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ACCA Strategic Professional · Strategic Business Reporting (International) · Employee benefits

Arden Co pays a fixed 8% of each employee's salary into an independently managed pension fund. Arden has no legal or constructive obligation to pay further amounts if the fund has insufficient assets to pay benefits. Under IAS 19, how should Arden account for the plan?

Arden should treat the scheme as a defined contribution plan and expense the contributions payable for the period. Its obligation is limited to the fixed contributions, with no further legal or constructive obligation, so no deficit liability or actuarial measurement arises.

  1. AAs a defined contribution plan, recognising the contributions payable for the period as an expenseCorrect
  2. BAs a defined benefit plan, recognising a net liability for any fund deficit
  3. CAs a defined benefit plan, but measuring the obligation at undiscounted amounts
  4. DAs a defined contribution plan, recognising the expense only when benefits are paid to retirees

Explanation

A plan where the employer's obligation is limited to fixed contributions and there is no further legal or constructive obligation is defined contribution. The expense is the contribution payable for service in the period, with an accrual or prepayment for unpaid or excess amounts. Recognising expense on payment of benefits is wrong because the cost follows employee service, not retirement payments.

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