Professional Documents
Culture Documents
Employment Benefit
Employment Benefit
Employment Benefit
Company Fund
1. After fixed contribution
Benefits Paid Company has no further
Defined Benefit Defined obligation.
Plan Contribution Plan
2. Investment risk are
assumed by employee or
third party.
3. Benefit will depend on the
assets of the fund.
Post Retirement Benefit
Contribution Investment
Company Fund
1. Employer is unable to
Benefits Paid show that all actuarial and
Defined Benefit Defined investment risk has been
Plan Contribution Plan transferred to another
party
2. Benefit is normally a pre-
defined formula not solely
linked to the amount of
contribution
Post Employment Benefit
Defined Contribution Plan Defined Benefit Plan
Company pays a fixed contribution Plans not defined as
into a separate fund and has no contribution plans are classed
further legal or constructive as defined benefit plans.
obligation
If an employer is unable to
Actuarial and investment risks of show that all actuarial and
defined contribution plans are investment risk has been
assumed either by the employee or transferred to another party and
the third party. its obligations are limited to
contributions made during the
period, a plan is defined benefit.
Accounting for Defined Contribution Plan
Contribution paid by the company is recorded as an expense.
Any unpaid amount is treated as a liability.
Any overpaid amount is treated as an asset only if it is expected to be
recovered, otherwise treated as an expense.
Accounting for Defined Contribution Plan
Accounting
Contributions paid is recorded as an expense.
Example
ABC Ltd has payroll costs of $5 million for the year ended 31 December 2015. The
company has a defined contribution scheme and pays pension contributions of 5%
of salary costs each year.
During the year, ABC Ltd paid $0.2m and will pay over the balance in January
2016.
Accounting for Defined Benefit Plan
Date of
Employment Post Retirement
Retirement
1. Expense allocated to each year is 1. Fund will be treated as an asset for the
called Current Service Cost (Which company as the risk and reward belongs
is an estimated cost) to the company.
2. All values will be recorded in present 2. Interest earned by the fund will be the
value terms and will increase each income for the company.
year due to unwinding.
3. Contribution into the fund will increase
3. At the end of each year the estimates the fund.
will be reassessed and the liability will
4. Benefits will be paid from the fund which
be recorded as per the new estimates.
will decrease the fund.
Example – Defined Benefit Plan
$
PV of DBO at 1st January 2013 210m
PV of DBO at 31st December 2013 378m
FV of Plan asset at 1st January 2013 168m
FV of Plan asset at 31st December 2013 294m
Current service cost 63m
Contribution paid 105m
Benefits paid 20m
Discount rate 10%
Answer to Example
Plan Net
Particular DBO
Asset Liability
Brought forward
Interest expense / Income
Current Service Cost
Contribution paid*
Benefits paid
Re-measurement gain / loss
Carried forward
Past Service Cost
Past service cost is the change in liability due to change in pension
entitlement.
Past service cost may either be positive (where pension entitlements are
increased) or may be negative (where pension entitlements are reduced).
Decrease in Employees in the Plan
Decrease
Dr. DBO
Over paid Under paid
Cr. Gain on Curtailment