Problems with the requirements of IAS 19

Under a defined benefit scheme, the employees are entitled to a pension which is likely to be based on their salary at the time of their retirement. A defined benefit scheme creates a potential liability which is related to a variety of unknown factors such as salaries at time of retirement, life expectancy after retirement, probability of death in service, etc.

This creates a potential liability which is extremely difficult to measure and companies must normally seek advice from actuaries, experts in statistics and investment who specialise in this type of field.

Given the requirement of IAS 19, it is possible that the charge to the income statement will not be the same as the company's annual contribution. In particular, some basis has to be found to account for the effects of surpluses or deficits from investments or changes in the expected value of the future pension commitments.

IAS 19: How pension plans should be treated?

IAS 19 regards the cost of providing a pension as part of the cost of obtaining the services of its work force, even though that pension might not be paid until some time in the relatively distant future.

IAS 19 requires that the cost of the pension should be recognised on a systematic and rational basis over the period during which the company benefits from the employee's services.

Thus, IAS 19 requires the application of the matching concept so that the full cost of an employee's pension is charged to the profit and loss account during that person's period of service.