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Chapter 18
ACCOUNTING AND REPORTING BY RETIREMENT BENEFIT PLANS (IAS 26)
INTRODUCTION
IAS 26 deals with accounting and reporting to all participants of a retirement benefit plan as a group, and not with reports that might be made to individuals about
their particular retirement benefits. The Standard sets out the form and content of the general-purpose financial reports of retirement benefit plans. The Standard applies
to
• Defined contribution plans. Where benefits are determined by contributions to the plan together with investment earnings thereon.
• Defined benefit plans. Where benefits are determined by a formula based on employees’ earnings and/or years of service.
IAS 26 is sometimes confused with IAS 19, because both Standards address employee benefits. But there is a difference: While IAS 26 addresses the financial
reporting considerations for the benefit plan itself, as the reporting entity, IAS 19 deals with employers’ accounting for the cost of such benefits as they are earned by
the employees. These Standards are thus somewhat related, but there will not be any direct interrelationship between amounts reported in benefit plan financial
statements and amounts reported under IAS 19 by employers.
SCOPE
IAS 26 addresses the accounting and reporting by retirement benefit plans. It does not mandate the presentation of an annual report for the plan. However, the terms
of a retirement plan may require that the plan present an annual report; in some jurisdictions this may be a statutory requirement. If such annual reports are prepared by
a retirement plan, then the requirements of this Standard should be applied to them.
The retirement benefit plan is a separate entity, distinct from the employer of the plan’s participants; the Standard treats it as such. The Standard also applies to
retirement benefit plans that have sponsors other than the employer (e.g., trade associations or groups of employers). Furthermore, this Standard deals with accounting
and reporting by retirement benefit plans to all participants as a group; it does not deal with reports to individual participants with respect to their retirement benefit
entitlements.
Whether there are formal retirement benefit plans or informal retirement benefit arrangements, the Standard prescribes the same accounting for both. It is also worthy
of mention that this Standard applies whether a separate fund is created or not and regardless of whether there are trustees. The requirements of this Standard also
apply to retirement benefit plans with assets invested with an insurance company, unless the contract with the insurance company is in the name of a specified
participant or a group of participants and the responsibility is solely of the insurance company.
(In accordance with IAS 26)
DEFINITIONS OF KEY TERMS
Actuarial present value of promised retirement benefits. The present value of the expected future payments by a retirement benefit plan to existing and
past employees, attributable to the service already rendered.
Defined benefit plans. Retirement benefit plans whereby retirement benefits to be paid to plan participants are determined by reference to a formula usually
based on employees’ earnings and/or years of service.
Defined contribution plans. Retirement benefit plans whereby retirement benefits to be paid to plan participants are determined by contributions to a fund
together with investment earnings thereon.
Funding. The transfer of assets to a separate entity (distinct from the employer’s enterprise), the “fund,” to meet future obligations for the payment of
retirement benefits.
Net assets available for benefits. The assets of a retirement benefit plan less its liabilities other than the actuarial present value of promised retirement
benefits.
Participants. The members of a retirement benefit plan and others who are entitled to benefits under the plan.
Retirement benefit plans. Formal or informal arrangements based on which an enterprise provides benefits for its employees on or after termination of
service, which usually are referred to as termination benefits. These could take the form of annual pension payments or lump-sum payments. Such benefits, or
the employer’s contributions toward them, should however be determinable or possible of estimation in advance of retirement from the provisions of a
document (i.e., based on a formal arrangement) or from the enterprise’s practices (which is referred to as an informal arrangement).
Vested benefits. Entitlements, the rights to which, under the terms of a retirement benefit plan, are not conditional on continued employment.
DEFINED CONTRIBUTION PLANS
Retirement benefit plans can either be defined contribution plans or defined benefit plans. When the amount of the future benefits payable to the participants of the
retirement benefit plan is determined by the contributions made by the participants’ employer, the participants, or both, together with investment earnings thereon, such