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In-Depth Study Complete
HKAS 26 - Retirement Benefit Plans (Condensed)
๐ PDF โ HKICPA Handbook Vol II
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| Section | Key Concept | Brief Description |
|---|---|---|
| 1. Scope | Plan as separate reporting entity | Applies to financial statements of retirement benefit plans; plan is separate from employer; complements HKAS 19; covers defined contribution, defined benefit, and hybrid plans. |
| 2. Definitions | Key terms for plan accounting | Defines retirement benefit plans, defined contribution/benefit plans, net assets available for benefits, actuarial present value, vested benefits, and other key terms. |
| 3. Defined Contribution Plans | Statement of net assets + funding policy | Financial statements must include a statement of net assets available for benefits and a description of the funding policy; actuary's advice not normally required. |
| 4. Defined Benefit Plans | Three format options for actuarial present value | Financial statements must show or disclose actuarial present value of promised retirement benefits; can use current or projected salary levels; three presentation formats permitted. |
| 5. All Plans โ Valuation & Disclosure | Fair value measurement + comprehensive disclosures | Plan investments carried at fair value; required disclosures include statement of changes in net assets, accounting policies, plan description, and investment policies. |
| 6. Effective Date | Periods beginning on or after 1 Jan 2005 | Standard effective for financial statements relating to periods beginning on or after 1 January 2005. |
| 7. Appendix โ MPF & ORSO Guidance | Additional guidance for Hong Kong schemes | Provides specific guidance for MPF (defined contribution only) and ORSO (defined contribution or defined benefit) schemes, including financial statement content and disclosure requirements. |
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1. Scope (Paragraphs 1-7)
Application
HKAS 26 shall be applied in the financial statements of retirement benefit plans where such financial statements are prepared.
Key Concept: HKAS 26 regards a retirement benefit plan as a reporting entity separate from the employers of the participants in the plan.
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- All other HKFRS apply to retirement benefit plan financial statements to the extent they are not superseded by HKAS 26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)
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)
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
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
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2. Definitions (Paragraphs 8-12)
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 |
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.
- Paragraph 11: The term 'trustee' is used broadly to describe parties who independently manage fund assets.
- Paragraph 12 - Hybrid Plans: Such hybrid plans are considered to be defined benefit plans for the purposes of HKAS 26.
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3. Defined Contribution Plans (Paragraphs 13-16)
Required Financial Statements (Paragraph 13)
Requirement: The financial statements of a defined contribution plan shall contain:
- A statement of net assets available for benefits
- A description of the funding policy
Characteristics
- Future benefits determined by contributions paid by employer, participant, or both, operating efficiency of the fund, and 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)
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
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4. Defined Benefit Plans (Paragraphs 17-31)
Required Financial Statements (Paragraph 17)
Requirement: The financial statements of a defined benefit plan shall contain either:
Option (a): A statement that shows:
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
- (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
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)
Three Formats for Financial Statement Content (Paragraphs 28-31)
| Format | Description |
|---|---|
| Format (a) - Full Statement Approach | Statement showing net assets available for benefits, actuarial present value of promised retirement benefits, and resulting excess or deficit; statements of changes in net assets and actuarial present value; 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. |
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.
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5. All Plans โ Valuation and Disclosure (Paragraphs 32-36)
Valuation of Plan Assets (Paragraphs 32-33)
Requirement: 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
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
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
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6. Effective Date (Paragraph 37)
Effective Date
Effective Date: 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.
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7. Appendix โ MPF and ORSO Schemes (Paragraphs 1-44)
Objective and Scope
Sets out additional guidance for MPF schemes and ORSO schemes based on MPFSO and ORSO in effect as at 31 December 2003.
Types of Schemes
| Scheme Type | Characteristics |
|---|---|
| MPF scheme | Can only be a defined contribution scheme; must be directly invested under trust; administered by an approved trustee. |
| ORSO scheme | May be defined contribution or defined benefit; pooling agreements permitted. |
| Hybrid schemes | Considered defined benefit schemes. |
Scheme Arrangements
| 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
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
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