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Chapter 8

Defined benefit plans

3.1 Statement of financial position

An entity with a defined benefit plan has an obligation to pay its
employees a promised level of pension benefit upon retirement. The
pension plan obligation is a liability and is measured at present value.

The entity will have been paying cash into the pension plan in order to
meet the pension obligation. These assets will be invested to generate
returns. The pension plan assets are measured at fair value.

On the statement of financial position, the entity offsets the obligation and the plan
assets and reports the net position:

 If the obligation exceeds the assets then the pension is in deficit and a liability is
reported

 If the assets exceed the obligation then the pension is in surplus and an asset is
reported.

Due to the difficulty involved in calculating these amounts, IAS 19 recommends the
use of an expert known as an actuary.

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