Craig Coulter disusses the three significant changes brought by the revised SORP.
On 25 November 2014, a revised version of The Statement of Recommended Practice (SORP) Financial Reports of Pension Schemes was released. This was due to the Financial Reporting Council (FRC) issuing FRS102 - the Financial Reporting Standard applicable in the UK and Ireland.
This revised SORP applies to accounting periods that began on or after 1 January 2015, and the three most significant changes it brings surround the following key areas;
Valuation of annuities
FRS 102 removes the exemption that currently exists to allow individual annuity policies to be valued at nil. The revised version of The Statement of Recommended Practice recommends:
- That the valuation basis adopted should be disclosed in the financial statements
- The valuation should be carried out by a suitably qualified person or organisation and this person or organisation is disclosed in the financial statements
- The nature of benefits covered by the annuity and any collateral arrangements in place are disclosed in the financial statements.
Investments fair value determination
FRS 102 also contains a requirement to analyse investments according to a tiered valuation hierarchy, and to the ease with which a market valuation is obtained for the investment. The Statement of Recommended Practice recommends that the above disclosure is made by class of investment, disclosed on the face of the Statement of Net Assets.
Investment risk disclosure
The key additional disclosures FRS 102 contains relate to the investment risk disclosures for both defined benefit (DB) and defined contribution (DC) schemes. It means trustees will now be required to explain the nature and extent of investment risks, quantify the risk exposures, explain how they arise and set out their policies for risk management.
These three key areas mean that significant thought should now be given as to how the requirements of the revised Statement of Recommended Practice will impact on the preparation of scheme accounts, both from a process and cost perspective.
The additional work that it brings should not be underestimated and consideration will certainly need to be given to the fact that comparatives for the new disclosures will be also required.
Action should be taken now to liaise with advisers and investment manager, helping to ensure the additional information required by the revised SORP can not only be provided in a useable format, but also in timely manner which will help to ensure that audited accounts can continue to be produced in line with the legal timescales.
Written by Craig Coulter, Pension Fund Accounts, Spence & Partner.
