Accounting for retirement benefits
in the UK – FRS 17
David Loweth
Secretary, ASB
May 2004
FRS 17: Objective
• Financial statements reflect at fair value assets and
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liabilities arising from employer’s retirement benefit
obligations and any related funding
Operating costs are recognised in period(s) in which
benefits earned by employees and costs arise
Financial statements contain adequate disclosure of
the cost of providing retirement benefits and related
gains, losses, assets and liabilities
FRS 17: Scope
• Applies to all financial statements intended to give a
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true and fair view
Covers all retirement benefits that an employer is
committed to provide
Covers funded and unfunded retirement benefits,
including pay-as-you-go schemes
FRS 17 requires a liability to be recognised as
benefits are earned, not when they fall due to be paid
Focus on defined benefit (DB) schemes
FRS 17 : Measurement
• Assets in a DB scheme should be measured at fair
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value at the balance sheet date
DB liabilities should be measured on an actuarial
basis using the projected unit method
Projected unit method is an accrued benefits valuation
in which scheme liabilities make allowance for
projected earnings
Liabilities comprise any benefits promised under
formal terms of the scheme and any constructive
obligations where a valid expectation created
FRS 17: Liability Assumptions
• Best estimate of future cash flows that will arise under
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scheme liabilities
Directors’ responsibility, but on actuarial advice
Actuarial assumptions should reflect expected future
events that will affect cost of benefits to which the
employer is committed at balance sheet date
Expected future events will affect the cost of the
benefits
Discount rate for liabilities: AA corporate bond rate
Professional actuarial valuation every 3 years
FRS 17: Balance sheet
• Recognise surplus/deficit in a DB scheme
• This is excess/shortfall of value of assets in the
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scheme over/below present value of scheme liabilities
Employer recognises asset to the extent it can
recover a surplus either through reduced contributions
or refunds
Employer recognises liability to the extent it reflects
the legal or constructive obligation
FRS 17 : Performance statements
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Recognise –
Current service cost
Interest cost
Expected return on assets
Actuarial gains and losses
Past service costs
Gains and losses on settlements and curtailments
FRS 17 : Actuarial gains and losses
• Actuarial gains and losses arising from any new
valuation and from updating latest actuarial valuation
to reflect conditions at balance sheet date should be
recognised in the period
• Actuarial gains and losses recognised in the
statement of total recognised gains and losses. Once
recognised, not recognised again in profit and loss
• Different to IAS 19, although IASB proposed
amendment will introduce option to recognise
actuarial gains and losses in full as they arise, outside
profit or loss – statement of recognised income and
expense
FRS 17 : DB Disclosures
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Disclosures include –
Nature of scheme
Date of most recent actuarial valuation
Contribution
Main financial assumptions
Components of DB cost
FRS 17: Implementation
• Transitional disclosure arrangements from 2001
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onwards
Full adoption required for accounting periods ending
on or after 22 June 2005
Earlier adoption encouraged