IAS 26 - Accounting and Reporting for Retirement benefit Plans (detailed review)

Thursday, March 27, 2014 Print Email

Objective

This standard prescribes the guidelines to deal with the accounting and reporting requirements of the retirement benefit plans (often referred to as retirement benefit schemes) which are established for the provision of retirement benefits to employees. This also states certain disclosures which are required by those retirement benefit plans. 

Scope

The requirements of this standard are applicable in the preparation of financial statements of retirement benefit plans.

  • This standard is not applicable to account for the employee benefits which are provided to employees in exchange for their services and are covered under IAS 19. However, the requirements of this standard are applicable for the reporting by retirement benefit plans which are established by the employers for the payment of retirement benefit to their employees
  • For the purpose of this standard, the retirement benefit plan is regarded as ‘separate legal entity’ from the employers which establishes such retirement plans for the payment of retirement benefit to their employees
  • This standard requires the retirement benefit plan to report all the employers as a group and these plans are not required to report to individual participant to the plan for their individual benefit entitlements
  • The retirements benefit plan may be established in the form of a defined contribution plan or a defined benefit plan. The retirement benefit plans are normally established in the form of a ‘separate fund’ and may be registered as a ‘separate legal entity’, managed and controlled by the independent party known as ‘trustees’
  • However, some employers maintain their retirement benefit fund with an insurance company under specified terms. The requirements of this standard are applicable even if a retirement benefit plan is ‘self-managed’ or maintained with the insurance company, except when the insurance company is independently liable for the retirement benefits as per the contractual terms.

Definitions

Retirement Benefit Plans

The arrangements which are established by the employers to pay employee benefits, either upon the completion of employee’s period of services or at termination of services, in the form of lump sum payments or periodic income are termed as retirement benefit plans.

Defined Contribution Plans

The retirement benefit plans under which employee’s retirement benefit is determined on the basis of total contributions made to the fund for a particular employee along with the related investment income (interest or dividend) earned over the time are termed as defined contribution plans

Defined Benefit Plans

The retirement benefit plans under which employee’s retirement benefit is determined on the basis of employee’s earnings multiple of year of services with the entity are termed as defined benefit plans

Funding

It is the transfer of resources to the retirement benefit plan by employers or parties on behalf of employers established to pay employee benefit retirements 

Participants

The individuals who are the members to the retirement benefit plan are referred to as participants

Net Assets available for Benefits

The resources of the plan which are available to pay retirement benefits, determined as assets of the plan less related liabilities other than the present value of retirement benefits which are promised by employer.

Actuarial Present Value of Promised Retirement Benefits

It is the present value of estimated amount payable by a retirement benefit plan to the current and former employees, in respect of the services already rendered.

Vested Benefits

The benefits for which employees has become eligible

Defined Contribution Plan

The retirement benefit plans under which employee’s retirement benefit is determined on the basis of total contributions made to the fund (by employer and employee both) for a particular employee along with the related investment income (interest or dividend) earned over the time are termed as defined contribution plans. If retirement benefit plan is a defined contribution plan this standard requires its financial statements should include the following:

  • Statement of net assets available to pay benefits
  • Details of its funding policy

The purpose of reporting by a defined contribution plan is to enable the employers to evaluate and obtain information about the plan's resources and performance of its investments and resources. This objective is achieved through reporting by retirement benefit plan in the form of financial statements and certain disclosures as required by this standard.

Example

Statement of Net Assets Available for Benefit
For the year ended…..

Assets

$

Investments

x

Government securities  

x

Qualifying corporate bonds  

x

Equity Instruments  

x

Debt Securities

x

Saving Certificates

x

Other Instruments  

x

Total Investment

x

Receivables

 

Amount to be received from stock agents on sale of investments

x

Interest Income Receivable  

x

Dividend Receivable  

x

Total receivable  

x

Cash  

x

Total Assets  (A)  

x

Liabilities

 

Payable to stock agent for the purchase of investments 

x

Payable due to the participants  

x

Outstanding Expenses  

x

Total Liabilities (B)

x

Net Assets Available for Benefit Payable    (A - B)

x

 

Defined Benefit Plans

The retirement benefit plans under which employee’s retirement benefit is determined on the basis of employee’s earnings multiple of year of services with the entity, are termed as defined benefit plans. If retirement benefit plan is a defined contribution plan, this standard requires its financial statements should include the following:

a) Either a single statement showing:

(i) Statement of net assets available for benefit

(ii) Calculation of Present value of defined retirement benefit classified into vested and non-vested benefit

(iii) Difference between (i) and (ii)

b) or a statement of net assets available for benefit including:

(i) Either a note disclosing the Present value of defined retirement benefit classified into vested and non-vested benefit or

(ii) A note referring information in (i) above in the accompanying report issued by actuary

 

  • The above (a) or (b) should also include a statement of changes in net assets available for benefit and changes in present value of defined retirement benefits along with the separate actuary’s report supporting the calculation of present value of defined retirement benefits
  • The retirement benefit plan is required to determine the present value of defined retirement benefits as per the terms of the plan considering the current or projected salary levels and taking into account the services rendered by employee to the date of valuation.
  • If the fresh calculation of the present value of defined retirement benefits is not available at reporting date, the retirement benefit plan can use the most recent valuation of the present value of defined retirement benefits
  • The retirement benefit plan is required to disclose the effect on present value of defined retirement benefits due to change in actuarial assumptions, the relationship between the present value of defined retirement benefits and net assets available for benefit and the plan’s funding policy

Example

Statement of Net Assets Available for Benefit, Present value of defined retirement benefit and Plan Excess or Deficit

For the year ended…..

1. Statement of Net Assets Available for Benefit

Assets

$

Investments

x

Government securities  

x

Qualifying corporate bonds  

x

Equity Instruments  

x

Debt Securities

x

Saving Certificates

x

Other Instruments  

x

Total Investment

x

Receivables

 

Amount to be received from stock agents on sale of investments

x

Interest Income Receivable  

x

Dividend Receivable  

x

Total receivable  

x

Cash  

x

Total Assets  (A)  

x

Liabilities

 

Payable to stock agent for the purchase of investments 

x

Payable due to the participants  

x

Outstanding Expenses  

x

Total Liabilities    (B)

x

Net Assets Available for Benefit Payable    (A - B)

x

2. Present Value of Defined Retirement Benefit

 

$

Vested Benefit  

x

Non-vested Benefit  

x

Total retirement Benefit  

x

3. Plans Excess or Deficit

 

$

Net Assets Available for Benefit  

x

Present value of Defined Retirement Benefit

(x)

Excess / (Deficit)  

x/(x)

Statement of Changes in Net Assets available for Benefit
For the period ended…

 

$

Net Assets available at the start of the period  

x

Add

 

Interest & dividend income during the year  

x

Contribution made by employer during the year

x

Contribution made by employee during the year

x

Less

 

Annual Pension payments  

(x)

Lump sum retirement benefits paid  

(x)

Benefits due

(x)

Increase in net assets available for benefit

x

Valuation of the Retirement Benefit Plan

The retirement benefit plan is required to present its resources (investments) at fair value for both the defined contribution plan and defined benefit plan. The fair value for the investment whose market value is available will be its market value, however if market value of certain investment is not available this fact should be disclosed.

Disclosures

  • The retirement benefit plan is required to disclose the following as part of its financial statements whether it is a defined contribution plan or a defined benefit plan:

(i) Statement of changes in net assets available for benefit

(ii) Details of its major accounting policies

  • The entity is required to disclose the following for the statement of net assets available for benefits:

a) Assets at the start of the period

b) Measurement basis used for the valuation of assets

c) Description of any individual investment which has value more than the 5% of the net assets available for benefits

d) Description of any investment made in the employer

e) The detail of liabilities relating to the retirement benefit plan except the present value of defined retirement benefits

f) Contribution made by employer during the year

g) Contribution made by employee during the year

h) Investment income earned during the period

i) Benefit paid during the period and any outstanding amounts

g) Management expenses related to the plan

k) Disposal gain or loss on investments relating to the plan

l) Details of the funding policy

m) The present value of defined retirement benefit in respect of the defined benefit classified into vested and non-vested benefits

  • A report by the retirement benefit plan which reflects the following:

a) The details of the employer

b) The nature of the plan established

c) Details of the benefit offered to the participants

d) Information about its contributories

e) Details of the termination terms

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