PROPOSALS from the Financial Reporting Council (FRC) may leave charity finance directors sleeping a little uncomfortably at the moment. A consultation document issued in October has proposed a methodology which would see most, if not all, organisations participating in multi-employer pension schemes disclose their deficits on their balance sheets.
The existing accounting standard (FRS17) provides the ability for organisations to disclose on a much less onerous defined contribution basis should they feel they are unable to identify their share of assets and liabilities on a consistent and reasonable basis. This has led to numerous inconsistencies where one organisation participating in a scheme chooses to disclose defined benefit liabilities in full, while others in the same or a broadly similar scheme disclose just their defined contributions.
One can't help feeling that the FRC's review is a reaction to last year's parting of ways between the Citizen's Advice Bureau and its former auditor Baker Tilly, which resigned when the charity would not accept its advice that it should disclose its pension debt within its annual accounts
While some in the not-for-profit or third sector have sought to defend the status quo, I can't help feeling that they are missing the point. The key question that should be asked is: without disclosing, is the organisation providing a true and fair representation of its financial position? Surely if there is a defined benefit scheme in place and the organisation is funding the deficit for it, then the only real answer to this question must be ‘no.'
While FRS17 and IAS19 are far from perfect, they do at least both ensure that what can often be a material liability is recognised and people can make a fair assessment of its potential impact on the organisation.
Identifying what matters
Given the numerous employers that do disclose, I also find it difficult to accept the contention from others who claim they cannot identify their position on a reasonable basis. The local government pension scheme, for example, has established a sophisticated and cost-effective mechanism to provide the figures and yet some participants chose not to avail themselves of the information. Would a donor, funder or bank feel misled if they subsequently discover the accounting information was omitted and the organisation ultimately became insolvent?
Assuming these changes are adopted, charities, and other organisations participating in these multi-employer schemes, will need to decide on the exact basis they would look to disclose. The draft FRS 102 proposal suggests using a net present value basis on which to establish the past service deficit contributions, which would be likely to produce a higher level of liability than would be the case on the current FRS17 / IAS19 disclosure. This could encourage more organisations to seek to produce figures based upon the current more detailed approach which could cause complications for scheme administrators, such as the Pensions Trust, that do not provide this service at the moment.
For organisations not already disclosing their liabilities, this move could be very material. Assuming a £100,000 per annum deficit contribution over 15 years, using a discount rate of 5% per annum, this could negatively affect the charity's financial position by around £1m and, in some cases, could result in a negative balance sheet.
The proposed change would produce greater consistency and transparency amongst organisations participating in these schemes, although it will undoubtedly be very painful for some to implement, especially at an exceedingly challenging time for a hard-pressed third sector.
David Davison is head of public sector, charity and not-for-profit practice at Spence and Partners
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