• PAS 26

Accounting and Reporting by Retirement Benefit Plans

Introduction

PAS 26 applies to the presentation of financial statements of retirement benefit plans (also called
‘pension schemes, ‘superannuation schemes’ or ‘retirement benefit schemes’).

PAS 26 views a retirement benefit plan as a reporting entity separate from the employers of the
participants in the plan. Accordingly, the retirement benefit plan may have its own financial statements.

PAS 26 deals with the accounting and reporting by the plan to all participants as a group, rather than
individually regarding their retirement benefit rights.

PAS 26 applies to all retirement benefit plans whether formal or informal, contributory or non-
contributory, funded (managed by a trustee) or unfunded (managed by the employer), and defined
contribution plan or defined benefit plan.

Some plans may have characteristics of both a defined contribution plan and a defined benefit plan.
Such hybrid plans are considered defined benefit plans under PAS 26.

However, PAS 26 does not apply to government social security type arrangements and employee
benefits other than retirement benefits.

 Funding is “the transfer of assets to an entity (the fund) separate from the employer’s entity to
meet future obligations for the payment of retirement benefits.”

Defined Contribution Plans

Under a defined contribution plan, the employer’s obligation is usually discharged by making the agreed
contributions. The benefits to be received by employees are dependent on the contributions and
investment income of the fund. The participants therefore are interested in information about actual
contributions and the plan’s investment performance.

To address the foregoing needs the financial statements of a defined contribution plan shall contain the
following:

a. A statement of net assets available for benefits;

b. A statement of changes in net assets available for benefits; and

c. Accompanying notes to the financial statements

 Net assets available for benefits are “the assets of a plan less liabilities other than the actuarial
present value of promised retirement benefits.”

Illustrative financial statements:

Entity A – Defined Contribution Plan

Statement of Net Assets Available for Benefits

As of December 31, 20x1

Assets: 20x1 20x0

Investments at fair value 1,120,000 484,000

Investments at contract value 1,020,000 1,020,000

Contributions receivable from employer 60,000 -___

Total Assets 2,200,000 1,504,000

Liabilities:

Accrued management fees payable - 4,000

Net Assets Available for Benefits 2,200,000 1,500,000

See accompanying notes to the financial statements

Entity A – Defined Contribution Plan

Statement of Changes in Net Assets Available for Benefits

For the period ended December 31, 20x1

Additions: 20x1 20x0

Net fair value changes 940,000 240,000

Interest income 42,000 30,000

Dividends income 106,000 50,000

1,088,000 320,000

Contributions 140,000 200,000

Total Additions 1,228,000 520,000

Deductions:

Benefits paid to participants 500,000 -

Administrative expenses 28,000 20,000

Total deductions 528,000 20,000

Net increase for the period 700,000 500,000

Net assets available for benefits, beg. 1,500,000 1,000,000

Net Assets Available for Benefits, End 2,200,000 1,000,000

See accompanying notes to the financial statements

Defined Benefit Plans

Under a defined benefit plan, the benefits to be received by employees are definite amounts which can
be determined by reference to the plan formula. The employer’s obligation is not discharged simply by
making contributions to a fund, but rather by actually paying the promised benefits when they become
due. The payment of benefits therefore is dependent on the availability of earmarked funds and the
employer’s ability to make good any deficiency in those funds.

Accordingly, the plan participants are not only interested in information on the earmarked funds (net
assets available for benefits) but also on the obligation (actuarial present value of promised retirement
benefits) for which those funds were set aside. Thus, the financial statements of a defined benefit plan
requires the reporting of the actuarial present value of promised retirement benefits either within those
financial statements or by reference to an accompanying separate actuarial report.

The financial statements of a defined benefit plan contain either:

1. A statement that shows:

a. The net assets available for benefits;

b. The actuarial present value of promised retirement benefits, distinguishing

between vested benefits and non-vested benefits; and

c. The resulting excess or deficit

Or

2. A statement of net assets available for benefits including either:

a. A note disclosing the actuarial present value of promised retirement benefits,

distinguishing between vested benefits and non-vested benefits; or

b. A reference to this information in an accompanying actuarial report.

A statement of changes in net assets available for benefits and accompanying notes are provided in both
(1) and (2) above.
  Vested benefits are “benefits, the rights to which, under the conditions of a retirement benefit
plan, are not conditional on continued employment.”

Actuarial Present Value of Promised Retirement Benefits

Actuarial present value of promised retirement benefits – is “the present value of the expected
payments by a retirement benefit plan to existing and past employees, attributable to the service
already rendered.”

The present value of the retirement benefits may be calculated using either current salary levels or
projected salary levels at the retirement dates.

Actuarial valuations are frequently prepared every three years. If an actuarial valuation has not been
made prepared at the date of financial statements, the latest actuarial valuation is used as the basis. The
valuation date is disclosed.

Valuation of Plan Assets

Plan assets are measured at fair value or market value. Securities with fixed redemption values that
have been acquired to match the obligations of the plan may be measured at their final redemption
values. If an estimate of fair value is not possible, the reason for this is disclosed.

Disclosure

Aside from a statement of net assets available for benefits and a statement of changes in net assets
available for benefits, the financial statements of either a defined contribution plan or a defined benefit
plan shall also provide information on the following:

a. Summary of significant accounting policies

b. Description of the plan and the effect of any changes in the plan during the period

c. Details of any single investment exceeding 5% of net assets or 5% of any category of investment

d. Details of any investment in the employer

e. Contributions of employer and employee, if applicable

f. Analysis of benefits paid or payable according to, for example, retirement, death and disability
benefits, and lump sum payments

g. Funding policies and, for defined contribution plans, investment policies

h. Investment income on the plan assets

i. Administrative, tax and other expenses

j. Transfers from or to other plans

k. For defined benefit plans, the actuarial present value of promised retirement benefits, including
information on significant actuarial assumptions, the methods used, the number of plan
participants, a description of the promised benefits, and the names of the employers and the
employee groups covered. These may be presented either within the financial statements or in a
separate report.