PRAG updates guidance on Accounting for Derivatives in Pension Schemes

Background

The Pensions Research Accounting Group (PRAG) has published updated guidance to help preparers of financial statements to account for derivatives in pension schemes. The guidance is designed to provide practical assistance to pension scheme accountants in understanding derivatives, maintaining accounting records for derivative contracts and how to report them in financial statements covering the requirements of the accounting regulations for pension schemes.

The new guidance

The derivatives market is in constant change and the use of derivatives has continued to increase in all types of pension schemes. Therefore, although the guidance focuses on four main types of derivative contracts (futures, options, forwards and swaps and various sub-types and variations of these), it also extends to other types of commonly used financial instruments such as repurchase agreements, even though these don’t strictly fit into the definition of a derivative.

In addition, as the derivatives market is highly dynamic and innovative and new products or variants of existing products are continuously being introduced, it is inevitable that not all derivative products used by pension schemes will be covered by this guidance. Therefore, generic principles and accounting treatment have also been included to enable preparers of pension scheme accounts to interpret and apply this guidance in these circumstances.

This guidance also includes illustrative examples, illustrative double entry postings and illustrative disclosures which are provided to assist the reader in understanding the main principles and requirements of the derivatives covered and what may be disclosed in the financial statements of pension schemes.

What you need to do

It is noted that service providers such as fund managers, custodians and other third-party providers may approach the recording and reporting of derivatives differently due to the specific way that information systems supporting markets and trading platforms capture and communicate accounting information, but as long as this information can be mapped to the SORP requirements this should be acceptable once the specific reporting style is understood by the accounts preparer. The accounts preparer will need to spend time liaising with the fund manager or custodian to ensure they understand the reports and that they are sufficient to meet all of the pension scheme’s reporting requirements.

To discuss this further, please contact Stuart Henderson or your usual Crowe contact.