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| Old GAAP | FRS 102 | Further Comment On Differences |
| Retirement Benefits | Employee Benefits (S.28) | |
| Old GAAP is limited to retirement benefits only.
|
FRS 102 is wider in scope than old GAAP. Employee benefits are all forms of consideration given by an entity in exchange for services rendered by its employees. These benefits include:
· short-term employee benefits (such as wages, salaries, profit sharing and bonuses); · termination benefits (such as severance and redundancy pay); · post-employment benefits (such as retirement benefit plans); · other long-term employee benefits (such as long-term service leave and jubilee benefits). |
Section 28 has a lot wider scope that FRS 17. Previously short term employee benefits, termination benefits and long term employee benefits were dealt with under FRS 12. Much of the concepts for the aforementioned are similar other than any differences mentioned below. |
| The principles of FRS 12, ‘Provisions, contingent liabilities and contingent assets’, have been relevant to the accounting for short-term employee benefits. | Where an employee has rendered services, an expense is recognised for the cost of the undiscounted amount of the short-term employee benefits expected to be paid. | The requirements are similar under both so differences are not expected other than in relation to the specific requirement to accrue for holiday pay under FRS 102. |
| No specific requirement in FRS 12 for holiday pay to be accrued so therefore treatment varied in practice. | Specific requirement in the standard for holiday pay to be accrued. | Where untaken holiday leave has not been accrued under old GAAP a transition adjustment will be required. On transition, the opening balance sheet will need to be restated to include the accrual and the deferred tax effect of this accrual. Deferred tax is included as although the deduction was not allowed previously it will be allowed in the future as part of the transition tax adjustments. There will also be an impact on the comparative figures of the first set of FRS 102 financial statements. Note from current year on there will be no timing differences for the posting for holiday accruals as for tax purposes it is an allowable deduction. See example attached showing the journals required on transition (Example 102 – Holiday Accrual) |
| Retirement benefits are provided to employees either through defined contribution schemes or defined benefit schemes. | Same as old GAAP.
|
No differences. |
| FRS 17 required the expected return on plan assets to be included in interest cost.
|
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 will result in a transition adjustment in the prior year comparatives to re-class the cost from other comprehensive income to interest cost in the profit and loss. No adjustment will be required to the opening balance sheet. See attached an example of the transition adjustments required (Example 103 – Determination Of Net Interest On Defined Benefit Scheme). |
| For group schemes, if the company cannot determine its share of the assets and liabilities of the scheme then it can be accounted for as a defined contribution scheme by all members of the group.
|
Defined benefit schemes 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. | Where this group scheme exists, transition adjustments will be required. See attached the transition adjustments required (Example 104 – Group Defined Benefit Pension Scheme Treated As Defined Contribution Scheme Under Old GAAP Now Required To Be Brought On Balance Sheet). |
| Present valuing not required.
|
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 has to be discounted. | It will be very rare where defined pension contributions will not have to be paid within 12 months of the period end. Where this does occur a transition adjustment will be required on transition where material. The discount rate to use is the likely cost of obtaining finance for the same period of time. The journals required to the opening balance sheet would be to:
Cr Profit and loss reserves not if deferred tax Dr Accrual for pension contributions Cr Deferred tax in balance sheet Being journal to reflect the adjustment for accrual at its present value and the related deferred tax. Then in the following year the journals assuming the above journals are posted to profit and loss reserves required would be to: Dr Interest cost in P&L Cr Accrual for pension contributions Being journal to reflect unwinding of the discount (i.e. the prior year accrual by the discount rate). If the payment is made the accrual and deferred shall also be reversed. |
| For multi-employer schemes, where the company cannot determine its portion of the assets and liabilities, then this is accounted for as a defined contribution scheme regardless of whether an agreement has been entered into with the plan to fund a deficit.
|
For multi-employer schemes, where the company cannot determine its portion of the assets and liabilities, then this is accounted for as a defined contribution scheme. However, where the company has entered an agreement to fund the plan, then an entity is required to recognise a provision for that obligation.
|
Where such an agreement is in place a transition adjustment will be required. The journal required where this agreement is in place at the date of transition would be to:
Cr Accrual for pension contributions payable Dr Profit and loss reserves net of deferred tax Dr Deferred tax asset in the balance sheet Being journal to reflect the additional liability and the associated deferred tax (tax asset as the amount will be allowed for tax purposes when paid but went through the accounts at this time). This journal will be posted to reserves in the following year and reversed if the pension payment is made. Where this is not in place no transition adjustment is required. |
| Past service costs to be recognised in the profit and loss on a straight line basis over the period in which the increase in benefits vest.
|
Past service costs to be recognised in the profit and loss immediately (Section 28.21). | 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. See example attached which illustrates the journals required on transition (Example 105 – Past Service Costs Not-Vested Recognised In Full Under FRS 102). |
| The deferred tax on the pension scheme should be netted against the defined pension scheme liability/asset.
|
The deferred tax on the pension scheme should be shown separately within deferred tax and not netted against the defined pension scheme liability/asset. | A reclassification adjustment will be required on transition to FRS 102. See example attached which summarises the journals on transition (Example 106 – Reclassification Of Deferred Tax From The Carrying Amount Of The Defined Benefit Balance). |
| A comprehensive valuation for a defined benefit scheme is required once every three years.
|
Section 28 does not provide a timeline in which a comprehensive valuation for a defined benefit scheme has to be performed instead if the underlying assumptions have not changed significantly, then adjusting employee demographics may be sufficient.
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Although not required, applying old GAAP guidance would seem appropriate under FRS 102. However where it is done less often the employee demographic may just need to be updated.
This difference will not result in transition adjustments. |
| Detailed guidance provided on the recognition of plan/surplus assets. It was made clear that a pension surplus could only be recognised if the amount recovered from refunds to the scheme had been agreed by the pension trustees at the balance sheet date.
|
Limited guidance provided on the recognition of surplus plan assets, other than saying that it can be recognised to the extent it can be recovered through reductions in future contributions or refunds from the scheme. Confirmation would not necessarily be required at the balance sheet date, instead they could be recognised where it is almost certain the pension trustees will agree.
|
There is a lower threshold to meet under Section 28 than required under old GAAP. This may result in surpluses being recognised in the profit and loss earlier.
Where since the date of transition a surplus on plan assets has been recognised through the STRGL under old GAAP because agreement had not been reached with the trustees at the balance sheet date but it was almost certain it would be agreed; a transition adjustment will be required to reclassify it from the STRGL/OCI to the profit and loss account. Where this arises at the date of transition, no adjustment is required as it would have no impact on reserves. |
| Settlements and curtailments can only be recognised in the period where there is an irrevocable commitment to implement the plan. Settlements and curtailments should only be recognised in the profit and loss account where they meet the irrevocable requirement. | Settlements and curtailments can be recognised in the period of the adjustment if it is certain.
|
It is possible for settlements or curtailments to be recognised in the profit and loss earlier as there is no need for the agreement to be irrevocable. In reality there is unlikely to be differences as in order to state something is virtually certain it would need to be irrevocable. |
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