Chapter 9 · Substance over form and leases 245 (c) Explain briefly any circumstances in which a lessor and a lessee might classify a partic- ular lease differently, i.e. the lessee might classify a lease as an operating lease whilst the lessor classifies the same lease as a finance lease or vice versa. (3 marks) (d) Explain briefly any circumstances in which the requirements of SSAP 21 with regard to accounting for operating leases by lessees might result in charges to the profit and loss account different from the amounts payable for the period under the terms of a lease. (3 marks) (e) Draft a concise accounting policy in respect of ‘Leasing’ (as a lessee only) suitable for inclusion in the published accounts of Pilgrim plc and comment on the key aspects of your policy to aid your managing director’s understanding. (4 marks) (f) List the other disclosures Pilgrim plc is required to give in its published accounts in respect of its financial transactions as a lessee. (3 marks) Note: Ignore taxation. ICAEW, Financial Accounting 2, December 1992 (21 marks) 9.9 Flow Ltd prepares financial statements to 31 March each year. On 1 April 1998, Flow Ltd sold a freehold property to another company, River plc. Flow Ltd had purchased the prop- erty for £500 000 on 1 April 1988 and had charged total depreciation of £60 000 on the property for the period 1 April 1988 to 31 March 1998. River plc paid £850 000 for the property on 1 April 1998, at which date its true market value was £550 000. From 1 April 1998 the property was leased back by Flow Ltd on a ten-year operating lease for annual rentals (payable in arrears) of £100 000. A normal annual rental for such a property would have been £50000. River plc is a financial institution which, on 1 April 1998, charged interest of 10.56% per annum on ten-year fixed rate loans. Requirements (a) Explain what is meant by the terms ‘finance lease’ and ‘operating lease’ and how oper- ating leases should be accounted for in the financial statements of lessee companies. (7 marks) (b) Show the journal entries which Flow Ltd will make to record: ● its sale of the property to River plc on 1 April 1998, ● the payment of the first rental to River plc on 31 March 1999. Justify your answer with reference to appropriate Accounting Standards. (13 marks) CIMA, Financial Reporting, May 1999 (20 marks) 9.10 Leese, a public limited company and a subsidiary of an American holding company oper- ates its business in the services sector. It currently uses operating leases to partly finance its usage of land and buildings and motor vehicles. The following abbreviated financial infor- mation was produced as at 30 November 2000: Profit and Loss Account for the year ending 30 November 2000 £m Turnover 580 –––– Profit on ordinary activities before taxation 88 Taxation on profit on ordinary activities (30) –––– Profit on ordinary activities after taxation 58 –––– 246 Part 2 · Financial reporting in practice Balance Sheet as at 30 November 2000 Fixed assets 200 Net current assets 170 Creditors: amounts falling due after more than one year (interest free loan from holding company) (50) –––– 320 –––– Share Capital 200 Profit and Loss Account 120 –––– 320 –––– Notes Operating lease rentals for the year – paid 30 November 2000: £m Land and buildings 30 Motor vehicles 10 Future minimum operating lease payments for leases payable on 30 November each year were as follows: Year Land and Buildings Motor Vehicles £m £m 30 November 2001 28 9 30 November 2002 25 8 30 November 2003 20 7 Thereafter 500 – –––– ––– Total future minimum operating lease payments (non-cancellable) 573 24 –––– ––– The company is concerned about the potential impact of bringing operating leases onto the balance sheet on its profitability and its key financial ratios. The directors have heard that the Accounting Standards Board (ASB) is moving towards this stance and wishes to seek advice on the implications for the company. For the purpose of determining the impact of the ASB’s proposal, the directors have decided to value current year and future operating lease rentals at their present value. The appropriate interest rate for discounting cash flows to present value is 5% and the current average remaining lease life for operating lease rentals after 30 November 2003 is deemed to be 10 years. Depreciation on land and buildings is 5% per annum and on motor vehicles is 25% per annum with a full year’s charge in the year of acquisition. The rate of corporation tax is 30% and depreciation rates equate to those of capital allowances. Assume that the operating lease agreements commenced on 30 November 2000. Required (a) Discuss the reasons why accounting standard setters are proposing to bring operating leases onto the balance sheets of companies. (7 marks) (b) (i) Show the effect on the Profit and Loss Account for the year ending 30 November 2000 and the Balance Sheet as at 30 November 2000 of Leese capitalising its oper- ating leases; (10 marks) (ii) Discuss the specific impact on key performance ratios as well as the general busi- ness impact of Leese capitalising its operating leases. (8 marks) ACCA, Financial Reporting Environment (UK Stream), December 2000 (25 marks) Chapter 9 · Substance over form and leases 247 9.11 Accounting for leases has been a problematical issue for some years. In 1984, SSAP 21, – Leases and hire purchase contracts was issued. This Accounting Standard requires that lessee companies capitalise leased assets in certain circumstances. The Standard classifies leases as either finance leases or operating leases, depending on the terms of the lease. In December 1999, the Accounting Standards Board (ASB) published a Discussion Paper – Leases: Implementation of a New Approach. Under the recommended approach, at the beginning of a lease the lessee would recog- nise an asset and a liability equivalent to the fair value of the rights and obligations that are conveyed by the lease (usually the present value of the minimum payments required by the lease); thereafter, the accounting for the leased asset and liability would follow the normal requirements for accounting for fixed assets and debt. Expo plc prepares financial statements to 30 September each year. On 1 October 2001, Expo plc leased a fleet of cars for its sales force. There were 50 identical cars in the fleet. Relevant details for each car are as follows: ● Fair value on 1 October 2001 was £10000. ● Lease term is 2 years. ● Estimated residual value of car on 30 September 2003 is £3000. ● Lease rentals are £9000 in total – a payment of £4000 on 1 October 2001 plus two pay- ments of £2500 on 30 September 2002 and 30 September 2003. ● The payments of £2500 increase by £1 for every mile travelled in excess of an agreed annual maximum of 50000 miles per car. ● The lessor is responsible for repair and maintenance of the fleet. Required (a) Explain the factors that led to the issue of the Discussion Paper in 1999. (6 marks) (b) Demonstrate the effect of the leasing arrangement on the profit and loss account of Expo plc for the year ended 30 September 2002 and its balance sheet at 30 September 2002, ● assuming Expo plc follows SSAP 21; (7 marks) ● assuming Expo plc follows the proposals outlined in the Discussion Paper. (7 marks) Note: The discount rate to be used where relevant is 10%. In requirement (b), you should explain exactly where in the profit and loss account and balance sheet the relevant amounts will be reported. CIMA, Financial Reporting – UK Accounting Standards, November 2002 (20 marks) The provision of occupational pension schemes for employees is now common practice in the UK and in many other countries. Expenditure on pensions can be extremely significant, adding 20 per cent, or even more, to the costs of employees’ remuneration. Prior to the issue of SSAP 24 Accounting for Pension Costs, in 1988, the treatment of pension costs in financial statements was subject to very little regulation through either statute law or professional guidance. The result was that, in general, the financial state- ments failed to disclose a realistic figure for the costs of employing staff in that they did not indicate the actual costs of the pension and, accordingly, balance sheets often failed to dis- close the liability that the company faced in discharging its obligations. SSAP 24 was a major step forward in bringing some degree of order to what had been a very disorganised field of accounting activity. Despite, or possibly in part because of, the pioneering nature of SSAP 24, many com- mentators believed that it suffered from a number of conceptual weaknesses and allowed reporting entities too much scope. However it took a long time to bring forward an improved standard. It was only after many years’ deliberation that the ASB published FRED 20 Retirement Benefits, in 1999, and it was not until November 2000 that the resulting stan- dard, FRS 17 was published. That is not the end of the story because, for reasons we will explore in this chapter, FRS 17 has proved to be extremely controversial and the ASB has now decided that it will not be implemented in full until 2005. We will therefore need to deal in some detail with both standards in this chapter. Thus in this chapter we will cover: ● SSAP 24 Accounting for Pension Costs (1988) ● FRS 17 Retirement Benefits (2000) ● IAS 19 (revised) Employee Benefits (revised 2000) ● FRED (unnumbered) Amendment to FRS 17 (2002) Introduction We think it would be helpful if we started by describing the main types of pension schemes that are to be found and, at the same time, explaining some of the terms which have to be understood if the reader is to make sense of the rest of the chapter. 1 Funded or unfunded: In the case of the funded scheme, contributions are paid into a sep- arate fund that is usually administered by trustees who invest the contributions and meet the pension commitments. The contributions are invested in a portfolio of property and/or securities either directly or indirectly by the purchase of insurance policies. In unfunded schemes, contributions are not placed in a separate fund but are reinvested in Pension costs chapter 10 overview Chapter 10 · Pension costs 249 the employer’s business and pensions are subsequently paid on a ‘pay-as-you-go’ basis. An unfunded pension scheme is obviously the more risky from the point of view of the employees and the vast majority of pension schemes in the UK are funded. 2 Defined benefits and defined contribution scheme: In defined contribution schemes, the contributions are determined and the employees receive pensions on the basis of what- ever amounts are available from those contributions and the returns earned from their investment. The risks in such a scheme fall entirely upon the shoulders of the employees. Such a scheme poses few problems for the accountant. The amount to be charged as the cost of providing pensions is clearly determinable as the amount payable to the scheme by the employer in respect of a particular year. Under a defined benefit scheme the retirement benefits are determined, sometimes on the basis of average salary over the employee’s period of service, but more often on the basis of salary in the final year or years before retirement. For such a scheme the cost of pensions in a particular year is, as we shall see, much more difficult to determine. It depends not only upon the contribution payable in respect of a year but also upon the pensions that will be paid in the future. The pensions payable depend on such factors as the future rate of increase in wages and salaries, the number of staff leaving the scheme before retirement and the life expectancy of pensioners and, where relevant, their depen- dants. In addition, the cost in the year of providing future pensions depends upon the rate of return to be earned on contributions and reinvested receipts. It is the need to take a very long-term view in the face of great uncertainties that makes accounting for defined benefit schemes such an interesting and difficult problem for the accountant. Fortunately for many employees, but perhaps unfortunately for accountants, most UK pension schemes, certainly those of major employers, have been of the defined benefit variety. However, in recent years, a large number of major employers have closed down their defined benefits schemes to new employees and replaced them with defined contri- bution schemes. 3 Contributory or non-contributory : Some schemes are contributory, where the employees and the employer share the cost, while others are non-contributory, where the whole cost falls on the employer. The issues We will in this chapter concentrate on funded schemes where the assets are held by the trustees of the pension fund on whom falls the liability of paying the actual pension. Pension schemes are not normally subsidiaries, or quasi-subsidiaries, and it is not, therefore, appro- priate to consolidate the scheme into the employer’s financial statements. However, a pension scheme can give rise to assets and liabilities of the employer but only to the extent to which the employer is entitled to benefit from any surplus or has a legal or constructive obligation to make good any deficit. The tasks that have to be performed are: ● determine the amount that must be paid into the pension fund each year in order to allow it to pay the promised pensions, this is sometimes called the regular contribution; ● measure the assets and liabilities of the fund; ● decide how any difference between the assets and liabilities should be reflected in the financial statements. 250 Part 2 · Financial reporting in practice Pensions involve, by their nature, long-term issues including such things as life expectancy. Thus actuaries play a key part in assessing the regular contribution and in valuing the liabil- ities, although their role in valuing assets will be of less significance when the provisions of FRS 17 are applied in full. We will illustrate the issues involved and the approach that might be taken by the actuary by describing a very simple scheme involving only one employee. Let us suppose that at the inception of the scheme the sole employee, Mac, is aged 41 and is due to retire in 24 years’ time at 65. It is currently estimated that his life expectancy on his date of retirement will be 15 years. The actuarial calculations might proceed as follows: Present salary £20 000 Assume that Mac’s salary will increase by 6% per year Hence, salary on retirement = £20 000 (1.06) 24 ≈ £81 000. If, on retirement, a pension of half final salary is payable, the fund will need to be sufficient to pay £40 500 per annum for 15 years. Assuming, for simplicity, that the retirement pension will be paid at the end of each year and that it is expected that the assets in the fund will earn 8 per cent per annum for the period following retirement, the capital value of the fund at retirement age will need to be £346 660. 1 If we assume that, in the period until retirement, the annual return on investments is only 7 per cent, then 13 per cent of the staff member’s salary will need to be paid into the fund. 2 Actuarial gains and losses Now let us see how things can go wrong, or to be more precise, how things might change. Few, if any, pension funds put all their investments in fixed-interest securities and so the return earned will probably not be 7 per cent. If the assets in, say, five years are worth more than the actuary had expected, how should that gain be treated? Should the surplus be cred- ited to the profit and loss account immediately or over some future period? A different question is whether the difference between the expected and actual value of the assets should be returned to the employer immediately or used to reduce the future regular payments. There may also be changes in the actuarial assumptions. Actuarial science is based on averages and people are, on average, living longer. Thus, suppose that five years into the scheme, the actuary revises his estimate of Mac’s life expectancy and now expects that he will live for 18 years after retirement rather than 15. The fund will not be sufficient to pay the expected required pension, so what should be done? Should the extra cost be charged to the current profit and loss account immediately or spread over some future period? A different 1 On the date of retirement the required balance on the fund x is given by: x = £40 500∑ 15 i =1 (1.08) –i = £346 660 or x = £40 500 a 15 at I = 0.08 2 Let y be the required fraction of the annual salary which needs to be paid into the fund, then £346 660 = y £20 000∑ 24 i =1 (1.06) i (1.07) 24–i from which y = 0.13. ٘ Chapter 10 · Pension costs 251 question concerns whether the employer should immediately pay the extra required or simply increase the regular payments to reflect the new assumption. The above are simple examples of what are termed actuarial gains and losses and as we shall see SSAP 24 and FRS 17 take very different lines as to how they should be treated. Va luation of pension fund assets and liabilities There are basically two ways of measuring pension fund assets: the actuarial approach (the basis underlying SSAP 24) and the market approach which is the one most commonly used in countries other than the United Kingdom and is the method specified in both FRS 17 and IAS 19 Employee Benefits (revised 1998). The actuarial approach measures both the obligations of the fund and the assets of the fund by reference to the present values of the expected cash flows. In contrast, the market approach, as the name implies, values the assets by reference to their current market values while, in theory at least, the liabilities would be measured by the price that would have to be paid to purchase appropriate deferred annuities. These two methods are obviously not unconnected; for example, a change in the market’s view as to long-term interest rates will affect the actuary’s calculations of present values, the current value of investments and, in particular, the market value of deferred annuities. But in the short term, there may be con- siderable variations due to the short-term market fluctuations. As we shall see, those who would advocate a market approach recognise that it is rarely possible to identify market values against which the obligations of the pension fund can be measured. Thus it is accepted that the fund’s liability will have to be based on the present value of the expected pension payments but that still leaves open the choice of interest rate. Traditionally, the actuarial approach discounted the future pension payments at the same rate as that used to estimate the return on assets. An alternative approach, which is more in tune with the market approach, is to use a rate of interest that reflects the time value of money plus a risk premium relating not to the risks associated with the returns on the assets but to the risk that the employer will not be able to meet its obligations, see p. 262. SSAP 24 and FRS 17– the differences in outline We will look at the differences between SSAP 24 and FRS 17 in more depth after we have properly introduced the two standards but readers will find it helpful, before examining SSAP 24, to be aware of the major differences between the two approaches. SSAP 24 focuses on the profit and loss account and is primarily concerned with matching revenue and expenses even if this results in some rather unsatisfactory estimates of assets and liabilities. Its stated objective is to require ‘the employer to recognise the cost of providing pensions on a systematic and rational basis over the period during which he benefits from the employees’ services’. 3 No mention here of the reporting of assets and liabilities. In contrast, FRS 17 takes a much more ‘balance sheet approach’ and seeks to ensure that the fair values of the pension fund’s assets and liabilities are the bases for determining whether the employer has an obligation to the fund or the fund has an obligation to the employer. Specifically the objectives of FRS 17 are to ensure that: 3 SSAP 24, Para. 16. 252 Part 2 · Financial reporting in practice a. financial statements reflect at fair value the assets and liabilities arising from an employer’s retirement benefit obligations and any related funding; b. the operating costs of providing retirement benefits to employees are recognised in the accounting period(s) in which the benefits are earned by the employees, and the related finance costs and any other changes in value of the assets and liabilities are recognised in the accounting periods in which they arise; and c. the financial statements contain adequate disclosure of the cost of providing retirement benefits and the related gains, losses, assets and liabilities. 4 The main consequences of the very different approaches taken by FRS 17 and SSAP 24 are: ● SSAP 24 allows certain types of differences, called experience differences, to be written off over the remaining service life of the current employees while FRS 17 calls for immediate recognition in the financial statements. ● SSAP 24 is based on the actuarial method of valuation, for both pension fund assets and liabilities, while FRS 17 is firmly rooted in the market approach. ● FRS 17 is much more prescriptive about the methods that should be used. In addition, in line with the principle that users should be provided with more ‘narrative’ information that would enable them more easily to appreciate the information provided in the financial statements, the disclosure requirements of FRS 17 are more extensive than the not inconsiderable requirements of SSAP 24. SSAP 24 Accounting for Pension Costs The accounting principles underlying SSAP 24 Prior to the adoption of SSAP 24 many companies simply showed their contribution to the pension scheme as the pension cost for the period. The contribution may have been affected by factors other than those relating solely to the needs of the fund. Employers might, for example, increase the contribution for a year or for a limited period, with a view to reducing contributions in the future. Conversely, employers have in periods of financial stringency reduced their contributions. Such actions may have been effective in achieving the desired ability to manipulate the levels of reported profit, but they did little to help users of financial statements assess the total costs of employment for the period. The accounting objective set by SSAP 24 was to require employing companies to recog- nise the cost of providing pensions on a systematic and rational basis over the period in which they benefit from the services of their employees and to recognise that, in many cases, this cost may well not be equal to the contribution made to the pension scheme in any period. 5 Thus, in a very simple world, the actuary’s task is to estimate what proportion of pension- able pay would have to be paid into the scheme each year to pay for the pensions, and the whole of this (in the case of a non-contributory scheme) or a part of this (in a contributory scheme) would represent the cost to the employer. This cost can be regarded as the regular pension cost. 4 FRS 17, Para. 1. 5 Since tax relief is based on the contributions paid to the scheme the difference has deferred tax implications. See Chapter 12. Chapter 10 · Pension costs 253 But we do not live in such a state of simplicity and both the world and employers change their minds. The world changes its mind through altered interest rates, changes in the level of earnings and by allowing people to die other than when predicted by the actuary. Employers can also change their minds (or have their minds changed for them) and vary the conditions under which pensions are paid. Thus, there will be variations to the regular cost and a large part of SSAP 24 is devoted to discussing how to account for these variations. Variations from the regular cost may be due to the following: (a) the results of the world not being as the actuary expected it to be when he or she last worked out the regular cost – experience surpluses or deficiencies; (b) changes in actuarial assumptions and methods and retroactive changes in benefits or conditions of membership; (c) discretionary pensions increases. Bases of the actuarial methods In general SSAP 24 does not specify how the actuary should determine the actuarial value of pension fund assets and liabilities. Much is left for the actuary to decide: The selection of the actuarial method and assumptions to be used in assessing the pension cost of a defined benefit scheme is a matter of judgement for the actuary in consultation with his client, taking account of the circumstances of the specific company and its work force. (Para.18) It would perhaps not be too great an exaggeration to say that, as far as SSAP 24 is concerned, it is a matter of ‘anything actuarial goes’. FRS 17 is far more prescriptive and it will be con- venient to defer our discussion of some of the main actuarial methods used to that section of the chapter in which we discuss FRS 17 in more detail. Experience surpluses or deficiencies In deciding whether the fund is in balance, that is whether it has sufficient assets to pay the required pensions given all the necessary assumptions about salary increases, rates of return and the like, the pension fund’s assets are compared with its liabilities. Part of any difference may be due to changes in policy and assumptions about the future; these will be dealt with in the reassessment of the regular costs but, as noted above, part of the difference will, in all likelihood, be because some of the assumptions made at the last review proved to be incorrect, for example the rate of wage and salary increases might have been under- or over- estimated. This part of the difference is known as experience surpluses or deficiencies, which are defined in SSAP 24 as follows: An experience surplus or deficiency is that part of the excess or deficiency of the actuarial value of the assets over the actuarial value of the liabilities, on the basis of the valuation method used, which arises because events have not coincided with the actuarial assump- tions made for the last valuation. (Para. 63) The definition refers, not to the market value of the assets, but to their ‘actuarial value’, which is a value based on assumptions about future cash flows and interest rates and which may well, from time to time, differ significantly from the current market value. As we 254 Part 2 · Financial reporting in practice explained earlier the use of actuarial rather than market values was a controversial issue and FRS 17 takes a very different approach. But at this stage we will concentrate on the treatment of experience surpluses and defi- ciencies. Should they be credited (or charged) to the past, the current year or the future? SSAP 24 specifies that, with certain exceptions to which we will refer later, material ex- perience deficiencies, and surpluses, should be dealt with by adjusting current and future costs and not by immediately expensing (or crediting) the amount. In accordance with the main accounting objective of SSAP 24, the normal period over which the effect of the defi- ciency or surplus should be spread is the expected remaining service life of the current employees in the scheme after making suitable allowances for future withdrawals, or the average remaining service lives of the current membership. There are three exceptions to the general rule: (a) Where there is a significant reduction in the number of employees covered by the scheme (see below). (b) Where prudence requires a material deficiency to be made up over a shorter period. This exception is strictly limited to cases where a significant additional payment has to be paid into the scheme arising from a major transaction or event outside the actuarial assumptions and normal running of the scheme; a possible example is the consequence of a major mismanagement of the assets of the pension scheme. The standard does not specify the period over which the additional charge should be spread; it merely allows a shorter period than would otherwise be required. (c) Where a refund is made to employers subject to deduction of tax within the provisions of the Finance Act 1986, or similar legislation. In such cases the employer may (not must) depart from the normal spreading rule and recognise the refund in the period in which it occurs. The exception arising from a significant reduction of employees merits further comment. There have been many instances in recent years where reorganisation schemes have resulted in significant redundancies. These have often led to large surpluses in the pension funds, with the result that future contributions are reduced or eliminated for a period (a ‘contribu- tion holiday’), or contributions are refunded. In such instances, the benefit should not be spread over the lives of the remaining work force but instead recognised in the periods in which the benefits are received. They should, in general, not be anticipated in the sense of taking credit immediately the facts are known, but should be recognised on a year-by-year basis. But to this rule there is an exception, where the redundancies are related to a sale or termination of an operation, for in such a case FRS 3 Reporting Financial Performance must be followed. (SSAP 24, which of course predates FRS 3, refers to SSAP 6 in this context.) It may not be appropriate to defer recogni- tion of a pension cost or credit, because FRS 3 requires that provisions relating to the sale or termination of an operation be made after taking into account future profits of the operation or on the disposal of the assets. Changes in actuarial assumptions and methods and retroactive changes to the scheme The effect of changes in the assumptions and methods used by the actuary should be treated in the same way as experience deficits and surpluses – they should be spread over the period of the expected remaining service lives of the current employees. [...]... (a) The appropriate discount rate for the scheme was 10% in 20X1 and 20X2 but fell to 8% for the rest of the period (b) That the contributions to the pension fund are made at the end of each year (c) The probability of Jane not completing four years of service is so low that it may be ignored (d) That the expected rate of return on assets is 12% for the whole of the period but the fair values of the. .. to the financial statements 267 268 Part 2 · Financial reporting in practice The information that has to be disclosed includes the following Details of the scheme ● ● ● ● the nature of the scheme, i.e that it is a defined benefit scheme; the date of the most recent full actuarial valuation and, if it be the case, a statement that the actuary is an officer or employee of the entity; the contribution for. .. Payments (2002) The number of exposure drafts in the list indicates the extent to which a number of the aspects covered in the chapter are, at the time of writing, part of the convergence programme Part A Reconfiguring the financial statements Reporting financial performance Financial statements report on past performance but they are also used as an aid in the prediction of future performance Prediction... but we will first outline the relevant provisions of the standard 10 11 The reason why the calculation is based on the figures for the following year rather than the current year is that the method was developed by actuaries to determine the regular cost for the future period FRS 17, Appendix IV, Para 21 Chapter 10 · Pension costs First the standard, at Para 50, analyses the costs as between periodic... of the present value of the scheme liabilities at the balance sheet date; the total actuarial gain or loss expressed as an amount and as a percentage of the present value of the scheme liabilities at the balance sheet date Other notes ● ● the movement in the surplus or deficit during the year; an analysis of the reserves to show the amount relating to the defined benefit asset or liability, net of the. .. disclosure of information in the notes to the financial statements should be implemented on the following timetable.17 Periods ending on or after Provisions 22 June 2001 Details of the scheme Assumptions Fair values and expected returns on assets Movement of the surplus 22 June 2002 The information relating to the performance statements Information relating to the actuarial loss or gain for the current... practice that year.10 There is an alternative actuarial approach known as the attained age method where the contribution rate is calculated by dividing the present value of the benefits which will accrue to the members of the scheme after the date of the valuation, as with the projected unit method, by the present value of the total projected earnings of the members of the scheme The attained age method... to ensure that the financial statements provide users with more relevant and helpful information The approach that has now been adopted is well described in the Statement of Principles: The ability to use information in financial statements to make assessments is enhanced by the way in which it is presented For example, the predictive value of information provided by the financial performance statement... for the current period and any agreed future contributions; for closed schemes, and for those in which the age profile of the active membership is rising significantly, the fact that under the projected unit method the current service cost will increase as the members of the scheme approach retirement Assumptions The major assumptions employed in the valuation of the pension scheme must be disclosed These... accounting for pension costs but, given the pioneering aspects of the standard, there was a need for a reasonably early review of the lessons learnt from its implementation The review did not, however, come quickly, for the first of the two discussion papers relating to review, Pension costs in the employer’s financial statements, was not published until 1995 The second paper, Aspects of accounting for pension . (usually the present value of the minimum payments required by the lease); thereafter, the accounting for the leased asset and liability would follow the normal requirements for accounting for fixed. (1.08) –i = £3 46 660 or x = £40 500 a 15 at I = 0.08 2 Let y be the required fraction of the annual salary which needs to be paid into the fund, then £3 46 660 = y £20 000∑ 24 i =1 (1. 06) i (1.07) 24–i from. standard. 10 The reason why the calculation is based on the figures for the following year rather than the current year is that the method was developed by actuaries to determine the regular cost for the