The following information relates to the two schemes

The following information relates to the two schemes:
Nevad (1990) Pension Plan
The terms of the plan are as follows:
(i) Employees contribute 6% of their salaries to the plan
(ii) Nevad Ltd contributes, currently, the same amount to the plan for the benefit of the
employees
(iii) On retirement, employees are guaranteed a pension which is based upon the number of
years service with the company and their final salary
The following details relate to the plan in the year to 31
st
October 2009:
Rwfm
Present Value of Obligation at 1
st
November 2008 200
Present Value of Obligation at 31
st
October 2009 240
Fair Value of Plan Assets at 1
st
November 2008 190
Fair Value of Plan Assets at 31
st
October 2009 225
Current Service Cost 20
Pension Benefits Paid 19
Total contributions paid to scheme for year to 31
st
October 2009 17

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It is company policy to recognise actuarial gains and losses arising in the period as “Other
Comprehensive Income” in the period.
Nevad (2006) Pension Plan
Under the terms of the plan, Nevad Ltd does not guarantee any return on the contributions
paid into the fund. The company’s legal and constructive obligation is limited to the amount
that is contributed to the fund. The following details relate to this scheme:
Rwfm
Fair value of Plan Assets at 31
st
October 2009 21
Contributions paid by company for year to 31
st
October 2009 10
Contributions paid by employees for year to 31
st
October 2009 10
The discount rates and expected return on plan assets for the two plans are:
1
st
November 2008 31
st
October 2009
Discount rate 5% 6%
Expected return on plan assets 7% 8%
The company would like advice on how to treat the two pension plans, for the year ended
31
st
October 2009, together with an explanation of the differences between a defined
contribution plan and a defined benefit plan.
SOLUTION
A defined contribution plan is a pension plan whereby an employer pays fixed contributions
into a separate fund and has no legal or constructive obligation to pay further contributions.
Payments or benefits provided to employees may be a simple distribution of total fund assets
or a third party (an insurance company) may, for example, agree to provide an agreed level of
payments or benefits. Any actuarial and investment risks of defined contribution plans are
assumed by the employee or the third party. The employer is not required to make up any
shortfall in assets and all plans that are not defined contribution plans are deemed to be
defined benefit plans.
Defined benefit, therefore, is the residual category whereby, if an employer cannot
demonstrate that all actuarial and investment risk has been shifted to another party and its
obligations limited to contributions made during the period, then the plan is a defined benefit
plan. Any benefit formula that is not solely based on the amount of contributions, or that
includes a guarantee from the entity or a specified return, means that elements of risk remain
with the employer and must be accounted for as a defined benefit plan. An employer may
create a defined benefit obligation where no legal obligation exists if it has a practice of
guaranteeing the benefits. An employer’s obligation under a defined benefit plan is to provide
the agreed amount of benefits to current and former employees. The differentiating factor
between defined benefit and defined contribution schemes is in determining where the risks
lie.