It can be said that companies are separate legal entity from its owners who are the shareholders. The company is therefore accountable t these group of people called shareholders. They also have maintain a lasting relation with the bank who are the fund suppliers to the company and an important user of the financial report. Other entities are also users of the financial statement which are employee, the public and the government. Therefore it is required that companies produce it financial statement to meet the regulatory requirement and also to meet the needs of its users. The Companies Act also requires companies on formation to company with the period financial reporting requirements. (need to find reference). For the reason that company has to produces information of various user, it therefore has to be consistent with the regulation accounting standards.
DEFINED BENEFIT PLAN
Employee benefits are based on two categories; short-term employee benefits and long-term employee benefits. Pension benefit is a long-term employee benefit and is the most important. Pension systems is broken down into three types namely state pensions, pension received from employee resulting from employment contract and individual pension saving plans. The state pension is given by the government and the payment and it is based on number of qualifying years gain through the National Insurance contributions paid. Individual pension plan involved making a personal contribution apart from state and companies which provides a regular source of income in the future after retirement. The focus would be on the second type of pension, Pension received from employee that is company pension ( Alexandra IFRA)
Company pension is an agreement between the employee and the employer on signing a contract over a period of time for the employer to give some form of pay benefit after retirement. This plan is known as the defined benefit plan. The employee does not get to know how much would be paid until retirements. This contribution made over the period of employee contract are the company is usually made to a separate entity as a form of investment for a later return.
Defined benefit plans are those plans where the benefits are guaranteed amounts and amounts to be paid as retirement benefits are determined by reference to a formula, usually based on the employees' earnings and/or number of years of service. The critical factors are thus the retirement benefits that are fixed or determinable, without regards to the adequacy of assets that may have been set aside for payment of the benefits. (Wiley IFRS workbook and Guide)
Defined benefit plans may be unfunded, or they may be wholly or partly funded by contributions by an entity, and sometimes its employees, into an entity, or fund, that is legally separate from the reporting entity and from which the employee benefits are paid. The payment of funded benefits when they fall due depends not only on the financial position and the investment performance of the fund but also on an entity's ability (and willingness) to make good any shortfall in the fund's assets. Therefore, the entity is, in substance, underwriting the actuarial and investment risks associated with the plan. Consequently, the expense recognised for a defined benefit plan is not necessarily the amount of the contribution due for the period. (IAS 19)
Under a defined benefit plans, the benefits payable to employees are not based based solely on the amount of the contribution, but are determined by the terms of the defined benefit plan which typical are age, length of service and compensation. The employer retains the actuarial and investment risk plan. (ACCA Global). Therefore if a company does not make ensure contribution towards an employee pension, upon retirement, the employee would still receive its full entitled which thereby has negative effects on this profits statement and balance. It has been said that companies are recently have problems in pension regulatory requirement.
KEY ISSUES IN THE DEBATE EMPLOYE BENEFIT
The key issues in the debate were arrived at by going through a number of comment letters from different organisations in response to the invitation to comment on the ED as well as research using textbooks and journal articles. These issues are discussed below.
IAS 19 requirements had caused some companies to close such pension plans because of their volatile effect on the balance sheet
Argued that IAS 19 simply highlighted the real cost of defined benefit plans, causing management to question whether such schemes are sustainable.
The IAS 19 employee benefit requires the accounting and disclosure of the employed benefit. The cost of providing employee benefits should be recognised in the period in which the benefit is earned by the employee, rather than when it is paid or payable (Deliottes). A number of companies and commentators has been recently reported lastly that the Pension plan is have violent on effects on the companies' balance sheet. Companies wants to take significant measure in other gains back its financial strength. Therefore they are considering closing the pension plan and/ or reduction in the pension plan.
The observer posted an article on a survey was carried out by the defined benefit plan executive. Forty-four percent reported that defined benefit plan plan's performance in the past year has substantially affected their company's overall financial performance. It pointed out that more than half of this group of companies are having a rethink about the plan and only a few are ready to terminate the plan.
Why are companies facing problem with the pension plan? The approach used by companies in determining amount to be expensed in their financial statement is one of the most important issue is employing the IAS 19. This include the approach taking towards reflecting the figures is another likely issues that could be