IAS 26 | Accounting and Reporting by Retirement Benefit Plans

1

Scope

This Standard shall be applied in the financial statements of retirement benefit plans where such financial statements are prepared.

2

Reporting Entity

Retirement benefit plans (also known as pension schemes or superannuation schemes) are regarded as reporting entities separate from the employers. All other Standards apply to them unless superseded by this Standard.

3

Group Reporting

The Standard deals with accounting and reporting by the plan to all participants as a group, not reports to individual participants about their specific rights.

4

Relation to IAS 19

IAS 19 Employee Benefits deals with the cost of retirement benefits in the employer's financial statements. This Standard complements IAS 19 by addressing the plan's reporting.

5

Plan Types

Plans may be defined contribution or defined benefit. They may involve separate funds with or without separate legal identity or trustees. The Standard applies regardless of these structures.

6

Insurance Contracts

Plans with assets invested with insurance companies are within the scope unless the contract is in the name of a specified participant/group and the obligation is solely the insurer's responsibility.

7

Exclusions

The Standard does not deal with other employment benefits like termination indemnities, deferred compensation, long-service leave, or government social security arrangements.

8

Definitions

The following terms are used in this Standard with the meanings specified:

• Retirement benefit plans: Arrangements whereby an entity provides benefits for employees on or after termination of service (either in the form of an annual income or as a lump sum) when such benefits, or the contributions towards them, can be determined or estimated in advance of retirement from the provisions of a document or from the entity's practices.
• Defined contribution plans: Retirement benefit plans under which amounts to be paid as retirement benefits are determined by contributions to a fund together with investment earnings thereon.
• Defined benefit plans: Retirement benefit plans under which amounts to be paid as retirement benefits are determined by reference to a formula usually based on employees' earnings and/or years of service.
• Funding: 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.
• Participants: The members of a retirement benefit plan and others who are entitled to benefits under the plan.
• Net assets available for benefits: The assets of a plan less liabilities other than the actuarial present value of promised retirement benefits.
• Actuarial present value of promised retirement benefits: The present value of the expected payments by a retirement benefit plan to existing and past employees, attributable to the service already rendered.
• Vested benefits: Benefits, the rights to which, under the conditions of a retirement benefit plan, are not conditional on continued employment.

9

Sponsors

Some plans have sponsors other than employers; the Standard applies to their financial statements as well.

10

Formal vs Informal

The Standard applies to both formal agreements and informal plans that have acquired a degree of obligation through established practice.

11

Separate Funds

Many plans establish separate funds administered by trustees (independent parties).

12

Plan Characteristics

Plans are normally defined contribution or defined benefit. Hybrid plans are considered defined benefit plans for the purposes of this Standard.

13

Defined Contribution Reporting

The financial statements of a defined contribution plan shall contain a statement of net assets available for benefits and a description of the funding policy.

14

DC Plan Nature

Benefits depend on contributions and investment earnings. The employer's obligation is usually discharged by contributions. Actuarial advice is not normally required.

15

Participant Interest

Participants are interested in the activities because they directly affect future benefits (contributions received, control exercised). Employers are interested in efficient operation.

16

DC Objectives

Reporting objectives are achieved by providing financial statements including: (a) description of significant activities and changes; (b) statements reporting on transactions, investment performance, and financial position; and (c) description of investment policies.

17

Defined Benefit Reporting

The financial statements of a defined benefit plan shall contain either: (a) a statement showing net assets, the actuarial present value of promised retirement benefits (distinguishing vested/non-vested), and the resulting excess/deficit; or (b) a statement of net assets including a note disclosing the actuarial present value (or a reference to an accompanying actuarial report).

18

Actuarial Valuation Basis

If a valuation hasn’t been prepared at the statement date, the most recent one is used and disclosed. The actuarial present value is based on benefits promised under plan terms for service to date, using either current or projected salary levels (with disclosure). Changes in assumptions must be disclosed.

19

Relationship Explanation

Financial statements shall explain the relationship between the actuarial present value of promised benefits and net assets available, and the policy for funding.

20

DB Plan Nature

Payment depends on the plan's financial position, future contributions, and investment performance.

21

Actuarial Advice

Periodic advice of an actuary is needed to assess financial condition, review assumptions, and recommend contribution levels.

22

DB Objectives

Reporting objectives are achieved by providing financial statements including: (a) description of activities and changes; (b) reports on transactions, investment performance, and financial position; (c) actuarial information; and (d) description of investment policies.

23

Salary Approaches

The present value of expected payments may be calculated and reported using current salary levels or projected salary levels.

24

Current Salary Arguments

Reasons for current salary approach: (a) calculated more objectively with fewer assumptions; (b) benefit increases from salary increases become obligations only when the increase occurs; (c) generally more closely related to the amount payable on termination.

25

Projected Salary Arguments

Reasons for projected salary approach: (a) financial information should be on a going concern basis; (b) final pay plans determine benefits by salaries near retirement, so projections are necessary; (c) ignoring projections may result in reporting apparent overfunding or adequate funding when the plan is actually underfunded.

26

Disclosure Context

Current salary valuation indicates the obligation for benefits earned to date. Projected salary valuation indicates the magnitude of the potential obligation on a going concern basis (funding basis). Sufficient explanation is needed to indicate the context.

27

Valuation Frequency

Actuarial valuations are often every three years. If not at the reporting date, the most recent one is used and the date disclosed.

28

Presentation Formats

Information is presented in one of three formats: (a) statement showing net assets, actuarial present value, and surplus/deficit; (b) statement of net assets and changes, with actuarial value in notes; (c) statement of net assets and changes, with separate actuarial report referenced.

29

Format Opinions

Supporters of formats (a) and (b) believe quantification helps users assess plan status. Critics argue format (a) might wrongly imply a liability exists. Supporters of format (c) argue comparing actuarial values directly with asset market values may not be valid.

30

Accepted Formats

The Standard accepts the view permitting disclosure in a separate report but rejects arguments against quantifying the actuarial value. Therefore, all formats in paragraph 28 are acceptable if accompanied by the necessary actuarial information.

32

Asset Valuation

Retirement benefit plan investments shall be carried at fair value. For marketable securities, this is market value. If fair value is not possible, reasons must be disclosed.

33

Valuation Details

Market value is usually the most useful measure. Securities with fixed redemption values acquired to match obligations may be carried at amounts based on ultimate redemption value. Assets used in operations are accounted for under applicable Standards.

34

Disclosure Requirements

Financial statements shall contain: (a) statement of changes in net assets; (b) summary of significant accounting policies; and (c) description of the plan and any changes during the period.

35

Specific Disclosures

Financial statements include (if applicable): (a) statement of net assets disclosing assets classified, basis of valuation, investments exceeding 5% of net assets/class, investments in the employer, and liabilities; (b) statement of changes in net assets showing contributions (employer/employee), investment income, other income, benefits paid, expenses, taxes, profits/losses on investments, and transfers; (c) description of funding policy; (d) for defined benefit plans, the actuarial present value of promised benefits (distinguishing vested/non-vested) and assumptions; (e) description of significant actuarial assumptions.

36

Report Content

The report contains a description of the plan (names of employers/groups, number of participants, type of plan, contribution notes, benefit descriptions, termination terms, and changes).

37

Effective Date

The Standard becomes operative for financial statements covering periods beginning on or after 1 January 1988.