AS-15
This query is : Resolved
Querist : Anonymous
Querist :
Anonymous
(Querist)
21 July 2011
What is the difference between Defined Contribution Plan and Defined Benefits Plan?
31 July 2011
Contribution plans which employer obligation only the contributing amount
Contribution benefit plans are retirement benefit plans that defines the benefit not the amount of liability
Contribution benefit plans are retirement benefit plans that defines the benefit not the amount of liability
Querist : Anonymous
Querist :
Anonymous
(Querist)
02 August 2011
Thanks but still i am not clear on Contribution benefit plan.
14 July 2024
Accounting Standard (AS) 15 - Employee Benefits distinguishes between two main types of employee benefit plans: Defined Contribution Plans and Defined Benefit Plans. Here’s the difference between these two types:
### Defined Contribution Plan:
1. **Nature of Plan:**
- In a Defined Contribution Plan, the employer agrees to contribute a specified amount to a fund (such as a provident fund or superannuation fund) on behalf of the employee.
- The contributions are typically based on a percentage of the employee’s salary or wages.
2. **Obligation of Employer:**
- The employer's obligation is limited to making contributions to the fund.
- Once the contributions are made, the employer has no further liability.
3. **Risk and Rewards:**
- The risk and investment performance of the fund are borne by the employee.
- The benefits received by the employee depend on the contributions made and the investment returns earned on those contributions.
4. **Accounting Treatment:**
- Contributions to the fund are recognized as expenses in the profit and loss account of the period in which they are incurred.
- There is no actuarial calculation or estimation of future obligations related to benefits.
5. **Examples:**
- Provident funds, superannuation funds, and certain types of retirement savings plans are typically structured as defined contribution plans.
### Defined Benefit Plan:
1. **Nature of Plan:**
- In a Defined Benefit Plan, the employer promises to provide specific benefits to employees upon retirement or termination, based on a formula that considers factors such as salary history and years of service.
- The benefits are usually defined by reference to a predetermined formula, rather than the contributions made.
2. **Obligation of Employer:**
- The employer bears the actuarial and investment risks associated with providing the promised benefits.
- The employer is obligated to provide the promised benefits, regardless of the amount contributed to the plan.
3. **Risk and Rewards:**
- Investment performance and other actuarial assumptions affect the employer's liability under the plan.
- Actuarial calculations are necessary to estimate the present value of the obligation and determine the required funding levels.
4. **Accounting Treatment:**
- The cost of providing benefits under a defined benefit plan is determined using actuarial valuation techniques.
- The net defined benefit liability (or asset) is recognized in the balance sheet, with the cost recognized in the profit and loss account over the employees' service period.
5. **Examples:**
- Pension plans, gratuity plans, and post-employment medical benefit plans are typically structured as defined benefit plans.
### Key Differences:
- **Nature of Promise:** Defined contribution plans promise a specific contribution amount, while defined benefit plans promise specific benefits based on a formula.
- **Accounting Treatment:** Defined contribution plans expense contributions as they are made, while defined benefit plans require actuarial calculations and recognize the net obligation in the balance sheet.
- **Risk and Rewards:** Defined contribution plans shift investment risk to employees, while defined benefit plans bear investment and actuarial risks.
Understanding these distinctions is crucial for determining the appropriate accounting treatment and financial reporting disclosures under AS 15 for different types of employee benefit plans.
### Defined Contribution Plan:
1. **Nature of Plan:**
- In a Defined Contribution Plan, the employer agrees to contribute a specified amount to a fund (such as a provident fund or superannuation fund) on behalf of the employee.
- The contributions are typically based on a percentage of the employee’s salary or wages.
2. **Obligation of Employer:**
- The employer's obligation is limited to making contributions to the fund.
- Once the contributions are made, the employer has no further liability.
3. **Risk and Rewards:**
- The risk and investment performance of the fund are borne by the employee.
- The benefits received by the employee depend on the contributions made and the investment returns earned on those contributions.
4. **Accounting Treatment:**
- Contributions to the fund are recognized as expenses in the profit and loss account of the period in which they are incurred.
- There is no actuarial calculation or estimation of future obligations related to benefits.
5. **Examples:**
- Provident funds, superannuation funds, and certain types of retirement savings plans are typically structured as defined contribution plans.
### Defined Benefit Plan:
1. **Nature of Plan:**
- In a Defined Benefit Plan, the employer promises to provide specific benefits to employees upon retirement or termination, based on a formula that considers factors such as salary history and years of service.
- The benefits are usually defined by reference to a predetermined formula, rather than the contributions made.
2. **Obligation of Employer:**
- The employer bears the actuarial and investment risks associated with providing the promised benefits.
- The employer is obligated to provide the promised benefits, regardless of the amount contributed to the plan.
3. **Risk and Rewards:**
- Investment performance and other actuarial assumptions affect the employer's liability under the plan.
- Actuarial calculations are necessary to estimate the present value of the obligation and determine the required funding levels.
4. **Accounting Treatment:**
- The cost of providing benefits under a defined benefit plan is determined using actuarial valuation techniques.
- The net defined benefit liability (or asset) is recognized in the balance sheet, with the cost recognized in the profit and loss account over the employees' service period.
5. **Examples:**
- Pension plans, gratuity plans, and post-employment medical benefit plans are typically structured as defined benefit plans.
### Key Differences:
- **Nature of Promise:** Defined contribution plans promise a specific contribution amount, while defined benefit plans promise specific benefits based on a formula.
- **Accounting Treatment:** Defined contribution plans expense contributions as they are made, while defined benefit plans require actuarial calculations and recognize the net obligation in the balance sheet.
- **Risk and Rewards:** Defined contribution plans shift investment risk to employees, while defined benefit plans bear investment and actuarial risks.
Understanding these distinctions is crucial for determining the appropriate accounting treatment and financial reporting disclosures under AS 15 for different types of employee benefit plans.
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