Retirement Benefits: Disclosures

Background

The Accounting Standards Board (ASB) published FRS 17 'Retirement Benefits' in November 2000. Its full requirements only became mandatory for accounting periods beginning on or after 1 January 2005. Following its implementation, some commentators expressed a concern that the financial statements do not contain sufficient information in relation to defined benefit schemes to allow users of the financial statements to obtain a clear view of the risks and rewards arising from defined benefit schemes.

In 2006 the ASB undertook a review of the disclosure requirements for defined benefit schemes as set out in FRS 17. This review was distinct from the wider research project the ASB is undertaking into the financial reporting of pensions, which is a far reaching project reconsidering the fundamental principles of accounting for retirement benefits.

Following initial research on possible improvements to disclosures, in May 2006, the ASB issued for comment a Financial Reporting Exposure Draft (FRED) that proposed to replace the disclosure requirements of FRS 17 with those of IAS 19 'Employee Benefits'. In addition the FRED set out a draft Reporting Statement 'Retirement Benefits - Disclosures'.

In deciding to propose the draft Reporting Statement the ASB considered the amended FRS 17 addressed many, but not all, of the concerns of commentators. The draft Reporting Statement, therefore, proposed disclosures that would complement those disclosures required by the amended FRS 17.

Respondents to the FRED were generally in support of the proposal to amend FRS 17 and in December 2006 the ASB issued an amendment to FRS 17. Respondents, however, raised a number of concerns in relation to the proposals set out in the draft Reporting Statement. Those concerns were taken into consideration when developing the final Reporting Statement, which was issued in January 2007.

Role of the Reporting Statement

The Reporting Statement is designed as a formulation of best practice; it is intended to have persuasive rather than mandatory force. The Reporting Statement is written for any entity that operates or sponsors a defined benefit scheme.

The Reporting Statement recommends that the directors provide disclosures in the notes to the financial statements that complement the disclosure requirements set out in FRS 17 'Retirement Benefits'. The extent of disclosure required depends on the significance to the entity of its participation in defined benefit schemes and of its exposure to risk arising from those schemes.

As the amendment to FRS 17 replaced the disclosure requirements set out in the previous FRS 17 with those of International Accounting Standards (IAS) 19 'Employee Benefits' the ASB noted the Reporting Statement can be applied by entities applying either UK or International Financial Reporting Standards.

In developing the Reporting Statement the ASB was conscious that any additional disclosure requirements, beyond those set out in the amended FRS 17, should address the needs of users whilst not being cumbersome to preparers. The ASB is of the view a Reporting Statement which sets out principles for disclosure, rather than specific requirements, allows entities the flexibility to provide disclosures that are appropriate to their exposure to risks and rewards arising from defined benefit schemes.

Objective and recommendations

The objective of this Reporting Statement is to recommend disclosures for defined benefit schemes such that:

1. the financial statements contain adequate disclosure of the cost of providing retirement benefits and the related gains, losses, assets and liabilities;
2. the users of financial statements can obtain a clear view of the risks and rewards arising from defined benefit schemes; and
3. the funding obligations of the entity in relation to liabilities of a defined benefit schemes are clearly identified.

The Reporting Statement sets out six principles to be considered when providing disclosures for defined benefit schemes in the financial statements. The six areas addressed by the principles are:

1. the relationship between the entity and trustees (managers) of the defined benefit scheme;
2. the principal assumptions used to measure scheme liabilities;
3. the sensitivity of the principal assumptions used to measure the scheme liabilities;
4. how the liabilities arising from defined benefit schemes are measured;
5. the future funding obligations in relation to the defined benefit scheme; and
6. the nature and extent of the risks arising from financial instruments held by the defined benefit scheme.

The principles set out in the Reporting Statement aim to assist the users of financial statements in understanding the risks and rewards, and funding obligations, arising from defined benefit schemes.