Chapter 22

1. Chapter 22 Accounting for superannuation plans

2. Objectives of this lecture • 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 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 • AAS 25 is the one remaining accounting standard in 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. As we know, all new standards released by the AASB have the prefix AASB. • AAS 25 contains recognition and disclosure requirements for superannuation plans.

6. Work on a new standard • Among the reasons for the review are some inconsistencies between AAS 25 and the requirements embodied in AASB 119. • There is an expectation that a final standard would not be released prior to 2013. • Proposals adopted in Exposure Draft ED 223 Superannuation Entities as released in December 2011. • ED 223 proposes some significant changes to the requirements currently embodied within AAS 25.

7. Introduction to accounting for superannuation plans Superannuation plan • 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 • 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

8. 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 • Fund administrators • Australian Prudential Regulation Authority (APRA)

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 • No statutory backing, but APRA encourages compliance • Prescribes accounting and disclosure policies for superannuation plans deemed to be reporting entities

11. Reporting entities • 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. 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

13. Measurement rules • Assets (AAS 25) • May include contributions receivable, plan investments, cash and other assets • The asset revaluation and depreciation requirements of AASB 116 do not apply to superannuation plans • All assets are to be measured at net market values as at reporting date (AAS 25) • Revenue (AAS 25) Refer to Worked Example 22.1 (p. 758)—Calculation of revenue for a superannuation fund: consideration of changes in market values

14. 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 revalued 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

15. Measurement rules (cont.) • Inclusion in revenue of changes in net market values of investments introduces potential for earnings volatility • Accrued benefits • For a defined contribution plan (AAS 25) • For a defined benefit plan (AAS 25)

16. 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 • notes

17. 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 22.2 (p. 760)—Presentation of financial statements for a defined benefit superannuation plan that has not prepared a detailed actuarial report at the end of the reporting period

18. Financial reporting for defined contribution superannuation plans • Plans must prepare (AAS 25): • statement of financial position • operating statement • statement of cash flows, and • Notes • Refer to Worked Example 22.3 (p. 765)—Presentation of financial statements for a defined contribution superannuation plan

19. Disclosure requirements • Disclosures required for defined contribution plans (AAS 25) • A statement of financial position • An operating statement • A statement of cash flows • Also applies to some defined benefits plans • Defined benefit plans (not measuring accrued benefits at year end) (AAS 25) • A statement of net assets • A statement of changes in net assets • A copy or summary of most recent actuarial report

20. The development of a new accounting standard for superannuation plans • Need for a comprehensive review of the general purpose financial reporting requirements applicable to superannuation entities • Release of various IFRS created an increasing number of inconsistencies between AAS 25 and the requirements embodied in other accounting standards

21. The development of a new accounting standard for superannuation plans (cont.) • AASB released ED 223 Superannuation Entities • ED 223 Superannuation Entities proposes that: • superannuation entities present a range of financial statement • Specific changes and benefits be presented as gains and losses in profit or loss • that current and deferred tax be charged directly to member benefits and presented in the statement of changes in member benefits when relevant

22. The development of a new accounting standard for superannuation plans (cont.)—some of the proposed changes • By contrast, AAS 25 requires changes in the net market value of assets and financial liabilities to be included as a component of revenue. • ED 223 Superannuation Entities it does demonstrates that there will likely be significant changes in how we account for superannuation entities. • Further, the differences in the reporting requirements between superannuation entities and other reporting entities are likely to be reduced should the contents in ED 223 ultimately be incorporated in an accounting standard released by the AASB.

23. 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 • We have also considered some possible changes to how we shall account for superannuation funds in the future