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CMA Intermediate · Corporate Accounting and Auditing · Employee Benefits (Ind AS 19)

Meridian Pharma Ltd has a pension arrangement under which it pays contributions to a fund. For years it has increased pensions of retired employees to keep pace with inflation, though no contract requires it. It has no legal obligation to continue. How does Ind AS 19 treat this practice when classifying the plan?

The practice can create a constructive obligation, so the plan is defined benefit. Ind AS 19 looks at economic substance, and a history of raising benefits for former employees to keep pace with inflation means the entity's obligation is not limited to its agreed contributions.

  1. AIt is ignored because only legal obligations determine classification
  2. BIt can create a constructive obligation, so the entity's obligation is not limited to its contributions and the plan is defined benefitCorrect
  3. CIt makes the plan a defined contribution plan because payments are discretionary
  4. DIt converts the plan into a short-term benefit plan

Explanation

Ind AS 19 says classification depends on economic substance and that informal practices giving rise to a constructive obligation, such as a history of increasing benefits for former employees to keep pace with inflation, mean the obligation is not limited to the agreed contribution. The plan is therefore defined benefit. Looking only at legal obligation is the error in the first option.

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