The Accounting Standards Board ended last year by issuing its controversial standard on retirement benefits – FRS 17.

Under the new standard, due to take effect in 2003, companies will have to measure assets and liabilities using market values rather than at historical cost. Not only this could have a major effect on how some company balance sheets look, it also means new challenges for auditors and company accountants.

The new standard requires companies (with a few exceptions) that operate defined benefit pension schemes to recognise in their balance sheets the surplus or deficit in the scheme, to the extent that the company can benefit or suffer from it. For some companies, these amounts may be very material to the financial statements

The new standard will become effective in stages :

– Certain disclosures will be required for accounting periods ending after 23 June 2001

– In 2002 the opening and closing balances, and charges/credits to the profit and loss account, will need to be shown as notes to the financial statements,

– In 2003 the pension scheme balances will be incorporated in the company’s primary financial statements

Phased implementation will, however, only partially reduce the impact on auditors as disclosures for companies with 31 December 2001 year-ends will have to be audited. This is likely to be challenging for company accountants and their auditors – not least because many companies have different year-ends from their pension schemes. Actuaries will need to be instructed to update their liability valuations, pension schemes and their asset values – all within tight timetables.

To achieve this, responsibilities will need to be established (both between company directors and pension scheme trustees and between company auditors and pension scheme auditors) and clear communications will be of paramount importance.

The Auditing Practices Board has set up a working party to develop guidance and hopes to issue a bulletin before the summer.

But time is short. The current reporting season is an important opportunity for auditors to alert their clients to the new accounting requirements for defined benefit pension schemes and to start planning with them how best to overcome the implementation issues.

– Jon Grant is technical director of the APB.

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