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Financial Reporting Standard 17 (UK) on retirement benefits
UK Accounting Standards Board staff on 11/21/2003 6:15:43 PM
The Accounting Standard Board (ASB) is a UK accounting standards setter. It aims at establishing and improving standards of financial accounting and reporting for the benefit of users, preparers, and auditors of financial information. It issues Financial Reporting Standards (FRS). To date 19 FRS have been issued. More information about ASB and its activities can be found on its website at:

Today, the UK ASB staff is graciously providing, for the benefit of participants of the EDG on pensions, access to the text of FRS 17 on retirement benefits. The Moderator warmly encourages EDG participants to read this text, which he found particularly clear?including Appendix IV that gives interesting ASB reasoning in support of the FRS 17.

1- FRS 17 (retirement benefits)

FRS 17 sets out the accounting treatment for retirement benefits such as pensions and medical care during retirement. It replaces SSAP 24 ?Accounting for pension costs? and UITF Abstract 6 ?Accounting for post-retirement benefits other than pensions?.

The FRS 17?s objectives are that:
(a) financial statements reflect at fair value the assets and liabilities arising from an employer's retirement benefit obligations and any related funding; and
(b) the operating costs of providing retirement benefits to employees are recognized in the accounting period(s) in which the benefits are earned by the employees, and the related finance costs and any other changes in value of the assets and liabilities are recognized in the accounting periods in which they arise.

Regarding defined benefit (funded) plans, the main requirements of FRS 17 are:

1. pension scheme assets are measured using market values.
2. pension scheme liabilities are measured using a projected unit method and discounted at an AA corporate bond rate.
3. the pension scheme surplus (to the extent it can be recovered) or deficit is recognized in full and without delay on the balance sheet (the surplus/deficit here is stock a concept: it is the difference between the market value of the scheme?s assets and the scheme?s liabilities).
4. the movement in the scheme surplus/deficit is analyzed into:
    a. the current service cost and any past service costs; these are recognized in operating profit;
    b. the interest cost and expected return on assets; these are recognized as other finance costs; and
    c. actuarial gains and losses; these are recognized in the statement of total recognized gains and losses.

2- The notion of the Statement of total recognized gains and losses (FRS 3)

Traditional financial reporting

Traditionally, financial reporting is structured around two main statements:
* the balance sheet, which shows the entity?s assets and liabilities at one point in time, and their difference: the shareholders? own funds or equity at that moment;
* the income statement (named also: profit and loss account, expense and revenue accounts, etc.), which shows the entity?s revenues and expenses during a period, and their difference: the profit or loss of the period.

The basic tenet of accounting is that the change observed over a period in the balance sheet must relate to the income statement of the period, that is: the change in ?own funds? must be equal to the profit or loss during the period (before distribution to, or contributions from, shareholders).

FRS new presentation

Retaining this basic tenet, FRS sponsors a promising refinement: it retains an income statement using a broad approach to income, but distinguishes it from another statement using a narrow approach to income. Hence, FRS defines two primary statements summarizing the activity of the period:

* the Profit and loss account, which reflects the operating result as well as results from financing costs, costs of termination and extraordinary items (narrow view of income);
* the Statement of total recognized gains and losses, which encompasses?in addition to the result of the profit and loss account?other recognized gains and losses that are specifically permitted or required to be taken directly to reserves (broad view of income).

3- Interplay between FRS 3 and FRS 17

The Discussion Paper 'Aspects of Accounting for Pension Costs', published in July 1998, explained that, as it was clear that a pensions standard based on actuarial values for assets would be regarded internationally as weak and would not be an approach that other standard-setters would follow, the Board did not believe that there were sufficient reasons to stand out against the global trend to a market value approach as long as such an approach could be developed in a way that did not introduce undue volatility into the profit and loss account. [FRS 17?Appendix IV paragraph 6; emphasis added]

In practice, the putting to use of the Statement of total recognized gains and losses was the device that allowed marking to market the sponsor?s net exposure to the scheme without creating undue volatility of the profit and loss accounts.

The Moderator

The authors of this contribution to the discussion group on this site bear the sole responsibility for both the substance and the style of the contents. The purpose of the discussion group is to elicit comments and to promote debate on specific topics. As such, the views expressed on any of the issues raised are not to be attributed to the IMF.
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