IAS 26 – Accounting and Reporting by Retirement Benefit Plans

IAS 26 is a significant global accounting standard specifically addressing accounting and reporting by retirement benefit plans. It sets out the principles for disclosing and measuring the financial performance and status of these plans, distinct from how an employer accounts for its own benefit obligations under IAS 19.

This article looks specifically at IAS 26 Accounting and Reporting by Retirement Benefit Plans and why it matters.

Types of Retirement Benefit Plans

IAS 26 formally addresses two core categories of retirement benefit plan, with a third, hybrid approach seen in practice that combines elements of both:

Type	Details
Defined Contribution Plans	Benefits depend on contributions from employees or employers, plus investment returns on those contributions. Employees bear the investment risk, since the eventual benefit isn’t guaranteed at a fixed amount.
Defined Benefit Plans	Employees receive a determined benefit at retirement, usually calculated based on factors such as salary and years of service. Employers bear the risk here, since they’re obligated to fund whatever benefit is promised regardless of investment performance.
Hybrid Plans	A practical combination of defined benefit and defined contribution features, not a formally separate category under IAS 26 itself, but common in practice as a way to share risk between employer and employee.

What Is Accounting and Reporting by Retirement Benefit Plans Under IAS 26?

IAS 26 addresses several distinct aspects of how retirement benefit plans should account for and report their own financial position, separate from the employer’s own accounting.

Financial Statements for Retirement Benefit Plans

Financial statements for retirement benefit plans are essential for understanding these plans’ financial position and performance. IAS 26 sets out specific obligations for preparing and presenting them, built around a few core components.

Statement of Changes in Net Assets Available for Benefits

This statement shows how the plan’s net assets changed over a specific period, typically a financial year, covering:

• Contributions from employers and employees
• Investment income
• Benefits paid out to participants
• Administrative expenses

Statement of Net Assets Available for Benefits

This statement gives a snapshot of the plan’s assets and liabilities at a specific point in time, typically including cash, investments, and other assets, along with liabilities such as unpaid benefits or amounts due.

Actuarial Present Value of Promised Retirement Benefits

For defined benefit plans specifically, IAS 26 requires the financial statements to either include, or make clear reference to, the actuarial present value of promised retirement benefits, distinguishing vested from non-vested benefits where relevant. This figure is compared against the plan’s net assets available for benefits, showing whether the plan has a funding surplus or a deficit. This comparison is arguably IAS 26’s most distinctive requirement, and the reason defined benefit plan reporting is genuinely more involved than defined contribution plan reporting.

Notes to the Financial Statements

Financial statements are meant to give investors a clear read on a retirement benefit plan’s financial health, supporting informed decisions. The notes provide additional context, including:

• Details of accounting policies
• Significant events during the period
• Information that helps readers interpret the financial statements properly

Also check: Financial Statement Audit Services in Dubai

Reporting Requirements: Defined Contribution vs. Defined Benefit

Requirement	Defined Contribution Plans	Defined Benefit Plans
Statement of net assets available for benefits	Required	Required
Actuarial present value of promised benefits	Not applicable	Required, either presented or referenced
Description of funding policy	Required	Required
Actuarial assumptions disclosed	Not applicable	Required

Measurement and Valuation

Precise measurement and valuation are essential under IAS 26, confirming financial statements genuinely reflect the true value of a retirement benefit plan’s assets and liabilities.

Actuarial Assumptions

Valuing liabilities for defined benefit plans depends on actuarial assumptions, typically including:

• Discount rates
• Inflation
• Mortality rates

These assumptions need to be reliable and reasonable, and any changes to them should be disclosed clearly rather than buried in the numbers.

Fair Value Measurement

Investments held by retirement benefit plans need to be measured at fair value, generally the market value of the assets at the reporting date. Where market prices aren’t available, discounted cash flow techniques may be used instead.

Contributions and Benefits

Measurement also covers tracking contributions from employers and employees, along with benefits paid to retirees, both recorded in the period they actually occur.

Related: Statutory Audit Services in Dubai

Disclosure Requirements

IAS 26 requires transparency through specific disclosures about a retirement benefit plan, including:

Description of the Plan

Covers the plan’s structure, the benefits available, funding strategy, and the number of participants.

Investment Policies and Risks

The plan needs to disclose its types of assets, investment policies, and the risks associated with them, giving stakeholders a clear picture of the level of risk and potential variability involved.

Managerial Expenses

Retirement benefit plans need to disclose managerial expenses, along with any additional costs tied to administering the plan.

Also check: External Audit Services in Dubai

Worked Example

A Dubai-based employer sponsors a defined benefit retirement plan for its long-serving employees. At year-end, the plan’s net assets available for benefits total AED 45 million, while an independent actuary calculates the present value of promised retirement benefits at AED 52 million. Under IAS 26, the plan’s financial statements need to present or clearly reference this AED 7 million funding deficit, along with the actuarial assumptions behind it, discount rate, inflation, and mortality assumptions among them. A defined contribution plan sponsored by the same employer wouldn’t require this comparison at all, since the eventual benefit simply reflects whatever contributions and investment returns have accumulated.

Common Mistakes in Applying IAS 26

• Treating defined contribution and defined benefit reporting as identical. Only defined benefit plans require the actuarial present value comparison, applying it to a defined contribution plan misunderstands the standard.
• Omitting the actuarial present value comparison for DB plans. This is IAS 26’s central requirement for defined benefit plans, skipping it undermines the entire report’s purpose.
• Measuring plan investments at cost instead of fair value. IAS 26 requires fair value measurement for plan investments, not historical cost.
• Confusing IAS 26 with IAS 19. IAS 26 governs the plan’s own reporting; IAS 19 governs how the sponsoring employer accounts for its benefit obligations, they’re related but distinct.

Conclusion

IAS 26 sets out detailed guidelines for accounting and reporting by retirement benefit plans, centered on clear financial statements, precise measurement, and comprehensive disclosure, with the actuarial present value comparison standing out as the standard’s most distinctive requirement for defined benefit plans specifically.

If your business needs help applying IAS 26, whether for a defined contribution, defined benefit, or hybrid plan, Audit Firms in Dubai can help work through the specific reporting and disclosure requirements that apply.

Frequently Asked Questions

What Is the Difference Between IAS 26 and IAS 19?

Both standards deal with retirement benefits, but from different perspectives. IAS 26 addresses accounting and reporting by the retirement benefit plan itself, while IAS 19 addresses how the sponsoring employer accounts for employee benefit obligations in its own financial statements.

What Does IAS 26 Deal With?

IAS 26 covers the accounting and reporting requirements for retirement benefit plans specifically, including the measurement and valuation of plan assets and liabilities and the required disclosures. It applies to both defined contribution and defined benefit plans, though the specific requirements differ meaningfully between the two.

Does IAS 26 require an actuarial valuation for every retirement plan?

Only for defined benefit plans, where the actuarial present value of promised benefits needs to be presented or referenced. Defined contribution plans don’t carry this requirement, since there’s no fixed benefit promise to value.

How are investments held by a retirement benefit plan measured under IAS 26?

At fair value, generally market value at the reporting date, with discounted cash flow techniques used where market prices aren’t available.

What happens if a defined benefit plan has more promised benefits than net assets?

That funding deficit needs to be disclosed as part of the comparison between the plan’s net assets and the actuarial present value of promised benefits, giving stakeholders a clear view of the plan’s funding position.