A funded plan holds assets in a trust that's legally separate from the employer. Under both rulebooks those assets are measured at fair value and netted against the obligation, so a company with a fully funded plan shows nothing on its balance sheet at all, no matter how large the two gross numbers are.
Four movements run the assets. There's the opening balance, the actual return earned in the market, contributions from the employer, and benefits paid out. Nandan Forgings opened at ₹31,50,00,000, earned ₹2,71,00,000, put in ₹5,00,00,000, and paid out ₹2,80,00,000, closing at ₹36,41,00,000. Nothing in that arithmetic is difficult and nothing in it is controversial.
Does the actual return on plan assets reach profit?
The controversy is what happens to the ₹2,71,00,000. Under neither rulebook does the actual return reach the income statement.
Under IFRS and Ind AS 19 the assets are credited with interest income at the same discount rate used for the obligation, here 7.20% of ₹31,50,00,000, or ₹2,26,80,000. The difference between the actual ₹2,71,00,000 and that ₹2,26,80,000, which is ₹44,20,000, is a remeasurement and goes to other comprehensive income. The logic is clean. The plan's investment performance against a risk-benchmark isn't an operating result of the employer, so it doesn't belong in profit.
Under ASC 715 the assets are credited with an expected return, computed as management's estimated long-term rate of return applied to the market-related value of the assets. If Allegheny Tool Works expects 8.50% on $31,500,000, the income statement takes credit for $2,677,500 whatever the market did. The difference between actual and expected, here $32,500, goes to other comprehensive income and then drips back into profit through the corridor.
Advertisement
Why is the expected return assumption worth checking?
Both frameworks therefore keep the market out of profit. They differ in what they replace it with, and the difference is worth money. The expected-return assumption is set by management, is disclosed, and isn't constrained by any observable rate. Every percentage point of expected return on a large plan is a percentage point of plan assets added straight to pre-tax profit, permanently, with no cash consequence and no obligation to be right. American companies with big plans have historically leaned on this line hard. It's the first thing to check in a US benefit note.
One further US wrinkle. The expected return is applied to the market-related value of plan assets, which may be fair value or a calculated value that smooths asset gains and losses over up to five years. A smoothed value keeps feeding an old, higher asset base into the income statement after a market fall. Read the accounting-policy note for which basis is used, because the two produce different numbers from the same portfolio.
Funded status, and the ceiling on a surplus
The balance sheet carries one number: plan assets at fair value less the obligation. Nandan Forgings shows a net liability of ₹11,39,00,000, being ₹47,80,00,000 less ₹36,41,00,000. Allegheny Tool Works, the American plan set beside it, shows $11,390,000. The two rulebooks agree here completely, and have since American practice moved to full funded-status recognition in 2006. Whatever else differs, the balance sheet doesn't.
A deficit is a liability and behaves like one. A surplus is where the rulebooks part company again.
Under IAS 19 and Ind AS 19 a surplus is recognised as an asset only up to the asset ceiling, which is the present value of the economic benefits actually available to the employer as refunds from the plan or as reductions in future contributions. A trust deed that forbids refunds and a plan that's closed to new members can leave a company with a real surplus it can't touch. Suppose a plan holds ₹42,00,00,000 of assets against a ₹37,00,00,000 obligation, a surplus of ₹5,00,00,000, and the trust deed permits only ₹1,80,00,000 of contribution holiday. The balance-sheet asset is ₹1,80,00,000. The other ₹3,20,00,000, which is 64.00% of the surplus, is written off through other comprehensive income and stays there.
Is there an asset ceiling under ASC 715?
ASC 715 has no equivalent ceiling. An overfunded American plan carries its full surplus as a non-current asset. So a company that moved from IFRS reporting to US reporting, with no change in its plan at all, would find assets rising by the amount the ceiling had been suppressing.
Both effects are second-order for most industrials and first-order for old-economy companies with legacy plans and for public-sector undertakings. The habit to build is to look at the funded status, then look for the asset-ceiling line in the reconciliation, and only then decide whether a surplus you're reading is money or just a number.