A Comparability of Financial Reporting for Pension Accounting

ABSTRACT

The comparability of financial information is used as a means to communicate with users about the economic events that can be compared over a period of time between entities in order to make decision on the effective and efficient use of resources. With the rapid pace of growing technology globally, the convergence to the IFRS had an in-depth impact to the comparability of financial information. Since such areas have not well been investigated and comprehended according to the empirical research, a comparability framework was employed to analyse thoroughly in an Australian, USA and Mauritian perspective. Hence, an annual report was used to enable comparison between the ways of reporting the pension accounting using the Stock Exchange industry for the three countries for the year 2016. Certain accounting standard-setters would like to maintain the principle ‘like-for-like’, as in, same transactions should be applied for same economic activities but sometimes, same accounting treatments are compelled to be used under different economic events, i.e., in substance form.

Keywords: comparability, convergence, pension accounting, comparability framework, IFRS

ACRONYMS

AASB   Australian Accounting Standard Board

AGL   Actuarial Gains and Losses

ASIC   Australian Securities and Investment Commission

ASX   Australian Securities Exchange

AR   Annual Report

DBO   Defined Benefit Obligation

DBP   Defined Benefit Plan

DCP   Defined Contribution Plan

ERISA   Employee Retirement Income Security Act

FASB   Financial Accounting Standard Board

GAAP   Generally Accepted Accounting Principle

IAS   International Accounting Standard

IASB   International Accounting Standard Board

IFRS   International Financial Reporting Standard

NCCG   National Code of Corporate Governance

PBGC   Pension Benefit Guarantee Corporation

US   United States

SEM   Stock Exchange of Mauritius

SFAS   Statement of Financial Accounting Standard

SFP   Statement of Financial Position

SIS   Superannuation Industry Supervision

QC   Qualitative Characteristics

 

 

LIST OF ILLUSTRATIONS AND TABLES

 

INTRODUCTION

 

With the advent of rapidly-changing competitive environment, the international accounting standards have made a drastic move towards its implementation and development globally. The requirement of such radical change was due to the burgeoning demands to cater for the need of maintaining high-quality and allowing comparability of accounting information around the world. Apparently, achieving such objective becomes part and parcel of the IASB and GAAP framework. Nowadays, the term ‘comparability’ has a strategic aspect in assisting users for decision-making purposes.

• Clear idea about the central issue and why it is worth studying
• Background
• Purpose
• Objectives
• Statement of purpose
• Context
• Motivation

 

Purpose of the study

Pension is one of the rare of subjects that have been discussed in the past and some users of financial information are still struggling to understand the correct treatment of superannuation or pension accounting in a statutory report for different countries. Therefore, the comparison of correct reporting of pension funds is very limited or has no knowledge about these in Australia, US and Mauritius.

 

 

LITERATURE REVIEW

 

• Comparability Framework

According to the fundamental QC of financial information, a financial report is required to be relevant and faithfully represented for effective decision-making. Information becomes relevant once it creates an effect in terms of confirmatory value, predictive value or both to the decision-makers (IASB, 2010b). Therefore, this will help the financial reports to be faithfully represented which give an indication that the economic phenomena is presented in a way, that is, freedom from material error, completeness and neutrality. As such, these can be enhanced by combining the four qualities of comparability, verifiability, timeliness and understandability to make decisions more relevant and faithfully represented (IASB, 2010).

Of all those discussed QC of financial information, comparability has gathered momentum globally following the convergence with IFRS to demonstrate similar information to capital-providers (Nobes & Parker, 2011). A comparison between alternative information becomes more appealing provided that it can be compared with other entities that assist in useful decision-making. Thus, there is a need for two or more items of information which make comparability more unique in terms of quality as linked with merely one item. The fundamental and enhancing QC of financial information are required to interrelate among themselves for more effective and efficient decision-making. However, the faithful representation and relevance are not necessarily the excellent production of accounting information even though IASB conceptual framework tries to balance everything related to the QC of information (Whittington, 2008). Such problem can be overcome by referring to the prevailing rule, for instance, ‘true and fair’ view (Alexander, 1999).

Though a myriad variation of measurement present in the financial perspective, comparability become highly complicated to identify, measure and quantify (Langbert, 1996), e.g., Revsine (1985) and Krisement (1997) try to quantify comparability in their pursuit of research which emanated from information system and industrial background (using entropy) correspondingly. Accounting cannot be treated like a physical object as it is quite challenging to distinguish and recognise the ‘like’ and “unlike” things in financial context (Langbert, 1996). Most of the previous research argued that the use of earning information (using the comparability concept) has greater accuracy and less bias while forecasting those results (De Franco, Kothari, & Verdi, 2009). As a result, comparability assist in saving time and costs for collecting large number and valuable financial information. Although the topic of comparability has been quite debatable over the years following the international convergence, such subject has remained unresolved and not even an enhanced comparability has been brought up (Langbert, 1996). It has often questioned whether the accounting methods using IFRS in “genuine” comparability or “superficial” comparability.

The empirical research outlined two issues on the concept of comparability from the framework formed. The initial condition includes information that faithfully represents the economic event when it is being reported. In other words, the information presented should be in the same economic conditions to allow comparisons between alternative investments and by doing so, it enables users of financial information to use professional judgment and subjectivity, especially in specific professional boundaries (Krisement, 1997). Secondly, the accounting methods used for each economic event should be adopted consistently throughout the comparable firms over the period. Moreover, the comparability is sometimes different from uniformity (in terms of accounting treatment or presentation of financial information) as some information might have been manipulated to look like real comparability.

At times, it is quite tough to adopt consistency while utilising accounting methods and in that particular case, the accounting standard-setters can accept sufficient disclosures for accounting treatment or assess the economic substance of the event if similar situations arise. For instance, pension accounting has an optional accounting method for AGL which mean that these different methods of accounting can apply for similar events.

The Figure 1 illustrate a matrix with two alternatives of accounting technique (same or different) showing in rows and the other two options for economic substance (similar/different) representing in columns.

Figure 1: Comparability Framework (Gordon & Gallery, 2012)

		ECONOMIC SUBSTANCE
		SAME EVENT	DIFFERENT EVENT
ACCOUNTING METHOD	Similar (no alternatives)	Deep comparability (DC)	Surface comparability (SC)
	Dissimilar (including alternatives)	Non-convergent comparability (NCC)	Intrinsic differences comparability (IDC)

DC arose when there are no accounting alternatives and as a result, similar arrangements are accounted the same. IIJC is accomplished once the firms, being compared, used a consistent accounting method in such case. Thus, comparability begets the outcome and consistency becomes the means (Gordon & Gallery, 2012).

NCC occurs when other accounting treatments are applied in similar particular economic events. Some accounting standards can be adjusted according to a particular country’s needs, e.g., IAS19 Employee Benefits authorise three alternatives to explain AGL. As a result, both IIJC is obstructed because firms employ different accounting methods in accordance to their country’s needs despite the economic events are similar in substance which facilitates comparability of financial information. As such, notes for disclosures of accounting method give additional information to users for alternative accounting treatments in the book (Gordon, 2012).

SC implies where the same accounting method across and between firm is utilised to different economic events, e.g., same accounting treatment is applied to different organisation with different jurisdictions (in form of law and regulations requirement) even though the economic situation change (Schipper, 2003) and this, however, impede the comparability of financial information (Zeff, 2007). In this regard, SC diminishes inter-jurisdictional comparisons as the economic circumstances differ in substance which led to inability to use comparability.

IDC refers to a circumstance where different accounting treatments are applied to different economic situation. As such, comparisons between financial information become nearly impossible and are required to disclose as additional notes to the financial statements, e.g., IAS8 Operating Segments focus on predictive capacity while comparing information (Schipper, 2003).

In conclusion, the organisation prefers to DC and IDC than the other two components for useful decision-making. On the other hand, the dysfunctional facet (combine both SC and NCC) decreases the usefulness of comparisons between different financial information for different firms. Therefore, standard-setters should emphasis on dysfunctional comparability to eradicate certain non-comparability information that emanate from utilising the global accounting standards.

• Application of Comparability Framework to International Pension Accounting

The application of pension accounting to comparability framework becomes widely significant on two specific grounds:

1. The pension accounting standard involved a high level intricacies and divergence in its rules and regulations in almost all whole worlds (Kiosse & Peasnell, 2008). In fact, the different type or nature of industry change the economic substance of an event which result to greater challenge for accounting standard-setters and for making similar or dissimilar comparison. Australia, USA and Mauritius were chosen because their economies are different in terms of economy and society itself which led to different pension accounting treatments (Gordon & Gallery, 2012). For instance, Australia was unsuccessful when introducing the pension accounting standards which were derived from a proposed USA standard in early 1990s (Lambert & Gallery, 1996).

2. IASB states that the alternatives in standards for deferring pension benefits led to insufficient of comparable information which was part of the IAS19 Employee Benefits and SFAS87 Employers’ Accounting for Pensions (USA). In the same way, Australia also has a deferral options in its pension accounting standards since 2005. Therefore, each country has different jurisdiction (IASB, AASB and FASB) and the idea projecting on pension accounting is almost similar.

Impact of Pensions in Social Contexts for Comparability

Formerly, pensions were derived as a result of disability and other related injuries at the workplace in USA and Mauritius and later included payment of pension (Bateman, Kingston, & Piggott, 2001) whereas pension in Australia were meant for white collar people only (Ward, 1998). Since their inceptions, the DBP funds become dominant in the society as contribution is made by employees only whereas in Australia and Mauritius, both employees and employers participate in the contribution of the funds. The SIS Act 1993 (Australia) and Private Pensions Scheme Act 2012 (Mauritius) obliged both the employer and employees to participate in trustee’s board (Gallery, 1999) while such board is hired by the employer in US.

The US rules and regulations were tremendously complicated that affect the protection of workers (Langbert, 1996), e.g., employees were benefited from ERISA and PBGC system as they were used as a mechanism against those sponsoring employers who tried to eliminate under-funded DBP and other related obligations by imposing 30% over the firm’s net worth in case of terminating the employment contract in1974. On the contrary, there are no such stringent system exists in Australia and Mauritius but instead they depend on good corporate governance procedures, such as, ASIC (Australia) and NCCG (recently implemented in Mauritius 2016).

Furthermore, there is legal connection between employer and pension accounts and considered to be of similar economic events as employers have better control over the board regarding the management of DBP’s fund. On the other hand, both Australia and Mauritius work towards plan for maintaining the good governance by encouraging both employee and employer to participate in the board and in this way, the Australian and Mauritian pension funds do not have the legal obligations to make any payment in case of termination plan. Thus, they are not part of the economic entity (Mauricio et al., 2015).

In addition, there are various implications for accounting pension when using different institutional laws, e.g., the SFAS87 (Pension accounting and plans, 2006) lay on emphasis on the proper disclosure of DBP’s funds, be it, any gains or losses and the recognition of those accounts. This is also applicable to IAS19 Employee Benefits in both Australia and Mauritius but only for the liability part; DBP’s funds can partly be reported in the Statement of Financial Position. Table 1 displays some major distinction between the three countries.

Table 1: Comparison made based on the USA, Australian and Mauritian context (Ang et al. (2000) and Gordon (2007))

Feature	USA	Australia	Mauritius
Origins	Entitlements were meant for people with disabilities but was converted to retirement entitlements afterwards	Retirement entitlement motivated to avoid fidelity insurance by bondsmen of the bank (for job protection)	Entitlements were meant for people with disabilities but was converted to retirement entitlements afterwards
Type of industries it was first implemented	Railways and mining	Banks, insurance and financial institutions	Agricultural industry
In what way the pension was arranged	Depend on the overall management but is considered as a deferred payments.	As a managerial gratuity	Arose when the country was economically unstable after the independence in 1958
How employees take up the membership	Generally covered all employees of firms with DBP funds.	Was limited to white-collar people	Every person is automatically eligible for pensions
Legislation and year of enactment	Employee Retirement Income Security Act 1974 Plus over 15 additional statutes enacted over the next 30+ years, & Pension Protection Act (2006).	SIS Act 1993 (replaced the Occupational Superannuation Standards Act 1987)	National Pensions Act 1976 & Private Pensions Schemes Act 2012
How funds was distributed	Generally non-contributory (only employers contribute)	Participate in sharing the contribution by both employers and employees	Universal pensions – not necessary to make any contributions by people
Fund governance structure	Pension plan trustees are usually appointed by the employer	SIS requires equal numbers of employer and member representatives on a pension fund’s board of trustees.	NCCG requires participation of both employee and employer on the board
Statutory insurance guaranteeing benefits of underfunded DBPs that are terminated	Yes – provided through PBGC	No	No
Recourse to employers for terminated DBPs that are underfunded	Yes – PBGC 30% lien over firms’ net worth	No	No
Funding status	Underfunding is common	Generally fully funded	Generally fully funded
Penalties for failing to meet minimum funding requirements	Penalty tax imposed on sponsoring employers	No statutory penalties imposed on sponsoring employers	No penalties imposed

The trials made by standard-setters to incorporate US pension accounting in Australia has been unsuccessful as they constitute of different social and institutional structures (Ang, Gallery, & Sidhu, 2000). It is within the US, Australian and Mauritian companies’ disposal to account for DBP funds as a constructive and contingent liability in the notes to the account according the IAS37 (Provisions, Contingent Assets/Liabilities) and AASB137.

On top of that, SC is likely to happen when attempting to compare the DBP funds in different jurisdiction, as in, US, Australian and Mauritian companies as same accounting methods are applied to substantive and different pension events in different economic situations. Therefore, it is very crucial to recognise the pension accounting in substance to allow proper justifications to the users of the financial information (Napier, 2009), e.g., BHP Billiton Ltd has its own branches spreading in Australia, USA, Canada, Europe and South Africa.

The proposed framework has stressed on the nexus between the substance forms of events and the recognition of the particular transaction. Due to the differences in law and regulations, SC is likely to occur given the fact that there is a chance of different events or different type or nature of an organization for the same accounting transaction. So the standard-setters found it quite challenging when the regulatory system changes and hence, increase the risks between the accounting and the economic substance for pension transaction).

Effects of Accounting Options on Comparability

In the past, IFRS permitted options in pension accounting according to countries’ needs but the IASB requested to remove all these changes in order to recognise pension assets and liabilities instantly. The elimination of options from the IFRS has led to a reduction in NCC along with a rise in DC. Nevertheless, the organisations will remain with hardly any alternatives to show the pension accounting in substance form and thus, SC may rise due to the volatility in the regulation systems.

The standard related to the pension accounting has attracted many controversies from its introduction (Saemann, 1995; Ang et al., 2000). Hence,  such results were quite obvious in USA (Daley & Tranter, 1990), e.g., SFAS87 were designed to meet domestic requirements but a corridor method was incorporated for AGL to mininise the effects on financial statements and allow present a part of the pension liabilities.

In the same way, IAS19 were permitted to adopt the corridor method and other accounting alternatives to report for AGL. Generally, the corridor method is described as “delayed recognition or smoothing technique” for accounting AGL in turn to decrease the unreported expenditure for pensions (Gordon & Gallery, 2012) but it has been critically evaluated as subjective and non-compliant with the characterisation of assets/liabilities for deferred AGL (Gordon, 2001). Therefore, SFAS158 insist on immediate reporting of AGL in the financial statements by maintaining consistency and proper disclosure of the pension transactions, e.g., BHP Billiton had US$38m as actuarial losses in their Statement of Comprehensive Income during the year 2010.

As international accounting standard-setters allow the options in the pension transactions across different jurisdictions, this may prone to NCC where those transactions are treated differently. Since there are many alternatives available for AGL, comparisons made between firms for the disclosure of pension accounting for one jurisdiction are expected to decline. This may give rise to NCC and inability to use IIJC.

Consequences for IIJC

As earlier, much emphasis was brought forward on the use of the two types of dysfunctional comparability (SC and NCC) because each country has its own way of applying pension accounting depending on the substance of an event and the employment of consistent accounting standard to different economic situation has resulted to inter-jurisdictional surface comparability. When alternatives are included in the pension accounting standard, the dysfunctional comparability moves to another level but the NCC restricts both IIJC. The NCC difficulties can be resolved in a realistic way (probably not in political terms) by abolishing choices in pension accounting standards world-widely assuming economic situations are similar in substance but by doing so, it may lead to deep comparability for different jurisdictions.

In addition, the SC problems can be solved by using specific provisions that are applicable to institutional differences across or within jurisdictions in different economic events, e.g., the DBP for BHP Billiton Ltd are accounted similarly in Australia and USA. Furthermore, the IDC is concerned with warning financial statement users about the different economic events of pension accounting across the jurisdictions. The principle “dissimilar phenomena are presented dissimilarly” is required to reflect in pension accounting while trying to compare the financial information.

573 – chp13

468

Index – pg 591(employee benefits), 594(tax),

ANALYSES, METHODOLOGIES AND RESULTS

The financial reports were used as a secondary data and qualitative information for Stock Exchange companies (Australian Securities Exchange (ASX), NASDAQ (US), and Stock Exchange of Mauritius (SEM)) to compare the proper reporting of pension accounting in Australia, US and Mauritius for the year 2016. Income statement, Statement of Financial Position, Statement of Cash Flows and Notes to the accounts from Annual Report 2016 were specifically employed to make comparisons for the three countries.

Initially, Mauritius has basically applied IAS 19 to report the employee benefits and same applies to Australia that uses the AASB 119 Employee Benefits and FAS 158 for US (from Table 2). Such accounting standards aim to recognise a liability when an employee has attained a certain level for the organisation, i.e., required to be paid in future and expense can be reported when the economic benefits generated from the service offered by the employee. Normally, these three countries provided different types of employee benefits as mentioned in the Table 2. Finally, the payment benefits are usually given to workers, ex-workers, to their partners, children or other dependants or given for insurance purpose by employers, government, insurance companies or other employment associations.

Table 2: The scope and standard adopted for each country

	AUSTRALIA (AASB) – AAS 119 US (FASB) – FAS 158 MAURITIUS (IASB) – IAS 19
Scope & Standard	Employee Benefits include 1. short-term benefits 2. long-term benefits 3. termination benefits 4. post-employment benefits 5. others

Types of employee benefits and their reporting in the statutory report

The different types of employee benefits have been well-defined in the following Table 3 for each jurisdiction. The table is served as a purpose to give a better insight on how each of the employee benefits (AASB 119 (Australia), FAS 158 (US) and IAS 19 (Mauritius)) is recognised in their financial statements. Additionally, Australia and Mauritius were combined together as they both follow the IFRS accounting principles whereas US use the rules-based GAAP accounting method. As such, the comparisons become very critical to achieve the main purpose of the report which may also help users of financial information in their decision-making.

Table 3: Comparison of different types of employee benefits and their reporting system in each jurisdiction

Employee Benefits	Australia & Mauritius	US
Short-term employee benefits	A scheme benefited by employees for the service provided within one year and it is reported as a liability when due expense when payment is done.	No guidance is provided on such benefits other than the compensation absent. However, it can be accounted using the accrual accounting system.
Post-retirement benefits	Payments done after the completion of work-contract and can be made through formal & informal arrangement before or during retirement.	Consists of Post-retirement benefits (provide during employment) Other post-employment benefits (provide after the completion of employment but before retirement). The reporting of such benefits depends on type of benefits received.
Termination benefits	Such benefits are provided when an employee terminates their contract of employment before their normal retirement date or receive a benefit instead of termination of job. It is reported at a prior date when restructuration costs contain the payment of termination benefits or, on the date when the employee accepts the offer for termination benefits.	Such benefits can be categorised as: Ongoing benefit arrangements Contractual termination Special termination One-time termination Generally, there is no single model for reporting the termination benefits and the timing of recognition depends on the category termination benefits.
Other long-term employee benefits	These are all benefits, except, post-employment benefits, termination benefits and short-term benefits. The expenditure for such benefits is calculated using a discount method which is accrued over the service years. It is similarly calculated as DBP.	US GAAP do not take into account of short or long term employee benefits. Its expenses are accumulated over the service period but the computation may be different from IFRS.
Multi-employer plans	These are post-employment benefits that accumulate assets contributed by different entity of the employees. Such schemes can be categorised as Defined Contribution Plans (DCP) Defined Benefit Plans (DBP) If information is not available for DBP, then it is generally recommended to treat the plan as DCP including requirements of additional disclosures. If DCP is applied to such plan and there is an agreement that outlined the distribution of surplus or deficit in the plan funded, then an asset or liability is recognised as a result of the agreement presented. No guide is provided on the application of DBP to such plans that would be DCP unless they have minimum benefit guarantee.	These are post-employment benefits that accumulate assets contributed by different entity for the employees. Such schemes are only treated as DCP. Even there is such agreement in US, the asset or liability will not be reported unless the refund has been received or the liability has been assessed. There is specific guidance on application of DBP to some plans that would be DCP unless they have minimum benefit guarantee. The plan can be reported as DBP or cash balance plan depending on the form of minimum guarantee.

At first instance, the short-term employee benefits can be defined as a scheme benefited by employees working for less than one year in Australian and Mauritian context but no proper guidance were provided apart from the compensation of absent in US. According to the IFRS, such employee benefits are presented as an accrued expense (liability) when it is owed in SFP and as an expense when it is paid in IS while it is calculated on accrual basis for US GAAP.

Such benefits are usually occurred when the contract of employment has ended and hence, can be arranged formally or informally before or during the retirement according to the IFRS. On the other hand, US GAAP outlined two types of such employee benefits, first “post-retirement benefit” and secondly, “the other post-retirement benefits”. The post-retirement benefits are generally provided when the employee is still working whereas the benefits which are provided after the employment was ended but before the retirement is called the other post-retirement benefits. Hence, each of these benefits is reported on their respective way.

When an employee terminates their job contract before the normal retirement date or receives a benefit instead of the ending their job contract is usually referred to the ‘termination benefits’ according to the IFRS. Therefore, it is recognised when the restructuration costs form part of the retirement benefit payments at a prior date or when the employee gives consent to the offer of the termination benefits. However, there are four different types of termination benefits in the case of US GAAP.

Ongoing benefit arrangements

Contractual termination

Special termination

One-time termination

Normally, there is no specific guidance for reporting the termination benefit and it is certain termination benefit that can be recognised depending on the timing.

Other long-term employee benefits include all benefits excluding the post-retirement benefits, short-term benefits and termination benefits in terms of the IFRS. Such benefits’ expenses are calculated using the discount method which is due over the length of service. The DBP is similarly calculated as long-term benefits. Nevertheless, the US GAAP does not take into account of the short or long term employee benefits, but its expenses are accumulated over the employee’s length of service where it is computed differently from IFRS.

Eventually, the multi-employer plans consist of post-employment benefits that gathered assets contributed by the various entities of the employee. Such schemes can be categorised as Defined Contribution Plan (DCP) and Defined Benefit Plan (DBP) which is defined in Table 4. Furthermore, the DCP is considered in certain case when there is no information available for DBP and hence, it needs to be disclosed in notes to the account according to IFRS whereas the US treated such schemes as DCP only. Even there is such agreement in US, they will not recognise the asset or liability in their financial statements except that the refund has been made or liability has been evaluated. In the context of IFRS, a written agreement should include the allocation of any surplus or deficit for DCP and based on information presented, the assets or liabilities should be reported in the financial statements. Besides, there is proper guidance to treat DBP as DCP for a multi-employer plan provided that a minimum benefit guarantee is supplied but such plan depend on the nature of such guarantee according to the US GAAP. On the other hand, there is no such guidance to treat DBP as DCP except that a minimum benefit guarantee is presented according to the IFRS framework.

Defined Contribution Plans and Defined Benefit Plans

The DCP refers to a post-employment benefit where the employers make certain contribution in a separate entity and hold no responsibility apart from this whereas the DBP is referred as other post-employment plans as demonstrated in Table 4. In Australia and Mauritius, they both categorised other post-employment benefits plans as DCP and DBP but in US, there is no such classification under such scheme. Each jurisdiction has to contribute towards their DCP using the accrual basis.

Table 4: How the DCPs are reported in each country (KPMG, 2015)

Australia	US	Mauritius
Refers to a post-employment benefit where fixed contribution is made by employer into a separate entity and has no further responsibility. Other post-employment plans are referred as ‘defined benefit plans’. They classify other post-employment benefits plans as DCP DBP Contributions made to DCP are reported under accrual accounting system.	Refers to a post-employment benefit where fixed contribution is made by employer into a separate entity and has no further responsibility. Other post-employment plans are referred as ‘defined benefit plans’. In US, they don’t have any classification under such scheme. Contributions made to DCP are reported under accrual accounting system.	Refers to a post-employment benefit where fixed contribution is made by employer into a separate entity and has no further responsibility. Other post-employment plans are referred as ‘defined benefit plans’. They classify other post-employment benefits plans as DCP DBP Contributions made to DCP are reported under accrual accounting system.

The computations for DBP involve four different steps as illustrated in Table 5. Australia and Mauritius were combined together in the table because they both employed the IFRS in their financial statements whilst the GAAP is slightly different from the IFRS for doing such calculations. Firstly, both IFRS and GAAP determine their present of the DBO by employing an actuarial valuation method. In their second step, the IFRS and GAAP both deduct the fair value of any plan assets. Thirdly, both Australia and Mauritius will adjust the amount that affects the surplus/deficit limiting a net defined asset to the asset ceiling but in US, there is no requirement to make such adjustment. The final step involved the computation of the service costs, net interest and remeasurements of the net DBO for Australia and Mauritius but they may recognise, measure or present differently in US GAAP as compared to the IFRS.

Table 5: Steps involved in accounting the Defined Benefits Plans (DBP) (KPMG, 2015)

Australia & Mauritius	US
Determine the present value of the defined benefit obligation (DBO) by applying an actuarial valuation method. Deduct the fair value of any plan assets   Adjust the amount of the deficit/surplus for any effect of limiting a net defined asset to the asset ceiling   Determine the service costs, net interest and remeasurements of the net defined benefit liability (asset)	Determine the present value of the DBO by applying an actuarial valuation method. Deducting the fair value of any plan assets No adjustment for any effect of limiting a net defined asset to the asset ceiling Determine the service costs, net interest and remeasurements of the net defined benefit liability (asset) which may differ from IFRS in form of measurement, recognition and presentation.

Other related terms for the recognition of the DBP

Projected Unit Credit Method is a quantitative method that is used to find out the present value of the DBO and the present service cost and any prior service cost, if relevant in accordance with the IFRS as shown in Table 6. Under such method, the liabilities and expenses are calculated using an actuary basis for pay-related plans and cash balance plans according to the US GAAP.

Plan assets – Certain assets are required to meet some criteria in turn to meet the requirements as plan assets and must also include provisions that do not facilitate access to entity’s creditors especially those have insolvency history in the context of IFRS, but there is no such requirement for US GAAP except that assets are needed to meet certain principles to be qualified as plan assets.

Plan assets should incorporate insurance policies into the plan supplied by the sponsor or a related party of the sponsor only if such policies are transferable according to the US GAAP but the definition of the plan assets and other criteria are also required for the IFRS. Both the IFRS and US GAAP require the asset to go through the definition of the asset, qualified insurance policies and other associated liabilities are reported in the SFP.

Asset ceiling – Any surplus in the DBP will lead to an amount of net asset accounted that is limited to the present value of any available economic benefits from the plan in the form of refunds from the plan or reductions in future contributions to the plan while considering the IFRS framework whereas in US, there is no restriction to recognise the asset under such plans.

Minimum funding requirements are required to compensate for any shortfalls that have liabilities provided that such payment resulted to a surplus in excess of the asset ceiling according to the IFRS framework. A liability is generally regarded for an underfunded plan and thus, no adjustments are made under such requirements as per the US GAAP guidance.

Periods of service – The retirement benefits are recorded depending on the employee’s length of service but if the plan’s benefit formula for retirement benefits is back-end loaded, then it is recommended to employ a straight-line method which is applicable to both IFRS and US GAAP framework.

Table 6: Other related terms for the recognition of the DBP in the statutory report (KPMG, 2015)

	Australia & Mauritius	US
Projected Unit Credit Method	It is used to find out the present value of the DBO and the related current service cost and, if applicable, any previous service cost.	Under such method, the liability and expenses are measured using actuarial method for pay-related plans and for certain cash balance plans.
Plan assets	To be eligible as plan assets, assets need to meet particular criteria, including a requirement that they be unavailable to the entity’s creditors (even in bankruptcy).	To be eligible as plan assets, assets need to meet particular criteria but there is no such requirement to show that the asset would be unavailable to the entity’s creditors in bankruptcy.
Insurance policies	Plan assets contain insurance policies issued to the plan by the sponsor or related party of the sponsor if the policies are transferable and meet the definition of plan assets and certain criteria. Assets that satisfy the definition of the assets, qualified insurance policies and the associated liabilities are displayed on a net basis in the SFP.	Plan asset incorporate insurance policies supplied to the plan by the sponsor or a related party of the sponsor if the policies are transferable. Similar to IFRS
Asset ceiling	If a DBP is in surplus, then the amount of any net asset recognised is limited to the present value of any available economic benefits from the plan in the form of refunds from the plan or reductions in future contributions to the plan. This is recognised in the SFP.	The recognition of an asset is not restricted in such plans.
Minimum Funding Requirements	Such requirement is needed to cover any existing shortfalls that have any liability if such payment produces a surplus in excess of the asset ceiling.	An underfunded plan is recognised as a liability and such liability is not subjected to additional adjustments under such requirements.
Periods of service	The retirement benefits (plan’s benefit formula) are in accordance of their length of service but the straight-line method is employed if the formula is back-end loaded.	Similar to IFRS
Curtailment	Curtailments and other related plans are reported at the same time as the related restructuration or other termination benefits before any other plan amendments happen.	Curtailment gains are reported as they occur whereas its losses are accounted when they are probable.

Curtailment and other associated plans are accounted along with the restructuration and other termination benefits before any changes are occurred in the context of IFRS. As for the IFRS, any gains from the curtailments are recognised immediately as they occur but its losses are reported when they are probable.

 

CONCLUSION

 

 

RECOMMENDATIONS FOR FUTURE RESEARCH

Future research may study the impact of recognizing plan assets and liabilities in the balance sheet on financial ratios of those companies that sponsor postretirement benefits. In addition, the impact of this recognition and improved footnote disclosures on the stock prices of sponsoring companies can be determined. Finally, the feasibility of requiring the use of a certain interest rate by all sponsors to determine plan asset returns and obligations may be explored.

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