many cases it is not possible for them to identify their share of the underlying assets and liabilities. Accordingly, in line with FRS17 ‘Retirement benefits’ (paragraph 9b) they account for these schemes as if they are a defined contribution (DC) scheme.
This is the treatment required under UK Generally Accepted Accounting Principles (GAAP) and the Financial Reporting Council (FRC) has on 3 October proposed a change that will align the treatment with International Financial Reporting Standards (IFRS).
There has been a measure of publicity about the accounting treatment adopted by the National Association of Citizens Advice Bureaux (Citizens Advice) that indicated that Citizens Advice got it wrong. However the FRC’s publication of a limited scope exposure draft and technical notes shows that the treatment they have adopted is correct. In fact the technical notes accompanying the exposure draft clarify that until the proposed changes come into force the treatment followed by Citizens Advice continues to be applicable. If the proposed changes are implemented the change will be mandatory for accounting periods beginning on or after 1 January 2015.
Background
Citizens Advice operates a multi-employer defined benefit (DB) scheme and it is not possible for them to identify their share of the underlying assets and liabilities. It is complicated by the fact that employees move about within employers in the mult-iemployer scheme. Accordingly, in line with FRS17 ‘Retirement benefits’ (paragraph 9b) the charity has been accounting for the scheme as if it were a defined contribution (DC) Scheme and makes all the necessary disclosures. The charity has closed its defined benefit scheme to new entrants and to future service accrual. Following advice from the scheme actuaries the charity has entered into a formal agreement to make annual payments over the next 20 years to fund the deficit. The amounts could vary from year to year for a number of reasons.
Having taken legal advice, sought the views of the ICAEW, the Accounting Standards Board (now the Accounting Council), the Charity Commission, other accountants and existing practice the charity is satisfied that this is the correct treatment under existing UK GAAP. As its new auditors we have concurred with this treatment.
In all circumstances that we have seen where there is an agreed payment plan this payment plan is not the basis for the number that makes up the provision, but rather the FRS17 liability measured on an actuarial basis using the projected unit is used for the balance sheet. This means that preparers and auditors of financial statements have taken the view that despite the fact that the agreed payment plan can allow a number to be calculated that could be seen to represent a constructive obligation, this number is not shown on the balance sheet as a liability.
In essence, there were clear stages with different issues to consider to arrive as this conclusion.
i) Does the NPV of agreed future payments under a deficit recovery plan need to be included as a liability on the balance sheet? – The accepted view on this is that the answer to this is No.
ii) Is this a multi-employer scheme where the employer is unable to identify its share of the underlying assets and liabilities in the scheme on a consistent and reasonable basis? – Yes
iii) If so then does this mean that the answer to i) above needs to be changed to account for the NPV of agreed future payments? – Our view is that the fact that a DB scheme has to be accounted for as a DC scheme should not change this. FRS17 explains that “the cost of a defined contribution scheme is equal to the contributions payable to the scheme for the accounting period”.
It is important to note that this is the position under existing UK GAAP. International Accounting Standard 19 as amended in 2011 takes a different approach to FRS17. Paragraph 37 of IAS 19 states: “There may be a contractual agreement between the multi-employer plan and its participants that determines how the surplus in the plan will be distributed to the participants (or the deficit funded). A participant in a multi-employer plan with such an agreement that accounts for the plan as a defined contribution plan in accordance with paragraph 34 shall recognise the asset or liability that arises from the contractual agreement and the resulting income or expense in profit or loss.”
Therefore, where entities are accounting under IAS19 the required accounting treatment for contractual agreements to fund deficits would be to recognise a liability but under existing UK GAAP this would not be the case. There is no equivalent requirement in FRS17 or indeed in the draft of the new all-encompassing FRS102. In addition, charities are precluded by law from following IFRS.
While it may appear odd that no DB liability or any liability for an agreed funding contribution appears on the balance sheet this is the conclusion that is appropriate under the existing accounting rules as required by FRS17 and the treatment that is followed by many entities in similar circumstances. An alternative treatment would require an amendment to UK GAAP.
New exposure draft
It seems that the FRC has come to a similar conclusion and issued on 3 October 2012 a limited scope exposure draft which proposes the adoption of the IAS19 treatment referred to above. The technical note that accompanies the exposure draft explains: “In the period prior to draft FRS 102 being effective, the FRC notes that FRS17.9(b)(v) continues to be applicable.”
FRS17 paragraph 9b makes it clear that for multi-employer DB schemes where assets and liabilities cannot be allocated on a consistent and reasonable basis the accounting should follow DC accounting and the charge should be the contributions payable in the accounting period. Paragraph 9(b) (v) explains that the implications, if any, for the employer need to be disclosed. This in effect endorses the view taken by many accountants that the existing rules do not require a provision for the future deficit funding payments. Therefore the existing treatment will continue to be appropriate until accounting periods beginning on or after 1 January 2015 when the new FRS102 comes into force.
This proposed change will mean that in future such multi-employer defined-benefit schemes, where the assets and liabilities cannot be allocated on a reasonable and consistent basis will be accounted for and valued on a different basis from those where they can be. The inconsistency in valuation and the number that is presented on the balance sheet arises from the differing measurement bases for retirement benefits.
This change will result in a significant change to the net assets shown on the balance sheet of many entities that participate in multi-employer DB schemes that are presently accounted for as DC schemes. In some cases this could lead to a negative balance sheet.
The FRC is requesting comments to the exposure draft by 3 December 2012.
It is important that the many public benefit entities that will be affected by the proposed change consider what the impact will be on their balance sheet and respond to the proposals.
Pesh Framjee is head of the not-for-profit unit at Crowe Clark Whitehill, special adviser to Charity Finance Group and a member of the Charity Sorp Committee
