A defined-contribution plan is a retirement benefit plan that determines the amount of pension payable based on contributions to the pension fund and subsequent investment income.
Under IAS 26, defined contribution plans are retirement benefit plans in which the benefits payable are determined based on contributions to a pension fund and subsequent investment income. Where retirement plans are agreements in accordance with which an organization provides benefits to its employees on time or after the end of employment (in the form of annual income or in the form of a lump sum). At the same time, such payments or contributions to ensure them can be determined or calculated in advance of retirement in accordance with the documents or on the basis of the practice adopted in the organization.
Additionally, according to IAS 19, defined contribution pension plans are pension plans under which a company pays fixed contributions to another company (fund) and does not have legal or other obligations to make additional payments if the fund does not have enough funds to pay employee benefits.
IAS 26 Accounting and Reporting by Retirement Benefit Plans is an international financial reporting standard that sets out the principles of measurement and disclosure of information in financial statements. The standard was put into effect for use on the territory of the Russian Federation.
In a defined contribution plan, future benefits to participants are determined by the contributions made by the employer, the participant, or both parties to the pension fund, and by the fund’s operating performance and investment returns. Employer obligations are usually limited to contributions to the pension fund. An actuary’s consultation is generally not required, although it is sometimes used to estimate the number of future payments that could be secured based on current contributions and different levels of future contributions and investment income.
According to IAS 19, the ruen accrual principle is used when accounting for defined contribution plans. The liability of the entity in each period is determined based on the number of contributions that are due in that period. Contributions payable during the period are expensed in the income statement and the statement of financial position shows the outstanding or prepayments in respect of the contributions. An entity discloses in the notes the amounts recognized as an expense for defined contribution plans.
Under IAS 26, the financial statements of a defined contribution plan include a statement of net assets available for payment and a description of the funding policy for the plan. The amount of future payments to participants is determined by contributions from the employer, the participant, or both parties, as well as the operational efficiency and investment returns of the fund. The fulfillment of an employer’s obligation is usually limited to contributions to the fund. Participants are interested in the activities of the program because it directly affects the level of their future payments. The purpose of the financial statements is to periodically provide information about the defined contribution plan and the results of its investment activities: a description of significant activities during the period and the impact of changes related to the program, membership, terms, and conditions; reports on transactions and results of investment activities for the period, as well as on the financial position of the program at the end of the period; and a description of the investment policy.
If an actuarial valuation was not prepared at the date of the financial statements, the most recent valuation available, with an indication of the date it was made, is used as the basis. The pension plan investments are carried at fair value. The fair value of marketable securities is their market value. If there are pension plan investments whose fair value cannot be estimated, the reason why the fair value is not used is disclosed.
Consistency of accounting for defined benefit plans
Accounting for pension plan assets
- The fair value of plan assets at the beginning of the period is the balance at the end of the previous period;
- During the reporting period, the organization makes contributions to the pension fund, which in the future will pay off obligations to employees;
- Payment of pensions at the expense of the fund’s assets during the reporting period;
- Accrual of income from plan assets at the discount rate, which is calculated at the rate at the beginning of the reporting period;
- Calculation of actuarial differences based on the actual fair value of plan assets at the end of the period.
Accounting for pension plan liabilities
- The present value of the plan liability at the beginning of the period is the balance at the end of the previous period;
- The expected increase in the company’s pension obligations under the pension plan over the period by the “current service cost for the period”;
- Pension liabilities are measured at their present value, which means that as they approach the date of maturity of these liabilities, interest expenses arise in the income statement, which is calculated using the discount rate at the beginning of the reporting period;
- Extinguishing pension liabilities by paying pensions during the period;
- Calculation of actuarial differences based on the actual present value of the plan liability at the end of the period. The discount rate used to discount the post-employment benefit obligation should be based on the market yield on high-quality corporate bonds at the reporting date.
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