Accounting for Pensions Survey 2002
Pension accounting in turmoil


  The UK accounting standard, SSAP24, was due to be replaced by FRS17, with gradual implementation of FRS17 beginning during 2001. However, as discussed below, a delay has recently been proposed by the Accounting Standards Board (“ASB”).

Internationally, pension accounting is governed by a standard known as IAS19, produced by the International Accounting Standards Board (“IASB”). However, numerous other country-specific standards exist around the world, most notably FAS87 in the United States.
Differences between the standards Of the various standards, SSAP24 is the “odd one out” as all of the other major standards require assets to be taken at market value or close to market value, whereas SSAP24 allows a discounted income method to be adopted, as described in Section 5.

There are other differences between standards. FRS17 recognises “gains and losses” (defined below) in the STRGL in the year in which they arise. Under IAS19, FAS87 and SSAP24, gains and losses are generally spread over a number of years and then recognised through the profit & loss account. This results in a year on year movement that is not subject to the balance sheet volatility seen under FRS17.

(If actual experience turns out to be more favourable than assumed, for example through higher than expected investment returns, this creates a “gain”. The converse results in a “loss”.)
Harmonisation From 2005, UK companies will be required to account under rules laid down by the IASB, rather than under UK standards.

However, a project is underway to review the current international standards before harmonisation in 2005. This includes a limited review of IAS19 and, perhaps ambitiously, aims to end up with just one set of standards that is applicable throughout Europe, North America and other major regions.

It is interesting to observe that the current Chairman of the IASB, Sir David Tweedie, was previously Chairman of the ASB in the UK and a key driving force behind the introduction of FRS17. He may be keen to see the principles of FRS17 implemented as the international standard but he will need to convince the other members of the IASB that immediate recognition of gains and losses in the STRGL is preferable to the spreading approach used under other standards.
Deferral of FRS17 In line with the calls made in our interim survey published in May 2002, the ASB have proposed an amendment to FRS17. Rather than the new standard completely replacing SSAP24 from 2003, full adoption of FRS17 is now expected to be deferred until 2005. This coincides with the imposition of the international standard in the UK, meaning FRS17 may never be adopted in full.

For the next few years, whilst this uncertainty reigns, the ASB has proposed that companies continue to account under SSAP24. Despite the announcement, disclosure of FRS17 numbers will continue to be required in the notes to the accounts.

We welcome the harmonisation of accounting standards internationally and, against that background, we certainly welcome the deferral of full implementation for FRS17. The longer period of transition will allow all commentators the opportunity to gain a better appreciation of the significance of FRS17 disclosures.
Early adoption of FRS17 WPP (in 2001) and BAA (in 2002) took the decision to adopt the provisions of FRS17 in full. We wonder whether they will come to regret this decision. In the current environment, companies would need to think very carefully before adopting FRS17 voluntarily in their primary accounting statements.