A major new accounting standard says your pension liabilities need not be valued by an independent actuary. So does this pave the way for companies to carry out their own valuations? Our guest contributor, David McBain of Johnston Carmichael, Chartered Accountants and Business Advisers, investigates. Fortunately he is concluding there is still a role for actuaries! Defined benefit pension schemes are something of an irritant to finance directors. Annual valuations of the assets and liabilities are required and the resultant deficits (and occasional surpluses) introduce a high degree of volatility to the annual accounts. Pages of disclosures also result, many of which are largely unintelligible to the average reader. So it’s little wonder that the same FDs will be hoping to find some simplification in the new International Financial Reporting Standard for Smaller Entities (IFRSSME). But will they find it?
Well first of all, it’s worth just clarifying who the IFRSSME will apply to, as in this case, the answer is not as they say in the question! Although labelled internationally as a Standard for Small and Medium Sized Entities, it is, in fact, likely to be applicable to Medium and Large sized companies as we know them. UK companies currently classed as Small are expected to still be governed by the Financial Reporting Standard for Smaller Entities. However, this does mean that from its expected implementation date of 2012, all other UK private companies will come under the IFRSSME. For these companies FRS 17 will be no more. Secondly, it should be noted that the IFRSSME does not change the principle that pension liabilities should be included on the company balance sheet. It is unlikely to change in a major way the valuation of most liabilities and the disclosures are, for the main part, similar to FRS 17. So what’s different? Well, in principle, there are some major differences introduced by the IFRSSME. First of all, and most surprisingly, the IFRSSME says that you don’t need to engage an independent actuary to carry out the necessary valuation. However, any finance directors thinking of trying to save some money by a “DIY valuation” should think again. In reality, the complex nature of valuing scheme liabilities will take this process out of the expertise of even the most informed FD unless he is himself a qualified actuary! Although scheme auditors do review and challenge the actuary’s work, they are able to place a degree of reliance on the use of an independent expert in the calculation process. These auditors are highly unlikely to accept a valuation prepared in-house without this level of expertise and will either insist on the use of an independent actuary or look to engage an independent actuary themselves to check the valuations. In the latter case the auditor would be looking to pass back the extra costs through their audit fees! So the reality is that the only practical answer is to continue to use the experts. In doing so, the process can be done efficiently and smoothly, providing the company with the best estimate of its financial position, and satisfying the scheme auditors and other users of the financial statements as to its accuracy. Another exemption available in the IFRSSME is an “undue cost” exemption. This however does not allow valuations to be avoided – it merely allows a few simplifications to be made in the valuation process. Again, difficult conversations with scheme auditors are likely for any company which wishes to invoke this exemption, as it is only available where a company is unable to carry out a full valuation without undue cost or effort. The reality is that the annual valuation cost and effort is unlikely to be prohibitive to almost all companies, meaning that few will really be able to justify applying the simplified valuation basis. A final key change in the IFRSSME is that the standard permits a choice over where the annual movements are shown in the financial statements. Currently only a few of the movements, usually those that are relatively stable, are shown through the profit and loss account. All other movements are instead shown in the supporting Statement of Total Recognised Gains and Losses (STRGL). The IFRSSME, in contrast, permits the STRGL movements to be shown through the profit and loss account. However, before any finance director thinks that any actuarial gains arising might be a good way of propping up the profit and loss account, they should bear in mind that the policy needs to be applied consistently from year to year. Therefore, anyone adopting this policy needs to be prepared to accept the good and the bad! Again, in reality, most companies will be keen to avoid the added volatility of such a policy and the current status quo is likely to be maintained. So, all in all, despite some apparently significant changes, the new standard is unlikely to be change very much in practice. The need for an independent actuary and a full valuation is likely to be as strong as ever and unfortunately the new standard is unlikely to magically lead to a reduction in the measurement of scheme liabilities! David McBain is an Audit & Assurance Director with Johnston Carmichael, Chartered Accountants and Business Advisers, specialising in pension schemes and complex financial reporting matters.