top stories

Comments from the Association of Chartered Certified Accountants
July 2002

We set out below our reactions on i) the detailed text of the ED; ii) the additional consultation questions posed; and iii) the question of the recognition of actuarial liabilities.

i) Detailed points regarding proposed changes to the current SORP

Paragraph 2.9

The Fund Account format requires disclosure of investment management expenses which are borne by the scheme. We suggest it might be helpful if there were separate disclosure, in the notes to the accounts, of management and administrative expenses which were not borne by the scheme, i.e. were borne by the sponsoring employer.

With regard to both the model Fund Account and the model Net Assets statement under paragraph 2.13, we suggest there should be clarification as to whether 'fixed interest securities' include floating rate instruments.

We would also draw attention to the provision for disclosure of changes in market value of investments, and suggest that the SORP needs to do more to cover the implications for this area of foreign exchange fluctuations. Where, say, 50% of a fund is held in US equities, and those equities rise in value by 20% but the exchange rate changes by 10%, the effect of the rate change can be hidden within the information under 'change in market value'. We suggest that there needs to be some additional, specific disclosure of the effects of rate changes so as to avoid a distorted impression being given of the real change in value.

Paragraph 2.19 et seq

The exposure draft recommends columnar analysis, in the financial statements, of the income and expenditure and net assets which are attributable to each discrete section within a fund. We accept that all the individual sections within a fund need to be acknowledged within the financial statements. But there are many industry-wide schemes which have a great number of discrete sections within the one scheme, each with their own contribution and benefit structures and each one subject to actuarial reviews and valuations. We understand that, at present, it is common practice for the schemes concerned to produce a 'consolidated' set of accounts in which the net asset value of each individual section is reported, but with detailed financial statements for each being separately published. We agree that scheme accounts must take full account of the various constituent sections of the scheme, but presenting the all, in columnar format in the one set of accounts, will not be practicable in such cases. We suggest that this part of the SORP be expanded to provide additional guidance to assist those schemes with multiple benefit structures.

Paragraph 2.46

We suggest that this passage would benefit from some additional clarification in order to make absolutely clear what is meant by the term 'withholding tax'. At present, if custodians omit to make any mention of irrecoverable 'withholding taxes', only the net dividend received will be reported as income by the scheme. This scenario should be addressed in the text and advice given as to the correct treatment. Further, it would be helpful if the text clarified what application, if any, this passage has for UK dividend income. Since 1997, of course, there is no recoverable tax credit on dividend income received. It is our understanding that many UK schemes still choose to report UK equity income gross, i.e. showing the tax credit as a cost; other schemes report it as income, without grossing it up. The text needs to rule on the correct treatment.

Paragraph 2.106

The text advises that any tax on trading activities should be shown in the financial statements as a tax charge. We query what taxable trading activities pension schemes are likely to carry out.

Paragraph 2.136

We query why, in the context of the advice that corresponding amounts be disclosed for every amount shown in the financial statements, sales and purchase of investments are specifically excluded.

Paragraph 2.141

We suggest it may be helpful to supplement the recommendation to disclose the total amount of stock lent out at the year end with a recommendation to disclose an analysis of the stock concerned, for example between UK equities, overseas equities, UK and overseas bonds etc.

Drafting point

The header note which appears throughout section 2 should, of course, read 'Recommended Accounting Practice' rather than 'additional guidance in special situations'.

ii) Additional issues

We do not consider that there would be any merit in requiring disclosure of information on the matters listed under this heading. The Statement of Investment Principles is available on request, while ten year performance date would, in our view, be largely irrelevant since management contracts tend to be for shorter periods. There may be a case however for requiring additional information to be disclosed subsequent to an auditor qualifying the scheme's accounts.

iii) Recognition of actuarial liabilities

We look forward to contributing to the consultation exercise on this matter in due course. We have no settled view to communicate at this stage, other than to re-iterate that coverage of actuarial liabilities in the SORP would need to be preceded by a change in the law regarding the scope of the financial statements of pension schemes.

Back to top