AS 15 Post-employment Benefits: Defined Contribution Plans

Understand Post-employment Benefits: Defined Contribution Plans

Key rules to remember

Definition test

Obligation limited to fixed contribution → Defined contribution plan; otherwise → Defined benefit plan

The test is whether you must pay more if the fund falls short. Always apply this test first.

Expense for the period

Expense = Contribution payable for service rendered in the period

Charge it to the Statement of Profit and Loss unless another AS (such as AS 10 or AS 2) permits inclusion in an asset's cost.

Liability or prepaid amount

Liability = Contribution due − Contribution paid (if positive); Prepaid expense = Contribution paid − Contribution due (if positive)

Recognise a prepaid amount as an asset only to the extent it reduces future payments or gives a cash refund.

Discounting rule

Where contributions to a defined contribution plan do not fall due wholly within 12 months after the end of the period in which the employees render the service → discount them using the discount rate (the market yield on government bonds at the balance sheet date)

Most contributions fall due within 12 months, so most exam problems do not need discounting.

Multi-employer plan with insufficient information

If it is a defined benefit plan and sufficient information is not available → account for your share as a defined contribution plan, and disclose that the plan is a defined benefit plan and the reason sufficient information is not available

Use this only when you cannot get enough information to account for it as a defined benefit plan.

Insured benefits

If your obligation is limited to the premiums and you have no legal or constructive obligation to pay the benefits directly or to pay further amounts if the insurer fails to pay all future benefits → account for it as a defined contribution plan; otherwise → defined benefit plan

Paying premiums alone does not decide it. If you must pay the employee directly or make good the insurer's failure, it is a defined benefit plan.

Disclosure

Disclose the amount recognised as expense for defined contribution plans

Where AS 18 requires it, also disclose the amount for key management personnel.

How to solve Post-employment Benefits: Defined Contribution Plans questions

1. 1Read the facts and ask one question: if the fund falls short, must the employer pay more? If no, it is a defined contribution plan.
2. 2Check for special cases: government provident fund or state plan, multi-employer plan, insured benefit, or exempt PF trust with an interest guarantee. Classify each using its own rule.
3. 3If part of the plan is defined benefit (for example, the interest shortfall guarantee), split the answer. Treat the contributions as defined contribution and the guarantee as a defined benefit obligation.
4. 4Compute the contribution payable for the year from the rate and the salary base given. Use only the salary base stated in the question.
5. 5Decide how much goes to the Statement of Profit and Loss and how much to an asset's cost (for example, staff engaged in constructing a qualifying asset).
6. 6Subtract the amount already paid. A balance due is an accrued liability; an excess paid is a prepaid expense, if it will reduce future payments or be refunded.
7. 7Check whether any contributions do not fall due wholly within 12 months after the end of the period in which the employees render the service. If so, discount them using the discount rate, which is the market yield on government bonds at the balance sheet date.
8. 8State the disclosure: the amount recognised as expense for the period.

Quickest way: Classify first, then compute in three lines

Common mistakes in Post-employment Benefits: Defined Contribution Plans

• Calling every provident fund a defined contribution plan.

  Students remember that PF involves a fixed percentage contribution and stop there.

  Fix: Check who bears the risk. Government-administered PF is defined contribution. In an exempt trust, if you must make good the interest shortfall, treat that obligation as defined benefit.

• Doing an actuarial valuation for a defined contribution plan.

  Students mix up the methods of defined benefit plans with defined contribution plans.

  Fix: For defined contribution, the expense is just the contribution payable for the period. Actuarial valuation and the projected unit credit method belong to defined benefit plans.

• Charging the amount paid in cash, rather than the amount due, to Profit and Loss.

  Students think in cash terms instead of accrual terms.

  Fix: Expense = contribution payable for service rendered. If you have paid less than due, add a liability. If you have paid more, show a prepaid expense, subject to the condition.

• Charging all contributions to Profit and Loss when some staff build a qualifying asset.

  Students forget that AS 15 lets another standard require inclusion in cost.

  Fix: Read the question for staff working on own construction or production. Capitalise their share under AS 10 (or include in inventory under AS 2) and expense the rest.

• Treating all multi-employer and insured plans as defined benefit, or all as defined contribution.

  Students assume complexity means defined benefit, or that paying premiums means defined contribution.

  Fix: Classify by terms. A multi-employer plan that is defined benefit is accounted for as defined contribution only if sufficient information is not available, and then you must disclose that it is a defined benefit plan and why information is lacking. An insured plan is defined contribution only if you have no legal or constructive obligation to pay the benefits directly or to pay further if the insurer fails to pay.

• Discounting every contribution.

  Students carry over discounting from other employee benefit topics.

  Fix: Discount only where contributions do not fall due wholly within 12 months after the end of the period in which the employees render the service. Most contributions fall due within that time, so they need no discounting.

Worked examples