Understanding Post Employment Benefits (Pensions) for IAS 19

Post-employment benefits

Post-employment benefits, by their name, are benefits that are given, or will be given, to employees after they have left the company.

The main type of post-employment benefit we will come across is a pension, but there are also post-employment life insurance and health insurance that may also arise.

We’ll just look at pensions though, and the two types of pension we’ll be looking are:

  1. defined contribution plans and
  2. defined benefit plans

Each of these requires different accounting treatment.

What is a defined contribution pension plan?

In this type of pension plan, the employer pays a fixed amount of money at regular intervals into a pension plan held on behalf of the employee. The amount the employer pays is usually a set rate, e.g. 5% of the employees’ salary.

Once paid the payments/contributions are invested by a pension fund into a range of investments which increase the overall amount of money held by the fund.

Employees and defined contribution plans

When the employee retires they receive a pension from the pension plan, the amount of which depends on the size of the pension fund. This can fluctuate depending on a variety of factors including the amount of contributions made to the fund and returns earned by the investments.

In recent years, the funds held by pension funds went down with the global financial crisis and Ireland’s own economic problems. This leaves less money for pensioners holding defined contribution plans to draw down.

Employers and defined contribution plans

From an employer point of view, the entity’s obligation is limited to the amount it agrees to contribute to the fund. If the investments held by the fund perform badly, there is no recourse to the employer. All the risks of a badly performing pension fund fall to the employee, not the employer.

Accounting for defined contribution pension plans

The accounting treatment for contributions to a defined contribution scheme is fairly straightforward. The company pays an amount of money into the pension plan each year, and that’s it, done.

Under the accruals concept, the contributions payable for the period is expensed to the income statement as an employee cost for that period.

If there are any unpaid employer contributions at the end of the period, these will be recorded as a liability, and any prepaid/overpaid contributions will be recorded as an asset. In most cases, these assets or liabilities will be current, unless the entity pays contributions for more than a year in advance, which is unlikely.