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Comments invited on new draft SORP for pension schemes

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16 Apr 2014

The Pension Research Accountants Group (PRAG) in conjunction with its SORP Working Party has today published an Exposure Draft (ED) on a revised Statement of Recommended Practice (SORP) setting out revised proposals for financial reporting by pension schemes (“the draft SORP”). Comments are invited until 16 July 2014.

The draft SORP, which will replace the current 2007 SORP (“the 2007 SORP”), sets out proposals for accounting and reporting by pension schemes in the context of the new accounting framework introduced by Financial Reporting Standard (FRS) 102 applicable in the UK and Republic of Ireland for financial years beginning on or after 1 January 2015.  The draft SORP also updates the 2007 SORP to include the requirements of new regulations and changes in the pension industry since the 2007 SORP. 

Some of the most significant changes include: 

  • Removal of the exemption available under the Audited Accounts Regulations and 2007 SORP to value annuity policies at nil as FRS 102 requires annuity policies to be valued at the amount of the related obligation.  PRAG comment that “this change will require many schemes to incur additional costs in obtaining valuations for annuities previously reported as nil”.  However the SORP highlights “if the value of the annuity is not considered significant to the Statement of Net Assets and the costs of obtaining a valuation outweigh the benefits then the current practice can continue”.
  • Setting out a fair value hierarchy for valuation of financial instruments and introducing new disclosure requirements on the approach to determining fair value of financial instruments.  These disclosures are extended to all scheme investments including investment property.  PRAG comment that “the fair value hierarchy required by FRS 102 is not consistent with the fair value hierarchy under IFRS and this may require providers of investment accounting information to provide two different analyses of investment valuations” and will raise this with the Financial Reporting Council.
  • The introduction of new disclosures on investment risks arising on financial instruments.  These disclosures are extended to all scheme investments including investment property.
  • The requirement to report scheme investments in subsidiaries, associates and joint ventures at fair value in the Statement of Net Assets.
  • Reducing and simplifying the existing guidance on accounting for DC arrangements.
  • Incorporating a “pragmatic approach” to accounting for the first contribution due for auto-enrolled employees.  The SORP recommends that opt-out payments made by the scheme are reported as an item of expenditure in the Fund Account.
  • Removing “outdated” statutory disclosures required by the Audited Accounts Regulations in relation to types of investment (for example equity, fixed interest public sector, fixed interest other and indexed linked securities analysed between quoted and unquoted and UK and overseas) and disclosure of pooled arrangements between property/other and unit trusts/managed funds.  PRAG are liaising with the Department for Work and Pensions over these changes. 

It is expected that the final SORP will be effective for accounting periods beginning on or after 1 January 2015, consistent with the effective date for FRS 102.  Early application is permitted. 

The ED can be obtained from the PRAG website, here.

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