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Hi sir, as I am doing exam questions I found that I really don’t understand about the difference of the two schemes in particular why there is no asset and liability recognised over the defined contribution plan. Since I understand that the contribution is debited for an expense and credit for cash in the company’s perspective. I also understand there is no liability should be recognised since the company is not guranteed for the benefits of the employee. But why the contrbition is expensed, since it is not paid to the employees yet, shouldn’t it be recognised as an asset as well?
I have one hypothesis that the company has signed a contract with external party who runs the fund for them. so probably this is why it is expensed as they regard this as part of the service paid to an outsider just like insurance? on the contrary defined benefits scheme is a one that is runned by company itself internally? I am not sure if I am right about it.
Thank you for your time!
Your argument is very well put – you almost convinced me about the asset!
But, as you say, in reality, the money is given to a financial institution (e.g. Aviva) – it is an additional expense of employing the staff.
Interestingly, even DB plans were not on the balance sheet 30 years ago.
🙂
Thank you for your insigntful fact shared!
Very interesting to know that there is no asset recognied on BS for DB plan 30 years ago.
Now that makes me think that it doesn’t matter if the company is dealing with internal or external party in the DBP and DCP transactions. It is just that the nature of the transaction for DBP is more like an investment, while that for DCP is more of an expense one.
I will happily carry out the exam preparation with this idea 🙂
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