1. Accounting for superannuation plans
Chapter 21
Accounting for superannuation plans
Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan

2. Learning 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
Continues/ …
Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan

3. Learning objectives (cont.)
Understand what financial reports must be prepared for a defined benefit superannuation plan, and what financial reports 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
Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan

4. Status of newly converged accounting standards
From 2005, AASB 119 ‘Employee Benefits’ replaces AASB 1028 ‘Employee Benefits’
Addresses employee benefit obligations from the employer’s perspective—not from the perspective of the superannuation fund
Continues/ …
Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan

5. Status of newly converged accounting standards (cont.)
AAS 25 ‘Financial Reporting by Superannuation Plans’:
contains recognition and disclosure requirements for superannuation plans
is not currently being revised
contains some inconsistencies with AASB 119
Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan

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
Members require information about:
individual claims against the fund; and
the ability of the fund to pay the claim when it is due
Superannuation plans control significant sums of money and play a significant role in Australian financial markets
Continues/ …
Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan

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
Continues/ …
Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan

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
Australian Prudential Regulation Authority (APRA):
monitors and regulates operations of superannuation funds (also banks, insurance companies, etc.)
Continues/ …
Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan

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
Continues/ …
Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan

10. Introduction to accounting for superannuation plans (cont.)
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
Continues/ …
Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan

11. Introduction to accounting for superannuation plans (cont.)
AAS 25 ‘Financial Reporting by Superannuation Plans’
No disclosure requirements about individual members’ entitlements
No statutory backing, but APRA encourages compliance
Prescribes accounting and disclosure policies for superannuation plans deemed to be reporting entities
Continues/ …
Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan

12. 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
Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan

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
Defined contribution plan
Amounts to be paid at normal retirement age are determined by accumulated contributions made by and/or on behalf of members, and investment earnings
Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan

14. Measurement rules Assets (AAS 25):
may include contributions receivable, plan investments, cash and other assets
All assets are to be measured at net market values as at reporting date (AAS 25)
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
Continues/ …
Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan

15. Measurement rules (cont.)
Revenue (AAS 25):
may include investment revenue (e.g. interest, dividends, property rentals)
may include contributions from employers and employees
changes net market value of plan assets
Refer to Worked Example 21.1
The asset revaluation and depreciation requirements of AASB 116 do not apply to superannuation plans
Continues/ …
Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan

16. Measurement rules (cont.)
Inclusion in revenue of changes in net market values of investments introduces potential for earnings volatility
Accrued benefits
Represent an obligation to the members of the superannuation plan (i.e. a liability)
For a defined contribution plan (AAS 25):
the difference between carrying amounts of assets and the sum of income tax liabilities and sundry liabilities (i.e. a residual)
Continues/ …
Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan

17. 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
Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan

18. Financial reporting for defined benefit superannuation plans
If a detailed actuarial review of members’ entitlements at balance date is undertaken, the plan can prepare either (AAS 25):
statement of net assets;
statement of changes in net assets; and
notes; OR
balance sheet;
operating statement;
statement of cash flows; and
notes
Continues/ …
Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan

19. 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 21.2
Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan

20. Financial reporting for defined contribution superannuation plans
Plans must prepare (AAS 25):
balance sheet;
operating statement;
statement of cash flows; and
notes
Refer to Worked Example 21.3
Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan

21. Disclosure requirements
Disclosures required for defined contribution plans (AAS 25)
A balance sheet:
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
Continues/ …
Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan

22. 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
Continues/ …
Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan

23. 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
Continues/ …
Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan

24. Disclosure requirements (cont.)
Defined benefit plans (not measuring accrued benefits at year end) (AAS 25) (cont.)
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
Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan

25. Summary
The chapter 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
Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan