Understanding Defined Contribution Savings Plans

Defined contribution savings plans, such as ThriftPlans, involve both the employer and employee contributing to the employee’s savings account. Contributions are typically based on a fixed percentage of the employee’s salary, with the employer matching the employee’s contributions up to a specific limit. The employee’s savings benefits depend on the total contributions made and the investment returns earned on those contributions.

Accounting for Defined Contribution Savings Plans under IFRS

To account for defined contribution savings plans like ThriftPlans, follow these guidelines:

1. Record the contribution as an expense – Include the contributions made to the savings plan as an expense in the income statement when the contributions are made, remember the employee contribution is part of the Salary; if a vesting schedule is in place for more than 1 year, account for the company contribution when earned and maintain as an asset till that point in time.

2. Recognize the liability – In the balance sheet, recognize a liability for contributions made but not yet paid during the period in which the contributions are made.

3. Acknowledge the asset – In the balance sheet, recognize an asset equal to the contributions made plus any investment returns earned on those contributions during the period in which the contributions are made.

Accounting for Your ThriftPlan

• For employee contributions, classify them as part of the employee’s salary, with the only difference being that the payment is made to the savings account.

• For company contributions, follow one of these two treatments:
  • If paid in the month due (funded plan) – Account for it as an “Employee Benefit Provision” and create an asset account. At the end of the year, request an Ending Balance Certificate and account for changes in balance due to investment returns or losses (required during your audit).
  • If not paid when due (unfunded plan) – Record the contribution as an expense in the month the matching is due, and record a corresponding entry in the Accounts Payable account.
• How to treat vesting, until the vesting date, this amount has not yet been “earned” so consider the payout an expense at the vesting point for instance as “Retention Program Payout”, which should be considered an HR expense. This would be a non-cash transaction that will reduce the asset account “Employee Benefit Provision”

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📣 Accounting for ThriftPlans: A Quick Step-by-Step Guide 📚💼

1️⃣ Record Contributions as Expenses:

Include both employer and employee contributions to the savings plan as expenses in the income statement when they are made.

2️⃣ Recognize Liabilities:

In the balance sheet, account for contributions made but not yet paid as liabilities during the period they are made.

3️⃣ Acknowledge Assets:

Recognize an asset equal to the contributions made plus any investment returns earned on those contributions during the same period.

4️⃣ Classify Employee Contributions:

Treat employee contributions as part of their salary, with the only difference being that the payment is made to the savings account.

5️⃣ Handle Company Contributions:

– If paid immediately, account for it as an “Employee Benefit Provision” and create an asset account.

– If not paid when due, record the contribution as an expense in the month the matching is due, and record a corresponding entry in the Accounts Payable account.

6️⃣ Account for Vesting:

Upon reaching the vesting date, treat the payout as an expense (e.g., “Retention Program Payout”), which should be considered an HR expense. This non-cash transaction will reduce the asset account “Employee Benefit Provision.”

📌 Don’t forget to request an Ending Balance Certificate at the end of the year and account for changes in balance due to investment returns or losses during audits.

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