Employee Benefits: Pension Assets and IAS 19

In this article, we’ll take a quick look over pension assets for under IAS 19 Employee Benefits.

When a company contributes money into a pension fund, the money is invested in shares, bonds and other investments. These are the plan’s assets.

The fair value of the plan assets is the market value of these investments.

The closing balance of last years pension assets will be this years opening balance. This should be provided to you in the exam.

If you need to calculate the return on the plan’s assets, which is the interest earned on the assets, take the opening balance of the plan’s assets and multiply it by an appropriate discount rate.

This should be provided to you in the exam, and will usually be a rate similar to other corporate bonds.

Let’s look over a short example of how to do this.

How to calculate the interest earned on pension assets

Take the opening balance of pension assets (e.g. 2,000)

Multiply by the expected return (eg. 10%)

This will give you the expected return on plan assets, which is also known as the interest earned (200). This will be added to the asset figure and count towards the closing balance of the assets.

Make sure you use the opening pension assets balance, not closing.

The journal entries for the interest earned on the assets is:

DR Plan Assets XX
CR   Income Statement (Income) XX


Company contributions

Each year the employer pays money into the pension plan on behalf of the employees.

The employer also has an onus to pay any shortfall in the defined benefit pension plan, and may also have a right to an asset if there’s a surplus.

The company’s contributions to the pension fund is recorded in the profit or loss for the period. This is the amount of money the company pays on behalf of the employees.

The basic journal entries for this is:

DR Pension Fund Assets XX
CR   Contributions (P&L) XX


Benefits paid

Benefits paid are the amounts that are paid to retired employees in the period. The basic journal entry for these is:

DR Pension Liabilities XX
CR   Pension Assets XX


The payment of the benefits reduces the assets held by the pension plan, but also reduces the amount of the pension liabilities.

The closing balance of pension assets at the year end will be given to us by the actuary, and should be already calculated in the exam.

If we add up all the entries, there may be a difference. This is due to the remeasurement of the assets and liabilities.

These unrealised gains or losses are a balancing figure in our calculations.