FRS 102 retains the differing treatments for defined contribution plans and defined benefit plans used by FRS 17. However, there are a number of changes as FRS 102 applies the recent IAS 19 approach to the recognition of the elements of the cost of a defined benefit plan, in either profit or loss or other comprehensive income (OCI), and introduces some key changes in accounting for group schemes or multi-employer schemes.
Defined benefit schemes
The accounting for defined benefit schemes under FRS 102 broadly follows the same principles as current UK GAAP (FRS 17 Retirement Benefits). However, a key change is that FRS 102 follows IAS 19 Employee Benefits (2011) in recognising in profit or loss, net interest determined by multiplying the net defined benefit liability (the defined benefit obligation net of plan assets) by the discount rate used to calculate the defined benefit obligation. By contrast, FRS 17 recognises the expected return on scheme assets and the unwinding of the discount on scheme liabilities. The FRS 102 approach aligns with revisions made recently to full IFRS. The effect on earnings may be significant.
The original proposals in FRED 48 permitted a simplified valuation method in measuring the scheme liability. That was not retained in FRS 102 which requires the projected unit credit method to be used to measure the defined benefit obligation.
There is no concept of a separate pension reserve in FRS 102 or full IFRS and, therefore, it might be expected that these will be subsumed within an entity's retained surplus. In addition, the net pension asset or liability and associated deferred tax would be shown based on the normal FRS 102 presentation requirements. This contrasts with the requirement in FRS 17 to disclose on a net basis as a separate item after other net assets.
Group schemes
FRS 102 requires entities participating in a group defined benefit pension plan to recognise the net defined benefit cost in their individual financial statements where a relevant agreement or policy exists for charging the net defined benefit cost.
Where that is not the case, the group entities (other than the entity that is legally responsible for the group pension plan) shall, in their individual financial statements, recognise a cost equal to their contribution payable for the period. So far, not too different to FRS 17. However, in this situation FRS 102 requires the entity that is legally responsible for the group pension plan to recognise the entire net defined benefit cost in its individual financial statements. This is a key difference from FRS 17 under which group entities, including the parent, typically use the multi-employer exemption to avoid recognising their share of the group plan in their individual financial statements. This change may lead to problems in the payment of dividends from a group if the parent is legally responsible for the group pension plan or to problems in passing up dividends within a group if an intermediate parent is responsible.
Multi-employer schemes
FRS 17 and FRS 102 both acknowledge the difficulties of applying defined benefit accounting to multi-employer schemes. They instead permit an entity to account for participation in such schemes as defined contribution schemes if it is not possible to identify its share of the underlying assets and liabilities of the multi-employer scheme. A key difference, however, is the treatment of deficits where a plan has been agreed to fund an identified deficit. Where there is such an agreed deficit funding plan, FRS 102 requires a liability to be recognised for the present value of the contributions payable that arise from that agreement (to the extent that they relate to the deficit) with the resulting expense recognised in the profit or loss. This accounting is likely to give rise to much more volatility in the profit or loss as deficit funding plans are revised with each triennial actuarial valuation, and previously assessed liabilities are increased or decreased. It may also lead to blocks on distributions.
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