Introduction

IAS 26 sets out the form and content of the general-purpose financial reports of retirement benefit plans. The standard applies to:

• Defined contribution plans where benefits are determined by contributions to the plan together with investment earnings thereon; and
• Defined benefit plans where benefits are determined by a formula based on employees' earnings and/or years of service.

IAS 26 may be compared to IAS 19. The former addresses the financial reporting considerations for the benefit plan itself, as the reporting entity, while the latter deals with employers' accounting for the cost of such benefits as they are earned by the employees. While these standards are thus somewhat related, there will not be any direct interrelationship between amounts reported in benefit plan financial statements and amounts reported under IAS 19 by employers.

Definitions of Terms

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.

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.

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.

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.

Net assets available for benefits. The assets of a retirement benefit plan less its liabilities other than the actuarial present value of promised retirement benefits.

Participants. The members of a retirement benefit plan and others who are entitled to benefits under the plan.

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 (i.e., based on a formal arrangement) or from the entity's practices (which is referred to as an informal arrangement).

Vested benefits. Benefits, the rights to which, under the terms of a retirement benefit plan, are not conditional on continued employment.

Scope

IAS 26 should be applied in accounting and reporting by retirement benefit plans. IAS 26 does not establish a mandate for the publication of such reports by retirement plans. However, if such reports are prepared by a retirement plan, then the requirements of this standard should be applied to them.

IAS 26 regards a retirement benefit plan as a separate entity, distinct from the employer of the plan's participants. It is noteworthy that this standard also applies to retirement benefit plans that have sponsors other than the employer (e.g., trade associations or groups of employers). Furthermore, this standard deals with accounting and reporting by retirement benefit plans to all participants as a group and does not deal with reports to individual participants with respect to their retirement benefit entitlements.

The standard applies the same basis of accounting and reporting to both formal and informal retirement benefit plans. It is also worthy of mention that this standard applies whether or not a separate fund is created and regardless of whether there are trustees. The requirements of this standard also apply to retirement benefit plans with assets invested with an insurance company, unless the contract with the insurance company is in the name of a specified participant or a group of participants and the responsibility is solely of the insurance company.

This standard does not deal with other forms of employment benefits such as employment termination indemnities, deferred compensation arrangements, long-service leave benefits, special early retirement or redundancy plans, health and welfare plans or bonus plans.

Retirement benefit plans are usually described as being either defined contribution or defined benefit plans. When the quantum of the future benefits payable to the retirement benefit plan participants is determined by the contributions paid (by the participants' employer, the participants, or both) together with investment earnings thereon, such plans are defined contribution plans. Defined benefit plans, by contrast, promise certain benefits, often determined by formulae which involve factors such as years of service and salary level at the time of retirement, without regard to whether the plan has sufficient assets.

Under defined benefit plans the ultimate responsibility for payment (which may be guaranteed by an insurance company, the government or some other entity, depending on local law and custom) remains with the employer. In rare circumstances, a retirement benefit plan may contain characteristics of both defined contribution and defined benefit plans. Such a hybrid plan is deemed to be a defined benefit plan for the purposes of this standard.

Defined Contribution Plans

IAS 26 requires that the reporting of a defined contribution plan contains a statement of the net assets available for benefits and a description of the funding policy. In preparing the statement of the net assets available for benefits, the plan investments should be carried at fair value, which for marketable securities would be market value. In cases where an estimate of fair value is not possible, disclosure is required of the reason as to why fair value has not been used. As a practical matter, most plan assets will have determinable market values, since the plans' trustees' discharge of their fiduciary responsibilities will generally mandate that only marketable investments be held.

An example of a statement of net assets available for plan benefits, for a defined contribution plan, is set forth below.

Defined Benefit Plans

When amounts to be paid as retirement benefits are determined by reference to a formula, usually based on employees' earnings and/or years of service, such retirement benefit plans are defined benefit plans. The key factor is that the benefits are fixed or determinable, without regard to the adequacy of assets which may have been set aside for payment of the benefits.

The reporting objective for a defined benefit plan is periodically to provide information about the financial resources and activities of the plan that is useful in assessing the relationship between the accumulated resources and the plan benefits over time. To achieve the objective the financial statement usually includes the following:

1. A description of significant activities for the period and the effect of changes relating to the plan, its membership and terms and conditions.
2. A statement of performance for the period and the financial position at the end of the period.
3. Actual information either as part of the financial statements or separately.
4. A description of the investment policies.

The standard requires that the report of a defined benefit plan should contain either:

1. A statement that shows:
   1. The net assets available for benefits;
   2. The actuarial present value of promised retirement benefits, distinguishing between vested and non-vested benefits; and
   3. The resulting excess or deficit;

   or

2. A statement of net assets available for benefits including either:
   1. A note disclosing the actuarial present value of promised retirement benefits, distinguishing between vested and non-vested benefits; or
   2. A reference to this information in an accompanying actuarial report.

The standard does not make it incumbent upon the plan to obtain annual actuarial valuations. If an actuarial valuation has not been prepared on the date of the report, the most recent valuation should be used as the basis for preparing the financial statement. The date of the valuation used should be disclosed. Actuarial present values of promised benefits should be based either on current or projected salary levels. Whichever basis is used should be disclosed. The effect of any changes in actuarial assumptions that had a material impact on the actuarial present value of promised retirement benefits should also be disclosed. The report should explain the relationship between actuarial present values of promised benefits, the net assets available for benefits and the policy for funding the promised benefits.

As in the case of defined contribution plans, investments of a defined benefit plan should be carried at fair value, which for marketable securities would be market value.

The following are examples of the alternative types of reports prescribed for a defined benefit plan:

Disclosures

IAS 26 requires that the reports of a retirement benefit plan, both defined benefit plans and defined contribution plans, should also contain the following information:

1. A statement of changes in net assets available for benefits;
2. A summary of significant accounting policies; and
3. A description of the plan and the effect of any changes in the plan during the period.

Reports provided by retirement benefits plans may include the following, if applicable:

1. A statement of net assets available for benefits disclosing:
   1. Assets at the end of the period suitably classified;
   2. The basis of valuation of assets;
   3. Details of any single investment exceeding either 5% of the net assets available for benefits or 5% of any class or type of security;
   4. Details of any investment in the employer; and
   5. Liabilities other than the actuarial present value of promised retirement benefits.
2. A statement of changes in net assets available for benefits showing the following:
   1. Employer contributions;
   2. Employee contributions;
   3. Investment income such as interest and dividends;
   4. Other income;
   5. Benefits paid or payable (analysed, for example, as retirement, death and disability benefits, and lump sum payments);
   6. Administrative expenses;
   7. Other expenses;
   8. Taxes on income;
   9. Profits and losses on disposal of investments and changes in value of investments; and
   10. Transfers from and to other plans.
3. A description of the funding policy;
4. For defined benefit plans, the actuarial present value of promised retirement benefits (which may distinguish between vested benefits and non-vested benefits) based on the benefits promised under the terms of the plan, on service rendered to date and using either current salary levels or projected salary levels. This information may be included in an accompanying actuarial report to be read in conjunction with the related information; and
5. For defined benefit plans, a description of the significant actuarial assumptions made and the method used to calculate the actuarial present value of promised retirement benefits.

According to the standard, since the report of a retirement benefit plan contains a description of the plan, either as part of the financial information or in a separate report, it may contain the following:

1. The names of the employers and the employee groups covered;
2. The number of participants receiving benefits and the number of other participants, classified as appropriate;
3. The type of plan—defined contribution or defined benefit;
4. A note as to whether participants contribute to the plan;
5. A description of the retirement benefits promised to participants;
6. A description of any plan termination terms; and
7. Changes in items 1 through 6 during the period covered by the report.

Furthermore, it is not uncommon to refer to other documents that are readily available to users and in which the plan is described, and to include only information on subsequent changes in the report.

US GAAP Comparison

The US GAAP codification has separate sections for the reporting by defined benefit plans (ASC 960), defined contribution plans (ASC 962) and health and welfare plans (ASC 965). Like IFRS, actuarial measurement of the obligation is necessary and shall include estimates of participant vesting.

The obligations for these three types of plans must include future expected increases in salary rates (if applicable). There is no option as there is under IFRS to choose current salary levels. US GAAP, like IFRS, includes future increases in benefits costs. Plan assets are recorded at fair value with reductions for costs to sell. Benefit-responsive insurance contracts are reported both at fair value and contract value.

The accounting for benefit plans under US GAAP is heavily influenced by US regulations, primarily the Employment Retirement and Income Security Act of 1974 (ERISA). Certain disclosures are required only because ERISA mandates them, although the plan need not be under the jurisdiction of ERISA. Additionally, certain US government-defined plans are specifically presented in the financial statements of the plans.

Generally, all three types of plans require the following statements:

• A statement that includes information regarding the net assets available for benefits as of the end of the plan year.
• A statement that includes information regarding the changes during the year in the net assets available for benefits.
• Except for defined contribution plans, information regarding the actuarial present value of accumulated plan benefits as of either the beginning or end of the plan year.