Pension Plans: Changes in the Fair Value of Scheme Assets under IAS 19

How should you deal with changes in the fair value of pension scheme assets?

Each year the fair value of the pension plan or scheme’s assets will change.

This is affected by:

  • Payments into the scheme by employers, the contributions, which will increase the scheme’s assets.
  • Returns on investments held by the pension plan, which also increase the assets.
  • Payments to pensioners, which reduce the assets held by the pension plan, but also reduce the amount of liabilities.

The basic journal entries for this is:

DR Liabilities XX
CR   Assets XX


Gains and losses

Each year an actuary will assess the assets and liabilities of a pension plan.

When looking at the scheme’s obligations, the actuary will consider things like life expectancy and interest rates.

These assumptions may change from year to year.

If they change, there will be an actuarial gain or loss which also affects the obligations of the employer to the defined benefit scheme.

These actuarial gains or losses are recognised in other comprehensive income along with any changes in the effect of the asset ceiling and any returns on the plan assets that aren’t interest.

Exam Tip

In the exam, once you have all the figures calculated for our defined benefit pension scheme for the year, you might find the opening asset and liability figure, combined with these changes do not total the closing asset and liability figures.

This difference is due to the unrecognised gains or losses on the assets and liabilities. In the exam we will simply use a balancing figure to calculate them.

Recognising gains and losses in equity

So once we’ve calculated the gains and losses, what do we do with them? Well, we’ll recognise them in equity.

They’ll go to the SOCI under other comprehensive income, and a corresponding journal entry will pop them into reserves.

Asset ceiling

Once you calculate the net asset/liability position, if there is a net pension asset, it should only be recognised if it is recoverable.

Sometimes when a company pays into a pension fund it may not be entitled to any overpayments.

A pension asset should only be recognised in the Statement of Financial Position if the company can either recover the amount paid or reduce their future payments.

Under IAS 19, the pension asset that is recognisable in the Statement of Financial Position is the lower of:

  • The actual pension asset, or
  • The amount recoverable from the pension scheme