3.4.1 Distinction between defined contribution plans and defined benefit plans

Section 28 draws the natural, but important, distinction between defined contribution plans and defined benefit plans. The determination is made based on the economic substance of the plan as derived from its principal terms and conditions. The approach it takes is to define defined contribution plans, with the defined benefit plans being the default category. These definitions are stated at 3.1 above. Guidance is also provided explaining how to apply the requirements to insured benefits, multi-employer plans (including state plans) and group plans.

Defined contribution plans are post-employment benefit plans under which an entity pays fixed contributions into a separate entity (a fund) and has no legal or constructive obligation to pay further contributions or to make direct benefit payments to employees if the fund does not hold sufficient assets to pay all the employee benefits relating to employee service in the current or prior periods. Thus, the amount of the post-employment benefits received by the employee is determined by the amount of contributions paid by an entity (and perhaps also the employee) to a post-employment benefit plan or to an insurer, together with investment returns arising from the contributions. [FRS 102.28.10(a)].

Defined benefit plans are post-employment benefit plans other than defined contribution plans. Under defined benefit plans, the entity's obligation is to provide the agreed benefits to current and former employees, and actuarial risk (that benefits will cost more or less than expected) and investment risk (that returns on assets set aside to fund the benefits will differ from expectations) are borne, in substance, by the entity. If actuarial or investment experience is worse than expected, the entity's obligation may be increased, and vice versa if actuarial or investment experience is better than expected. [FRS 102.28.10(b)].

The most significant difference between defined contribution and defined benefit plans is that, under a defined benefit plan some actuarial risk or investment risk falls on the employer. Consequently because the employer is in substance underwriting the actuarial and investment risks associated with the plan, the expense recognised for a defined benefit plan is not necessarily the amount of the contributions due for the period. In contrast the benefits received by the employee from a defined contribution plan are determined by contributions paid (both by the employer and employee) to the benefit plan or insurance company, together with investment returns, and therefore actuarial and investment risk fall in substance on the employee. Hence the expense of a defined contribution plan is the contributions due for the period from the employer.

Under defined benefit plans the employer's obligation is not limited to the amount that it agrees to contribute to the fund. Rather, the employer is obliged (legally or constructively) to provide the agreed benefits to current and former employees.

An employer's obligation may be increased by a constructive obligation such as the historical practice of discretionary pension increases going beyond the formal terms of the plan or statutory minimum increases.

3.4.2 Multi-employer and state plans

Multi-employer plans, other than state plans, are defined contribution plans or defined benefit plans that: [FRS 102 Appendix I]

• pool assets contributed by various entities that are not under common control; and
• use those assets to provide benefits to employees of more than one entity, on the basis that contribution and benefit levels are determined without regard to the identity of the entity that employs the employees.

In the UK these are typically industry wide schemes. They exclude group administration plans, which simply pool the assets of more than one employer under common control, for investment purposes and the reduction of administrative and investment costs, but keep the claims of different employers segregated for the sole benefit of their own employees. The accounting for these plans is dealt with at 3.10 below.

A multi-employer plan should be classified as either a defined contribution plan or a defined benefit plan in accordance with its terms, including any constructive obligation that goes beyond the formal terms of the plan, in the normal way (see 3.4.1 above). However, if sufficient information is not available to use defined benefit accounting for a multi-employer plan that is a defined benefit plan, the entity should account for the plan as if it were a defined contribution plan and make relevant disclosures (see 3.12.3 below). [FRS 102.28.11].

Where an entity participates in a defined benefit plan which is a multi-employer plan, and this plan is accounted for as a defined contribution plan, if the entity has entered into an agreement with the multi-employer plan that determines how the entity will fund a deficit, the entity should recognise a liability for the contributions payable that arise from this agreement (to the extent they are related to the deficit). The resulting expense is recognised in profit or loss. [FRS 102.28.11A].

In the UK the Pensions Act 2004 has required that where a defined benefit plan is underfunded (i.e. it does not have sufficient assets to cover its obligations), the trustees must establish a recovery plan which confirms how the Statutory Funding Objective must be met and the period over which this is to be met. This recovery plan will detail the contributions to be made by each participating employer. From this agreement it may be possible to establish sufficient information to allow defined benefit accounting as the schedule of deficit funding contributions provides information on how the deficit will be funded by each of the participating employers, and hence their share of assets and liabilities.

A state plan is an employee benefit plan established by legislation to cover all entities (or all other entities in a particular category, for example a specific industry) and operated by national or local government or by another body (for example an autonomous agency created specifically for this purpose) which is not subject to control or influence by the reporting entity. [FRS 102 Appendix I]. A state plan should be accounted for in the same way as a multi-employer plan. [FRS 102.28.11].

Neither FRS 102 nor IAS 19 address the accounting treatment required if sufficient information becomes available for a multi-employer plan which has previously been accounted for as a defined contribution scheme. There are two possible approaches to this:

• record an immediate charge/credit to profit and loss equal to the deficit/surplus; or
• record an actuarial gain or loss in other comprehensive income.

It can be argued that the first approach is correct as starting defined benefit accounting is akin to introducing a new scheme and, as discussed in 3.6.6 below, plan introductions result in the corresponding amount of any increase or decrease in a liability being taken to profit and loss.

On the other hand it could be argued that defined contribution accounting was the best estimate for what the defined benefit accounting should have been given the information available, and the emergence of new information is a change in estimate and therefore recorded as a remeasurement.

Given the lack of guidance in either FRS 102 or IAS 19 we believe that either approach would be acceptable as long as it is applied consistently.

3.4.3 Insured benefits

One factor that can complicate making the distinction between defined benefit and defined contribution plans is the use of external insurers.

Section 28 helps users to make this distinction by stating that where insurance premiums are paid to fund post-employment benefits, the employer should treat the plan as a defined contribution plan unless it has (either directly or indirectly through the plan) a legal or constructive obligation to:

• pay the employee benefits directly when they fall due; or
• pay further amounts if the insurer does not pay all future employee benefits relating to employee service in the current and prior periods.

If a plan involving insurance is determined to be a defined benefit plan, the insurance policies will represent plan assets which are discussed at 3.6.3 below.

If the employer has retained such a legal or constructive obligation it should treat the plan as a defined benefit plan. A constructive obligation could arise indirectly through the plan, through the mechanism for setting future premiums, or through a related party relationship with the insurer. [FRS 102.28.12].

Section 28 provides limited guidance on how to account for the insurance policy, other than requiring that if a plan asset is an insurance policy which exactly matches the timing and amount of some of the benefits payable under the plan, the fair value of the asset is deemed to be the present value of the related obligation (see 3.6.3 below).

Qualifying insurance policies are defined as an insurance policy issued by an insurer that is not a related party of the reporting entity, if the proceeds of the policy: [FRS 102 Appendix I]

• can be used only to pay or fund employee benefits under a defined benefit plan; and
• are not available to the reporting entity's own creditors (even in bankruptcy) and cannot be paid to the reporting entity unless either;
  • the proceeds represent surplus assets that are not needed for the policy to meet all the related employee benefit obligations; or
  • the proceeds are returned to the reporting entity to reimburse it for employee benefits already paid.

Qualifying insurance policies are accounted for as plan assets, however Section 28 provides no guidance on accounting for other insurance policies which do not meet the definition of a qualifying insurance policy. Under IAS 19 these are accounted for as reimbursement rights (providing the criteria for recognition as reimbursement rights are met). See 3.6.4 below.

3.5.1 General

Accounting for defined contribution plans is straightforward under Section 28 as a reporting entity's obligation for each period is determined by the amounts to be contributed for that period. Consequently, no actuarial assumptions are required to be made in order to measure the obligation or the expense and there is no possibility of any actuarial gain or loss to the reporting entity. Moreover, the obligations are measured on an undiscounted basis, except where they are not expected to be settled wholly before twelve months after the end of the period in which the employees render the related service. Where discounting is required, the discount rate should be determined in the same way as for defined benefit plans, which is discussed at 3.6.2.B below. [FRS 102.28.13A]. In general, though, it would seem unlikely for a defined contribution scheme to be structured with such a long delay between the employee service and the employer contribution.

Section 28 requires that, when an employee has rendered service during a period, the employer should recognise the contribution payable to a defined contribution plan in exchange for that service: [FRS 102.28.13]

• as a liability, after deducting any contribution already paid. If the contribution already paid exceeds the contribution due for service before the end of the reporting period, the excess should be recognised as an asset (prepaid expense) to the extent that the prepayment will lead to, for example, a reduction in future payments or a cash refund; and
• as an expense, unless another section of the FRS requires the cost to be recognised as part of the cost of an asset such as inventories or property, plant and equipment. See Chapters 11 and 15 respectively.

As discussed at 3.4.2 above, Section 28 requires multi-employer defined benefit plans to be accounted for as defined contribution plans in certain circumstances. It is clear that contractual arrangements to make contributions to fund a deficit should be fully provided for (on a discounted basis) even if they are to be paid over an extended period. The unwinding of any discount is recognised as a finance cost in profit or loss. [FRS 102.18.13A].

3.6.1 Recognition

In applying the general recognition principle (see 3.2 above) to defined benefit plans, an entity is required to recognise: [FRS 102.28.14]

• a liability for its obligations under the defied benefit plans net of plan assets – its ‘net defined benefit liability’; and
• the change in that liability during the period as the cost of its defined benefit plans during the period.

Guidance on how to account for these is covered below.

3.6.2 Measurement of plan liabilities

An entity is required to measure the net defined benefit liability for its obligations under defined benefit plans at the net total of the following amounts: [FRS 102.28.15]

• the present value of its obligations under defined benefit plans (its defined benefit obligation) at the reporting date; minus
• the fair value at the reporting date of the plan assets (if any) out of which the obligations are to be settled. If the asset is an insurance policy that exactly matches the amount and timing of some or all of the benefits payable under the plan, the fair value of the asset is deemed to be the present value of the related obligation. See 3.6.3 below.

3.6.3 Measurement of plan assets

Plan assets are required to be measured at fair value at the reporting date, except that if an asset is an insurance policy that exactly matches the amount and timing of some or all of the benefits payable under the plan, the fair value of the asset is deemed to be the present value of the related obligation. The Appendix to Section 2 – Concepts and Pervasive Principles – provides guidance on determining the fair value of those plan assets. See Chapter 4 at 3.13. [FRS 102.28.15(b)].

Plan assets are defined as comprising: [FRS 102 Appendix I]

• assets held by a long-term employee benefit fund; and
• qualifying insurance policies.

Assets held by a long-term employee benefit fund are an asset (other than non-transferable financial instruments issued by the reporting entity) that: [FRS 102 Appendix I]

• is held by an entity (a fund) that is legally separate from the reporting entity and exists solely to pay or fund employee benefits; and
• is available to be used only to pay or fund employee benefits, is not available to the reporting entity's own creditors (even in bankruptcy) and cannot be returned to the reporting entity, unless either:
  • the remaining assets of the fund are sufficient to meet all the related employee benefit obligations of the plan or the reporting entity; or
  • the assets are returned to the reporting entity to reimburse it for employee benefits already paid.

A qualifying insurance policy is defined at 3.4.3 above. A footnote to the definition clarifies that an insurance policy is not necessarily an insurance contract.

3.6.4 Reimbursement rights

Some employers may have in place arrangements to fund defined benefit obligations which do not meet the definition of qualifying insurance policies, but which do provide for another party to reimburse some or all of the expenditure required to settle a defined benefit obligation. In such cases, the expected receipts under the arrangement are not classified as plan assets.

Section 28 states that when an entity is virtually certain that another party will reimburse some or all of the expenditure required to settle a defined benefit obligation, the entity should recognise its right to the reimbursement as a separate asset, which should be treated the same way as other plan assets. The cost of a defined benefit plan recognised in accordance with paragraph 28.23 (i.e. service cost, net interest and the cost of plan introductions, benefit changes, curtailments and settlements) may be presented net of the amounts relating to changes in the carrying amount of the right to reimbursement. [FRS 102.28.28].

3.6.5 Longevity swaps

A longevity swap transfers, from a pension scheme to an external party, the risk of members living longer (or shorter) than expected.

Longevity swaps are not specifically dealt with in FRS 102. Therefore, we would expect users to turn to discussions held by the Interpretations Committee on the subject.

The Interpretations Committee was asked in August 2014 to clarify the measurement of longevity swaps held by an entity's defined benefit plan, and in particular discussed whether an entity should:

1. account for a longevity swap as a single instrument and measure its fair value as part of plan assets (discussed at 3.6.3 above) with changes in fair value being recorded in other comprehensive income; or
2. split longevity swaps into two components.

The two components in (b) would be a ‘fixed leg’ and a ‘variable leg’. As the variable leg exactly matches some or all of the defined benefit obligation it would represent a qualifying insurance policy and be measured at the present value of the related obligation (discussed at 3.4.3 above). The fixed leg comprises a series of fixed payments to be made in return for the receipt of the variable leg receipts. In other words, a longevity swap could be considered to be economically equivalent to the purchase of qualifying insurance (commonly called a ‘buy-in’) but with the premium paid over a period of time rather than at inception.

The likely effect of disaggregating a longevity swap in this way would be to recognise a loss at inception very similar to that for a buy-in. Conversely, considering the swap as a single instrument measured at fair value would likely have no initial effect as typically its fair value would be zero (that is, a premium neither received nor paid).

If the two legs were to be considered separately, an appropriate accounting policy would need to be applied to the fixed leg. Two possibilities were discussed by the Interpretations Committee as follows. The fixed leg would initially be measured at fair value with subsequent accounting either:

• if treated as part of plan assets, at fair value with interest reported in profit or loss and other changes being included in other comprehensive income (discussed at 3.6.3 above); or
• if a financial liability at amortised cost using the effective interest rate with interest recognised in profit and loss and no other remeasurements.

The Interpretations Committee noted that when such transactions take place, the predominant practice is to account for a longevity swap as a single instrument and measure it at fair value as part of plan assets.

The Interpretations Committee decided not to add this issue to its agenda as it did not expect diversity to develop in the application of IAS 19.² Given that the Interpretations Committee decided not to add this to its agenda we believe that either of the subsequent accounting options detailed above would be acceptable.

3.6.6 Plan introductions, changes, curtailments and settlements

If a defined benefit plan has been introduced or the benefits have changed in the current period, the entity should increase/(decrease) its net defined benefit liability to reflect the change and recognise the increase/(decrease) as an expense/(income) in profit or loss in the current period. [FRS 102.28.21].

The point in time at which a plan amendment occurs will often be a matter of fact based on the legal entitlements of plan members. Judgement may be required, based on individual facts and circumstances, if the benefits concerned constitute constructive, as opposed to legal, obligations (see 3.6.2.A above).

Sometimes benefit plans are amended in such a way as to allow members a choice, for a limited period, between two or more benefit arrangements. In such cases a plan amendment occurs (and a positive or negative past service cost will be recognised) on the date at which the new arrangement comes into existence (legally or constructively) and not at the later date by which members are required to make their choice. This may mean that the initial accounting for the plan amendment will require estimates to be made of the choices which members will make. However, if it is known, at the time the relevant financial statements are prepared, what choices members have made (for example, because the ‘window’ for making selections closes before the financial statements are authorised for issue) this definitive data would remove the need for estimation. Any subsequent changes in estimates in the following years resulting from the confirmation process would be a change in estimate and recognised as a remeasurement gain or loss.

Where a defined benefit plan has been curtailed (i.e. the benefits or group of covered employees are reduced) or settled (the relevant part of the employer's obligation is completely discharged) in the current period, the defined benefit obligation should be decreased or eliminated and the resulting gain or loss recognised in profit and loss in the current reporting period. [FRS 102.28.21A]. This gain or loss should be disclosed separately as part of the reconciliation of the defined benefit obligation along with the expense/(income) arising from plan introductions and changes. This expense/(income) should be disclosed separately as part of the required reconciliation of the defined benefit obligation. [FRS 102.28.41(f)(iv)]. See 3.12.4 below for further details on disclosure requirements.

An employer may acquire an insurance policy to fund all or some of the employee benefits relating to employee service in the current and prior periods. The acquisition of such a policy is not a settlement if the employer retains a legal or constructive obligation to pay further amounts if the insurer does not pay the employee benefits specified in the insurance policy (referred to as a buy-in arrangement – see 3.6.5 above). However, the acquisition of an insurance policy will mean that the entity has an asset which it needs measure at fair value. As discussed at 3.6.3 above, certain insurance policies are valued at an amount equal to the present value of the defined benefit obligation they match. The cost of buying such a policy will typically greatly exceed its subsequent carrying amount as the discount rate used by the insurance company will be lower than that used in an FRS 102 valuation. This raises the question of how to treat the resultant loss. One view might be that because the loss results from exchanging one plan asset for another it is an actuarial loss and therefore should be recognised in other comprehensive income. Another view is that the loss in substance is very similar to a settlement loss and should be recognised in profit or loss. This might be appropriate where the buy-in was entered into to enable the plan to move to a buy-out (or settlement). In our view, either approach is acceptable if applied consistently and, where material, disclosed. The plan assets and plan liabilities would remain to be recorded on the statement of financial position until such time as the settlement had occurred and the entity no longer had any obligations under the plan.

3.6.7 Restriction on plan assets

In practice, defined benefit pension plans tend to be funded on a more prudent basis than would be the case if the surplus or deficit was measured in accordance with FRS 102. This is due to the discount rate used for funding purposes typically being lower than that specified by Section 28. For this reason an FRS 102 valuation may result in a pension asset (surplus), when for funding purposes there is a deficit. FRS 102 states that if the present value of the defined benefit obligation at the reporting date is less than the fair value of plan assets at that date, the plan has a surplus. It goes on to observe that an entity should recognise a plan surplus as a defined benefit asset only to the extent that it is able to recover the surplus either through reduced contributions in the future or through refunds from the plan. [FRS 102.28.22].

No further explanation is given of the meaning of ‘reduced contributions in the future or through refunds from the plan’. This lack of guidance will require management to exercise judgement in developing and applying an accounting policy to determine the amount of any defined benefit pension surplus that can be recognised. In making such a judgement, management should refer to and consider the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses and the pervasive principles in Section 2 – Concepts and Pervasive Principles (see Chapter 9 at 3.2). Section 2 states that recognition is the process of incorporating in the statement of financial position or statement of comprehensive income an item that meets the definition of an asset, liability, equity, income or expense and satisfies the following criteria: [FRS 102.2.27]

1. it is probable that any future economic benefit associated with the item will flow to or from the entity; and
2. the item has a cost or value that can be measured reliably.

One possible way that an entity may interpret the above is that a defined benefit pension surplus is only recognised when it is probable that the entity will receive a refund or reduction in future contributions (i.e. it meets the definition of an asset in the standard).

In exercising judgement when developing and applying an accounting policy when FRS 102 does not specifically address a transaction, other event or condition, management may also consider the requirements and guidance in EU-adopted IFRS dealing with similar or related issues (see Chapter 9 at 3.2).

Due to the problems encountered in practice in applying the asset ceiling test in IAS 19, the Interpretations Committee issued IFRIC 14 in 2007. IFRIC 14 addresses the issues of:

• when refunds or reductions in future contributions should be regarded as available in accordance with the definition of the asset ceiling in IAS 19.8;
• how a minimum funding requirement might affect the availability of reductions in future contributions; and
• when a minimum funding requirement might give rise to a liability.

FRS 102 does not include the requirements of IFRIC 14. However, paragraph 15A of Section 28 states that ‘[w]here an entity has measured its defined benefit obligation using the projected unit credit method (including the use of appropriate actuarial assumptions), as set out in paragraph 28.18, it should not recognise any additional liabilities to reflect differences from these assumptions and those used for the most recent actuarial valuation of the plan for funding purposes. For the avoidance of doubt, no additional liabilities should be recognised in respect of an agreement with the defined benefit plan to fund a deficit (such as a schedule of contributions).’ [FRS 102.28.15A]. This means that entities turning to IFRIC 14 under the hierarchy in Section 10 should not recognise a liability for a minimum funding requirement.

3.6.8 Tax on defined benefit pension plans

The presentation of income and deferred tax on defined benefit pension schemes along with tax on a pension surplus are discussed in Chapter 26 at 8.4.

3.6.9 Presentation of the net defined benefit liability/asset

FRS 102 requires that an entity present a statement of financial position in accordance with one of the formats prescribed by the Regulations, or using one of the ‘adapted formats’ (see Chapter 6). The Regulations show pension deficits as the first line item in provisions and pension surpluses either in the same place as a pension deficit under Format 1 of the Regulations, or after prepayments and accrued income under Format 2 of the Regulations. The presentation under FRS 17, which was based on an interpretation of company law, could also be used under FRS 102 as it does not conflict with the Companies Act with the exception that any related deferred tax must not be offset against the pension balance. FRS 17 required defined benefit pension assets or liabilities to be presented, net of deferred tax, after accruals and deferred income, but before capital and reserves (see 2.4 above). As a result there is likely to be divergence in practice in the presentation of defined benefit pension surpluses and deficits under FRS 102.

Where the ‘adapted formats’ are used, neither FRS 102 nor IFRS specify where in the statement of financial position a net asset or a net liability in respect of a defined benefit plan should be presented, nor whether such balances should be shown separately on the face of the statement of financial position or only in the notes. This is left to the judgement of the reporting entity, but FRS 102 requires additional line items, headings and subtotals where relevant to an understanding of the entity's financial position. [FRS 102.4.3]. Classification of post-employment benefit assets and liabilities as current or non-current is discussed in Chapter 6 at 5.1.1.D.

The cost of a defined benefit plan would be included within administration expenses in the income statement, and net interest either within interest receivable and similar income or interest payable and similar charges dependent on whether net interest was an income or expense.

Where an entity has more than one defined benefit pension plan it is possible that it may have a plan with a surplus and another with a deficit. As Section 28 does not deal directly with the presentation of pension plans in the statement of financial position, users are required to look to other sections of FRS 102 which deal with the issue. FRS 102 states that an entity should not offset assets and liabilities unless required or permitted by an FRS. We would therefore expect defined benefit pension surpluses and deficits to be presented separately on the face of the statement of financial position. [FRS 102.2.52].

3.6.10 Treatment of defined benefit plans in profit and loss, and other comprehensive income.

Section 28 requires the cost of a defined benefit plan to be recognised as follows:

• the change in the net defined benefit liability arising from employee service rendered during the reporting period in profit or loss;
• net interest on the defined benefit liability during the reporting period in profit of loss (see 3.6.10.A below);
• the cost of plan introductions, benefit changes, curtailments and settlements in profit or loss (see 3.6.6 above); and
• remeasurement of the net defined benefit liability in other comprehensive income (see 3.6.10.B below).

Where another Section of FRS 102 requires part or all of a cost of employee benefits to be recognised as part of the cost of an asset such as inventories or plant, property and equipment that cost is not recognised in profit or loss. See Chapters 11 and 15 respectively. [FRS 102.28.3(b)].

Some defined benefit plans require employees or third parties to contribute to the cost of the plan. Contributions by employees reduce the cost of benefits to the entity. [FRS 102.28.23].

3.8.1 Meaning of other long-term benefits

Other long-term employee benefits include items such as the following, if they are not expected to be wholly settled within 12 months after the end of the annual reporting period in which the employees have rendered the related service: [FRS 102.28.29]

• long-term paid absences such as long-service or sabbatical leave;
• other long-service benefits;
• long-term disability benefits;
• profit-sharing and bonuses; and
• deferred remuneration.

3.8.2 Recognition and measurement

For other long-term benefits a simplified version of the accounting treatment required in respect of defined benefit plans (which is discussed in detail at 3.6 above) is required. The amount recognised as a liability for other long-term employee benefits should be the net total, at the end of the reporting period, of the present value of the defined benefit obligation and the fair value of plan assets (if any) out of which the obligations are to be settled directly. The net change in the liability during the period should be recognised in profit or loss, except to the extent that FRS 102 requires or permits their inclusion in the cost of an asset, such as inventory or property, plant and equipment. [FRS 102.28.30]. See Chapters 11 and 15.

In other words, all assets, liabilities, income and expenditure relating to such benefits should be accounted for in the same way as those relating to a defined benefit plan (see 3.6 above), except that remeasurements are recognised in profit or loss (and not in other comprehensive income).

A simple example of a long-term employee benefit would be where an employee receives a bonus of £100,000 in 5 years' time provided he/she continues to stay employed by the entity for this period. This cost will be spread over the 5 year period using the attribution of benefit period method described at 3.6.2.C above.

3.8.3 Long-term benefits contingent on a future event

It may be the case that a long-term benefit becomes payable only on the occurrence of an uncertain future event, for example an initial public offering of an entity's shares (IPO) or an exit event. Such events are binary in nature and would result in payment either to no employees with entitlements under the plan or to all such employees.

As discussed at 3.8.2 above, the projected unit credit method is applied to long-term employee benefits, [FRS 102.28.30], however the key question that arises is whether the accounting should reflect the single best estimate of the outcome; or, the expected value – that is, a weighted average of possible outcomes. Paragraph 26 of Section 28 states that ‘the probability that the specified event will occur affects the measurement of the obligation, but does not determine whether the obligation exists’. This sets out the requirement that probability affects measurement. The manner in which probability affects measurement is dealt with in the definition of actuarial assumptions which requires that these are a best estimate of the ultimate cost of providing benefits. [FRS 102 Appendix A]. Accordingly, we believe that the best estimate of the outcome of the uncertain event should be used when accounting for long-term employee benefits where the outcome is binary. Therefore if an IPO (or exit event) is not probable the liability should be measured at nil. When the IPO (or exit event) is or becomes probable (that is, more likely than not) the actuarial assumption used in applying the projected unit credit method should reflect the full benefits which would be payable upon the occurrence of the event.

3.12.1 Disclosures about short-term employee benefits

Section 28 does not require any specific disclosures about short-term employee benefits, [FRS 102.28.39], but preparers of financial statements should also consider the requirements of Section 33 – Related Party Disclosures – discussed in Chapter 30 at 3.2.

3.12.2 Disclosures about other long-term benefits

For each category of other long-term benefits that it provides to its employees, an entity should disclose the nature of the benefit, the amount of its obligation and the extent of funding at the reporting date. [FRS 102.28.42].

3.12.3 Disclosures about defined contribution plans

An entity is required to disclose the amount recognised in profit or loss as an expense for defined contribution plans. [FRS 102.28.40].

When a multi-employer plan is treated as a defined contribution plan because sufficient information is not available to use defined benefit accounting (see 3.4.2 above) entities should: [FRS 102.28.40A]

• disclose the fact that it is a defined benefit plan and the reason why it is being accounted for as a defined contribution plan, along with any available information about the plan's surplus or deficit and the implications, if any, for the entity;
• include a description of the extent to which the entity can be liable to the plan for other entities' obligations under the terms and conditions of the multi-employer plan; and
• disclose how any liability recognised as a result of the entity entering into an agreement to fund a deficit (see 3.4.2 above) has been determined.

3.12.4 Disclosures about defined benefit plans

As discussed at 3.6.9 above, FRS 102 requires that the statement of financial performance and income statement should be presented in accordance with The Large and Medium sized companies and Groups (Accounts and Reports) Regulations 2008 or the ‘adapted formats’.

3.12.5 Disclosures about termination benefits

For each category of termination benefits provided to employees the following should be disclosed: [FRS 102.28.43]

• the nature of the benefit;
• the accounting policy; and
• the amount of its obligation and the extent of funding at the reporting date.

When there is uncertainty about the number of employees who will accept an offer of termination benefits, a contingent liability exists. Section 21 requires the disclosure of contingent liabilities unless the possibility of an outflow in settlement is remote (see Chapter 19 at 3.10). [FRS 102.28.44].