PAS 26:Accounting and Reporting by Retirement Benefit Plans

 

Introduction

             PAS 26 applies to the preparation of financial statements of retirement benefit plans(also called 'pension schemes', 'superannuation schemes' or 'retirement benefit schemes'). It views retirement benefit plan as a reporting entity separate from the employers of the participants in the plan. Accordingly, the retirement benefit plan may have its own financial statements.

            PAS 26 also deals with the accounting and reporting to all participants a group rather than individually. It applies to all retirement benefit plans, may it be formal or informal, contributory or non- contributory, funded (managed by a trustee) or unfunded (managed by the employer), and defined contribution plan or defined benefit plan.

Defined Contribution Plan vs. Defined Benefit Plan

            Under the defined contribution plan, the employer's obligation is usually discharged by making the agreed contributions. The benefits to be received by employees are dependent on the contributions and investment income of the fund. The participants therefore are interested in information about actual contribution and the plan's investment performance.

           On the other hand, under a defined benefit plan, the benefits to be received by employees are definite amounts which can be determined by reference to the plan formula. The employer's obligation is not discharged simply by making contributions to a fund, but rather by actually paying the promised benefits when they become due. The payment of benefits therefore is dependent on the availability of earmarked funds and the employer's ability to make good any deficiency in those funds.

          Both contribution plan and benefit plan needs financial statements that contains both:

Statement of Net Assets Available for Benefits

and

Statement of Changes in Net Assets Available for Benefits

Actuarial Present Value of Promised Retirement Benefits

            "It is the present value of the expected payments by a retirement benefit plan to existing and past employees, attributable to the scenario already rendered"(PAS 26.8)

                     The present value of the retirement benefits may be calculated using either current salary levels or projected salary levels at the retirement dates.

             Actuarial valuations are frequently prepared every three years, If an actuarial valuation has not been made prepared at the date of the financial statements, the latest actuarial valuation is used as the basis. The valuation date is disclosed.

Valuation of Plan Assets

            Plan assets are measured at fair value or market value. Securities with fixed redemption values that have been acquired to match the obligations of the plan may be measured at their final redemption values. If an estimate of fair value is not possible, the reason for this is disclosed. 

Disclosure

            Aside from a Statement of Net Assets Available for Benefits and Statement of Changes in Net Assets Available for Benefits, the financial statements of either a defined contribution plan or a defined benefit plan shall also provide information on the following:

            a. summary of significant accounting policies

            b. details of any investment in the employer

            c. investment income on the plan assets

            d. administrative, tax, and other expenses.

            e. transfers from or to other plans

Terminologies

Funding - "the transfer of assets to an entity separate from the employer's entity to meet future obligations for the payment of retirement benefits."(PAS 26.8)

Net assets available for benefits - "the assets of a plan less liabilities other than the actuarial present value of promised retirement benefits."(PAS 26.8)