IAS 26 should be applied in accounting and reporting by retirement benefit plans. The terms of a retirement plan may require that the plan present an annual report; in some jurisdictions this may be a statutory requirement. IAS 26 does not establish a mandate for the publication of such reports by retirement plans. However, if such reports are prepared by a retirement plan, then the requirements of this standard should be applied to them.
IAS 26 regards a retirement benefit plan as a separate entity, distinct from the employer of the plan's participants. It is noteworthy that this standard also applies to retirement benefit plans that have sponsors other than 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.
The standard applies the same basis of accounting and reporting to informal retirement benefit arrangements as it applies to formal retirement benefit plans. It is also worthy of mention that this standard applies whether or not a separate fund is created 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.
Retirement benefit plans are usually described as being either defined contribution or defined benefit plans. When the quantum of the future benefits payable to the retirement benefit plan participants is determined by the contributions paid by the participants' employer, the participants, or both, together with investment earnings thereon, such plans are defined contribution plans. Defined benefit plans, by contrast, promise certain benefits, often determined by formulae which involve factors such as years of service and salary level at the time of retirement, without regard to whether the plan has sufficient assets; thus the ultimate responsibility for payment (which may be guaranteed by an insurance company, the government or some other entity, depending on local law and custom) remains with the employer. In rare circumstances, a retirement benefit plan may contain characteristics of both defined contribution and defined benefit plans; such a hybrid plan is deemed to be a defined benefit plan for the purposes of this standard.
IAS 26, para 13, requires that the report of a defined contribution plan contain a statement of the net assets available for benefits and a description of the funding policy. In preparing the statement of the net assets available for benefits, the guidance contained in IAS 26, para 32 (i.e., that plan investments should be carried at fair value, which for marketable securities would be market value) should be followed. In case an estimate of fair value is not possible, disclosure is required of the reason as to why fair value has not been used. As a practical matter, most plan assets will have determinable market values, since the plans' trustees' discharge of their fiduciary responsibilities will generally mandate that only marketable investments be held.
An example of a statement of net assets available for plan benefits, for a defined contribution plan, is set forth below.
Assets | |
Investments at fair value | |
| 5,000 |
| 3,000 |
| 3,000 |
| 3,000 |
| 2,000 |
| 2,000 |
| 1,000 |
| 19,000 |
Receivables | |
Amounts due from stockbrokers on sale of securities | 15,000 |
Accrued interest | 5,000 |
Dividends receivable | 2,000 |
| 22,000 |
Cash | 5,000 |
| 46,000 |
Liabilities | |
Accounts payable | |
| 10,000 |
| 11,000 |
| 21,000 |
Accrued expenses | 11,000 |
| 32,000 |
Net assets available for benefits | 14,000 |
When amounts to be paid as retirement benefits are determined by reference to a formula, usually based on employees' earnings and/or years of service, such retirement benefit plans are defined benefit plans. The key factor is that the benefits are fixed or determinable, without regard to the adequacy of assets which may have been set aside for payment of the benefits. This contrasts to the defined contribution plans approach, which is to provide the workers, upon retirement, with the amounts which have been set aside, plus or minus investment earnings or losses which have been accumulated thereon, however great or small that amount may be.
IAS 26, para 17, requires that the report of a defined benefit plan should contain either
A statement that shows
The net assets available for benefits;
The actuarial present value of promised retirement benefits, distinguishing between vested and nonvested benefits; and
The resulting excess or deficit;
or
A statement of net assets available for benefits including either
A note disclosing the actuarial present value of promised retirement benefits, distinguishing between vested and nonvested benefits; or
A reference to this information in an accompanying actuarial report.
IAS 26, para 28, recommends, but does not mandate, that in each of the three formats described above, a trustees' report in the nature of a management or directors' report and an investment report may also accompany the statements.
The standard does not make it incumbent upon the plan to obtain annual actuarial valuations. If an actuarial valuation has not been prepared on the date of the report, the most recent valuation should be used as the basis for preparing the financial statement. The date of the valuation used should be disclosed. Actuarial present values of promised benefits should be based either on current or projected salary levels; whichever basis is used should be disclosed. The effect of any changes in actuarial assumptions that had a material impact on the actuarial present value of promised retirement benefits should also be disclosed. The report should explain the relationship between actuarial present values of promised benefits, the net assets available for benefits and the policy for funding the promised benefits.
As in the case of defined contribution plans, investments of a defined benefit plan should be carried at fair value, which for marketable securities, would be market value (IAS 26, para 32).
The following are examples of the alternative types of reports prescribed for a defined benefit plan:
| |
| |
| |
| 50,000 |
| 30,000 |
| 30,000 |
| 30,000 |
| 20,000 |
| 20,000 |
| 10,000 |
| 190,000 |
| |
| 150,000 |
| 50,000 |
| 20,000 |
| 220,000 |
Cash | 50,000 |
| 460,000 |
| |
| |
| 100,000 |
| 110,000 |
| 210,000 |
| 110,000 |
| 320,000 |
| 140,000 |
| |
| 100,000 |
| 20,000 |
| 120,000 |
| 20,000 |
Investment income | |
| 40,000 |
| 10,000 |
| 10,000 |
| 60,000 |
Plan contributions | |
| 50,000 |
| 50.000 |
| 100,000 |
Total additions to net asset value | 160,000 |
Plan benefit payments | |
| 30,000 |
| 30,000 |
| 10,000 |
| 15,000 |
| 85,000 |
Total deductions from net asset value | 85,000 |
Net increase in asset value | 75,000 |
Net assets available for benefits | |
| 65,000 |
| 140,000 |
IAS 26, para 34, requires that the reports of a retirement benefit plan, both defined benefit plans and defined contribution plans, should also contain the following information:
A statement of changes in net assets available for benefits;
A summary of significant accounting policies; and
A description of the plan and the effect of any changes in the plan during the period.
In accordance with IAS 26, para 35, reports provided by retirement benefits plans may include the following, if applicable:
A statement of net assets available for benefits disclosing
Assets at the end of the period suitably classified;
The basis of valuation of assets;
Details of any single investment exceeding either 5% of the net assets available for benefits or 5% of any class or type of security;
Details of any investment in the employer; and
Liabilities other than the actuarial present value of promised retirement benefits;
A statement of changes in net assets available for benefits showing the following:
Employer contributions;
Employee contributions;
Investment income such as interest and dividends;
Other income;
Benefits paid or payable (analyzed, for example, as retirement, death and disability benefits, and lump-sum payments);
Administrative expenses;
Other expenses;
Taxes on income;
Profits and losses on disposal of investments and changes in value of investments; and
Transfers from and to other plans;
A description of the funding policy;
For defined benefit plans, the actuarial present value of promised retirement benefits (which may distinguish between vested benefits and nonvested benefits) based on the benefits promised under the terms of the plan, on service rendered to date and using either current salary levels or projected salary levels. This information may be included in an accompanying actuarial report to be read in conjunction with the related information; and
For defined benefit plans, a description of the significant actuarial assumptions made and the method used to calculate the actuarial present value of promised retirement benefits.
According to IAS 26, para 36, since the report of a retirement benefit plan contains a description of the plan, either as part of the financial information or in a separate report, it may contain the following:
The names of the employers and the employee groups covered;
The number of participants receiving benefits and the number of other participants, classified as appropriate;
The type of plan—defined contribution or defined benefit;
A note as to whether participants contribute to the plan;
A description of the retirement benefits promised to participants;
A description of any plan termination terms; and
Changes in items 1. through 6. during the period covered by the report.
Furthermore, it is not uncommon to refer to other documents that are readily available to users and in which the plan is described, and to include only information on subsequent changes in the report.