Angela Burns FRS 102 Presentation
Accounting for pension costs (the impact of FRS102) Angela Burns December 2013
Agenda
• • • •
Background What are the changes? How do the changes impact the P&L and Balance Sheet? Questions
2
Background • Companies can account for pensions costs under the following standards: • FRS17 (unlisted Companies) • IAS19 (listed Companies or unlisted Companies that elect to use this)
• FRC has introduced FRS 102 • The Financial Reporting Standard applicable in the UK and Republic of Ireland
• Changes some aspects of FRS17 • With effect from periods beginning on or after 1 January 2015 • Earlier adoption permitted Private and Confidential
4
What are the changes?
C onfidential: internal use only
FRS 102 • Transition to FRS 102 will result in the following changes: • Liability now disclosed if participate in non-segregated multiemployer Scheme
• EROA equal to the discount rate (FRS17 only) • Discount rate must reflect duration of liabilities
12
Private and Confidential
How do the changes impact the P&L and Balance Sheet?
Multi-employer Defined Benefit Schemes • Non-segregated assets • Previously recording annual contributions payable through income and expenditure account
• Now have to record liability on balance sheet
• Two approaches • Carry out a full valuation (i.e. under FRS17 or IAS19) • Disclose the present value of future deficit contributions
Private and Confidential
15
Example
P&L charge Balance Sheet item
Current Position £000
Under FRS102 (full valuation) £000
Under FRS102 (PV of deficit contributions) £000
£400
£500
£550
Nil
£3,000
£4,000
• Balance sheet position reduced by £3m/£4m • P&L charge higher • Full valuation – pension cost included • PV deficit contributions – interest on deficit included
What if you already carry out a full valuation? • EROA = Discount rate (higher pension cost in P&L) (FRS17 only) • Discount rate must take into account the duration of Scheme liabilities
• Discount rates higher at longer durations • For most Schemes will have the effect of reducing the liabilities
Implications of the change • Profit on ordinary activities will reduce due to pension cost/interest • Removal of separate EROA assumption – increases pension cost – reduction in profit on ordinary activities before tax – further reduction in Balance Sheet position • Performing a full FRS17 as opposed to disclosing the present value of future contributions can save a significant amount • Weakened Balance Sheet position could affect • Procurements (i.e. LGPS contracts) • Banking covenants • Cost of obtaining Finance (higher interest rates)
Questions?
www.spenceandpartners.co.uk
Agenda
• • • •
Background What are the changes? How do the changes impact the P&L and Balance Sheet? Questions
2
Background • Companies can account for pensions costs under the following standards: • FRS17 (unlisted Companies) • IAS19 (listed Companies or unlisted Companies that elect to use this)
• FRC has introduced FRS 102 • The Financial Reporting Standard applicable in the UK and Republic of Ireland
• Changes some aspects of FRS17 • With effect from periods beginning on or after 1 January 2015 • Earlier adoption permitted Private and Confidential
4
What are the changes?
C onfidential: internal use only
FRS 102 • Transition to FRS 102 will result in the following changes: • Liability now disclosed if participate in non-segregated multiemployer Scheme
• EROA equal to the discount rate (FRS17 only) • Discount rate must reflect duration of liabilities
12
Private and Confidential
How do the changes impact the P&L and Balance Sheet?
Multi-employer Defined Benefit Schemes • Non-segregated assets • Previously recording annual contributions payable through income and expenditure account
• Now have to record liability on balance sheet
• Two approaches • Carry out a full valuation (i.e. under FRS17 or IAS19) • Disclose the present value of future deficit contributions
Private and Confidential
15
Example
P&L charge Balance Sheet item
Current Position £000
Under FRS102 (full valuation) £000
Under FRS102 (PV of deficit contributions) £000
£400
£500
£550
Nil
£3,000
£4,000
• Balance sheet position reduced by £3m/£4m • P&L charge higher • Full valuation – pension cost included • PV deficit contributions – interest on deficit included
What if you already carry out a full valuation? • EROA = Discount rate (higher pension cost in P&L) (FRS17 only) • Discount rate must take into account the duration of Scheme liabilities
• Discount rates higher at longer durations • For most Schemes will have the effect of reducing the liabilities
Implications of the change • Profit on ordinary activities will reduce due to pension cost/interest • Removal of separate EROA assumption – increases pension cost – reduction in profit on ordinary activities before tax – further reduction in Balance Sheet position • Performing a full FRS17 as opposed to disclosing the present value of future contributions can save a significant amount • Weakened Balance Sheet position could affect • Procurements (i.e. LGPS contracts) • Banking covenants • Cost of obtaining Finance (higher interest rates)
Questions?
www.spenceandpartners.co.uk
