Comments from ACCA to the Financial Reporting Council (FRC), 30 November 2012.
ACCA’s specific views on the two proposed amendments are set out below. In general, we would question the need for a consultation which encompasses only these two changes, and is also on such a wide scale. Not many entities will be affected by the change to multi-employer pension schemes (as mentioned by the FRC in para 6 of the Summary of the Amendment), and fewer will be the grantors of service concessions.
ACCA believes that it would have been beneficial for the FRC to canvas views from entities likely to be particularly affected by the proposed changes, such as public benefit entities. We believe that this would have been preferable to issuing a general invitation to comment as a first step.
In addition, the fact that a limited but identifiable group of entities is likely to be affected by the changes, calls into question whether it is necessary to amend draft FRS 102. The changes could be incorporated within guidance related to main Standards (such as a SORP), rather than in a main Standard which is intended to apply to a large number of sectors.
We now give our comments on the specific questions raised by the FRC.
Q1: Do you agree with the proposed additions to Section 28 ‘Employee benefits’? If not, why not?
This amendment concerns multi-employer defined benefit pension schemes, which cannot be accounted for as defined benefit, as there is insufficient information to do so. Consequently, they are treated as defined contribution schemes. Under the FRC’s proposals, the liability to fund a deficit, as reflected in an agreement made with the scheme, would now be recognised by the employer in its financial statements.
We understand that a number of schemes will have agreed with their employer-members how a deficit will be funded (thereby bringing the employer-member within the scope of the amendment), whilst still having insufficient information to enable calculation of the ‘true’ (actuarial) liability arising from service up to the current financial reporting period. In this case, the entities currently disclose what information is available to provide an indication of the scale of the deficit, for example how much will need to be paid to address a current deficit in the medium term, and the cost of leaving the multi-employer scheme. Draft FRS 102, paragraph 28.40 provides for the continued disclosure of this type of information, which is currently also required by FRS 17 and for example, the Accounting Direction for Social Housing in England 2012.
ACCA acknowledges that the necessary information is readily available to calculate and recognise the agreed liability as well. Furthermore, this change proposed by the FRC will, to some degree, increase the consistency of accounting for multi-employer schemes with that for other defined-benefit schemes, and gives some means of reflecting the commitment taken on by employers involved in such schemes.
ACCA agrees with the principle of discounting a liability which is to be settled more than twelve months after the period in which the employees render service. In order to avoid undue complexity in the preparation of, and the disclosures within, financial statements, we believe that FRS 102 should include a confirmation that this discounting is to be applied only where its effect would be material to the financial statements.
We note that it is proposed that changes in the liability will be recognised in profit or loss (or net income / expenditure). This will result in greater volatility within the profit and loss account (or equivalent) compared to the accounting for other defined benefit schemes, for which the changes in the liability are at least partly reflected in other comprehensive income (draft FRS 102, para. 28.23(a) and (d)), and it is likely that users of the financial statements would want to be aware of this. As a result, we suggest that the FRC also considers whether entities adopting the proposed change should explain in their financial statements how it differs from the standard accounting treatment for changes in the liability of a defined benefit scheme. This explanation would be in addition to the disclosures referred to in draft FRS 102, para. 28.40 which in our view, would still be needed.
Q2: Do you agree with the proposed amendment to Section 34 ‘Specialised activities’ setting out the accounting requirements for grantors of service concession arrangements? If not, why not?
This amendment specifies the accounting for infrastructure assets (as defined) by the grantor of a service concession: specifically, that the finance lease model is to be used. There is no change proposed to the accounting adopted by the operator of a concession.
ACCA believes that the finance lease model is the appropriate one to reflect the substance of the relationship between the grantor and operator of a service concession, especially in view of the control by the grantor of the residual interest in the infrastructure assets at the end of the term of the arrangement.
We also note that the definition of grantor has been broadened beyond public sector bodies. We also agree with this change, in view of the increasing role of other bodies, especially public benefit entities, in the provision of public services.
On a more minor point, the references to ‘government’ and ‘public sector’ in para. 34.13 of draft FRS 102 will need to be amended to reflect the changed definition of a grantor.
Last updated: 10 Dec 2012