FRS 17, Henrietta Thompson answers the questions you've been burning to ask about the new standard and its implementation" />

Last month I examined the reasons why

FRS 17, Retirement Benefits, must be taken seriously by the managements of entities sponsoring defined benefit pension schemes. This article looks at some of the questions being raised in relation to implementing the new standard. In addition, the importance of communicating the impact of FRS 17 is considered. Transitional disclosures

What is the status of these disclosures?

The transitional disclosures set out in para 94 (a) and (b) of

FRS 17 are required for accounting periods ending on or after 22 June 2001 and 2002 respectively. The primary financial statements will continue to be prepared under SSAP 24, Accounting for Pension Costs, so the accounting policy and the notes to the financial statements must reflect this. The FRS 17 transitional disclosures are included as additional notes to the financial statements, and are not reflected in the primary financial statements.

Because the inclusion of the transitional disclosures is a requirement of

FRS 17, nondisclosure would mean the financial statements had not been prepared in accordance with the standard and could result in a qualification in the audit report.

Do transitional disclosures need to be accurate?

The primary purpose of the transitional arrangements is to enable the information required for full implementation to be collated gradually. The disclosures will provide the information needed for restatement of comparatives and related notes when the FRS is implemented in full for periods ending on or after 22 June 2003. In particular, the assumptions (expected returns, discount rate, etc) will determine the p&l account entries for the first full

FRS 17 financial statements. Inaccuracies in the disclosures, therefore, may have a direct effect on the reported results in 2003. Material inaccuracies could affect the audit opinion on the transitional periods or on full implementation.

In addition, analysts and other interested parties are eager to assess the impact of the new standard on companies at an early stage, emphasising the importance of accuracy in the transitional disclosures.

What does 'disclosures…..relating to the closing balance sheet' mean (para 94(a), FRS 17)?

'Relating to the closing balance sheet' does not mean the balance sheet reported in the primary financial statements, which will continue to be prepared under SSAP 24 during the transitional periods. Instead it is referring to what the position of the reporting entity would be if

FRS 17 had been adopted at that date.

For the first transitional period, each of the disclosures indicated by para 94(a) needs to be given at the balance sheet date on an

FRS 17 basis. This includes disclosure of actuarial assumptions.

Paragraph 90 of FRS 17 requires 'an analysis of reserves distinguishing the amount related to the defined benefit asset or liability net of the related deferred tax'. What does this mean in the transitional periods?

The inclusion of an example of the transitional disclosures would have been a helpful addition to

FRS 17, in particular in relation to para 90, about which there has been considerable debate. Applying the 'as if under FRS 17' approach, it would be logical to show what the analysis of reserves at the balance sheet date would be if FRS 17 had been applied. However, the wording of para 90 refers directly to the analysis of reserves. This could be interpreted to mean the actual reserves at the transitional balance sheet date, which may include significant SSAP 24 items. A suggested approach is to present the analysis of reported reserves with a reconciliation to the 'as if under FRS 17' position (see panel). Groups and multi-employer schemes

Are disclosures required in subsidiary as well as group financial statements?

FRS 17 applies to both individual companies and groups. A subsidiary with a defined benefit scheme should account for this in accordance with FRS 17 in its own financial statements. The group financial statements should reflect all the defined benefit schemes in the group. It is not acceptable to state in the subsidiary statements that the FRS 17 disclosures are presented in the group financial statements.

Does the parent company have to give separate disclosures?

If the parent company sponsors a defined benefit scheme, the company must give the

FRS 17 disclosures in addition to the group disclosures, which will include other defined benefit schemes in the group. Only if the parent company scheme is the only one in the group will it be appropriate to present just one set of disclosures.

What happens if the scheme assets and liabilities attributable to individual companies in a group cannot be identified?

Sometimes defined benefit schemes (eg, a scheme covering all employees in a large, multicompany group, or an industry-wide scheme), operate in a way that the assets and liabilities attributable to individual participating companies cannot be identified. These are termed multi-employer schemes, and

FRS 17 allows the individual employers to account for such schemes as if they were defined contribution schemes. Certain additional disclosures are required regarding the scheme overall where this situation arises (para 9, FRS 17). Example of para 90 transitional reserves disclosure, 31 December 2001

Profit and loss account reserve as reported	X
Pension reserve	X
	X
Less: SSAP 24 items included in reserves that will be reversed on implementation of FRS 17	(X)
Profit and loss reserve on FRS 17 basis	X
Comprising:
Profit and loss account reserve on FRS 17 basis excluding pension reserve	X
Pension reserve	X

For a multi-employer group scheme, the individual companies, including the parent company, would account for the scheme as a defined contribution scheme. However, for the group financial statements, the information will be available to account for it as a defined benefit scheme.

Identification of the assets and liabilities for each subsidiary in the group is going to be time-consuming and expensive. Does this mean the 'exemption' referred to above can be applied?

Time and expense will not be regarded as acceptable reasons for not obtaining the split of assets and liabilities on a company-by-company basis. The employer needs to liaise with the actuary well in advance of the reporting date to determine whether this split can be obtained. If the actuary is unable to determine the split, the reasons should be put in writing: auditors will challenge claims by employers that the split cannot be made.

The group has a multi-employer scheme but group accounts are not prepared in the UK. How is FRS 17 applied here?

Interestingly, where there is no requirement for group financial statements to be prepared in the UK, in a group multi-employer scheme situation no financial statements will be prepared that account for the scheme as a defined benefit scheme in accordance with

FRS 17. This is most likely to arise where the UK group has a (non-UK) EU parent that prepares group financial statements under its own country's GAAP.

Distributable reserves are determined at individual company level. If a group has a multiemployer scheme with a significant deficit, does this affect distributable reserves?

This is a question that is likely to see some 'live testing' in the near future, and currently the question is the subject of debate.

During

FRS 17's lengthy development, stock markets were buoyant and many schemes were showing very significant surpluses. The main questions raised at that time regarding distributable reserves centred on whether an FRS 17 net pension asset was distributable. Clearly, in the current market climate, the impact of scheme deficits is a much more significant issue.

On the face of it, where there is a multiemployer scheme with a significant deficit, the para 9 'exemption' will mean that only contributions payable for the period are charged to the p&l account in individual companies.

Distributable reserves will be unaffected by the scheme deficit. The group financial statements will reflect the net pension liability, but this does not affect distributable reserves. However, the employers' obligations in respect of the scheme in deficit need to be considered further. In undertaking to sponsor a final salary based scheme, the employer has an obligation to the scheme members to ensure that the scheme is adequately funded to meet its liabilities. In addition, the Minimum Funding Regulations set time limits by which employers must restore funding levels.

The question is, in a deficit situation, should the employer 'book' a liability in respect of the scheme deficit? The debate over this will continue, but, in the meantime, any company seeking to pay a dividend out of distributable reserves that would be diminished below the level of the distribution were such a deficit to be recognised in the financial statements, should seek legal advice.

Minority interests

If minority interests are usually shown after accruals and deferred income, should the net pension asset or liability be shown above or below this?

The summary section of

FRS 17 refers to the pension asset or liability being presented below other net assets, ie, below minority interests.

If there is a defined benefit scheme in a minority interest subsidiary, the figure for minority interests will include the minority's share of the net pension asset or liability, but the total net pension asset or liability will be shown on the group balance sheet. Care must be taken in the statement of total recognised gains and losses - only the group's share of actuarial gains or losses should be recognised. However, it would be appropriate to show the total actuarial gains and losses in the notes with a deduction for the minority's share. The fiveyear-history of STRGL movements that para 86 requires would need to be prepared on a total basis, because excluding the minority element would distort the percentages.

Getting the FRS 17 message over

FRS 17 has already commanded more space in the financial press than any other accounting standard in recent years, but employers need to take specific action to explain the effects on the business to its stakeholders.

The inclusion of scheme assets and liabilities on the employer's balance sheet will suddenly make members of the scheme, whether current employees or not, take a keener interest in the financial statements, not least because members may regard any surplus as theirs rather than the employer's. This interest may be heightened considerably if the employer's financial position is less favourable than it has been in the past. Management needs to take positive action, over and above the disclosures that

FRS 17 requires, to communicate clearly with these interest groups, explaining in layman's terms how the standard has affected the financial statements and its implications for scheme members. Direct communication would be best, but additional commentary in the directors' report or operating and financial review would also be appropriate. Such additional commentary may be helpful to other users of the financial statements such as suppliers and financiers.

It is worth bearing in mind that questions in relation to

FRS 17 may arise at agms, and thorough preparation on this topic may help avoid embarrassment.

Henrietta Thompson is a senior manager in Deloitte & Touche's National Assurance & Advisory Department