Defined Contribution Plan

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Definition

Defined contribution plan is basically a plan for retirement where a certain specified percentage or amount of money is kept aside every year by an organization for their employees benefit. There are several restrictions with regard to how and when an employee can withdraw this amount so that he isn’t charged with any penalties.

As per this Defined-Contribution Plan (in accordance with IAS 19), an organization contributes a default amount to a separate organization and in not legally obliged to carry out any additional or effective contributions.

Accounting for Defined Contribution Plan

IAS 19 calls for the entity to recognize the contribution made by it to a defined contribution plan. As per the 43^rd paragraph of the IAS 19 Employee Benefits, defined contribution plan accounting implies recognizing of the reporting organization’s obligation towards its employees who would be the beneficiary of the scheme. Contributions made to the plans are recognized or expensed in the form of liability at a time when they are due as well as refunds are accounted as an income and asset at a time when the employer/entity is entitled for it, for example, when the employee fails to match the vested conditions.

Measurement and Recognition

In cases where the employee has offered services to the entity for a year, the entity must recognize the employee’s contribution to the defined contribution plan as part of offering services like:

(a) In the form of liability, after deduction of any amount that has been paid already. In case the amount that has been paid already is more, then the contributions should be made in accordance to the services offered through the date of balance sheet and the entity should recognize the difference in the form of an asset in a way that the advance payment leads.

(b) In the form of an expense, until another IAS permits or demands the inclusion of the outlined benefits in the asset cost.

In cases where the contributions made to a defined contribution plan have not been paid within 12 month period, the same amount must be discounted utilizing the rate of discount specified in the paragraph 78 of IAS 19.