Disclosure by a lessor for operating lease arrangements

Chapter 17 – Employee Benefits Page 227 6 Defined Contribution Plans

6.1 Recognition and measurement

Contributions into a defined contribution plan by an employer are made in return for services provided by an employee during the period. The entity should recognise contributions payable as an expense in the period in which the employee provides the services by reference to which contributions by the employer become payable. A liability should be recognised where contributions arise in relation to an employee’s service, but remain unpaid at the period end. [IAS 19.44] Where contributions are not payable during the period or within 12 months of the end of the period in which the employee provides his or her services on which they accrue, the amount recognised should be discounted, to reflect the time value of money. [IAS 19.45]

6.2 Disclosure

Where an entity operates a defined contribution plan during the period, it should disclose the amount that has been recognised as an expense during the period in relation to the plan. [IAS 19.46] 7 Defined Benefit Plans The formal definition of a defined benefit plan is any post-employment benefit plan not meeting the definition of a defined contribution plan. However, it is generally a plan whereby the amount of benefits that an employee will receive on retirement is specified in some way, for example as a proportion of an employee’s final salary depending on the number of years’ service worked. [IAS 19.7] As noted above, the key feature of a defined benefit plan is that the employer retains an obligation to make up any shortfall in the plan, should there be insufficient funds within it to pay out the promised benefits. It would be inappropriate for the entity to record only the contributions paid as expenses, since in effect it is underwriting some of the risks associated in the plan. There are many uncertainties in terms of the measurement of an employer’s obligation in relation to a defined benefit plan, not least because an obligation only arises if the investments out of which the payment of benefits will be made are less than the benefits payable. In terms of the investments, the major uncertainties relate to how investments, both those already made and those to be made from future contributions, will perform in terms of investment returns and capital appreciation. IAS 19 is based on the principle that an entity has an obligation under a defined benefit plan when an employee performs services which accrue benefits under the plan. It is therefore appropriate that an expense is recognised for an employee’s services during the period in which they are performed and by reference to which benefits will be payable under the defined benefit plan. Because of the long-term nature of a defined benefit plan and the level of uncertainty of actual obligations that will fall due under it, the specialist services of an actuary are required. An estimate of the level of the obligations payable under the plan, and whether the value of the plan’s assets will be sufficient to meet these estimated liabilities, is made. Due to the nature of defined benefit plans, an entity is required to recognise the defined benefit liability in its statement of financial position.