Section 23 – Employee Beneﬁts

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Section 23 – Overview

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Section 23: Employee Benefits

Summary

Section 23 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 when compared to previous GAAPs – General?

Requirement for entities that have a defined benefit scheme to only recognise a liability for the contributions committed to in order to fund the deficit at the year end under Section 23 of FRS 105 and the employer contributions payable for the year. No further liability needs to be recognised.

In addition no deferred tax needs to be recognised on the liability as Section 24 of FRS 105 does not permit deferred tax to be recognised.

All costs are recognised in the profit and loss account as there is no STRGL/OCI under FRS 105.

Under old GAAP/FRS 102 where a company operated a defined benefit pension scheme it was required to recognise the full defined pension scheme assets and liabilities and the related deferred tax. Any re-measurement differences on the pension scheme is recognised in the STRGL under old GAAP and OCI under FRS 102. The cost recognised in the P&L related to the estimated current service cost as opposed to the actual employer pension contribution made. Instead the employer pension scheme contributions are posted to the defined benefit pension scheme asset or liability.

Therefore on transition to FRS 105 for such entities, an adjustment will be required to only show a liability for the defined benefit pension scheme deficit to which it has committed to rectify, to derecognise any deferred tax, recognise employer contributions in the P&L and reverse all notional postings.

Old GAAP/FRSSE/FRS 102 provided detailed guidance on valuing defined benefit schemes. As stated above this guidance is not necessary as the rules in Section 105 are simplistic.

Settlements and curtailments have not been dealt with in Section 23 however it is likely the guidance in FRS 102 will apply in the unlikely event they arise.

What is new when compared to FRSSE/old GAAP?

Section 23 deals specifically with short term employee benefits and termination benefits which were not dealt with under old GAAP (FRS 17)/FRSSE. However the treatment is the same as dictated by FRS 12.

Section 23 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 corporation tax will also have to be considered. Note this is not applicable for entities transitioning from FRS 102 as holiday pay was required to be accrued.

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/FRSSE 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 23.

Section 23 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 23 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 was not required under old GAAP/FRSSE). This will result in additional liabilities being recognised than was required under old GAAP/FRSSE.

What is different when compared to FRSSE/old GAAP?

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/FRSSE.

Section 23 has no guidance on the recognition of plan surpluses, whereas old GAAP had more prescriptive guidance where plan surpluses are restricted.

Other standards affecting Section 23 where differences arise:

Section 24 – Income tax – A requirement to account for corporation tax on any holiday pay accrual at the date of transition.

Section 24 – Income tax – Requirement to derecognise any deferred tax on any timing differences in relation to employee benefits and to derecognise deferred tax in relation to the defined benefit pension scheme as Section 24 does not permit deferred tax to be recognised. FRSSE/old GAAP/FRS 102 did require it to be recognised.

What are the key points?

Short term employee benefits must be recognised together with the corporation 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 and the contributions paid in the period.

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). Under Section 23, an entity should recognise:

an expense for the contributions paid/payable to the scheme (i.e. as a defined contribution scheme);
a liability for a schedule of contributions to the extent that it relates to the deficit on the DB scheme. The liability should be present valued.
All costs should be recognised as an expense in the profit and loss account regardless of whether they relate to re-measurement or not.

The discount rate to use when present valuing the cash flows is a discount rate that reflects the time value of money but not the investment or actuarial risk which would usually be reflected in the market yields of high quality AA grade corporate bonds of equivalent currency and timing of the payments.

The unwinding of the discount is recognised within interest costs.

Group pensions schemes which are defined benefit in nature need to be accounted for in at least one of the group companies (the company legally responsible for the scheme).

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.

No deferred tax is to be accounted for on defined benefit scheme nor is there any deferred tax to be recognised on pension accruals.

An independent actuary is not required to perform the calculation and it does not dictate how often the valuation must be performed.

Termination benefits are to be provided for where there is a constructive obligation (affected parties have been communicated to) and there is a formal plan in place at the period end date. Where material the liability should be present valued.

What do accountants need to do?

Be aware of the differences between old GAAP/FRSSE/FRS 102 and Section 23.

Advise clients on the differences and assess what transition adjustment required to restate the old GAAP numbers to FRS 105 compliant numbers.

For clients that are transitioning from FRSSE or old GAAP, where annual leave can be carried forward, calculate the required accrual and associated corporation 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 within a group and the 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.

Review client lists for entities who are a member of a multi-employer scheme to assess whether there is a requirement to accrue for a funding deficit which they have committed to.

Advise clients considering paying a dividend in 2016 (assuming the first year under FRS 105 is 31 December 2016) of the need to ensure distributable reserves are available as after transition adjustments have been made to allow dividends to be paid.

For entities with a defined benefit scheme assess the adjustment required in order to account for the scheme under FRS 105 rules (i.e. recognise the contributions paid/payable as an expense and any commitment to fund a deficit – present valued).

What do Companies need to do?

Be aware of the differences between old GAAP/FRSSE/FRS 102 and Section 23.

Where annual leave can be carried forward, calculate the required accrual and associated corporation 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.

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