FRS 102 Employee Benefits

The key changes to UK Generally Accepted Accounting Principles (GAAP) with the introduction of Financial Reporting Standard 102.


For accounting periods commencing on or after 1 January 2015, current UK GAAP has been replaced by a single standard. The transition requires all UK company’s financial information to be prepared in accordance with FRS 102. The only exceptions will be those applying International Financial Reporting Standards (IFRS) or Financial Reporting Standard for Smaller Entities (FRSSE).

Below is a summary of the key changes to employee benefits under the new standard.

Employee benefits are categorised as short term benefits, long-term benefits, post-employment benefits (pensions), and termination benefits.

Short-term benefits

Short term benefits are those expected to be settled within 12 months of the balance sheet date. They include entitlement to holiday pay, profit shares or bonuses, and non-monetary benefits such as medical care. The basic principle is that these are recognised as a cost as entitlement to the benefit is earned.

This will mean that holiday entitlement not taken at the balance sheet date will need to be provided for. For the first time, this provides clarity to an area of UK GAAP where there have been different accounting practices. This may result in a significant one-off charge in entities where employee costs are significant.

The rules for providing bonuses or profit shares are largely unchanged. A liability may only be recognised where there is a constructive obligation as a result of past events at the balance sheet date.

Short term liabilities are not discounted in their recognition and no special disclosures are required.

Long-term benefits

Long term benefits are those which are not expected to be settled within 12 months of the balance sheet date. This can include deferred remuneration, or long term absences such as sabbatical leave.

These are recognised as a cost, as entitlement to the benefit is earned, but due to their long term nature, they are recognised at the expected present value of the liability.

Disclosures of the nature of long term benefits provided are required, the liability recognised and if applicable any funding put in place to meet these liabilities.

Termination benefits

Recognition for termination benefits is largely unchanged. A liability is recognised when an entity is demonstrably committed to:

  • terminate the employment of employees before normal retirement date
  • termination benefits have been offered to encourage voluntary redundancy.

A termination benefit is charged to the profit and loss immediately on recognition. The liability is recognised as the best estimate of the cost at the reporting date.

The nature of any benefits and the amount of the liability recognised will need to be disclosed.

Post-employment (retirement) benefits

The requirements of FRS 102 in relation to retirement benefits are largely the same as under FRS 17. Schemes are divided into defined contribution schemes and defined benefit schemes.

The costs of defined contribution schemes are expensed when they are payable.

For defined benefit schemes the net of the scheme assets less the estimated liabilities are shown on the balance sheet. The actuarial basis for recognising the actuarial liability is unchanged.

Estimated service costs and investment returns are recognised through the profit and loss account, while changes to actuarial assumptions are recognised through other comprehensive income.

The disclosures in relation to defined benefit schemes will be broadly the same.

The key area of changes will be in recognition of multi-employer schemes. A multi-employer scheme is one which has a number of employers all contributing into it. As under FRS 17, if you cannot allocate the schemes assets between the different employers they treat the scheme as a defined contribution scheme with additional disclosure requirements.

However, the accounting for this has been refined in two areas:

  • if the employer has entered into an agreement to fund a deficit, the present value of the funding liability should be recognised on the balance sheet; this would not have been required previously as funding contributions are only recognised when they fall due
  • if all of the members of a multi-employer scheme are within a group, if the assets and liabilities cannot be allocated between the members, they must be recognised in full in the entity legally responsible for the plan.