Skip to main content
main content, press tab to continue
Article | Pensions Briefing

Considering a buy-in or buyout but concerned about accounting impact?

By Tina Elwell | July 25, 2023

We take a high level look at the typical treatment of transactions to help pension plan sponsors to take steps to manage any potential impact.
N/A
N/A

With many defined benefit plans having seen their funding levels improve over the last year, plan sponsors and trustees are considering de-risking their pension obligations. Whilst this strategic move can help mitigate potential pension risks and uncertainties, the accounting impact can be significant.

The cheat sheet below (and available as a PDF download below) provides a high level summary of the typical accounting treatment of buy-ins and buyouts, under IAS 19, FRS 102, and US GAAP (ASC 715).

Plan sponsors should look to engage in discussions with their auditors early. This step is crucial to ensure that any impact on accounts can be agreed and managed before progressing with a transaction. By starting these discussions early, sponsors can try to avoid unexpected accounting surprises.


Partial scheme buy-in

High level summary of the typical accounting treatment for a partial scheme buy-in
Balance sheet P&L
IAS19 / FRS 102 Recognised as asset loss (no impact on DBO) No impact on current year. Loss flows through OCI
No remeasurement triggered
US GAAP (ASC 715) Two options for recognition:
1. Liability loss (set the PBO for the bought-in liabilities equal to the fair value of the insurance policy)
2. No loss (i.e. no impact on PBO or fair value of plan assets)
Option 1 – loss goes to AOCI. If mark-to-market, will be recognised in P&L in current year
Option 2 – no change to PBO or fair value of plan assets so no impact on day 1
No remeasurement triggered

Full scheme buy-in

High level summary of the typical accounting treatment for a full scheme buy-in
Balance sheet P&L
IAS19 / FRS 102 This is a grey area and may depend on factors such as whether a buyout in the short term has been agreed
US GAAP (ASC 715) Same as partial scheme buy-in Same as partial scheme buy-in

Buyout

High level summary of the typical accounting treatment for a buyout
Balance sheet P&L
IAS19 / FRS 102 At the point of buyout DBO falls by excluding the liabilities bought-out and plan assets fall by the value of the assets passed to the insurer Loss recognised immediately through P&L as a settlement
Remeasurement triggered
US GAAP (ASC 715) At the point of buyout PBO falls by excluding the liabilities bought-out and plan assets fall by the fair value of the assets passed to the insurer Remeasurement of the PBO at the point of buyout so that the PBO now equals the fair value of the assets passed to the insurer.
Total net gains/losses all recognised through P&L as settlement loss (or gain)
Remeasurement triggered

The treatment noted above is based on the assumption that the insurance premium exceeds the DBO/PBO of the insured benefits. The comments here should not be considered as and are not a substitute for accounting advice.


Key takeaway

Engage in discussions with auditors early - the treatment of any transaction within the company accounts would need to be discussed and agreed with the company’s auditors. Start these discussions early to avoid any surprises.

Contact


Tina Elwell
Director, Retirement
email Email

Related content tags, list of links Article Pensions Briefing United Kingdom
 
Contact us