The introduction of FRS17 Retirement Benefits, under which FDs have to report a raft of new pension liability figures, will generate a great deal of extra work this year. Worse still, the system's going to change again in 2005.
FRS17 requires supplementary balance sheet disclosures on pensions liabilities, assets and the resulting surplus or deficit on an end-year, fair-value basis. As such, it may seem like a topic that only the most dedicated actuary would care about, but it has provoked angst for two reasons. Firstly, the effort required to comply with the standard is unlikely to bring any long-term benefit because it looks set to be usurped by a new international standard in a couple of years.
Secondly, before Christmas, there were City rumours that FRS17 could force companies into re-thinking their dividend policy. There were fears that if a company had to disclose a large deficit on its defined benefit pension scheme it could have an impact on distributable profits. The theory is that although the company may have the cash, if the distributable profits aren’t sufficient to cover the dividends the directors would like to declare, then the pay-out would have to be cut – and it doesn’t take a great deal of imagination to work out the reaction of the market to a reduced dividend.
This second cause for angst appears to have subsided but nevertheless underlines the effect financial reporting practices can have in the real world of dividend policy and share values. Ask the Financial Services Authority whether it was concerned about FRS17 and its possible ramifications and the inquiry is redirected pretty smartly to the Accounting Standards Board.
Allister Wilson, head of financial reporting at Ernst & Young, dismisses the threat to dividends as ‘scaremongering’. He says: ‘In reality, directors have a duty under common law to ensure it is appropriate to make a distribution of profits. FRS17 doesn’t change that.’
Wilson believes large quoted companies have put in procedures to drag out the information required by FRS17. Whether small quoted companies and private companies are coping as well is another question. KPMG said earlier this year that it found some companies had not yet arranged to obtain the information they needed. The firm warned its clients that ‘directors should not underestimate the work and the time this process can take’.
FRS17 requires a different valuation basis to SSAP24, with the scheme assets and liabilities measured at market value at the company’s year-end. In order to gather this information, the company needs to liaise not only with its usual actuarial advisers but also with the scheme trustees and various scheme advisers, including its actuaries, administrators and, possibly, auditors.
FRS17’s reach also extends to overseas defined benefit arrangements, whereas under SSAP24 these could often be included in the accounts on whatever basis they were dealt with locally. That sort of switch means FDs need to have detailed plans in place to ensure full FRS17 disclosures are available in sufficient time for them to be reviewed by group directors and then audited in time.
However, companies shouldn’t bank on too much help from their auditors on this issue. The audit profession – as might be expected – saw this one coming and didn’t particularly like what it saw. At the start of February, the Audit & Assurance Faculty of the Institute of Chartered Accountants in England & Wales issued a technical release designed to assist auditors in dealing with practical issues encountered when auditing companies with defined benefit schemes. The technical release may help auditors but it also carries a strong warning that it is the responsibility of company directors and not the company’s auditors to comply with the requirements of FRS17.
And what about the ASB, which created the standard that started all this furore? It has stood by FRS17, shrugging off demands for its withdrawal and a return to the status quo until the international standard arrives in 2005. The ASB says the FRS17 approach ‘produces a consistent, objective measure whose implications can be assessed in the context of the known economic and financial environment at the reporting date, and (in the context of) the specific financial policies of the trustees and the employer’.
So at least now you know why you bothered.