If there is one single issue that is guaranteed to set the blood of accountants coursing, it's accounting for pension scheme liabilities. Some still see FRS17 - the accounting standard that requires balance sheet recognition of pension asset and liabilities - as a flawed standard that provides a snapshot picture of a position that will unfold over many years. Some say the standard has been the nail in the coffin of defined-benefit pension schemes. Others have sympathy with what the standard is trying to achieve, but find the detailed disclosure of the assumptions required to be beyond the wit of man.
Alexander Forbes recently estimated that current pension shortfalls in the sector's top 20 charities amount to more than £600m. This sum is not payable today, tomorrow or next year. And the actuarial valuation on which funding requirements are based may be significantly different from the FRS17-calculated liability. The real worry for finance directors is not the size of the debt, but the impact on cash flow.
In reality, an FRS17 valuation has no direct effect on the cost of a pension provision. Cost is linked to the scheme's provisions, life expectancy, investment returns and the tax regime. Pension contributions will be arrived at through negotiations with the pension trustees, subject to statutory funding requirements.
But what FRS17 does do is open finance directors' eyes to their level of exposure to pension fund and investment risk.
Where a substantial pension deficit exists, the finance director's mind will naturally also turn to questions of solvency and going concern. The first question is whether expected future cash flows can absorb the costs of any recovery plan. In effect, can you meet debts when they become due? This is the first test of solvency. Fortunately, the Pensions Regulator recognises the need for flexible recovery plans.
Things might get a little more complex where a charity borrows money, but perhaps the most difficult questions are: at what stage does the cost of pension contributions start to affect a charity's ability to raise funds? And when do pension costs affect a charity's ability to win contracts, or even have an impact on voluntary giving? The answer here will be different for each charity.
For those facing these difficult questions, a good starting point is the Charity Commission's recently updated Q&A pack on defined benefit pension schemes.
You can download the pack from the commission's website at www.charitycommission.gov.uk/supporting charities/dbps.asp.