Page 424 - SBR Integrated Workbook STUDENT S18-J19

Chapter 25

Chapter 9

Example 1

Defined contribution or defined benefit?

IAS 19 Employee Benefits says that a defined contribution pension plan exists
when the entity pays fixed contributions into a separate entity and has no legal
or constructive obligation to make further contributions. A constructive
obligation is where past practice or published policies have created a valid
expectation that the entity will discharge certain responsibilities.
The money in the Fund may not be sufficient to pay employees the retirement
benefits stated in the plan. Therefore Golden Gate bears some actuarial and
investment risk because, if it continues with the Fund, it would need to make
up for this shortfall.
Golden Gate does not have a legal obligation to make up this shortfall
because the Fund can be cancelled at any time. However, it does have a
constructive obligation because its past behaviour – its treatment of
employees, its press release – has created a valid expectation among its
employees that it will pay enhanced benefits on retirement.

Based on the above, the Fund should be accounted for as a defined benefit
scheme.

Example 2

Defined contribution pension schemes

The expense for the year is $0.7 million ($7m × 10%).
The contributions paid in the year are $0.6 million ($0.05m × 12 months).

An accrual of $0.1 million ($0.7m expense – $0.6m payment) will be recorded
on the statement of financial position.

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