Implementing the ASB’s new standard on retirement benefits will challenge those who prepare the financial statements of companies with defined benefit schemes and their auditors.
FRS 17 requires employers (other than smaller entities) to:
– value the scheme assets and liabilities;
– bring on to their balance sheet the surplus (or deficit) of scheme assets over scheme liabilities; and
– analyse the change in the surplus/deficit into specified components.
The APB is developing guidance for the implications of FRS 17 and hopes to issue a bulletin early in the summer. But the key points in the guidance are likely to be the need for auditors to understand the arrangements that the directors have established for the valuation of scheme assets and scheme liabilities, and for auditors to establish effective communication with the parties involved to clarify both the work to be done and the overall timetable.
The actuary will have a pivotal role in the valuation of scheme liabilities.
Guidance for actuaries is currently being developed by the Institute and Faculty of Actuaries: an exposure draft (EXD43) of this guidance has been published on their website (www.actuaries.org.uk/pensions/pension_consults.html).
Co-operation between the company, the auditors and the actuary will be of paramount importance to a successful audit. Important issues for the auditors to understand include which schemes and arrangements are covered by the actuary (and which are not), the assumptions that have been applied and the extent and nature of the actuaries work regarding the accuracy of source data.
The employers’ directors will also need to determine how best to value scheme assets at the company’s year-end (which may be different from the scheme’s year-end). This is likely to involve careful co-ordination between the company and the scheme’s trustees and between the company auditors and the scheme’s auditors.
FRS 17 becomes effective in three stages. While the full requirements apply to accounting periods ending on or after 22 June 2003, disclosures will be required for periods ending after 22 June 2001. Auditors need to clarify responsibilities and establish lines of communication as soon as possible.