SORP Information Sheet 4: Transitioning to DB accounting
The Charities SORP-making body has published SORP Information Sheet 4: Amendments to FRS 102 – Multi-employer defined benefit (DB) plans (November 2019).
About Information Sheet 4
The purpose of this Information Sheet is to assist accounts preparers to implement the amendments to section 28 of FRS 102 on employee benefits issued by the Financial Reporting Council (FRC) in May 2019. The amendments relate to accounting for multi-employer DB plans, specifically how to transition from defined contribution (DC) accounting to defined benefit (DB) accounting.
The amendments are effective for reporting periods commencing on or after 1 January 2020 with early application permitted. There is no indication that Scottish charities, which on previous occasions have been prohibited from applying changes to FRS 102 early, are prohibited from the early application of these amendments.
The SORP-making body concluded that no corresponding changes to the Charities SORP (FRS 102) were necessary as transitioning from DC to DB accounting is likely to be infrequent and little in the way of additional application guidance for charities is needed.
The Information Sheet includes an illustrative example of a charity transitioning from DC to DB accounting for the first time and provides a summary of other reporting considerations.
Transitioning from DC to DB accounting
The current position in FRS 102 and the Charities SORP (FRS 102) is that where a charity participates in a multi-employer DB plan it should apply DB accounting if sufficient information is available on its share of the plan’s assets and liabilities. Where sufficient information is not available accounting for the plan as if it were a DC plan is required.
In circumstances where sufficient information on an entity’s share of a plan’s assets and liabilities becomes available for the first time, an entity must move from applying DC accounting to DB accounting. However, prior to these latest amendments, FRS 102 was silent on how to account for this transition.
In order to promote a consistent approach to accounting for a transition from DC to DB accounting, the FRC decided it would be appropriate to specify a particular treatment.
Demand for clarity arose as a consequence of the Social Housing Pension Scheme and Scottish Housing Associations Pension Scheme making this information available to scheme employers for the first time, enabling them to transition from DC to DB accounting in their accounts for the period ending 31 March 2019.
The status of information sheets and accounting standards
Information sheets are intended to provide accounts preparers with suggested solutions to implementing new accounting and reporting requirements. Information sheets are the authoritative view of the Charities SORP-making body and its advisory SORP Committee but they do not form part of the SORP, meaning that charities are not obliged to follow them.
However, charities preparing ‘true and fair’ accounts are required to comply with the requirements of FRS 102, including any amendments to FRS 102 which do not result in amendments to the Charities SORP (FRS 102).
Charities transitioning from DC to DB accounting should therefore make sure that they refer directly to FRS 102. The following sections of FRS 102 are particularly relevant:
- Section 8 on notes to the financial statements.
- Section 10 on accounting policies, estimates and errors.
- Section 28 on employee benefits.