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 200
company) / unpaid contributions (representing deficit in the Fund)               _______

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)