1. Technical Opinion on IAS 26
Enquiry:
Our Company is maintaining separate funded Gratuity and Pension Funds (defined benefit plans) for the provision of retirement benefits to its eligible employees. Annual actuarial valuations are carried out for the determination of the liability to be recorded in the Company’s financial statements as of year-end as per lAS 19. The defined benefit liability recognized in the financial statements of the Company for the above defined benefit plans, as per the requirement of IAS 19, is the net total of the present value of defined benefit obligation at the end of the reporting period and current service cost minus the fair value of plan assets at the end of the said reporting period.
The following example would be helpful to explain the above fact and for discussions hereinafter:
Rupees)
Present value of defined benefit obligation as of the year end 300
Fair value of plan assets as of the year-end (100)
Net liability at end of the year (as recognized in the financial
statements of the company) / unpaid contributions (representing
deficit in the Fund) 200
Enquiry:
The query is in respect of the preparation of the separate financial statements of defined benefit plans and not from the perspective of the Company.
The query is in respect of assets that can be recognized in the separate financial statements of the defined benefit plans under lAS 26 (Accounting and Reporting for Retirement benefit Plans), under which these financial statements are being prepared.
To be specific, can a defined benefit retirement plan record the above deficit of Rs. 200 in the Fund as an amount receivable from the Company in its separate financial statements under IAS 26 (as an asset)?. In other words can it form part of the ‘Net assets available for benefits’ to be reported in the separate financial assets of a defined benefit plan?
Company’s Viewpoint / Treatment
We have been preparing our funds’ financial statements on the convention that amount not yet contributed by the Company (amounting to Rs.200 in the above example) is booked as receivable from company in the ‘Statement of Net Assets Available for Benefits’ of the funds. This view is based on the fact that liability for the said amount has also been recognized by the Company in its own financial statements.
Furthermore previously our funds were being audited by one of the top audit firms for a period of six years and they maintained the same treatment. However our audit firm has been rotated for FY2015 and the incoming auditors are of the view that such amount should not be made part of ‘Statement of Net Assets Available for Benefits’ instead it should only be disclosed in the notes to financial statements. The detailed viewpoint of our existing auditors is given in following paragraphs
In view of the above, we are in disagreement with our existing auditors and request you for the advice in this regard at the earliest.
Auditors’ Viewpoint / Treatment
Existing auditor recommends that this amount of Rs.200, representing deficit in the fund, is not part of the ‘Net Assets Available for Benefits’ and as such cannot be so recorded as an amount receivable from the Company in the separate financial statements of the defined benefit plan for inclusion in the said net assets (although its separate disclosure is required as a deficit in the Fund).
As per the definition of ‘Net assets available for benefits’ given in lAS 26, the amount of deficit mentioned above do not form part of the ‘Net assets available for benefits’. This fact can be corroborated from the definition itself wherein it indicates that net assets are the assets of the plan (net of liabilities mentioned therein). Plan assets have been explained in more detail in paragraph 114 of IAS 19, under which it states that the ‘Plan Assets.’ exclude unpaid contributions due from the reporting entity to the fund, and as such for this reason the view is that since no ‘funding’ has been made to the Fund by the Company, un-contributed amount cannot be considered part of the assets or ‘Net Assets’ of the Fund.
Paragraphs 17 and 28 of lAS 26 gives different formats for the presentation of actuarial information. In each of these formats, essentially the essence is the quantification/ presentation of deficit/ surplus and is determined by deducting the ‘net assets available for benefits’ with the actuarial present value of promised retirement benefits. In case the amount yet due from the Company (amounting to Rs.200 in the above mentioned example) is included in the net assets available for benefits’ in the separate financial statements of the defined benefit plan, essentially there would no deficit or excess to quantify and report. These paragraphs essentially contain different modes of the presentation of net assets and actuarial obligation and at no point does it mention that the amount not yet contributed by the Company is part of the net assets available for benefits.
Essentially the view is that in case of both the Company and the separate financial statements of the defined benefit plan, fair value of the plan assets should be the same (i.e. Rs.l00 in the above mentioned example) on the assumption that the Fund carries all of its assets at fair values.
Furthermore, since these are defined benefit plans, the obligation vests with the reporting entity (i.e. the Company) and as such an obligation cannot be created in the separate financial statements of the Fund for the present value of promised retirement benefits. Recognition of a balance receivable from the Company in the said separate financial statements (in respect of the deficit / unpaid contributions) would amount to the recognition of the liability as explained above. Fund’s responsibility is only the maintenance of the assets in accordance with its mandate.
We would appreciate ICAP’s views and necessary clarification on the above-mentioned query.
Opinion:
The Committee would like to draw your attention to the following paragraphs of IAS 26 ‘Accounting and Reporting for Retirement benefit Plans’: (underline is ours)
Net assets available for benefits are the assets of a plan less liabilities other than the 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.
17 The financial statements of a defined benefit plan shall contain either:
(a) a statement that shows:
(i) the net assets available for benefits;
(ii) the actuarial present value of promised retirement benefits, distinguishing between vested benefits and non-vested benefits; and
(iii) the resulting excess or deficit; or
(b) a statement of net assets available for benefits including either:
(i) a note disclosing the actuarial present value of promised retirement benefits, distinguishing between vested benefits and non-vested benefits; or
(ii) a reference to this information in an accompanying actuarial report.
If an actuarial valuation has not been prepared at the date of the financial statements, the most recent valuation shall be used as a base and the date of the valuation disclosed.
Financial statement content
28 For defined benefit plans, information is presented in one of the following formats which reflect different practices in the disclosure and presentation of actuarial information:
(a) a statement is included in the financial statements that show the net assets available for benefits, the actuarial present value of promised retirement benefits, and the resulting excess or deficit. The financial statements of the plan also contain statements of changes in net assets available for benefits and changes in the actuarial present value of promised retirement benefits. The financial statements may be accompanied by a separate actuary’s report supporting the actuarial present value of promised retirement benefits;
(b) financial statements that include a statement of net assets available for benefits and a statement of changes in net assets available for benefits.
The actuarial present value of promised retirement benefits is disclosed in a note to the statements. The financial statements may also be accompanied by a report from an actuary supporting the actuarial present value of promised retirement benefits; and
(c) financial statements that include a statement of net assets available for benefits and a statement of changes in net assets available for benefits with the actuarial present value of promised retirement benefits contained in a separate actuarial report.
In each format a trustees’ report in the nature of a management or directors’ report and an investment report may also accompany the financial statements.
Your attention is also drawn to following paragraph of IAS 26 ‘Accounting and Reporting for Retirement Benefit Plans’:
31 This Standard accepts the views in favor of permitting disclosure of the information concerning promised retirement benefits in a separate actuarial report. It rejects arguments against the quantification of the actuarial present value of promised retirement benefits. Accordingly, the formats described in paragraph 28(a) and (b) are considered acceptable under this Standard, as is the format described in paragraph 28(c) so long as the financial statements contain a reference to, and are accompanied by, an actuarial report that includes the actuarial present value of promised retirement benefits.
From the above referred definitions and paragraphs, it implies that unpaid contributions due from the reporting entity to the fund are excluded from plan assets. Paragraph 17 and 28 explains different formats of presentation of net assets and actuarial obligation and does not anywhere mention that the amount not yet contributed by the Company is part of the net assets available for benefits.
Based on the above, the Committee is of the view that unpaid contributions cannot form part of the ‘Net assets available for benefits’ in the separate financial statements of a defined benefit plan and may be disclosed in the notes.
(January 11, 2016)
2. Accounting for Investments of Provident Fund Trust
Enquiry:
Trust Deed and the Trust Rules made there-under are the constitutive documents of a Provident Fund Trust. These constitutive documents also spell out the accounting/ financial reporting and book keeping requirements of the Provident Fund Trust.
Financial statements of Provident Fund Trust are prepared in accordance with lAS 26 ‘Accounting and Reporting by Retirement Benefit Plans’. lAS 26 mandate valuation of investments of the Provident Fund Trust at fair value.
In case of some Provident Fund Trusts, the financial reporting provisions contained in the Trust Deed or the Trust Rules made there-under require that: a percentage of surplus arising on re-measurement of investments to fair value should not be appropriated among Provident Fund Trust Members; or a particular type of investment should be measured at cost; or a particular type of investment be measured at lower of fair value and cost etc.
Trustees of the Provident Fund Trust include such requirements in the Trust Deed the Trust Rules made there-under in view of prudence concept and to counter the demerits of fair value accounting of investments and in some cases to maximize the returns to Provident Fund Trust members
As the Trust Deed and the Trust Rules made there-under are the constitutive documents of a Provident Fund Trust, hence have an overriding effect on requirements of lAS 26. Please confirm this understanding.
Strength is also derived from the financial statements of open end mutual funds. In case of open end mutual funds, Trust Deed is the constitutive document and it is mentioned therein to amortize the preliminary expenses and flotation costs over a period of five years. Hence, requirements of constitutive document have an overriding effect on approved accounting standards. Accounting policy of “Preliminary expenses and flotation costs” and “Statement of compliance” of an open end mutual fund is reproduced below for ready reference:
“Preliminary expenses and floatation costs:
Preliminary expenses and floatation costs represent expenditure incurred prior to the commencement of operations of the Fund. These costs are being amortized over a period of five years commencing from _____, as per the requirement of the Trust Deed of the Fund.”
“Statement of compliance
These financial statements have been prepared in accordance with approved accounting standards as applicable in Pakistan. Approved accounting standards comprise of such International Financial Reporting Standards (IFRSs) issued by the International Accounting Standards Board as are notified under the Companies Ordinance, 1984, the requirements of the Trust Deed, the Non-Banking Finance Companies (Establishment and Regulation) Rules, 2003 (the NBFC Rules), the requirements of the Non-Banking Finance Companies and Notified Entities Regulations, 2008 (the NBFC Regulations) and the directives issued by the Securities and Exchange Commission of Pakistan (SECP). Wherever the requirements of the Trust Deed, the NBFC Rules, the NBFC Regulations or the directives issued by SECP differ with the requirements of IFRSs, the requirements of the Trust Deed, the NBFC Rules, the NBFC Regulations or the directives issued by SECP prevail.”
Opinion:
The retirement benefit funds are established under the Trust Act, 1882 as separate entities in Pakistan and the trust deed is the incorporation document under which trust rules are formulated. The Trust Act, 1882 and the trust deed of the retirement benefit fund both require the preparation of financial statements for the funds but do not specify the applicable financial reporting framework under which the financial statements of the funds are required to be prepared. The generally accepted accounting framework in Pakistan is IAS/IFRS and for companies the requirement is emanating from section 234 of the Companies Ordinance 1984.
The accounts in Pakistan are required to be prepared in accordance with generally applicable framework so that they are comparable and understandable by the users. If the accounts are prepared in accordance with trust deed of each fund then they would not remain comparable. Trust deed can guide as to what is to be or not to be distributed but cannot override accounting policies which are required to be followed in accordance with IAS/IFRS. Hence, in view of the Committee IAS 26 will be the accounting framework of provident funds.
(November 12, 2015)