The SORP Working Party will have a chance to provide some much needed updates to pension scheme financial statement methodology by 2014, if the new accounting standard for schemes is released in time, finds Marek Handzel

When it comes to financial reporting, company balance sheet accounting standards get all the attention. What with their having to value defined benefit (DB) pension scheme assets on a mark-to-market basis, dragging down balance sheets and upsetting everyone from the CBI to the NAPF in the process, FRS17 and IAS19 are having a riot.

In contrast, the standards used for pension scheme financial reporting have had a far quieter time, happily going about their business, while trying not to upset too many people in the process.

But treading such a careful path has not always been straightforward. And, from this year, in the form of FRS 102, the standard being introduced by the Financial Reporting Council (FRC) as part of the process of updating Generally Accepted Accounting Practice in the UK (UK GAAP), it could become harder.

Some teething problems may have already surfaced. FRS 102 will be used by charities and non-listed companies as well as other unincorporated entities.

Given the wide scope of its coverage, the FRC has had much to grapple with, leading to delays. The finalised proposals in relation to pension schemes for FRS 102 were due in January; they are now expected in mid-March.

When the guidance becomes available, the SORP (Statement of Recommended Practice) working party created by the Pension Research Accountants Group (PRAG), will issue its own, more detailed, proposals for schemes to follow.

The revision will allow SORP to ensure that pension scheme financial reporting is in line with the principles of current international financial reporting frameworks and to bring it up to speed with the new pensions landscape.

Some overdue updating

The last SORP delivered by PRAG is now five years old and the pension scheme world has evolved significantly in that time. So the revision to the SORP is welcome in several areas, says Baker Tilly audit director Philip Briggs, given that trustees will be looking at a number of new areas as they seek to calculate the asset position of their scheme.

“There are matters to consider such as recognition of contributions, escrow assets, risk transfer products – which has already been looked at by another PRAG working party and the guidance from this needs to incorporated in the SORP – and Special Purpose Vehicles (SPVs),” says Briggs.

“A lot of these areas are becoming a more common feature of pension
scheme accounting and that wasn’t the case in 2007.”

Briggs sees two particular aspects of reporting that he hopes the SORP will address. Given the amount of new ground that schemes cover these days, the first will be to discourage formulaic reporting.

“A big challenge will be to avoid too much ‘boiler plate’ disclosure,” he says. “So to make accounting standards meet the needs of pension funds today, it’s got to be set up, as far as possible, that they give relevant information in relation to each individual scheme.”

Secondly, he hopes for some more detailed guidance on the actuarial information that will accompany financial statements. Briggs believes that this feature of the reporting process, which is not subject to audit, could be improved, helping to promote consistency.

As the summary funding statement isn’t always coherent with the financial statements (in terms of the dates and scope on which it is giving information on), he says that the new SORP should help fill this gap as best as possible.

To achieve this, the SORP working party may need to work in closer conjunction with the actuarial profession, which, Briggs admits, will make its job even more of a “sizeable task”.

Less onerous

The job handed to SORP’s authors may be a large one, but, as KPMG associate partner Kevin Clark and the chair of the SORP working party, hints, it may mean less work for schemes in the long-run.

Although PRAG has not been privy to any inside information on FRS 102, he says there has been some “tweaking of investment disclosure requirements” which will alleviate some of the legwork involved in compiling reports.

“There has been some movement on comprehensive requirements around extended disclosure of investments, principally around investment risks and valuations,” he says.

That will make the disclosures less onerous with the discarding of a number of features “that would have been of little value if they were included,” he adds.

The big question

As has always been the case in the past, the SORP working party will reconvene this year with the ‘big question’ over liability inclusion not so much hanging over it, but sitting quietly in the corner.

Accounting purists have never been able to stomach the fact that liabilities have only ever sat in the disclosure section of trustees’ reports, rather than on the actual balance sheet.

Many schemes now have certain financial instruments, such as swaps, which are typically held to protect against liability risks. These sorts of exotic assets, accounted for without the very liabilities they are there to protect against in the first place, mean that the risk disclosure element of a report can be unbalanced.

But any hope of seeing that change has been extinguished for the foreseeable future. Aon Hewitt principal consultant Martin Lowes says that despite pressure from both the international and national accounting standards boards (ASB – now renamed as the Accounting Council), the status quo has held firm.

In the run-up to the final drafting of FRS102, Lowes says that there was some anticipation that change was afoot. But following a consultation early in 2012, the idea was dropped and there is now agreement between the Accounting Council and the SORP that the inclusion of the liabilities would create too many difficulties.

Leaving things as they are has saved the industry a large headache, says Lowes. “(The report) has to balance, so if the assets are lower than the liabilities, then where’s the missing number?”

Common sense over theoretical accuracy of this sort is welcomed by Briggs as well.

“The principles of UK pension scheme accounting has always taken the position of reporting only upon the net assets of the scheme, excluding the liabilities, and there are good commercial, practical, legal – and theoretical – reasons why this is appropriate,” he says.

Cutting it fine

There may be no anticipated shock alterations to the standard, but the changes that the SORP working party will have to consider when it gets on with the job of putting its guidance together will all add up.

And the clock is ticking. Clark says that the party has already had two meetings aborted due to the delays to FRS 102.

The working party’s next meeting is scheduled for mid-April, in the expectation
that the standard will come out in mid-March, giving the working party some time to digest the new standard.

But if that date is pushed back, then the party will soon find itself under pressure.

“We haven’t had an initial chance to see what sort of exact issues will arise from the standard,” says Clark.

“The implementation date for the new accounting period commences in January 2015, so the principal concern will be if there are requirements for comparative information for December 2015 year ends, which will need to be prepared in December 2014 year ends,” he says.

On the current timetable, that won’t be a problem, with Clark and his colleagues aiming to have the revised SORP out by the middle of 2014.

“But if it comes out later than that,” he admits, “then it becomes a bit more of a challenge.”

At which point, FRS 102 may start to generate some of its own headlines.

Marek Handzel is a freelance journalist

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