David Davison reminds charities that FRS102 is just around the corner and it is essential that they prepare for it now.

The introduction of the new Financial Reporting Standard 102 (FRS102) could be one of the most significant issues charities participating in multi-employer defined benefit pension schemes will need to deal with in 2014/15.

To date many charities participating in these pension schemes have used an exemption under FRS17 which allowed disclosure on a simpler defined contribution basis where the organisations share of assets and liabilities in the pension scheme could not be clearly identified. This meant that purely contributions were disclosed with no balance sheet entry required to show an effective deficit position, should one exist. The change could see millions of pounds in balance sheet value being removed, effectively over night, with all the associated impacts that entails.

The introduction of FRS102 could therefore fundamentally change a charities financial position and charities need to carefully assess what options are open to them in their specific circumstances.

For organisations who do not currently disclose their defined benefit pension liabilities on their balance sheet FRS 102 will require disclosure of the net present value of any deficit contributions being made to a scheme. This will be a very significant change and will impact 1,000’s of charities. For example charities participating in the Pensions Trust Growth Plan, CARE Scheme and Social Housing Schemes are all likely to be affected as well as charities in other similar multi-employer schemes. 

To provide an example the net present value approach set out in FRS 102 would broadly see a £100,000 negative balance sheet amount being recorded for each £9,000 of annual deficit contribution payable over a 10 year period. Changes in the term, the annual amount of deficit payments and any payment increase amounts will change the calculation and the amount recorded on the balance sheet. Charities would have the option to carry out a more detailed calculation (as per the current accounting standard, FRS 17) which may well result in less volatile results and lower liabilities. This approach could be very valuable where the charities balance sheet position is important and particularly where the introduction of FRS102 could produce a negative balance sheet overall.

Charities which already account for their pension liabilities on balance sheet on a defined benefit basis, such as those participating in Local Government Pension Schemes, also need to consider their options. The new FRS could provide them with simpler and more cost effective alternatives to their existing FRS17 disclosures.

To assist charities in understanding their obligations and options we’ve compiled a guide which analyses who the changes will affect, what the changes will mean and what steps to take in preparation for them.

Charity finance directors and their boards need to be considering this issue early with their professional advisers to ensure they have reviewed the options available and selected the best route for their charity.

Civil Society Media wishes to thank Spence & Partners for their commercial support of our Pensions Blog