Plan assets are assets/investments of a funded defined benefit plan, a pension plan in which the employer guarantees a minimum payout and contributes an amount periodically to the plan for the purpose.
In a funded defined benefit plan, the employer earmarks the plan assets such that they cannot be used for any purpose other than the pension payments. Plan assets are managed either internally by the company or by an external pension fund manager and invested in different asset classes.
Plan assets are presented on the balance sheet at their fair value at the balance sheet date. Plan assets are compared with plan liabilities to determine the ultimate pension asset/liability i.e. the funded status.
Reconciliation between opening and closing plan assets
Reconciliation between opening plan assets and closing plan assets would look like follows:
|Opening plan assets||XXX|
|Add: contributions received from employer||XXX|
|Add: actual return on plan assets||XXX|
|Less: Benefits paid||(XXX)|
|Add/Less: actuarial gains and losses||XXX|
|Closing plan assets||XXX|
The value of plan assets increases whenever the employer makes additional contributions to the plan and whenever the existing plan assets earn a positive return, and it decreases when benefits are paid out to employees. Similarly, actuarial gains and losses also affect the value of pension plan assets.
The return on plan assets include interest earned, dividends earned, realized and unrealized gains or losses minus taxes payable by the plan minus administrative costs of the plan.
CE Ltd. has a funded defined benefit plan. Its plan assets had a fair value of $25 million as at 1 January 2011. They include $15 million equity investments and $10 investment in bonds. Equity investments are expected to pay a dividend of $1 million during the year. Bonds are expected to pay an interest of 6%. The fund received contributions of $5 million during the year and paid out $3 million to employees. The fair value of the investments as at 31 December 2011 is $30 million. Reconcile the opening balance of plan assets with closing balance.
The following table shows the reconciliation between opening and closing plan assets:
|USD in million|
|Opening plan assets||25|
|Add: contributions received from employer||5|
|Add: actual return on plan assets||1.6|
|Less: Benefits paid||(3)|
|Add/Less: actuarial gains and losses||1.4|
|Closing plan assets||30|
Return on plan assets equals the sum of dividends and interest. Since dividends amount to $1 million and interest income is $0.6 million (=$10 million × 6%), total return is $1.6 million.
The actuarial gains/losses in the above reconciliation are worked out as a balancing figure:
Actuarial gain/(loss) = closing plan assets – (opening plan assets + contributions + actual return – payout)
Actuarial gain/(loss) = $30M – ($25M + $5M + $1.6M – $3M) = $30M - $28.6M = 1.4