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8 Cards in this Set
- Front
- Back
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What are the four types of employee benefits? |
• Post-employment benefits. This normally relates to retirement benefits, which will typically take the form of either a defined contribution plan or a defined benefit plan (sometimes referred to as a defined benefit scheme). |
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What is a pension plan?
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A pension plan (sometimes called a post-employment benefit plan or scheme) consists of a pool of assets, together with a liability for pensions owed to employees. Pension plan assets normally consist of investments, cash and (sometimes) properties. The return earned on the assets is used to pay pensions.
There are two main types of pension plan: • defined contribution plans • defined benefit plans. |
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What is a defined contribution plan?
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The pension payable on retirement depends on the contributions paid into the plan by the employee and the employer:
• The employer's contribution is usually a fixed percentage of the employee's salary. The employer has no further obligation after this amount is paid. • Therefore, the annual cost to the employer is reasonably predictable. • Defined contribution plans present few accounting problems, other than ensuring that an accrual is made, where required, for contributions due, but not yet paid, at the reporting date. In this situation, the employee bears the uncertainty regarding the value of the pension that will be paid upon retirement. |
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What is a defined benefit plan?
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The pension payable on retirement normally depends on either the final salary or the average salary of the employee during their career.
• The employer undertakes to finance a pension income of a certain amount, - e.g. 2/3 × final salary × (years of service / 40 years) • The employer has an ongoing obligation to make sufficient contributions to the plan to fund the pensions. • An actuary calculates the amount that must be paid into the plan each year in order to provide the promised pension. The calculation is based on various estimates and assumptions including: - life expectancy - investment returns - wage inflation. • Therefore, the cost of providing defined benefit pensions will vary year-by-year over the working life of employees due to changes in circumstances, estimates and assumptions. |
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What are the three components of the pension charge to be shown in the statement of comprehensive income?
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• Service cost component, which includes current and past service costs, together with any gains or losses on curtailments and settlements. This is charged to profit or loss for the year.
• Net interest component, which is computed by applying the discount rate to measure the plan obligation to the net defined benefit liability or asset. This is charged (or credited) to profit or loss for the year. • Remeasurement component comprises actuarial gains and losses during the reporting period, including the returns on plan assets less any amount taken to profit or loss as part of the net interest component. This is taken to other comprehensive income for the year and identified as an item which will not be reclassified to profit or loss in future periods. |
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What are the two different service costs associated with a defined benefit plan?
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• Current service cost is the increase in the present value of the defined benefit obligation resulting from employee service in the current period. This is part of the service cost component. |
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What is a pension plan amendment? |
A plan amendment is defined as the introduction of, or withdrawal of, or changes to a post-employment benefit plan. It may either increase or decrease present value of the defined benefit obligation. Past service costs could arise, for example, when there has been an improvement in the benefits to be provided under the plan. This will apply whether or not the benefits have vested or whether they are obliged to provide additional work and service to become eligible for those enhanced benefits. |
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Define a curtailment and a settlement
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A curtailment occurs when there is a significant reduction in the number of employees covered by a defined benefit plan. This may occur when there is closure of a plant or discontinuance of an operation. A curtailment gives rise to a past service cost which is recognised at the earlier of three possible dates: |
