Defined benefit schemes

Gill Gittings

Hi,

Our firm is tendering for a client who has a defined benefit pension scheme and just wanted to know how easy these are to account for.

Anyone had any dealings with these?

Gill

peugeot

If you look at the notes to the financial statements for a defined benefit scheme that falls under the FRS 17 provisions you will probably run a mile! However the actual accounting for such schemes is relatively straight forward once you know how the requirements in FRS 17 work. The disclosure requirements are quite in-depth so it is important that you are up to speed in accounting for defined benefit pension schemes.

You will need actuarial information from the scheme's actuaries in order to complete the accounting input and bring the surplus/deficit of the scheme onto the balance sheet and to arrive at profit and loss items such as past service cost, current service cost, interest, actuarial gains or losses etc.

Kind regards
Steve

Gill Gittings

Hi steve

Thanks for that. Looking at the accounts for the client it doesn't look llike they have included the scheme's deficit on the balance sheet or I may be going mad! Should it be included or is it just the disclosures that are needed?

Do you know where I can find a definitive example of the disclosures so I can compare them against what I have in my posession now?

Thanks
Gill

peugeot

The deficit in the scheme must be brought onto the balance sheet of the company. If it hasn't then the financial statements will be misleading.

If you have an up to date disclosure checklist then the disclosure requirements will be contained within that.

First and foremost if the pension scheme deficit has not been included in previous years financial statements then you need to establish why. I would also expect to see any audit opinion qualified 'except for' where a company has failed to bring the deficit onto the balance sheet. If the accounts are outside the scope of audit then a note to the accounts should have been made explaining why the scheme has not been accounted for.

Actuaries can charge quite significant fees for providing actuarial information and some companies cannot justify the fees so they don't pay it. This is a common reason why schemes are not accounted for on the balance sheet because in order to account for them you need the actuarial information. Another reason is that a deficit on a defined benefit scheme may wipe out a company's reserves so a relatively healthy-looking company could become insolvent once the scheme has been accounted for.

Regards
Steve

Gill Gittings

Hi Steve

The accounts do not have the deficit and the audit opinion was unqualified. Does it make a difference if the company is small at all???

Also if we account for the deficit on the benefit types of scheme why not on the contributiion ones?

Sorry for all the questions i just need to get my head around it all.

peugeot

Hi Gill,

There are 2 reasons why the audit report is unqualified.

First is that the audit opinion is inappropriate and the auditors have issued the wrong opinion. The second is that the defined benefit pension scheme is immaterial to the accounts. I tend to think the former is the reason!

It doesn't make a difference that the company is small. If you refer to paragraph 10.4 (off the top of my head) of FRSSE (January 2007) you will see that the scheme's deficit must be accounted for. For accounting periods commencing prior to 22 June 2006 it was only necessary to make disclosure notes rather than account for the deficit. This was withdrawn by the ASB because this exemption conflicted with the ASB's Statement of Principles relating to recognising a liability.

Defined benefit schemes are different to defined contribution schemes because under contribution schemes the employer is not obliged to provide the retirement benefits - it is the scheme that provides these. In contrast under a defined benefit scheme the employer is legally obliged to provide the post-retirement benefits and it is up to them to ensure sufficient assets are available to meet these benefits - hence a liability. The differences between the two types of scheme relates to who is legally obliged to provide the post-retirement benefits - employer (therefore defined benefit), pension scheme (defined contribution scheme).

Regards
Steve

Gill Gittings

Thanks so much Steve. This has been really helpful:thumbup:

Can I ask one more question, how do you know all this? You're like a walking encyclopaedia! I read your articles on accountinweb and it fascinates me how you know all this.

Really do appreciate your help steve.

Nilesh Mandvia

I do read Steve's articles and I do wonder as well. How does he know all this things!

BTW Gill, it seems from your post that your firm is registered auditor and you are required help. You know what I would do, I would retain Steve's professional services!