Finance & Accounting

An overview of IAS 26 on Retirement Benefit Plans

IAS 26 establishes the measurement and disclosure criteria for reporting retirement benefit schemes. All plans must provide a statement of changes in net assets available for benefits, a summary of major accounting practices, and a description of the plan and the impact of any modifications made during the period in their reports.

The Scope of IAS 26

Where such financial statements are prepared, this Accounting Standard shall be implemented in the financial statements of retirement benefit plans.

‘Pension schemes, “superannuation schemes”, and ‘retirement benefit schemes’ are all terms that have been used to describe retirement benefit plans. A retirement benefit plan is treated as a reporting entity distinct from the employers of the plan’s members under this Standard. Further, to the extent that they are not replaced by this Standard, all previous Standards apply to financial statements of retirement benefit plans.

This Standard addresses the plan’s accounting and reporting to all members as a group. It does not address reports to individual participants on their retirement benefit entitlements. IAS 19 Employee Benefits is concerned with determining the cost of retirement benefits in the financial statements of businesses that have plans in place. As a result, this Standard supplements IAS 19.

Retirement benefit schemes can be either ‘defined contribution’ or ‘defined benefit’. Many necessitate the establishment of separate funds, which may or may not have a separate legal existence and may or may not have trustees, to which contributions are made and retirement benefits are given. This Standard applies whether or not such a fund is established and whether or not trustees are appointed.

The same accounting and financing standards apply to retirement benefit plans with funds invested with insurance firms as they do to privately funded arrangements. As a result, they are covered by this Standard unless the contract with the insurance company is in the name of a specific participant or group of participants and the retirement benefit obligation is entirely the insurance company’s obligation.

Other than employers, certain retirement benefit plans have non-employer sponsors; this Accounting Standard also applies to the financial statements of such plans.

The majority of retirement benefits schemes are based on written agreements. Some plans are informal, but they have gained a level of responsibility as a consequence of companies’ established practices. While certain plans allow employers to restrict their duties under the plans, it is normally difficult for a company to terminate a plan if workers are to be engaged. An informal plan is subject to the same accounting and reporting standards as a formal plan.

Many retirement benefit schemes call for the creation of distinct funds to which payments are made and benefits are paid. Such funds may be operated by third parties who manage fund assets independently. In certain countries, these parties are known as trustees. The word trustee is used in this Standard to identify such people regardless of whether a trust has been constituted.

Retirement benefit plans are often classified as either defined contribution plans or defined benefit plans, with each having unique characteristics. There are some plans that include elements of both. For the purposes of this Standard, such hybrid plans are considered defined benefit plans.

Defined contribution plans under IAS 26

A statement of net assets available for benefits and a description of the financing policy must be included in the financial statements of a defined contribution plan.

The amount of a person’s future benefits under a defined contribution plan is decided by the contributions provided by the employer, the participant, or both, as well as the fund’s operational efficiency and investment profits. Contributions to the fund are often used to satisfy an employer’s obligation. An actuary’s opinion is not typically required, but it is occasionally used to predict future benefits that may be possible based on current contributions and different levels of future contributions and investment gains.

The plan’s activities attract the members’ attention since they have a direct impact on the amount of their future rewards. Participants want to know if contributions have been received and if sufficient control has been performed to preserve the recipients’ rights. An employer is concerned with the plan’s efficiency and fairness.

A defined contribution plan’s reporting goal is to give information on the plan and the performance of its investments on a regular basis.

Defined benefit plans under IAS 26

A defined benefit plan’s report should include one of the following:

• a statement that indicates the available net assets for benefits, the actuarial present value of promised retirement benefits (differentiating between vested and non-vested benefits), and the excess or shortfall that results, or
• a statement of net assets available for benefits, which may include either a remark revealing the actuarial present value of promised retirement benefits (differentiating between vested and non-vested benefits) or a reference made to this information in an accompanying actuarial report.

If an actuarial valuation has not been conducted as of the date of the report of a defined benefit plan, the latest valuation shall be utilized as a foundation, and the date of the valuation should be stated. The actuarial present value (PV) of promised retirement benefits should be based on the benefits guaranteed under the provisions of the plan based on service given to date, using either current or anticipated wage levels, with disclosure of the basis employed. Any changes in actuarial assumptions that have had a substantial impact on the actuarial present value of promised retirement benefits should also be stated.

Financial statements must explain the link between the actuarial present value of promised retirement benefits and net assets available for payments, as well as the strategy for supporting promised benefits.

The payment of promised retirement benefits under a defined benefit plan is dependent on the plan’s financial situation and contributors’ capacity to make future contributions to the plan, as well as the plan’s investment success and operating efficiency. A defined benefit plan requires the counsel of an actuary on a regular basis to examine the plan’s financial state, review the assumptions, and suggest future contribution amounts.

The goal of reporting by a defined benefit plan is to give information on the plan’s financial resources and activities on a regular basis, which is valuable in examining the linkages between resource accumulation and plan benefits over time.

Actuarial present value (PV) of promised retirement benefits under IAS 26

The present value of expected payments from a retirement benefit plan can be computed and presented using current salary levels or predicted salary levels up to the time of retirement of members.

The actuarial present value (PV^[1]) of promised retirement benefits based on current salary is stated in a plan’s financial statements to highlight the commitment for benefits earned up to the date of the financial statements. The actuarial present value (PV) of promised retirement benefits based on predicted salary is reported to highlight the extent of the future liability on a going concern basis, which is typically the foundation for funding.

In addition to disclosing the actuarial present value of promised retirement benefits, an adequate explanation may be required to properly convey the context in which the actuarial present value of promised retirement benefits should be read. This explanation might take the form of information on the appropriateness of expected future funds and funding policies based on salary estimates. This information might be included in the financial statements or the actuary’s report.

Actuarial valuations are not generated more regularly than every three years in many nations. If an actuarial value has not been made at the time the financial statements are published, the most readily available valuation is used as a foundation, and the date of the valuation is stated.

Valuation of plan assets under IAS 26

Investments in retirement benefit plans must be carried at fair value. When it comes to marketable securities, fair value equals market value. When holding plan investments for which an estimate of fair value is not available, the reason for not using fair value must be disclosed.

In the instance of marketable securities, fair value is often market value since it is regarded as the most meaningful measure of the securities at the report date as well as the investment performance for the period. Securities with a predetermined redemption value that have been bought to match the plan’s obligations or particular elements of the plan thereof may be carried at amounts based on their final redemption value assuming that there is a constant rate of return to maturity.

When holding plan investments for which an estimate of fair value is not attainable, such as complete ownership of a company, the reason for not using fair value is disclosed. When investments are held at a price different than market value or fair value, the fair value is often declared as well. The assets utilized in the fund’s activities are accounted for in compliance with the relevant Standards.

Conclusion

The standards for the production of financial statements for retirement benefit schemes are outlined in IAS 26. It describes the needed financial statements and examines the measurement of numerous line items, including the actuarial present value of promised retirement payments for defined benefit plans.

Read our Article:A summary of IAS 24 on Related Party Disclosures