Some companies will offer benefit to its employees. These benefits may include:

  1. Short term benefit:(accounting: expense and liability )
  2. Monetary benefit:
    • Wages and salary
    • Paid sick leave
    • Compensated absence.
  3. Non-monetary salary: 
    • Medical care, housing, cars etc
  4. Long term benefit:shares (IFRS2), bonus, etc. (Accounting: easier than pension accounting. Only to show costs, asset and liability if company has invested their money in other instrument before paying for cash)
  5. Termination benefit:redundancy payments; early retirement payments etc. (accounting: expense and liability )
  6. Post-employment benefit: pensions etc.
Talking about pensions there’re two types of pensions.

They are defined contribution scheme and defined benefit scheme(we’ll talk about those below)

  1. Defined contribution scheme
    • The company doesn’t guarantee the final payment to employees.
    • Company and employee will put the money into the scheme run by the trustee each year and when employees retire then they get the money which is not fixed(defined).
    • If the trustee did a bad job, eg, invest money into shares and suffered a loss then company didn’t have enough money to pay off to the employee then company will have no further obligation for those money.
    • Risk is not born by the company but by the employee.
    • The accounting for this is to DR I/S CR cash each year.
    • Accounting: DR I/S CR Cash(income statement charge would equal to cash paid.)
    • Company does not recognize the asset and liability in their account because they have transferred all the risks and rewards of these to the trustee or agent.

  3. Define benefit scheme
    • The company will guarantee the amount of money paid to employees when they retire and this will be based on number of years that employee has worked for company and the their final salary as well.
    • The company will put money into the pension scheme each year to create pension asset(eg, buying shares etc) to be paid off to employees(settle pension liability) when employees get retired.
    • The question is whether company will have sufficient pension asset to pay off the pension liability? So the company will employ an actuary to value the pension asset and liability each money and any deficit occurred would require the company to put money into it again.
    • Dose the company recognize the asset and liability in its financial statements? Well the answer is yes because the company hasn’t transferred the risks and rewards to the trustee because company has to paid off to settle the pension liability even if the trustee has done a bad job (eg,lose money into its assets.)

And this is according to substance over form.


The actuary would value the pension asset and liability based on a number of assumptions:

  • Level of investment return from pension assets
  • Number of income/outgoing employees etc.

The accounting for this is to separate assets and liabilities. (remain in company’s account)




Asset Liability
b/f bal b/f bal
Return on asset Interest cost
Contributions in Service cost
Benefits out Benefits out
Actuarial gains/losses Actuarial gains/losses
c/f bal c/f bal




  • b/f bal (c/f from last year by actuary)
  • Return on asset(discount rate X b/f): DR asset CR I/S
  • Interest cost (discount rate X b/f): DR I/S CR liability
  • Contributions in (company putting money in): DR asset CR cash (only cash item)
  • Service cost (including current&past service cost: employees work for you and you have to pay for them): DR I/S CR liability
  • Benefits out (money paid to those retired): DR liability CR asset
  • c/f(by actuary then b/f to next year)
  • Actuarial gains/losses:

Gain: DR liability CR OCI  
Loss: DR OCI CR liability