Defined contribution plansFor defin

Defined contribution plans

For defined contribution plans, the cost to be recognised in the period is the contribution payable in exchange for service rendered by employees during the period. [IAS 19(1998).44]

If contributions to a defined contribution plan do not fall due within 12 months after the end of the period in which the employee renders the service, they are discounted to their present value. [IAS 19(1998).45]

Defined benefit plans

For defined benefit plans, the amount recognised in the statement of financial position is the present value of the defined benefit obligation (that is, the present value of expected future payments required to settle the obligation resulting from employee service in the current and prior periods), as adjusted for unrecognised actuarial gains and losses and unrecognised past service cost, and reduced by the fair value of plan assets at the end of the reporting period. [IAS 19(1998).54]

The present value of the defined benefit obligation should be determined using the Projected Unit Credit Method. [IAS 19(1998).64] Valuations should be carried out with sufficient regularity such that the amounts recognised in the financial statements do not differ materially from those that would be determined at the end of the reporting period. [IAS 19(1998).56] The assumptions used for the purposes of such valuations must be unbiased and mutually compatible. [IAS 19(1998).72] The rate used to discount estimated cash flows is determined by reference to market yields at the end of the reporting period on high quality corporate bonds, or where there is no deep market in such bonds, by reference to market yields on government bonds. [IAS 19(1998).78]

On an ongoing basis, actuarial gains and losses arise that comprise experience adjustments (the effects of differences between the previous actuarial assumptions and what has actually occurred) and the effects of changes in actuarial assumptions. In the long-term, actuarial gains and losses may offset one another and, as a result, the entity is not required to recognise all such gains and losses in profit or loss immediately. IAS 19 (1998) specifies that if the accumulated unrecognised actuarial gains and losses exceed 10% of the greater of the defined benefit obligation or the fair value of plan assets, a portion of that net gain or loss is required to be recognised immediately as income or expense. The portion recognised is the excess divided by the expected average remaining working lives of the participating employees. Actuarial gains and losses that do not breach the 10% limits described above (the 'corridor') need not be recognised - although the entity may choose to do so. [IAS 19(1998).92-93]

In December 2004, the IASB issued amendments to IAS 19 (1998) to allow the option of recognising actuarial gains and losses in full in the period in which they occur, outside profit or loss, in other comprehensive income. This option is similar to the requirements of the UK standard, FRS 17 Retirement Benefits. The Board concluded that, pending further work on post-employment benefits and on reporting comprehensive income, the approach in FRS 17 should be available as an option to preparers of financial statements using IFRSs. [IAS 19(1998).93A]

Over the life of the plan, changes in benefits under the plan will result in increases or decreases in the entity's obligation.

Past service cost is the term used to describe the change in the obligation for employee service in prior periods, arising as a result of changes to plan arrangements in the current period. Past service cost may be either positive (where benefits are introduced or improved) or negative (where existing benefits are reduced). Past service cost is recognised immediately to the extent that it relates to former employees or to active employees already vested. Otherwise, it is amortised on a straight-line basis over the average period until the amended benefits become vested. [IAS 19(1998).96]

Plan curtailments or settlements: Gains or losses resulting from curtailments or settlements of a plan are recognised when the curtailment or settlement occurs. [IAS 19(1998).109-110] Curtailments are reductions in scope of employees covered or in benefits.

If the calculation of the statement of financial position amount set out above results in an asset, the amount recognised is limited to the net total of unrecognised actuarial losses and past service cost, plus the present value of available refunds and reductions in future contributions to the plan. [IAS 19(1998).58]

The IASB issued the final 'asset ceiling' amendment to IAS 19 (1998) in May 2002. The amendment prevents the recognition of gains solely as a result of deferral of actuarial losses or past service cost, and prohibits the recognition of losses solely as a result of deferral of actuarial gains. [IAS 19(1998).58A]

The amount recognised in the profit or loss (unless included in the cost of an asset under another Standard) in a period in respect of a defined benefit plan is made up of the following components: [IAS 19(1998).61]

current service cost (the actuarial estimate of benefits earned by employee service in the period) interest cost (the increase in the present value of the obligation as a result of moving one period closer to settlement) expected return on plan assets* and on any reimbursement rights actuarial gains and losses, to the extent recognised past service cost, to the extent recognised the effect of any plan curtailments or settlements the effect of 'asset ceiling'
*The return on plan assets is interest, dividends and other revenue derived from the plan assets, together with realised and unrealised gains or losses on the plan assets, less any costs of administering the plan (other than those included in the actuarial assumptions used to measure the defined benefit obligation) and less any tax payable by the plan itself. [IAS 19(1998).7]

IAS 19 (1998) contains detailed disclosure requirements for defined benefit plans. [IAS 19(1998).120-125]

IAS 19 (1998) also provides guidance on allocating the cost in:

a multi-employer plan to the individual entities-employers [IAS 19(1998).29-33] a group defined benefit plan to the entities in the group [IAS 19(1998).34-34B] a state plan to participating entities [IAS 19(1998).36-38].