Entities that participate in defined contribution post-employment plans make payments to a post-employment benefit fund, such as a superannuation fund. The amount is determined as a percentage of remuneration paid to employees who are members of the fund. Contributions payable to defined contribution funds are recognized in the period the employee renders services. The contributions payable during the period are recognized as expenses unless another standard permits the cost of employment benefits to be allocated to the carrying amount of an asset, such as internally constructed plant in accordance with IAS 16 Property, Plant and Equipment (PPE).
If the amount paid to the defined contribution fund by the entity during the year is less than the amount payable in relation to services rendered by employees, a liability for unpaid contributions must be recognized at the end of the period. The liability is measured at the undiscounted amount payable to the extent that contributions are due within 12 months after the reporting period.
Para 52 of IAS 19 requires that discounting of liabilities for contributions to defined contribution plans that are due more than 12 months after the reporting period in which the employee provides the related services. The discount rate used to discount a post-employment benefit obligation is determined by reference to market yields on high-quality corporate bonds in accordance with IAS 19 para 83. If the obligation is to be settled in a country that does not have a deep market in high-quality corporate bonds, the market yield on government bonds must be used.
If the amount paid to the defined contribution fund by the entity during the year is greater than the amount of contributions payable in relation to services rendered by employees, the entity recognizes an asset to the extent that it is entitled to a refund or reduction in future contributions. In this situation, the asset would be a prepayment, or prepaid expenses.
