1. 23-1 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan Chapter 23 Accounting for superannuation plans

2. 23-2 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan 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

3. 23-3 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan 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

4. 23-4 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan AASB 119 ‘Employee Benefits’ Addresses employee benefit obligations from the employer’s perspective—not from the perspective of the superannuation fund

5. 23-5 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan AAS 25 AAS 25 ‘Financial Reporting by Superannuation Plans’ –contains recognition and disclosure requirements for superannuation plans –the AASB is currently undertaking a comprehensive review of the accounting requirements for superannuation plans and a new standard is expected in the near future. –among the reasons for the review are some inconsistencies between AAS 25 and the requirements embodied in AASB 119. –as an interim measure, the AASB made some minor amendments to AAS 25, which was re-released in May 2006

6. 23-6 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan 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; 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

7. 23-7 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan 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

8. 23-8 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan 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.)

9. 23-9 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan 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

10. 23-10 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan 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

11. 23-11 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan 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

12. 23-12 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan 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

13. 23-13 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan 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

14. 23-14 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan 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) –net market value is defined in AAS 25 as ‘the amount which could be expected to be received from the disposal of an asset in an orderly market after deducting costs expected to be incurred in realising the proceeds of such a disposal’ –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

15. 23-15 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan 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 23.1 (p. 800) The asset revaluation and depreciation requirements of AASB 116 do not apply to superannuation plans

16. 23-16 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan 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.

17. 23-17 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan 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) –is the difference between carrying amounts of assets and the sum of income tax liabilities and sundry liabilities (i.e. a residual)

18. 23-18 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan 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 –if rate based on the anticipated rate of return on an organisation’s assets cannot be determined then rate on government bonds may be used

19. 23-19 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan 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

20. 23-20 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan 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 23.2 (p. 803)

21. 23-21 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan 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 23.3 (p. 808)

22. 23-22 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan 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

23. 23-23 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan 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

24. 23-24 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan 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

25. 23-25 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan 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

26. 23-26 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan 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