Statement of Recommended Practice: Financial Reports of Pension Schemes ExposureDraft,issuedbythePensionsResearchAccountantsGroup (PRAG)inApril2014 CommentsfromACCA 16July2014 ACCA(theAssociationofCharteredCertifiedAccountants)isthe globalbodyforprofessionalaccountants.weaimtoofferbusinessrelevant,first-choicequalificationstopeopleofapplication,abilityand ambitionaroundtheworldwhoseekarewardingcareerin accountancy,financeandmanagement. Wesupportour170,000membersand436,000studentsin180 countries,helpingthemtodevelopsuccessfulcareersinaccounting andbusiness,withtheskillsneededbyemployers.weworkthrougha networkof91officesandcentresandmorethan8,500approved Employersworldwide,whoprovidehighstandardsofemployee learninganddevelopment.throughourpublicinterestremit,we promoteappropriateregulationofaccounting,andconductrelevant researchtoensurethataccountancycontinuestogrowinreputation andinfluence. 1
www.accaglobal.com FurtherinformationaboutACCA scommentsonthematters discussedheremaybeobtainedfromthefollowing: Paul Cooper Corporate Reporting Manager, ACCA Email: paul.cooper@accaglobal.com ACCAwelcomestheopportunitytocommentontheaboveExposure Draft(ED).OurPensionsTechnicalAdvisoryGrouphasconsideredthe questionsraisedbyprag,anditsviewsarereflectedinourfollowing generalandspecificcomments. GENERALCOMMENTS ACCAmainlyconcurswiththecontentintheproposedSORP,and welcomesthepracticalapproachtakentoitsstructure,andinthe supportingexplanationsgivenbyprag. 2
CommentsonspecificquestionsraisedintheEDaregivenbelow.On thewhole,weagreethattheproposedsorpmeetsprag s objectivesofnotextendingreportinganddisclosurerequirements beyondthoserequiredbyfrs102andbestpractice. WhenconsideringtheEDoverall,wegavethoughttoitsinteraction withthegenerally-applicablestandardonwhichitisbased,andin particular: ThereproductionofpartsofFRS102intheED(suchasforthe recognitionofassetsandliabilities paras3.6.9 3.6.10).Ontheone hand,thiscanbeseenasprovidinghelpfulcontext.alternatively,it mightobscureprovisionsspecifictopensionschemesintherevised SORP,anddiscouragepreparersfromgainingafamiliaritywiththe contentoffrs102. OneofthekeycharacteristicsofFRS102isitsbrevityinmany areas.forexample,therequirementtoadopttheaccrualsbasisis setoutintheshortparagraph2.36infrs102(withadefinitionof thebasisgivenintheglossarytofrs102).theproposedsorp providesagreaterlevelofguidance(paras3.6.3 3.6.4). Overall,weconcludedthatwedonothaveconcernsabouttheabove interaction.comparedtootherentitiessubjecttoasorp(suchas HousingAssociationsandcharities),pensionschemeswillhaveless needtorefertofrs102(forexample,inrespectofgrantsandleases). Consequently,thereisalogicinhavingaSORPforpensionschemes whichismoreself-containedthanothersorps.furthermore,the 3
additionalguidancedoesnotaddundulytotheoverallcontentofthe draftsorp,andmaybewelcomedbypreparersanduserswhofind somedisadvantagesinthebrevityofcontentinfrs102. TheclarityoftheproposedSORPwouldbeenhancedbyhighlighting itsrecommendedaccountingpractice.thiscouldbeachieved,for example,byshowingthewords ThisSORPrecommends inbold, and/orstartinganewsub-paragraphatthispoint. Finally,weencouragePRAGtofinalisetherevisedSORPassoonasis practicable.thereistobeapracticallyfullre-statementof comparativefiguresanddisclosures,alongwithareconciliationofold tonewgaap(assetoutinsection3.3oftheed). Asmostschemeshavea31Marchor5Aprilyear-end,theywillnow beinthefinalaccountingyearbeforethenewukgaapapplies. Consequently,theywillnowneedtobeconsideringthenecessary accountingpolicychanges,andestablishinginformationforthe reportingofcomparativefigures. SPECIFICCOMMENTS WenowcommentonthespecificquestionsraisedintheED(whichwe haveparaphrased)asfollows: Question 1 4
Withregardtotherequirementtoreportannuitiesattheamountof therelatedobligation,whataretheimplications,andshouldtheed looktoamountsbasedonthetrusteeperspectiveandtherefore determinablebytheschemeactuary? We agree that this change is more appropriate in accounting terms than the currently permissible NIL presentation, in view of the need for consistency with FRS 102 in future. As a result of the change, reporting schemes will bear the additional costs of valuations, although the impact will be mitigated to some extent by through the exclusion from the exercise of policies which are not considered to be significant. An additional mitigating factor will be the involvement of the Scheme Actuary. The use of the Actuary will also be consistent with the need to establish values from the perspective of the scheme s Trustees. We have doubts that para 3.12.22 of the proposed SORP contains guidance sufficient to achieve consistency between reporting schemes. It is unclear how a scheme should conclude whether a value is insignificant, in relation to the total value of all annuities, and if this conclusion is reached, how the scheme will then go about assessing whether the costs of valuation outweigh the benefits. 5
We understand that a Working Party (WP) is to be set up to consider best practice in this area, and would welcome a remit which aims for practicality rather than further prescription. In our view, it would be particularly useful if the WP considers compliance with para 3.12.22 in the context of the following: The materiality levels which scheme Trustees and external auditors determine and apply in practice. The scope for disclosure and trustee valuation of policies deemed to be insignificant (individually or in groups), which would be less burdensome alternatives to recognition and external valuation. Question 2 Whetheritisappropriate(inthecontextofbothpracticalityand compliance)forriskdisclosurestobeconfinedtoinvestment-typerisk, especiallyforpooledinvestments. The content of sections 3.15-3.16 indicates that the SORP does not need to attempt to go further than its focus on credit and market risks. We also agree that the look-through approach in section 3.16 of the proposed SORP represents a realistic approach to reporting. Furthermore, this section does leave scope for scheme trustees to 6
make their own decision as to whether this approach is appropriate for explaining the risks concerned. The scope of risk reporting in the proposed SORP does go further than FRS 102 by covering, for example, investment properties because they are recognised at fair value (para 3.15.5). The proposals in the SORP will consequently require additional information to be obtained, resulting in extra time and costs. We therefore recommend that PRAG considers the feasibility of fewer risk disclosures in respect of the less complex investments, such as property. Given the proposed risk disclosures for investments, similar disclosures appear to be appropriate in respect of the employer covenant. Question 3 Doesthefairvaluehierarchyhaveappropriatesub-categories? Categories (a) and (b) (quoted prices and recent prices, respectively) apply to distinct groups of assets, and follow the hierarchy set out in FRS 102. As a result, there will be little scope to make changes in the proposed SORP. Category (c) is a residual tier, which encompasses fair values which are established using observable inputs or otherwise, non- 7
observable inputs. The question arises as to whether the further sub-division, included in the ED at paras 3.12.8 3.12.10, but not explicitly in FRS 102, is appropriate for pension schemes. It might be argued that the sub-division is relevant to entities like pension schemes, for which fair-valued investments form a substantial part of total assets. We believe that it would be appropriate for such an entity, which does have material Category (c) investments, to go beyond the categorisation in FRS 102, which is written to cover a wide range of businesses and business models. We are aware that the fair value hierarchy in FRS 102 is based on that included in the IFRS for SMEs. In view of the subdivision of Category (c) in the proposed SORP, the hierarchy in IFRS 13 may well be more appropriate for pension schemes (being Level 1 quoted prices, Level 2 observable inputs and Level 3 unobservable inputs). There are two ways in which amendments can be initiated to make FRS 102, and consequently the Pensions SORP, consistent with the fair value hierarchy in IFRS 13. Respondents across sectors in the UK and Ireland (since FRS 102 is a general Standard) might support a change by the FRC which results in FRS 102 further deviating from the IFRS for SMEs in respect of the fair value hierarchy. On the other hand, respondents internationally might call for an amendment to the IFRS for SMEs. The latter process will take more time, as FRS 102 would probably then be amended from its next revision date, following the revision to the IFRS for SMEs. 8
Question 4 Aretheexamplefinancialstatementshelpful,includingwherethey showpermissiblealternatives? The illustrative financial statements usefully follow the headings set out for the Fund Account and Statement of Net Assets in sections 3.7.1-3.7.2 and 3.9.2 of the ED. It would be helpful for Appendix 1 to indicate the level of materiality applied in the illustrative financial statements, and how it is applied. For example, a note analysis is given of Administrative expenses (total 36k) but not of Other payments (total 38k). Alternatively, it might be appropriate for the SORP to confirm that in view of the needs of users of the financial statements, it is best practice for an analysis to be included of Administrative expenses, compared to other categories. With respect to the alternatives shown for Derivatives and Investment Risk, part 6) sub-part 4) of the introductory section of the ED asks specifically about the combined presentation for the notes covering investment risks and analysing derivatives. The non-combined note (presented first) appears preferable. The analyses in note 13 (sub-sections (i) (iii)) are then presented alongside the totals for derivatives (which can be readily agreed to the Statement of Net Assets), and alongside the stated objectives 9
and policies for derivatives. If only the one presentation is given in the example financial statements, this will encourage consistency between reporting schemes. However, PRAG may be aware that an alternative presentation needs to be set out, in order to provide flexibility across the entire range of schemes. Other / minor points: Notwithstanding that the tax charge of 14k is likely to be immaterial, the explanatory note 8 is unhelpful in its present form, as it just confirms the scheme s tax-exempt status. There is a missing note cross-reference (no.15) on the Statement of Net Assets with regard to AVC investments of 316k. Question 5 Viewsarerequestedontheaccountingforauto-enrolment,especially theinitialcontributions. The employer will become obliged to pay over the initial contribution once the one-month opt-out period ceases. This will be after the date of the deduction from salary, and actually before the legal due date for the remittance to the scheme. However, the simplification in para 3.8.2 may be considered practical, and to represent only a short timing difference, which will not often straddle the end of an annual reporting period. 10
In addition, for most schemes, the amounts of initial payments under auto-enrolment are unlikely to have a material effect on the financial statements, due to the number of joining employees involved. In practice, employers may well pay over the initial contribution earlier than the latest date set in law, which will reduce the impact of the timing difference. Question 6 Whether(asPRAGbelieves)certaindisclosurerequirementsinlaw shouldbeappropriatelyupdated. ACCA agrees that the statutory disclosure requirements set out in Appendix 7 should be removed or amended for the following reasons: The requirements of the draft SORP are more consistent with FRS 102. For example, compared to just a UK / overseas analysis of the various types of investment, the disclosures of risk factors and the fair value hierarchy are considered by many users to be more relevant to their current information needs, by enabling a more detailed assessment to be made of a scheme s situation. 11
This legally-required information may well cause confusion, due to the extent to which it differs from the requirements in the draft SORP. Consequently, ACCA supports the lobbying of the DWP to tackle the necessary changes at an early stage. Question 7 Whetherthedisclosureofanyinvestmentconstitutingover5%of schemeassetsshouldberetained(inviewofotherdisclosures regardingrisksandemployer-relatedinvestments).ifso,shouldthe thresholdbeappliedtopooledinvestmentsattheunitlevel,orby adoptingthe lookthrough approach? We believe that this disclosure does provide additional relevant information for users of the financial statements, without detract from their understanding of the other information presented in accordance with the draft SORP. The threshold is a proportional one, providing separate information to the nature or levels of risk, and the disclosure is independent of that required, where appropriate, in respect of investments in the employer. Furthermore, it has the advantage of clarity for users. For pooled investments, the 5% threshold is best applied consistently with the risk disclosures (Question 2 above). This means that, as for risk disclosures, either the look-through or unit of investment level approach will be applied, reflecting the 12
trustees broader consideration of the scheme s investment strategy. For example, the scheme may have more than 5% of its assets invested in the one pooled investment provider, but the implications of this might well be best apparent by looking at the extent to which this stake is diversified between the underlying investments. We also do not believe that the disclosure will be burdensome for schemes. 13