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Post-employment benefits: defined contribution plans
Extract from FRS102: Section 28.9-28.10 and 29.13-28.13A
28.9 Post-employment benefits include, for example:
(a) retirement benefits, such as pensions; and
(b) other post-employment benefits, such as post-employment life insurance and post-employment medical care.
Arrangements whereby an entity provides post-employment benefits are post-employment benefit plans. An entity shall apply this section to all such arrangements whether or not they involve the establishment of a separate entity to receive contributions and to pay benefits. In some cases, these arrangements are imposed by law rather than by action of the entity. In some cases, these arrangements arise from actions of the entity even in the absence of a formal, documented plan.
28.10 Post-employment benefit plans are classified as either defined contribution plans or defined benefit plans, depending on their principal terms and conditions:
– Defined contribution plans are post-employment benefit plans under which an entity pays fixed contributions into a separate entity (a fund) and has no legal or constructive obligation to pay further contributions or to make direct benefit payments to employees if the fund does not hold sufficient assets to pay all employee benefits relating to employee service in the current and prior periods. Thus, the amount of the post-employment benefits received by the employee is determined by the amount of contributions paid by an entity (and perhaps also the employee) to a post-employment benefit plan or to an insurer, together with investment returns arising from the contributions.
Recognition and measurement
28.13 An entity shall recognise the contribution payable for a period:
a) As a liability, after deducting any amount already paid. If contribution payments exceed the contribution due for service before the reporting date, an entity shall recognise that excess as an asset to the extent that the prepayment will lead to a reduction in future payments or a cash refund.
b) As an expense, unless another section of this FRS requires the cost to be recognised as part of the cost of an asset such as inventories or property, plant and equipment.
28.13A When contributions to a defined contribution plan (or a defined benefit plan which, in accordance with paragraph 28.11, is accounted for as a defined contribution plan) are not expected to be settled wholly within 12 months after the end of the reporting period in which the employees render the related service, the liability shall be measured at the present value of the contributions payable using the methodology for selecting a discount rate specified in paragraph 28.17. The unwinding of the discount shall be recognised as a finance cost in profit or loss in the period in which it arises.
OmniPro comment
Appendix I of FRS 102 defines post-employment benefits plans as ‘formal or informal arrangements under which an entity provides post-employment benefits for one or more employees’.
Defined contribution scheme
Section 28.1 defines what a defined benefit contribution is and makes it clear that any plan that is not a defined contribution plan is by default a defined benefit plan. For a defined contribution scheme the contributions that are payable are usually based on a percent of the employees’ salary and can be set at a maximum amount depending on the rules of the scheme. The only liability the entity is exposed to is the contributions that it has agreed to pay. The employee takes on the investment risks. If the pension losses money it is not the responsibility of the employer to make up this deficit. Whatever is left in the pension fund at the employees retirement date will be what can be used to purchase an annuity etc. Determination as whether a pension scheme is a defined contribution scheme or defined benefit scheme can be determined by reviewing the detailed rules of the scheme. Note employers are not legally required to contribute towards a defined contribution scheme in Ireland, they are just required to give employees access to a scheme.
Example 8: Defined contribution scheme
The company has provided employees access to a defined contribution scheme. The Company has agreed that it will contribute an amount up to a maximum of 5% of the employee’s salary. In this case, the employer is only liable for this 5%. If it is not paid within the year it should be accrued. If we assume the amount payable to the defined pension scheme in the year is CU100,000 and CU70,000 was paid up by the year end. The journals required under a defined contribution scheme would be to:
|
|
CU |
CU |
|
Dr pension costs in P&L |
100,000 |
|
|
Cr pension accrual |
|
30,000 |
|
Cr bank |
|
70,000 |
Being journal to reflect the cost to the employer for the year.
Multi-employer plans and state plans
Extract from FRS102: Section 28.11-28.12
28.11 Multi-employer plans and state plans are classified as defined contribution plans or defined benefit plans on the basis of the terms of the plan, including any constructive obligation that goes beyond the formal terms. However, if sufficient information is not available to use defined benefit accounting for a multi-employer plan that is a defined benefit plan, an entity shall account for the plan in accordance with paragraphs 28.13 and 28.13A as if it was a defined contribution plan and make the disclosures required by paragraphs 28.40 and 28.40A. An entity shall account for a state plan in the same way as for a multi-employer plan.
28.11A Where an entity participates in a defined benefit plan, which is a multi-employer plan that in accordance with paragraph 28.11 is accounted for as if the plan were a defined contribution plan, and the entity has entered into an agreement with the multi-employer plan that determines how the entity will fund a deficit, the entity shall recognise a liability for the contributions payable that arise from the agreement (to the extent that they relate to the deficit) and the resulting expense in profit or loss in accordance with paragraphs 28.13 and 28.13A.
Insured benefits
28.12 An entity may pay insurance premiums to fund a post-employment benefit plan. The entity shall treat such a plan as a defined contribution plan unless the entity has a legal or constructive obligation either:
(a) to pay the employee benefits directly when they become due; or
(b) to pay further amounts if the insurer does not pay all future employee benefits relating to employee service in the current and prior periods.
A constructive obligation could arise indirectly through the plan, through the mechanism for setting future premiums, or through a related party relationship with the insurer. If the entity retains such a legal or constructive obligation, the entity shall treat the plan as a defined benefit plan.
OmniPro comment
Multi-employer plans other than a state plan is defined in Appendix I of FRS 102 as ‘defined contribution or defined benefit plans that:
- Pool assets contributed by various entities that are not under common control; and
- Use those assets to provide benefit to employees of more than one entity, on the basis that contribution and benefit levels are determined without regard to the identity of the entity that employs the employees’.
A State plan as defined by Appendix I of FRS 102 ‘as an employee benefit plan established by legislation to cover all entities (or all other entities in a particular category, for example a specific industry) and operated by national and local government or another body (for example, an autonomous agency created specifically for this purpose (which is not subject to control or influence by the reporting entity’).
Where the entity’s allocation of the pension schemes assets and liabilities cannot be determined, the entity can account for the scheme as a defined contribution scheme. As a result contributions to the scheme are expensed as incurred. However as detailed in 28.11A above where an entity has committed to funding the pension scheme an accrual should be created for the amount committed at that time.
Where previously an entity has treated a multi-employer pension scheme as a defined contribution scheme and subsequently enough data becomes available to allow defined benefit accounting to be performed, Section 28 does not state how these assets and liabilities should be brought on to the balance sheet. There are two ways in which this can be done:
- recognise an immediate charge/credit to the profit and loss for the entity’s portion of the deficit/surplus; or
- recognise a prior year adjustment for a change in accounting policy.
Both methods are acceptable.
Insured benefits
Where under the agreement the insurers can request the employer to contribute benefits directly when they fall due or the employer is required to pay if the insurer does not pay then the pension should be accounted for as a defined benefit plan with the insurance policies shown as a plan asset. If not they can be accounted for as a defined contribution scheme as the insurer bears the investment and actuary risk.
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