1. Accounting For Superannuation Plans
Lecture-11 Topic-6
Accounting For Superannuation Plans
Readings Reference :
Text chapter 23: Accounting for superannuation plans
; Australian Financial Accounting McGraw-
Hill; 6th edition, 2008; p.p

2. Learning Outcome/Objectives
Understand what a superannuation plan is
Know the difference between a defined benefit superannuation plan and a defined contribution superannuation plan
Understand how accrued benefits are calculated for a defined benefit superannuation plan
Understand how accrued benefits are calculated for a defined contribution superannuation plan

3. Objectives (cont.)
Understand what financial statements must be prepared for a defined benefit superannuation plan, and what financial statements must be prepared for a defined contribution superannuation plan
Understand how assets must be measured, and how revenue is determined for a superannuation plan pursuant to AAS 25
Be aware of the disclosure requirements contained within AAS 25

4. AASB 119 Employee Benefits
Individuals frequently have a material amount of their wealth tied up in superannuation plans. These plan, also called ‘funds’, are established for the purpose of paying retirement, death or disability benefits to members of the fund, or to their beneficiaries.
Members retirement benefits may take the form of either a pension or a lump sum on retirement – with some plans allowing members to take time both a lump sum and a pension.
For many individuals their expected superannuation entitlement represents the largest proportion of their wealth at the time of their retirement . Such individuals would therefore typically require information about::
Their individual claim against the fund; and
The ability of the fund to pay the claim when it is due.
AASB 119 Employee Benefits
Addresses employee benefit obligations from the employer’s perspective—not from the perspective of the superannuation fund

5. AAS 25 AAS 25 Financial Reporting by Superannuation Plans
Contains recognition and disclosure requirements for superannuation plans
The AASB is currently undertaking a comprehensive review of the accounting requirements for superannuation plans and a new standard is expected in the near future
Among the reasons for the review are some inconsistencies between AAS 25 and the requirements embodied in AASB 119
As an interim measure, the AASB made some minor amendments to AAS 25, which was re-released in May 2006

6. Introduction to accounting for superannuation plans
An arrangement between trustees and employers, employees or self-employed persons that benefits will be provided upon the retirement (or other specified events) of plan members.
Superannuation plans control significant sums of money and play a significant role in Australian financial markets

7. Introduction to accounting for superannuation plans (cont.)
Funds managed through trusts
Funds paid by employers and/or employees into the trust fund
Role of trustees
To administer the fund in the interests of all members and in accordance with fund’s rules and government laws

8. Introduction to accounting for superannuation plans (cont.)
Fund administrators:
are appointed by trustees
administer the day-to-day running of the fund, arrange insurance cover and advise on fund’s operations
Provide advice to trustees who may not have extensive superannuation or investment experience themselves
Australian Prudential Regulation Authority (APRA) & Australian Securities and Investments Commission ( ASIC)
monitors and regulates operations of superannuation funds (also banks, insurance companies, etc.)

9. Introduction to accounting for superannuation plans (cont.)
Contributory plan
Employees contribute periodic payments into the trust fund
Non-contributory plan
All contributions made by employer
Types of reports provided by superannuation plans are those relating to:
individual contributions and entitlements of each member
the performance and financial position of the plan itself

10. Introduction to accounting for superannuation plans (cont.)
AAS 25 Financial Reporting by Superannuation Plans
No disclosure requirements about individual members’ entitlements
The provision of reports pertaining to individuals members contributions and entitlements is a requirement within Australia pursuant to particular statutory regulations, such as those in the Superannuation Industry Supervision Act 1993(SIS)
No statutory backing, but APRA encourages compliance
Prescribes accounting and disclosure policies for superannuation plans deemed to be reporting entities

11. Introduction to accounting for superannuation plans (cont.)
Only funds deemed to be reporting entities need follow AAS 25
Funds that might not be deemed to be reporting entities are:
single-member plans
plans where plan members are employed by entities other than public companies, and the plan members and the owners of the employer entity are identical groups

12. Status of the current accounting standard on superannuation plans
The accounting standard that deals with superannuation plans, including defined benefit plans, is AAS 25 Financial Reporting by Superannuation Plans. This is the one accounting standard within Australia that still retains the AAS prefix. AAS 25 was initially developed by the Australian Accounting Research Foundation (AARF),which has since been disbanded and its accounting responsibilities transferred to the AASB.
The AASB is currently undertaking a comprehensive review of the accounting requirements for superannuation plans and a new standards is expected in the near future .
As a part of this process, in October2008 a draft exposure draft for a replacement standard for AAS25 Financial Reporting by Superannuation Plans was reviewed by a panel appointed by the AASB .

13. Classification of superannuation plans
Defined benefit plan
Amounts to be paid to members at normal retirement age are specified or determined, at least in part, by members’ years of membership and/or salary levels( paragraph 12 of AAS 25)
Defined benefit plans have an option in relation to the financial statements they provide: They can elect between providing:
A statement of net assets, a statement of changes in net assets and accompanying notes ; or
A statement of financial position, an operating statement , a statement of cash flows and accompanying notes.

14. Classification of superannuation plans
Defined contribution plan/ accumulation fund
Amounts to be paid at normal retirement age are determined by accumulated contributions made by and/or on behalf of members, and together with investment earnings . That is , the benefits to be derived from a defined contribution fund will be directly dependent upon the earnings of the fund in the period leading up to retirement date and each member shares in the net income of the fund in appropriation to their ‘equity’ in the fund.
Defined contribution plans that are reporting entities are required , pursuant to AAS 25, to provide:
(a) a balance sheet ( statement of financial position);
(b) an operating statement; and
© a statement of cash flows.

15. Measurement rules
Assets ( paragraph 27of AAS 25) the assets of a superannuation fund may include:
Contribution receivable, being amounts due to the plan at the reporting date from employers, members and other contributors;
Investments of the plan , which may include equity or debt securities and real estates;
Cash and other monetary assets; and other assets, including those which are used in the operation of the plan.

16. Measurement rules (cont..)
All assets are to be measured at net market values as at reporting date (AAS 25)
Net market value is defined in AAS 25 as ‘the amount which could be expected to be received from the disposal of an asset in an orderly market after deducting costs expected to be incurred in realising the proceeds of such a disposal’
Presents difficulties for assets that are thinly traded and/or of a highly specialised nature
Justification for net market value (AAS 25)
It provides more relevant information to users about resources available to pay benefits than does the cost basis

17. Measurement rules (cont.)
Revenue ( paragraph 29 of AAS 25)
May include investment revenue (e.g. interest, dividends, proceeds of polices, property rentals and changes in the net market value of investment )
May include contributions from employers and employees
Changes in the net market value of plan assets ( other than just investment)
Refer to Worked Example 23.1 (p. 739)—Calculation of revenue for a superannuation fund—Consideration of changes in market values
The asset revaluation and depreciation requirements of AASB 116 do not apply to superannuation plans

18. No gain on sale to be recognised
No gain on sale will be recognised in relation to the sale of plant and equipment of a superannuation plan. This is consistent with paragraph 48 of AAS 25, which states:
The requirement to include changes in net market values of assets realised during the reporting period means that a gain or loss on the disposal of non-current assets will not result—in concept, assets will be devalued to net market value immediately prior to their disposal, changes in net market value will be included in revenue and no gain or loss on disposal will result
Inclusion in revenue of changes in net market values of investments introduces potential for earnings volatility

19. Measurement rules (cont.)
Accrued benefits
Represent an obligation to the members of the superannuation plan (i.e. a liability)
For a defined contribution plan (AAS 25)
Is the difference between carrying amounts of assets and the sum of income tax liabilities and sundry liabilities including liabilities arising from forfeited benefits that have not been designated for the benefit of existing plan members as at the reporting date (i.e. a residual)
Specifically paragraph 49 states:
Accrued benefits of a defined contribution plan shall be shown as an amount equivalent to the difference between the carrying amount of the assets and the sum of all other liabilities.

20. Measurement rules (cont.)
For a defined benefit plan (AAS 25)
Measured from a comprehensive actuarial review to determine present value of expected future benefit payments
Actuarial review requires assumptions about future salary levels, mortality rates, membership turnover, etc.
Measurement at least every three years
Determining appropriate discount rate is not an easy exercise and depends largely on professional judgment
If rate based on the anticipated rate of return on an organisation’s assets cannot be determined then rate on government bonds may be used

21. Financial reporting for defined benefit superannuation plans
If a detailed actuarial review of members’ entitlements at reporting date is undertaken, the plan can prepare either (AAS 25):
statement of net assets
statement of changes in net assets, and
notes OR
statement of financial position
operating statement
statement of cash flows, and
If defined benefit plans do not undertake a detailed review at reporting date, they must prepare a statement of net assets , a statement of changes in net assets and accompanying notes.

22. Financial reporting for defined benefit superannuation plans (cont.)
If a detailed actuarial review is not undertaken, the plan must prepare (AAS 25):
statement of net assets
statement of changes in net assets, and
notes
Refer to Worked Example 23.2 (p. 741)— Presentation of financial statements for a defined benefit superannuation plan that has not prepared a detailed actuarial report at reporting date

23. Financial reporting for defined contribution superannuation plans
According to paragraph 10 of AAS 25, a defined contribution superannuation plan is :
a superannuation plan where the amounts to be paid to members, if they were remain members until normal retirement age, are determined by reference to accumulated contributions made to the plan , together with investment earning thereon.
Plans must prepare (AAS 25):
statement of financial position
operating statement
statement of cash flows, and
notes
Refer to Worked Example 23.3 (p. 746)—Presentation of financial statements for a defined contribution superannuation plan

24. Disclosure requirements
Disclosures required for defined contribution plans
( paragraphs 57 to 73 of AAS 25)
A statement of financial position
Separate description of investments and other assets by class
Separate disclosure of liability for accrued benefits and other liabilities by class
Amount of accrued benefits allocated to members’ accounts and amount not yet allocated

25. Disclosure requirements (cont.)
Defined contribution plan disclosure requirements (AAS 25) (cont.)
An operating statement
Separate disclosure of investment revenue, amounts contributed by employers, amounts contributed by members and other revenue
A statement of cash flows
To be produced in accordance with AAS 28
Separate disclosure of amount paid to members
Also applies to some defined benefits plans

26. Disclosure requirements (cont.)
Defined benefit plans (not measuring accrued benefits at year end) (AAS 25)
A statement of net assets
Separate disclosure of assets, liabilities and net assets available to pay benefits
Note disclosure of liability for accrued benefits and date at which liability was measured
A statement of changes in net assets
A copy or summary of most recent actuarial report:
Effective date of report
Names and qualifications of actuary
Relationship of market value of net assets to aggregate vested benefits
Opinion of actuary as to plan’s financial condition

27. Summary
The lecture considers issues associated with accounting for superannuation plans
Plans can be either defined benefit (DBP) or defined contribution plans (DCP)
DCPs must provide a balance sheet, operating statement and statement of cash flows
DBPs have an option relating to the reports they provide
Superannuation plan assets are to be measured at net market values at reporting date
Measurement of accrued benefits differs between DCPs and DBPs

28. To be continued…………….