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Plain‑English explainer of HKAS 26 / IAS 26 for students, junior accountants and non‑specialists who find official standards too dense to read.
This article is based on Hong Kong Accounting Standards (HKAS / HKFRS), which are fully aligned with IAS / IFRS except for minor local tweaks, so the same principles generally apply under IAS / IFRS unless noted otherwise. The goal is to unpack HKAS 26 Accounting and Reporting by Retirement Benefit Plans (equivalent to IAS 26) using plain English and practical, real‑life examples instead of technical jargon. It is written for students, junior accountants, audit juniors and finance professionals who want to understand not just “what the standard says” but how to actually read and prepare financial statements in line with it.
When you see “the company” or “the entity” below, you can think of any entity that prepares general purpose financial statements under HKFRS / IFRS.
This Report Is Not The Employer’s Report
When you read a listed company’s annual report, you probably know that the employer has to account for employee benefits under HKAS 19 Employee Benefits (equivalent to IAS 19). You will see pension expenses in profit or loss, and retirement benefit assets or liabilities in the statement of financial position. But most people never look at the financial statements of the retirement benefit plan itself, even though those statements may exist as a separate set of accounts.
In practice, audit teams are often split: one team audits the company; another team (or even another firm) audits the retirement benefit plan. In your studies, most examples also focus on the employer’s side, so HKAS 26 is easily ignored. However, for plan members, regulators and other users, the financial position and activities of the plan itself are critical for assessing whether the promised benefits are being properly funded and managed.
HKAS 26 is all about the financial statements of the retirement benefit plan as a separate reporting entity, not the consolidated financial statements of the sponsoring employer. Understanding this distinction is important both for beginners and for those already working in audit or accounting, because it changes how you read the numbers and what questions you ask.
What You Should Be Able To Do After Reading?
By the end, you should be able to:
- Clearly define the scope of HKAS 26 and identify which retirement benefit arrangements fall under this standard, and which do not.
- Explain why a retirement benefit plan is treated as a separate reporting entity, instead of just being a note in the employer’s financial statements.
- Distinguish between HKAS 19 (employer’s perspective) and HKAS 26 (plan’s perspective) when analysing the same retirement arrangement.
- Understand the basic definitions and reporting objectives for defined contribution plans and defined benefit plans.
- Grasp the idea of “net assets available for benefits”, the core content of a retirement benefit plan’s financial statements and disclosures, and how these concepts link to familiar Hong Kong arrangements such as MPF and ORSO plans.
1. Purpose and scope of HKAS 26: what does it actually cover?
HKAS 26 sets out how the financial statements of retirement benefit plans should be prepared and what they should disclose, so that plan members and other users receive useful information about the plan’s resources, its commitments (promised benefits) and the relationship between the two. It does not tell the employer how to account for employee benefits; instead it focuses on how the plan, as a separate entity, reports its own financial position and activities.
The standard applies to retirement benefit plans set up by employers, governments or other organisations to provide retirement benefits to employees and their beneficiaries, whatever their legal form. It covers plans that are funded by contributions from employers and/or employees, and that may be operated through trust structures, insurance companies or other vehicles, as long as the plan itself prepares financial statements.
HKAS 26 does not cover every payment made when an employee leaves. For example, it does not apply to:
- Termination payments or redundancy compensation that are accounted for under HKAS 19 as short‑term or other employee benefits in the employer’s books.
- Long service leave or similar accumulated leave that is not managed through a separate fund.
- General social security schemes where the state or government pays benefits directly and there is no separate plan reporting entity and financial statements under HKAS 26.
In exams or in practice, if a question describes lump‑sum termination payments paid directly by the employer, with no separate fund and no separate set of plan financial statements, you should not force HKAS 26 onto it. HKAS 26 is only relevant where there is a retirement benefit plan that prepares its own financial statements.
In real work, you may encounter several types of documents:
- The employer’s financial statements, including notes on retirement benefits.
- A “retirement benefit plan financial report” issued by trustees or plan administrators.
- Plan financial statements submitted to regulators.
Only the last two are within the core focus of HKAS 26; the first belongs under HKAS 19.
2. Thinking of the plan as a separate reporting entity
A core idea in HKAS 26 is that a retirement benefit plan is a separate reporting entity, independent from the sponsoring employer. The plan has its own assets, liabilities, income and expenses, and its own set of users, so it needs its own financial statements.
From a user’s point of view, the key questions are not just “has the employer paid the required contributions?”. Users also want to know:
- How many assets are currently available to pay benefits.
- How large the promised retirement benefits are, especially for defined benefit plans.
- How the investments are performing and whether there appears to be a mismatch between plan assets and promised benefits.
This focus is quite different from a typical corporate group’s financial statements, which primarily look at total equity, profitability and cash flows of the company or group. Plan financial statements focus on the relationship between “assets available for benefits” and “promised benefits”, and on the flows of contributions, benefit payments and expenses.
If you audit a retirement benefit plan, you will usually see:
- A trust or similar structure, with its own financial statements and an independent auditor’s report.
- Primary users being plan members, trustees and regulators, rather than general investors.
- Assets mainly consisting of investments (funds, bonds, equities) plus receivables and cash, and liabilities mostly being benefit payables and other payables.
Once you internalise the idea that “the plan is its own entity”, the presentation and disclosure requirements of HKAS 26 will make much more sense, and you will understand why the format and emphasis differ from a normal company’s financial statements.
3. HKAS 19 vs HKAS 26: two sides of the same pension arrangement
Many students initially confuse HKAS 19 and HKAS 26 and treat them as if they were dealing with the same thing. In reality, they look at the same retirement arrangements from two very different angles:
- HKAS 19 / IAS 19: the employer’s perspective – how the employer recognises expenses, assets or liabilities for employee benefits (including retirement benefits) in its own financial statements, and what it must disclose.
- HKAS 26 / IAS 26: the plan’s perspective – how the retirement benefit plan itself reports its assets, its promised benefits and its activities to members and other users.
Consider a simple defined contribution plan where the employer pays contributions equal to 5% of salary into the plan each year.
- In the employer’s books under HKAS 19, the contributions are recognised as an expense in the period when the employee provides service; usually no retirement benefit liability is recognised in the statement of financial position if the contributions are up to date and there is no further obligation.
- In the plan’s books under HKAS 26, the plan recognises the contributions received, investment income, benefit payments and expenses, and reports the net assets available for benefits.
The same 5% contribution is an expense to the employer but a source of net assets to the plan.
For defined benefit plans, the contrast is even sharper:
- Under HKAS 19, the employer measures the defined benefit obligation and the plan assets, based on actuarial valuation, and recognises a net defined benefit liability or asset, together with current service cost, interest cost and remeasurements.
- Under HKAS 26, the plan concentrates on presenting the assets available to pay benefits, disclosing the actuarial present value of promised retirement benefits (often through notes or a separate actuarial report), and highlighting any surplus or deficit relative to those promised benefits.
Understanding this complementary relationship helps you decide whether a particular requirement belongs in the “employer’s books” or the “plan’s books”. It also prevents you from incorrectly applying the HKAS 19 measurement model to the HKAS 26 plan financial statement format.
4. Defined contribution vs defined benefit plans: key definitions and implications
HKAS 26, like HKAS 19 / IAS 19, classifies retirement benefit plans into two main types: defined contribution plans and defined benefit plans. The underlying nature of the plan drives what the financial statements emphasise and which disclosures matter most.
Defined contribution plans – contributions are fixed, benefits are variable
A defined contribution plan generally has these features:
- The employer, the employees or both pay contributions to the plan using a fixed rate or formula (for example, a fixed percentage of salary).
- The employer’s obligation is usually limited to paying these agreed contributions; it does not guarantee a specific benefit amount at retirement.
- The retirement benefit actually received by the member depends on the accumulated contributions and the investment performance of the plan assets.
In other words, the contribution is defined, but the benefit is not. The plan mainly provides a platform for investing contributions rather than promising a fixed outcome.
Defined benefit plans – benefits are defined, risk sits with employer or plan
A defined benefit plan has very different characteristics:
- The benefit payable to the member on retirement is determined by a formula, often based on final salary, average salary and/or years of service.
- The employer or the plan bears the investment and actuarial risk – if investment returns are insufficient to meet the promised benefits, the deficit theoretically needs to be made up.
- Actuarial valuation is needed to estimate the present value of those future promised benefits.
Here the benefit is defined, but the required contributions (over time) and the risk of under‑performance are carried by the employer or plan.
HKAS 26 adjusts its minimum reporting requirements depending on the plan type. For defined contribution plans, the main focus is on the net assets available for benefits and clear description of contribution and funding policies. For defined benefit plans, an additional key element is the actuarial present value of promised retirement benefits, and whether plan assets are sufficient to cover them.
In practice, you may also encounter hybrid plans that combine features of both types, such as plans that guarantee a minimum return but also share additional returns with members via bonus allocations. HKAS 26, consistent with the broader IFRS approach, looks at the substance of the plan terms: if the plan bears significant risk regarding benefit amounts or return guarantees, it is usually treated as a defined benefit plan rather than a pure defined contribution plan.
In Hong Kong, ORSO guidance notes that schemes with defined benefit elements are generally treated as defined benefit schemes for regulatory purposes and must submit different documents and actuarial information. This is consistent in spirit with HKAS 26, which requires additional disclosure for defined benefit plans, including promised benefit valuations and key actuarial assumptions.
5. Net assets available for benefits and the basic structure of plan financial statements
A critical concept in HKAS 26 is net assets available for benefits. This is the starting point for understanding the structure of a retirement benefit plan’s financial statements.
Under HKAS 26, net assets available for benefits typically means the plan’s assets minus its liabilities other than the actuarial present value of promised retirement benefits. Such liabilities may include payables, accrued expenses and other obligations, but not the promised benefit obligation itself. Importantly, the actuarial present value of promised retirement benefits is usually not recognised as a liability in the primary statements; instead, it is presented in the notes or in an accompanying actuarial report, and then compared with the net assets available for benefits. This presentation highlights the relationship between resources available and the benefits promised.
HKAS 26 sets out minimum content for different types of plans:
For defined contribution plans, at a minimum you would expect:
- A statement showing net assets available for benefits at the reporting date, with a breakdown of the main asset classes and liabilities.
- A statement of changes in net assets available for benefits, showing how contributions, investment income, benefit payments and expenses affect the plan’s net assets during the period.
- Descriptions of the funding / contribution policy and the investment policy, so members can understand how contributions are collected and how investment risk is managed.
For defined benefit plans, you need the above plus:
- Disclosure of the actuarial present value of promised retirement benefits, sometimes split between vested (already earned) and non‑vested benefits.
- A presentation of any surplus or deficit by comparing net assets available for benefits with the actuarial present value of promised benefits.
- A summary of key actuarial assumptions (for example, discount rate, salary growth, mortality rates) and the methods used to measure the present value of benefits.
In real plan financial statements, you will commonly see:
- A primary statement similar to a “statement of net assets available for benefits” listing investment assets, receivables, cash and payables.
- A “statement of changes in net assets available for benefits” showing employer contributions, member contributions, investment returns, benefit payments and administrative expenses line by line.
- Notes describing the nature of the plan (defined contribution / defined benefit), contribution and benefit policies, significant investment risks, and the key assumptions used in actuarial valuations.
Once you understand net assets available for benefits and these basic statements, you have the skeleton of HKAS 26 in your mind. The more detailed disclosure requirements then become easier to place into that structure rather than feeling like random rules to memorise.
6. Hong Kong context: where do MPF and ORSO fit?
In Hong Kong, “retirement benefit plan” immediately brings to mind MPF (Mandatory Provident Fund) schemes and ORSO (Occupational Retirement Schemes Ordinance) schemes.
MPF schemes are, by legal design, defined contribution plans. Employers and employees contribute at prescribed percentages of salary into individual accounts; the employer does not promise a specific benefit amount at retirement. The member’s eventual benefit depends on the contributions and investment performance. From an HKAS 26 perspective, the financial statements of MPF schemes are classic examples of defined contribution plan financial statements, focusing on net assets available for benefits, investment portfolios and the flows of contributions and benefit payments.
ORSO schemes are more diverse. They may be pure defined contribution, pure defined benefit, or contain hybrid features. Regulatory guidance generally treats schemes with defined benefit elements as defined benefit schemes and requires them to provide actuarial information and additional documentation. This aligns with HKAS 26, which expects defined benefit plans to disclose the actuarial present value of promised benefits and related assumptions.
The main text of HKAS 26 (and IAS 26) provides the general principles and minimum statement content. Appendices (particularly in IAS 26) often include illustrative formats and additional explanations to help preparers present information for defined contribution and defined benefit plans. When you study further, it is very helpful to compare real MPF or ORSO plan financial statements with these principles, rather than memorising the standard in isolation.
7. Building a “plan perspective” mindset
Understanding HKAS 26 is really about training yourself to open a second window in your head: the plan perspective. Whenever you encounter a retirement benefit arrangement, you should learn to ask two separate questions:
- How should the employer account for it in its own books and disclosures under HKAS 19 / IAS 19?
- What would the retirement benefit plan’s own financial statements look like under HKAS 26 / IAS 26?
In your work, this mindset helps you:
- Separate what belongs in the employer’s disclosures from what belongs in the plan’s own financial statements when reviewing retirement benefit documentation.
- Prepare better working papers by explaining the classification, measurement and disclosure of retirement benefit plans, rather than just copying numbers into schedules.
- Read listed company pension notes with more insight, connecting the HKAS 19 disclosures in the employer’s annual report back to the underlying HKAS 26 plan operations and funding position.
As a next step, you can:
- Take a real MPF or ORSO plan financial report and read it using the keywords from this article – “net assets available for benefits”, “defined contribution vs defined benefit”, “actuarial present value of promised benefits”.
- Study HKAS 19’s requirements for defined benefit plans in more depth and see how the numbers reported by the employer and by the plan are related but not identical.
Once you can hold both HKAS 19 and HKAS 26 in your head at the same time, retirement benefits stop being scattered rules and become a coherent conceptual framework, which makes both exam questions and real‑life files much more manageable.
Key Takeaways for Students and Junior Accountants
- When you see anything related to pensions or retirement benefits, always ask yourself first: am I dealing with the employer’s accounting (HKAS 19 / IAS 19) or the plan’s financial statements (HKAS 26 / IAS 26)?
- In exam questions and case files, check whether there is a separate plan with its own statements; if yes, think about net assets available for benefits, plan type (defined contribution vs defined benefit) and what extra disclosures are required.
- Common mistakes include treating all retirement benefits as if they fall under HKAS 26, or applying HKAS 19’s measurement model to the plan’s own statements; keep the two perspectives clearly separated.
- When reading trust deeds, plan rules or regulatory filings, highlight who bears the investment and benefit risk; this usually tells you whether the plan is a defined contribution or defined benefit plan for accounting purposes.
- In your working papers, explicitly document whether a plan is defined contribution or defined benefit, what “net assets available for benefits” consist of, and how those assets compare to promised benefits where applicable.
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