A defined contribution plan is a post-employment benefit plan whereby an employer pays fixed contributions into a fund in the form of a separate entity for the benefit of an employee but has no obligation to make further payments if the fund does not have sufficient assets to pay all of the employees’ entitlements to post-employment benefits. The plan promises a specified monthly benefit at retirement of the employee based solely on the amount contributed to the participant’s account. Contributions to a defined contribution plan are accounted for on an accrual basis.
If a post-retirement benefit plan is not a defined contribution plan, it is a defined benefit plan. A defined benefit plan is a post-employment benefit plan that creates an obligation of the employer to the company’s employees that is limited to the amount that the employer agrees to contribute to the plan. The amount of the benefits actually received by the beneficiaries is based on the amount of contributions paid into the plan and the investment returns arising from the contributions.
| Post-Employment Benefits – US GAAP vs. IFRS | ||
| US GAAP | IFRS | |
| Defined Contribution | The concept, characteristics and accounting are similar. | |
| Defined Benefit | PV of obligation − FV of plan assets | Present value of the obligation +/− Unrecognized actuarial gains/losses − Unrecognized prior service costs − Fair value of plan assets |
A plan asset is an asset in post-retirement benefit plan that serves as an investment vehicle to generate income to fund the plan for the benefit of the participating employees. To qualify as plan assets, they need to meet specific criteria. Plan assets include insurance policies issued to the plan by the sponsor or a related party of the sponsor if the policies are transferable and meet certain other criteria. Assets that meet the definition of plan assets and the related liabilities are presented on a net basis in the balance sheet.