1. Pension In many countries pensio

1. Pension
In many countries pension (or superannuation) plans are stablished by employers to provide retirement benefirs for employees. Employers make payments to pension funds which hold assets, in trust, to fund payments when employees retire. The pension funds are legal entities, separate from the employers firm.
Pension plans may be contributory (both the employer and the employee contribute to the fund) or non-contributory (where only the employer makes contributions). For a defined benefit fund, the amounts to be paid to the employee are at least partially a function of the employee’s final or average sallary. In contrast, adefined contribution (or accumulated benefit) fund pays an amount that is a function of the contributions made to the fund.
Pension funds may be fully funded, partially funded or unfunded. Fully funded plans have sufficient cash or investments to meet the fund’s obligation to members. In contrast, unfunded plans do not have cash or investment to cover the potential payouts under the plans. To the extent that amounts held in trust and being paid into the pension fund are insufficient to meet obligations under the plan as they fall due the pension plan is underfunded.
Since pension funds are sparate legal entities, it might be presumed that unfunded commitments of the plans are not liabilities of an employer firm that pays into a fund. However, it can be argued that the firm has an equitable obligation to meet unfunded commitmrnts and, therefore, has a liability. In support of this argument, whittred, zimmer and taylor offer the example of afirm that lets its sponsored superannuation fund default and suffers loss of reputation in labour and other markets as a consequence, thereby incurring a sacrifice of economic benefits. Although some firms traditionally have not recognised unfunded commitments as liabilities, under the framework and IAS 37/AASB 137 it is difficult to argue that they are not liabilities.
Another issue relates to when to recognise liabilities for pension (superannuation) payouts. It is :
a. As the employee renders service? The notion is that the payout is a form of compensation earned by the employee as service are rendered. However, it is paid in the future, after retirement.
b. When the employee retires?
c. When the fund is required to make payments under the pension plan?
Pension plans can be regarded as promise by the entity to provide pensions to employee inreturn for past and current services. Pension benefits are a form of deferred compensation offered by the firm in exchange for services by employees who have chosen, either implicitly or explicitly, to accept lower current compensation in return for future pension payments. These pension benefits are earned by employees, and their cost accrues over the years the services are rendered. The critical past event is the rendering of services by employee and, therefore, an obligation arises for those pension benefits that have not yet been funded. Case study 8.2 considers issues relating to accounting for pensions (superannuation) in the united kingdom and australia by focusing on pension (superannuation) liabilities of a number of large listed companies.
2. Provisions and contingencies
Provisions and cintingencies occur where there is a blurring of the line between present and future obligation. IAS 37/AASB 137 provisions, contingent liabilities and contingent assats acknowledges the overlap of definition in paragraph 12, when it state that all provisions are contingent because they are uncertain in timing or amount. Trying to distinguish between present , future and potential (or contingent) obligations is not as simple as it may appear. The distinction depends to a large degree on the nature of the ‘past event’
IAS 37/AASB 137 paragraph 10 defines a contingent liability as :
a. A possible obligation that arises from past event and whose existence will be confirmed only by the occurance or non-occurance of one or more uncertain future events not wholly within the control of the entity; or
b. A present obligation that arises from past events but is not recognised because:
(i) It is not probable that an outflow of resources embodying economic benefits will be recuired to settle the obligation; or
(ii) The amount of the obligation cannot be measured with sufficient reliability.
The IAS 37/AASB 137 paragraph 14 recognition criteria for provisions are consistent with the framework criteria for recognition of a liability. As such, liabilities and provisions are permitted to be recognised only when there is a present obligation, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation., and the amount of the obligation can be reliably measured. Contingent liabilities do not meet these criteria (just as contingent assets do not meet the criteria for recognition as assets). Hence, paragraph 27 of IAS 37/AASB137 state categorically that contingent liabilities are not to be recognise in the financial statements. IAS 37 is presently under review by the IASB as part of the liabilities project. One of the proposals is to eliminate the terms ‘provision’ and ‘contingent liability’ replacing them with ‘non-financial liability’. The proposals aim to extend and clarify the aplication of IAS 37; however, as is usual, the proposals have received mixed responses from stake holders.
The effect of IAS 37 is to limit the use of provisions. For example, a company may consider it prudent to create a provisioan for uninsured losses (i.e. the process of selfinsuring), however, a liability cannot be recognised under IAS 37 under the occurance of an event neccesitating the sacrifice of assets by the reporting entity. Another example relates to ‘provision for possible losses’ or a ‘provision for restructuring’ which may be created following poor performence. Since there is no existing obligation to an external party (i.e. a commitment to transfer resources from the entity to an external party which cannot be avoided) such a provision would not be permittedunder the framework or current standards.
Certainly, there are circumstances when the users of financial information want to know about potential losses or outgoings. IAS 37 (para. 86) states that in some circumstatces a note to the accounts is required because the knowledge of the liabilities is relevant to the users of the financial report in making and evaluating decisions about the allocation of scarce resources. That is, future settlement may be required, but the estimated probability test provides opportunities for firms to exclude liabilities from their financial statements. However, the liabilities should still be discloused when knowledge of them is likely to affect users decision making.