Summary
Section 28 deals with the recognition, measurement and disclosure of employees benefits to include the recognition and measurement of defined benefit and contribution pension schemes, short term employee benefits and termination benefits.
What is new?
Section 28 deals specifically with short term employee benefits and termination benefits which were not dealt with under old GAAP (FRS 17).
Section 28 requires holiday pay to be accrued. Under old GAAP there was no defined requirement for such an accrual so some entities may not have accrued for such costs. This may result in an adjustment on transition and the related deferred tax will also have to be considered.
For defined benefit pension schemes, Section 28 requires the net interest to be recognised in the profit and loss calculated on the net liability/asset using the relevant discount rate for liabilities. This contrasts with old GAAP where the expected return on plan assets was included in interest cost. This will result in a transition adjustment in the prior year comparatives to re-class the cost from interest cost in the profit and loss to other comprehensive income.
If an entity participates in a defined benefit plan where the risks are shared between entities under common control, and if there is a contractual agreement or stated policy for sharing costs between entities, then each recognises its own share in its individual accounts; if not, then the group entity legally responsible for the plan recognises the costs, assets and liabilities, and all other participating companies show only their contributions. Under old GAAP if the entity could not determine its share of the assets and liabilities of the scheme then it could be accounted for as a defined contribution scheme by all members of the group. There is no such exemption in Section 28.
What is different?
Contributions payable to a defined contribution pension scheme which are not expected to be settled before 12 months of the period in which the employee service was rendered have to be discounted. This was not a requirement under old GAAP.
Section 28 requires a liability to be recorded for deficit funding commitments where a multi-employer scheme has been accounted for as a defined contribution scheme. If the entity cannot determine their portion of the assets and liabilities, then it can still be recorded as a defined contribution scheme. However, what differs is that Section 28 requires that where an agreement has been entered into with the plan that determines how an entity will fund a deficit, then the entity is required to recognise a liability for the contributions payable from the agreement and record the resulting expense in the profit and loss. This will result in additional liabilities being recognised than was required under old GAAP.
Section 28.21 requires past service costs to be recognised in the profit and loss immediately, whereas under old GAAP these costs were recognised in the profit and loss on a straight line basis over the period in which the increase in benefits vest. If these costs have not vested prior to transition this will mean any unrecognised service costs under old GAAP will need to be recognised on transition to FRS 102.
The deferred tax on the pension scheme should be shown separately within deferred tax and not netted against the pension scheme liability as it would have been under old GAAP.
Section 28 does not provide a timeline in which a comprehensive valuation has to be performed, instead if the underlying assumptions have not changed significantly, then adjusting employee demographics may be sufficient. This compares to old GAAP which mandated that a valuation was required once every three years.
Section 28 has limited guidance on the recognition of plan surpluses, whereas old GAAP had more prescriptive guidance. Where plan surpluses are restricted, it should be posted to other comprehensive income.
Settlements and curtailments can be recognised in the period of the adjustment if it is certain, whereas under old GAAP there had to be an irrevocable commitment.
Old GAAP had strict criteria for the recognition of a defined benefit surplus. Under old GAAP a surplus could only be recognised where the entity had the agreement from the trustees to either reduce the future contributions to the scheme or the right to obtain a refund. Under FRS 102, the full surplus can be recognised where it is almost certain that it will be agreed at the reporting date (i.e. it does not have to be physically be agreed).
Other standards affecting Section 28 where differences arise:
Section 29 – Income tax – A requirement to account for deferred tax on any holiday pay accrual at the date of transition.
Section 29 – Income tax – The deferred tax on the pension scheme should be shown separately within deferred tax and not netted against the pension scheme liability as it would have been under old GAAP.
What are the key points?
Short term employee benefits must be recognised together with the deferred tax impact. This will require a transition adjustment where carryover of annual leave occurs.
In relation to defined contribution schemes contributions payable for each period are generally recognised as an expense and a liability. Where they are not likely to be paid for a further 12 months they should be discounted.
Defined benefit plans are post-employment benefit plans other than defined contribution plans. Generally, in a defined benefit plan, the employer has an obligation to provide an agreed level of benefits to employees. This means the employer bears actuarial risk and investment risk, and may be required to increase contributions if the plan assets are too low to fulfil promises to employees.
For an employer with a defined benefit scheme, the cost to recognise each period is the change in the value of the liability.
The liability on the defined benefit scheme is measured at the present value of the plan obligations less the fair value at the reporting date of the plan assets (there is detailed guidance in the section on measurement of these assets and liabilities).
The cost relating to movements in the net liability on the defined benefit scheme is recognised in profit or loss, except for the effects of re-measurement, which are recognised in other comprehensive income. Re-measurement comprises actuarial gains and losses and the return on plan assets, excluding amounts included in net interest on the net liability (calculated as a single item by multiplying the net defined benefit liability by the discount rate used to determine the present value of the scheme liabilities).
Group pensions schemes which are defined benefit in nature need to be accounted for in at least one of the group companies.
For multi-employer schemes where sufficient information is not available to use defined liability accounting, then it can be treated as a defined contribution scheme unless there is an agreement in place stating that it will fund the deficit, if so, then this amount needs to be provided.
Deferred tax on the pension scheme is shown as deferred tax on the balance sheet and not netted against the pension scheme carrying amount.
Curtailments and settlement should be accounted for in the period where the adjustment is certain and posted to the profit and loss with disclosure of the amount charged/credited in the notes.
An independent actuary is not required to perform the calculation and it does not dictate how often the comprehensive valuation must be performed.
What do accountants need to do?
Be aware of the differences between old GAAP and Section 28.
Advise clients on the differences and assess what transitions adjustments required to restate the old GAAP numbers to FRS 102 compliance numbers.
For clients, where annual leave can be carried forward, calculate the required accrual and associated deferred tax to include in the opening balance sheet, the prior year and current year balance sheets. This will also impact the distributable reserves coming forward. Advise clients that a deduction will be allowed for such an adjustment for corporation tax purposes over a 5 year period.
Review their client portfolio to identify any clients which have a defined benefit scheme with past service costs or clients that did not account for defined benefits previously as they took advantage of the exemption under old GAAP and advise clients of the impact on distributable reserves if these are required to be included on the balance sheet.
Advise clients considering paying a dividend in 2015 of the need to ensure distributable reserves are available as and when transition adjustments have been made.
What do Companies need to do?
Be aware of the differences between old GAAP and Section 28.
Where annual leave can be carried forward, calculate the required accrual and associated deferred tax to include in the opening balance sheet, the prior year and current year balance sheets.
Assess the pension scheme in operation and see will the entity now be required to bring a liability on to the balance sheet. If a defined benefit scheme exists, then at least one group entity will need to include this on its balance sheet.