HKAS 26 - Retirement Benefit Plans

HKAS 26 - Accounting and Reporting by Retirement Benefit Plans

1. SCOPE (Paragraphs 1-7)

1.1 Application

HKAS 26 shall be applied in the financial statements of retirement benefit plans where such financial statements are prepared.

1.2 Terminology

Retirement benefit plans are sometimes referred to as:

Pension schemes

Superannuation schemes

Retirement benefit schemes

Key Concept: HKAS 26 regards a retirement benefit plan as a reporting entity separate from the employers of the participants in the plan.

1.3 Relationship with Other Standards

All other HKFRS apply to retirement benefit plan financial statements to the extent they are not superseded by HKAS 26

HKAS 26 deals with accounting and reporting by the plan to all participants as a group (not individual reports)

HKAS 26 complements HKAS 19 (Employee Benefits), which deals with determining the cost of retirement benefits in employers' financial statements

1.4 Types of Plans Covered

Defined contribution plans

Defined benefit plans

Plans with or without separate funds

Plans with or without trustees

Plans with assets invested with insurance companies (unless the contract is in the name of a specified participant and the obligation is solely the insurance company's responsibility)

1.5 Exclusions

HKAS 26 does NOT deal with:

Employment termination indemnities

Deferred compensation arrangements

Long-service leave benefits

Special early retirement or redundancy plans

Health and welfare plans

Bonus plans

Government social security type arrangements

1.6 Hong Kong Specific Application (Paragraph 7A)

The Appendix provides additional guidance on preparing financial statements of:

Mandatory Provident Fund (MPF) Schemes

Occupational Retirement Schemes Ordinance (ORSO) Schemes

2. DEFINITIONS (Paragraphs 8-12)

2.1 Key Definitions

Term	Definition
Retirement benefit plans	Arrangements whereby an entity provides benefits for employees on or after termination of service (annual income or lump sum) when benefits or contributions can be determined or estimated in advance of retirement
Defined contribution plans	Plans where amounts to be paid as retirement benefits are determined by contributions to a fund together with investment earnings thereon
Defined benefit plans	Plans where amounts to be paid as retirement benefits are determined by reference to a formula usually based on employees' earnings and/or years of service
Funding	The transfer of assets to an entity (the fund) separate from the employer's entity to meet future obligations for retirement benefit payments
Participants	Members of a retirement benefit plan and others entitled to benefits under the plan
Net assets available for benefits	Assets of a plan less liabilities other than the actuarial present value of promised retirement benefits
Actuarial present value of promised retirement benefits	The present value of expected payments by a retirement benefit plan to existing and past employees, attributable to service already rendered
Vested benefits	Benefits whose rights, under the conditions of a retirement benefit plan, are not conditional on continued employment

2.2 Important Clarifications

Paragraph 9: Plans may have sponsors other than employers; HKAS 26 applies to such plans as well.

Paragraph 10: Both formal and informal plans are covered. Even informal plans that have acquired a degree of obligation through established practices are included.

Paragraph 11: The term "trustee" is used broadly to describe parties who independently manage fund assets, regardless of whether a formal trust has been formed.

Paragraph 12 - Hybrid Plans: Occasionally plans contain characteristics of both defined contribution and defined benefit plans. Such hybrid plans are considered to be defined benefit plans for the purposes of HKAS 26.

3. DEFINED CONTRIBUTION PLANS (Paragraphs 13-16)

3.1 Required Financial Statements (Paragraph 13)

The financial statements of a defined contribution plan shall contain:

- A statement of net assets available for benefits

- A description of the funding policy

3.2 Characteristics of Defined Contribution Plans

Future benefits determined by:

Contributions paid by employer, participant, or both

Operating efficiency of the fund

Investment earnings of the fund

Employer's obligation is usually discharged by contributions to the fund

Actuary's advice is not normally required (though sometimes used to estimate future benefits)

3.3 Stakeholder Interests

Stakeholder	Interest
Participants	How plan activities affect their future benefits; whether contributions have been received; proper control to protect rights
Employer	Efficient and fair operation of the plan

3.4 Reporting Objective (Paragraph 16)

The objective is to periodically provide information about:

The plan and the performance of its investments

This is achieved by providing financial statements including:

(a) Description of significant activities for the period and effect of any changes relating to the plan, its membership, and terms and conditions

(b) Statements reporting on transactions and investment performance for the period and financial position at period end

(c) Description of investment policies

4. DEFINED BENEFIT PLANS (Paragraphs 17-31)

4.1 Required Financial Statements (Paragraph 17)

The financial statements of a defined benefit plan shall contain either:

Option (a): A statement that shows:

- (i) The net assets available for benefits

- (ii) The actuarial present value of promised retirement benefits, distinguishing between vested benefits and non-vested benefits

- (iii) The resulting excess or deficit

Option (b): A statement of net assets available for benefits including either:

- (i) A note disclosing the actuarial present value of promised retirement benefits, distinguishing between vested and non-vested benefits; or

- (ii) A reference to this information in an accompanying actuarial report

Important: If an actuarial valuation has not been prepared at the date of the financial statements, the most recent valuation shall be used as a base and the date of the valuation disclosed.

4.2 Basis for Actuarial Present Value (Paragraph 18)

The actuarial present value of promised retirement benefits shall be based on:

- The benefits promised under the terms of the plan

- Service rendered to date

- Using either current salary levels or projected salary levels (with disclosure of the basis used)

Disclosure required: The effect of any changes in actuarial assumptions that have had a significant effect on the actuarial present value of promised retirement benefits.

4.3 Relationship Explanation (Paragraph 19)

The financial statements shall explain:

- The relationship between the actuarial present value of promised retirement benefits and the net assets available for benefits

- The policy for the funding of promised benefits

4.4 Factors Affecting Benefit Payment (Paragraph 20)

Under a defined benefit plan, payment of promised retirement benefits depends on:

Financial position of the plan

Ability of contributors to make future contributions

Investment performance and operating efficiency of the plan

4.5 Role of Actuary (Paragraph 21)

A defined benefit plan needs periodic advice of an actuary to:

Assess the financial condition of the plan

Review the assumptions

Recommend future contribution levels

4.6 Reporting Objective (Paragraph 22)

The objective is to periodically provide information about financial resources and activities useful in assessing the relationships between:

Accumulation of resources

Plan benefits over time

Achieved by providing financial statements including:

(a) Description of significant activities and effect of changes

(b) Statements on transactions, investment performance, and financial position

(c) Actuarial information (as part of statements or separate report)

(d) Description of investment policies

4.7 Actuarial Present Value - Current vs. Projected Salary (Paragraphs 23-26)

Current Salary Approach - Reasons (Paragraph 24)

Reason	Explanation
(a) More objective	Fewer assumptions required; can be calculated more objectively
(b) Benefit increases	Increases attributable to salary increase become obligation at time of salary increase
(c) Termination/discontinuance	Amount is generally more closely related to amount payable on termination or discontinuance

Projected Salary Approach - Reasons (Paragraph 25)

Reason	Explanation
(a) Going concern basis	Financial information should be prepared on going concern basis regardless of assumptions
(b) Final pay plans	Benefits determined by reference to salaries at/near retirement; salaries, contributions, and rates of return must be projected
(c) Funding consistency	Failure to incorporate salary projections may result in apparent overfunding when not overfunded, or adequate funding when underfunded

Disclosure Context (Paragraph 26)

Current salary basis: Indicates obligation for benefits earned to date

Projected salary basis: Indicates magnitude of potential obligation on a going concern basis (generally the basis for funding)

Sufficient explanation needed to indicate context in which actuarial present value should be read

4.8 Frequency of Actuarial Valuations (Paragraph 27)

In many countries, actuarial valuations are not obtained more frequently than every three years.

If an actuarial valuation has not been prepared at the date of the financial statements, the most recent valuation is used as a base and the date of the valuation disclosed.

4.9 Financial Statement Content - Three Formats (Paragraphs 28-31)

Format (a) - Full Statement Approach

Statement showing:

Net assets available for benefits

Actuarial present value of promised retirement benefits

Resulting excess or deficit

Statements of changes in net assets available for benefits

Statements of changes in actuarial present value of promised retirement benefits

May be accompanied by separate actuary's report

Format (b) - Note Disclosure Approach

Statement of net assets available for benefits

Statement of changes in net assets available for benefits

Actuarial present value disclosed in a note

May be accompanied by actuary's report

Format (c) - Separate Actuarial Report Approach

Statement of net assets available for benefits

Statement of changes in net assets available for benefits

Actuarial present value contained in a separate actuarial report

Financial statements must contain a reference to, and be accompanied by, the actuarial report

Additional: In each format, a trustees' report (management or directors' report) and an investment report may also accompany the financial statements.

Arguments For and Against Each Format

For Formats (a) and (b):

Quantification helps users assess current status and likelihood of obligations being met

Financial statements should be complete in themselves

Concern: Format (a) could give impression that a liability exists, though actuarial present value may not have all characteristics of a liability

For Format (c):

Actuarial present value should not be included in statement of net assets available for benefits

Direct comparison with plan assets may not be valid

Actuaries may assess present value of cash flows expected from investments, not compare with market values

Information about promised benefits should be in separate actuarial report with proper explanation

HKAS 26 Position (Paragraph 31):

Accepts views in favour of permitting disclosure in separate actuarial report

Rejects arguments against quantification of actuarial present value

All three formats are acceptable

5. ALL PLANS - VALUATION AND DISCLOSURE (Paragraphs 32-36)

5.1 Valuation of Plan Assets (Paragraphs 32-33)

Paragraph 32: Retirement benefit plan investments shall be carried at fair value.

- In the case of marketable securities, fair value is market value

- Where fair value estimate is not possible, disclosure shall be made of the reason why fair value is not used

Additional Guidance (Paragraph 33):

Marketable securities: market value is considered the most useful measure

Securities with fixed redemption value acquired to match plan obligations: may be carried at amounts based on ultimate redemption value assuming constant rate of return to maturity

Where investments are carried at amounts other than market/fair value, fair value is generally also disclosed

Assets used in fund operations: accounted for in accordance with applicable HKFRS

5.2 Required Disclosures (Paragraph 34)

The financial statements of a retirement benefit plan (whether defined benefit or defined contribution) shall contain:

- (a) A statement of changes in net assets available for benefits

- (b) A summary of significant accounting policies

- (c) A description of the plan and the effect of any changes in the plan during the period

5.3 Additional Disclosures (Paragraph 35)

Statement of Net Assets Available for Benefits - Disclosures:

(i) Assets at period end, suitably classified

(ii) Basis of valuation of assets

(iii) Details of any single investment exceeding either 5% of net assets available for benefits or 5% of any class/type of security

(iv) Details of any investment in the employer

(v) Liabilities other than actuarial present value of promised retirement benefits

Statement of Changes in Net Assets Available for Benefits - Disclosures:

(i) Employer contributions

(ii) Employee contributions

(iii) Investment income (interest, dividends)

(iv) Other income

(v) Benefits paid or payable (analysed: retirement, death, disability, lump sum)

(vi) Administrative expenses

(vii) Other expenses

(viii) Taxes on income

(ix) Profits and losses on disposal of investments and changes in value of investments

(x) Transfers from and to other plans

Additional Disclosures:

(c) Description of funding policy

(d) For defined benefit plans: actuarial present value of promised retirement benefits (may distinguish vested/non-vested) based on benefits promised, service rendered to date, using current or projected salary levels (may be in accompanying actuarial report)

(e) For defined benefit plans: description of significant actuarial assumptions and method used

5.4 Plan Description (Paragraph 36)

The report of a retirement benefit plan contains a description of the plan (as part of financial statements or separate report), which may include:

(a) Names of employers and employee groups covered

(b) Number of participants receiving benefits and other participants, classified appropriately

(c) Type of plan (defined contribution or defined benefit)

(d) Whether participants contribute to the plan

(e) Description of retirement benefits promised

(f) Description of any plan termination terms

(g) Changes in items (a) to (f) during the period

Note: It is not uncommon to refer to other readily available documents and include only information on subsequent changes.

6. EFFECTIVE DATE (Paragraph 37)

The accounting practices set out in this Standard should be regarded as standard in respect of financial statements relating to periods beginning on or after 1 January 2005.

7. APPENDIX A - GUIDANCE ON MPF SCHEMES AND ORSO SCHEMES

Part 1 - Introduction

Objective (Paragraphs 1-3)

Sets out additional guidance for MPF schemes and ORSO schemes

Based on MPFSO and ORSO in effect as at 31 December 2003

MPFSO contains numerous specific disclosure requirements

MPF and ORSO schemes must submit audited financial statements to MPFA within six months after financial year-end

Form and Context (Paragraphs 4-6)

Financial statements often presented as part of an annual report

Separate components must be consistent with each other

Trustees'/administrator's report must be fair review and consistent with financial statements

Types of Schemes (Paragraph 7)

MPF scheme: Can only be a defined contribution scheme

ORSO scheme: May be defined contribution or defined benefit

Hybrid schemes: Considered defined benefit schemes

Scheme Arrangements (Paragraphs 8-19)

Type	Description
Directly invested schemes	Governed by trust; assets comprise investments (shares, securities, unit trusts); may use in-house or external investment managers
Insured schemes	Employer pays premiums/contributions to insurer; premiums become insurer's property; may not guarantee benefits
Fully insured schemes	Insurance policies match and fully guarantee benefits to individual members
Pooling agreement	Administers two or more schemes together; assets vested with administrator; must be managed by registered trust company or authorized insurer

Forms of MPF Schemes (Paragraph 18)

(a) Master trust scheme

(b) Employer sponsored scheme

(c) Industry scheme

Note: MPF schemes must be "directly invested schemes established under trust" and administered by an approved trustee.

Constituent Funds (Paragraph 19)

MPF scheme may have one or more constituent funds

Each fund must be approved by MPFA

Each fund has different investment policy

Members have choice in investing their accrued benefits

Part 2 - Definitions (Paragraphs 20-21)

Terminology Comparison

Appendix Term	Standard Equivalent
Retirement Schemes	Retirement Benefit Plans
Schemes	Plans
Members	Participants
Accrued Benefits	Promised Retirement Benefits

Additional Definitions

Term	Definition
Accrued benefits	Benefits for service up to a given point in time, whether vested rights or not; may be calculated using current or projected earnings
Actuarial assumptions	Assumptions as to rates of return, inflation, earnings increases, dividend rate, mortality, etc. Includes financial (valuation rate, earnings increases, pension increases) and demographical (mortality, early retirement, withdrawal) assumptions
Actuary's certificate	Statement on ability of scheme assets to meet aggregate vested liability and adequacy of assets plus future contributions to meet promised benefits
Additional voluntary contributions	Contributions over and above mandatory/regular contributions to secure additional benefits
Administrator	Trustee (if trust governed), insurer (if insurance arrangement), or person principally responsible for management
Aggregate past service liability	As defined in ORSO section 2(1)
Aggregate vested liability	As defined in ORSO section 2(1)
Associates	As defined in ORSO section 2(1) and MPFSO Schedule 8
Past service liability	Value on a particular day, as determined by an actuary, of benefit entitlement under the scheme
Self investment	Investment of scheme assets in the employer's business and any Associates
Vested liability	As defined in ORSO section 2(1)

Part 3 - Additional Guidance on Accounting and Disclosures

Content of Financial Statements (Paragraph 22)

MPF scheme financial statements comprise:

Revenue statement

Statement of movement in capital account (for scheme and each constituent fund)

For each constituent fund: revenue statement, statement of assets and liabilities, statement of movement in capital account

Revenue statement and movement in capital account may be combined to form statement of changes in net assets available for benefits

Basis of Accounting - Scheme Arrangements (Paragraphs 23-25)

Directly invested schemes:

Statement of assets and liabilities shows nature of investments

For pooling agreement investments not individually identifiable: provide analysis for entire pool with disclosure of scheme's share

Fully insured schemes:

Policies purchased in individual members' names: NOT included in statement of assets and liabilities

Cost of acquiring policies treated as discharging retirement obligation at time of purchase

Revenue statement confined to transactions (contributions received, benefits paid)

Class G or H insurance arrangements:

Insurance policies reported as asset in statement of assets and liabilities

Financial statements disclose obligation to pay benefits (based on total accumulated contributions and declared returns)

Contributions Received Pending Allocation (Paragraph 26)

Identifiable as scheme assets (e.g., cheques payable to MPF scheme): Presented as cash

Not identifiable as scheme assets (e.g., cheques payable to trustee only): Presented as receivable

Long-term Insurance Policies (Paragraphs 27-28)

Policies matching and fully guaranteeing obligations: Acquisition cost treated as cost of discharging obligations; NOT included in statement of assets and liabilities

All other long-term insurance policies: Included in statement of assets and liabilities

Forfeitures (Paragraph 29)

When employee leaves, part/all of employer's contributions plus investment return may not be paid to member

Forfeitures may be applied to:

Reduce employer's contributions

Retained for benefit of members

Returned to employer

Forfeitures not designated for existing members and not returned to employer: Treated as liabilities

Additional Voluntary Contributions (AVCs) (Paragraphs 30-31)

AVCs to purchase added years or additional specific benefits: Included as contributions receivable; assets included in statement of assets and liabilities

AVCs separately invested (proceeds determine benefits): Disclosed separately but accounted for within financial statements or notes

Additional Financial Statement Disclosures - Constituent Funds (Paragraph 32)

Statement of Assets and Liabilities:

Total value of investments

Bank balances

Amounts of subscription receivable

Dividends and other receivables

Amounts payable on redemption

Other liabilities

Bank loans and overdrafts/other borrowings

Total value of all assets

Total value of all liabilities

Net asset value

Number of units in issue (unitised fund)

Net asset value per unit (unitised fund)

Revenue Statement:

Total investment income (by category)

Total other income (by category, including security lending)

Equalisation on issue and cancellation of units (unitised fund)

Investment management fees

Trustee fees

Custodian fees

Compensation fund levy paid to MPFA

Fees paid to Associates of trustee, custodian, or investment manager

Safe custody and bank charges

Auditors' remuneration

Interest on borrowings

Legal and other professional fees

Other expenses

Taxes

Amounts transferred to and from capital account

Statement of Movement in Capital Account:

Value of constituent fund at beginning of year

Number of units issued and amounts received (unitised) or subscriptions (non-unitised)

Number of units redeemed and amounts paid (unitised) or redemptions (non-unitised)

Amounts transferred to and from revenue account

Value of constituent fund at end of year

Notes to Financial Statements (Paragraph 33)

Transactions with Associates:

Description of nature of transactions with investment manager or entities in which they have material interest

Confirmation transactions entered into in ordinary course and on normal commercial terms

Aggregate value of transactions through Associate brokers

Percentage of such transactions to total transactions

Total brokerage commission paid to such brokers

Total brokerage commission paid for constituent fund

Average rate of commission through such brokers

Details of transactions outside ordinary course or not on normal commercial terms

Name of investment manager and any Associates entitled to profits

Amount of profits each becomes entitled to

Nil statement if no transactions with Associates

Basis of fee charged for investment management

Performance fee basis and amount (if applicable)

Soft Commission Arrangements:

Details of any soft commission arrangements or nil statement

Advertising and Promotional Expenses:

Amount of advertising expenses, promotional expenses, or commissions/brokerage fees to MPF intermediaries

Borrowings:

Whether secured or unsecured

Duration of borrowings

Contingent Liabilities and Commitments:

Details of any contingent liabilities and commitments

Restricted Assets:

If free negotiability of any asset is restricted, this shall be stated

Defined Contribution Schemes:

Accumulated scheme benefits (aggregate past service liability) normally equals balance of capital account at year-end

Aggregate vested liability at year-end disclosed in note

Defined Benefit Schemes - Note Disclosures:

Name of actuary and professional qualifications

Main assumptions used (salary increases, life expectancy, investment returns)

Statement that actuarial assumptions may not be directly comparable with net asset valuation basis

If assets insufficient to meet aggregate vested liability and/or aggregate past service liability: recommended funding rate and funding period(s)

Date of actuarial review

If aggregate past service liability not calculated as at same date as financial year-end: note to emphasize this fact

Restricted Investments:

If assets consist of restricted investments (as defined in MPFSO or ORSO), disclose nature and value

Long-term Insurance Policies:

If material part of net assets, disclose main characteristics (e.g., with or without profits)

Insurance Policies Matching Guarantees:

Disclose particulars of policies and names of insurer

MPF Schemes - Additional Disclosures (General Regulation Section 81):

Fees for administrative expenses deducted by trustee

Contributions and contribution surcharge paid and payable

Total return from investing in funds (including capital appreciation/depreciation)

Total amount of accrued benefits paid and payable but not paid

Amount of accrued benefits transferred to and from scheme

Part 4 - Notes on Legal Requirements in Hong Kong (Paragraphs 34-44)

MPFSO Requirements

Section 81 (General Regulation): Approved trustee must prepare balance sheet (true and fair view of financial position) and statement of account (true and fair view of financial transactions)

Section 86: Approved trustee must prepare scheme report for each financial period

Section 87: Approved trustee must prepare investment report for each financial period

Section 89: Financial statements, auditor's report, scheme report, and investment report form consolidated report

Section 110(3)(a): Consolidated report must be included in annual statement under MPFSO section 22A(1)

Guideline II.4: Prescribes statistical information and information on constituent funds

Approved Pooled Investment Funds (APIF):

Assets of constituent fund may be invested in APIF

APIF must be insurance policy, authorized unit trust, or authorized mutual fund complying with requirements

APIF financial statements, investment reports, and auditor's reports must be lodged with MPFA

ORSO Requirements

Section 20(1)(a): Administrator must keep proper accounts and records and prepare financial statements for each financial year

Section 20(2): Financial statements shall show true and fair view of financial transactions and disposition of assets and liabilities

Section 67(1C): Definitions for grouping of companies, group of companies, and associated companies

Pooling Agreements:

Financial statements of each scheme (not pooling agreement) shall be prepared

Section 20(7C)(a): Common accounting year required for each scheme within pooling agreement (unless exemption granted)

8. APPENDIX B - COMPARISON WITH INTERNATIONAL ACCOUNTING STANDARDS

Comparable standard: IAS 26 Accounting and Reporting by Retirement Benefit Plans

No textual differences between HKAS 26 and IAS 26

HKAS 26 includes additional appendix on MPF and ORSO schemes

KEY TAKEAWAYS SUMMARY

Topic	Key Points
Scope	Applies to retirement benefit plan financial statements; plan is separate reporting entity from employer
Plan Types	Defined contribution, defined benefit, hybrid (treated as defined benefit)
Defined Contribution	Statement of net assets available for benefits + description of funding policy
Defined Benefit	Three format options for presenting actuarial present value; must distinguish vested/non-vested benefits
Actuarial Valuation	Can use current or projected salary levels; disclose basis; if no valuation at date, use most recent
Plan Assets	Carried at fair value (market value for marketable securities)
Disclosures	Statement of changes in net assets, accounting policies, plan description, investment policies
MPF Schemes	Only defined contribution; must be directly invested under trust; administered by approved trustee
ORSO Schemes	Can be defined contribution or defined benefit; pooling agreements permitted
Effective Date	Periods beginning on or after 1 January 2005