HKAS 26

Revised August 2022May 2024

Hong Kong Accounting Standard 26

Accounting and Reporting by

Retirement Benefit Plans

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© Copyright 2024 Hong Kong Institute of Certified Public Accountants

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Contents

from paragraph

Hong Kong Accounting Standard 26

Accounting and Reporting by Retirement Benefit
Plans

SCOPE 1
DEFINITIONS 8
DEFINED CONTRIBUTION PLANS 13
DEFINED BENEFIT PLANS 17
Actuarial present value of promised retirement benefits 23
Frequency of actuarial valuations 27
Financial statement content 28
ALL PLANS 32
Valuation of plan assets 32
Disclosure 34
EFFECTIVE DATE 37
APPENDIX A:
Guidance on Preparing Financial Statements of Mandatory Provident
Fund Schemes and Occupational Retirement Schemes Ordinance
Schemes
APPENDIX B:
Comparison with International Accounting Standards

Hong Kong Accounting Standard 26 Accounting and Reporting by Retirement Benefit Plans (HKAS 26)
is set out in paragraphs 1-38. All the paragraphs have equal authority. HKAS 26 should be read in the
context of the Preface to Hong Kong Financial Reporting Standards and the Conceptual Framework for
Financial Reporting. HKAS 8 Accounting Policies, Changes in Accounting Estimates and Errors provides
a basis for selecting and applying accounting policies in the absence of explicit guidance.

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Hong Kong Accounting Standard 26

Accounting and Reporting by Retirement Benefit Plans

Scope
1. This Standard shall be applied in the financial statements of retirement benefit
plans where such financial statements are prepared.

2. Retirement benefit plans are sometimes referred to by various other names, such as
'pension schemes', 'superannuation schemes' or 'retirement benefit schemes'. This
Standard regards a retirement benefit plan as a reporting entity separate from the
employers of the participants in the plan. All other Hong Kong Financial Reporting
Standards apply to the financial statements of retirement benefit plans to the extent
that they are not superseded by this Standard.

3. This Standard deals with accounting and reporting by the plan to all participants as a
group. It does not deal with reports to individual participants about their retirement
benefit rights.

4. HKAS 19, Employee Benefits, is concerned with the determination of the cost of
retirement benefits in the financial statements of employers having plans. Hence this
Standard complements HKAS 19.

5. Retirement benefit plans may be defined contribution plans or defined benefit plans.
Many require the creation of separate funds, which may or may not have separate
legal identity and may or may not have trustees, to which contributions are made and
from which retirement benefits are paid. This Standard applies regardless of whether
such a fund is created and regardless of whether there are trustees.

6. Retirement benefit plans with assets invested with insurance companies are subject to
the same accounting and funding requirements as privately invested arrangements.
Accordingly, they are within the scope of this Standard unless the contract with the
insurance company is in the name of a specified participant or a group of participants
and the retirement benefit obligation is solely the responsibility of the insurance
company.

7. This Standard does not deal with other forms of employment benefits such as
employment termination indemnities, deferred compensation arrangements, long-
service leave benefits, special early retirement or redundancy plans, health and
welfare plans or bonus plans. Government social security type arrangements are also
excluded from the scope of this Standard.

7A. The Appendix to this Standard sets out additional guidance on preparing financial
statements of Mandatory Provident Fund Schemes and Occupational Retirement
Schemes Ordinance Schemes.

Definitions
8. The following terms are used in this Standard with the meanings specified:

Retirement benefit plans are arrangements whereby an entity provides benefits

for employees on or after termination of service (either in the form of an annual
income or as a lump sum) when such benefits, or the contributions towards
them, can be determined or estimated in advance of retirement from the
provisions of a document or from the entity's practices.

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Defined contribution plans are retirement benefit plans under which amounts to
be paid as retirement benefits are determined by contributions to a fund
together with investment earnings thereon.

Defined benefit plans are retirement benefit plans under which amounts to be
paid as retirement benefits are determined by reference to a formula usually
based on employees' earnings and/or years of service.

Funding is the transfer of assets to an entity (the fund) separate from the
employer's entity to meet future obligations for the payment of retirement
benefits.

For the purposes of this Standard the following terms are also used:

Participants are the members of a retirement benefit plan and others who are
entitled to benefits under the plan.

Net assets available for benefits are the assets of a plan less liabilities other than
the actuarial present value of promised retirement benefits.

Actuarial present value of promised retirement benefits is the present value of the
expected payments by a retirement benefit plan to existing and past employees,
attributable to the service already rendered.

Vested benefits are benefits, the rights to which, under the conditions of a
retirement benefit plan, are not conditional on continued employment.

9. Some retirement benefit plans have sponsors other than employers; this Standard
also applies to the financial statements of such plans.

10. Most retirement benefit plans are based on formal agreements. Some plans are
informal but have acquired a degree of obligation as a result of employers' established
practices. While some plans permit employers to limit their obligations under the
plans, it is usually difficult for an employer to cancel a plan if employees are to be
retained. The same basis of accounting and reporting applies to an informal plan as
to a formal plan.

11. Many retirement benefit plans provide for the establishment of separate funds into
which contributions are made and out of which benefits are paid. Such funds may be
administered by parties who act independently in managing fund assets. Those
parties are called trustees in some countries. The term trustee is used in this
Standard to describe such parties regardless of whether a trust has been formed.

12. Retirement benefit plans are normally described as either defined contribution plans or
defined benefit plans, each having their own distinctive characteristics. Occasionally
plans exist that contain characteristics of both. Such hybrid plans are considered to
be defined benefit plans for the purposes of this Standard.

Defined Contribution Plans

13. The financial statements of a defined contribution plan shall contain a
statement of net assets available for benefits and a description of the funding
policy.

14. Under a defined contribution plan, the amount of a participant's future benefits is
determined by the contributions paid by the employer, the participant, or both, and the
operating efficiency and investment earnings of the fund. An employer's obligation is
usually discharged by contributions to the fund. An actuary's advice is not normally

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required although such advice is sometimes used to estimate future benefits that may
be achievable based on present contributions and varying levels of future contributions
and investment earnings.

15. The participants are interested in the activities of the plan because they directly affect
the level of their future benefits. Participants are interested in knowing whether
contributions have been received and proper control has been exercised to protect the
rights of beneficiaries. An employer is interested in the efficient and fair operation of
the plan.

16. The objective of reporting by a defined contribution plan is periodically to provide

information about the plan and the performance of its investments. That objective is
usually achieved by providing financial statements including the following:

(a) a description of significant activities for the period and the effect of any
changes relating to the plan, and its membership and terms and conditions;

(b) statements reporting on the transactions and investment performance for the
period and the financial position of the plan at the end of the period; and

(c) a description of the investment policies.

Defined Benefit Plans

17. The financial statements of a defined benefit plan shall contain either:

(a) a statement that shows:

(i) the net assets available for benefits;

(ii) the actuarial present value of promised retirement benefits,

distinguishing between vested benefits and non-vested benefits;
and

(iii) the resulting excess or deficit; or

(b) a statement of net assets available for benefits including either:

(i) a note disclosing the actuarial present value of promised

retirement benefits, distinguishing between vested benefits and
non-vested benefits; or

(ii) a reference to this information in an accompanying actuarial

report.

If an actuarial valuation has not been prepared at the date of the financial
statements, the most recent valuation shall be used as a base and the date of
the valuation disclosed.

18. For the purposes of paragraph 17, the actuarial present value of promised
retirement benefits shall be based on the benefits promised under the terms of
the plan on service rendered to date using either current salary levels or
projected salary levels with disclosure of the basis used. The effect of any
changes in actuarial assumptions that have had a significant effect on the
actuarial present value of promised retirement benefits shall also be disclosed.

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19. The financial statements shall explain the relationship between the actuarial
present value of promised retirement benefits and the net assets available for
benefits, and the policy for the funding of promised benefits.

20. Under a defined benefit plan, the payment of promised retirement benefits depends on
the financial position of the plan and the ability of contributors to make future
contributions to the plan as well as the investment performance and operating
efficiency of the plan.

21. A defined benefit plan needs the periodic advice of an actuary to assess the financial
condition of the plan, review the assumptions and recommend future contribution
levels.

22. The objective of reporting by a defined benefit plan is periodically to provide

information about the financial resources and activities of the plan that is useful in
assessing the relationships between the accumulation of resources and plan benefits
over time. This objective is usually achieved by providing financial statements
including the following:

(a) a description of significant activities for the period and the effect of any
changes relating to the plan, and its membership and terms and conditions;

(b) statements reporting on the transactions and investment performance for the
period and the financial position of the plan at the end of the period;

(c) actuarial information either as part of the statements or by way of a separate

report; and

(d) a description of the investment policies.

Actuarial Present Value of Promised Retirement Benefits

23. The present value of the expected payments by a retirement benefit plan may be
calculated and reported using current salary levels or projected salary levels up to the
time of retirement of participants.

24. The reasons given for adopting a current salary approach include:

(a) the actuarial present value of promised retirement benefits, being the sum of
the amounts presently attributable to each participant in the plan, can be
calculated more objectively than with projected salary levels because it
involves fewer assumptions;

(b) increases in benefits attributable to a salary increase become an obligation of

the plan at the time of the salary increase; and

(c) the amount of the actuarial present value of promised retirement benefits
using current salary levels is generally more closely related to the amount
payable in the event of termination or discontinuance of the plan.

25. Reasons given for adopting a projected salary approach include:

(a) financial information should be prepared on a going concern basis,

irrespective of the assumptions and estimates that must be made;

(b) under final pay plans, benefits are determined by reference to salaries at or
near retirement date; hence salaries, contribution levels and rates of return
must be projected; and

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(c) failure to incorporate salary projections, when most funding is based on salary
projections, may result in the reporting of an apparent overfunding when the
plan is not overfunded, or in reporting adequate funding when the plan is
underfunded.

26. The actuarial present value of promised retirement benefits based on current salaries
is disclosed in the financial statements of a plan to indicate the obligation for benefits
earned to the date of the financial statements. The actuarial present value of
promised retirement benefits based on projected salaries is disclosed to indicate the
magnitude of the potential obligation on a going concern basis which is generally the
basis for funding. In addition to disclosure of the actuarial present value of promised
retirement benefits, sufficient explanation may need to be given so as to indicate
clearly the context in which the actuarial present value of promised retirement benefits
should be read. Such explanation may be in the form of information about the
adequacy of the planned future funding and of the funding policy based on salary
projections. This may be included in the financial statements or in the actuary's report.

Frequency of Actuarial Valuations

27. In many countries, actuarial valuations are not obtained more frequently than every
three years. If an actuarial valuation has not been prepared at the date of the financial
statements, the most recent valuation is used as a base and the date of the valuation
disclosed.

Financial Statement Content

28. For defined benefit plans, information is presented in one of the following formats
which reflect different practices in the disclosure and presentation of actuarial
information:

(a) a statement is included in the financial statements that shows the net assets
available for benefits, the actuarial present value of promised retirement
benefits, and the resulting excess or deficit. The financial statements of the
plan also contain statements of changes in net assets available for benefits
and changes in the actuarial present value of promised retirement benefits.
The financial statements may be accompanied by a separate actuary's report
supporting the actuarial present value of promised retirement benefits;

(b) financial statements that include a statement of net assets available for
benefits and a statement of changes in net assets available for benefits. The
actuarial present value of promised retirement benefits is disclosed in a note
to the statements. The financial statements may also be accompanied by a
report from an actuary supporting the actuarial present value of promised
retirement benefits; and

(c) financial statements that include a statement of net assets available for
benefits and a statement of changes in net assets available for benefits with
the actuarial present value of promised retirement benefits contained in a
separate actuarial report.

In each format a trustees' report in the nature of a management or directors' report

and an investment report may also accompany the financial statements.

29. Those in favour of the formats described in paragraphs 28(a) and 28(b) believe that
the quantification of promised retirement benefits and other information provided
under those approaches help users to assess the current status of the plan and the
likelihood of the plan's obligations being met. They also believe that financial
statements should be complete in themselves and not rely on accompanying
statements. However, some believe that the format described in paragraph 28(a)

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could give the impression that a liability exists, whereas the actuarial present value of
promised retirement benefits does not in their opinion have all the characteristics of a
liability.

30. Those who favour the format described in paragraph 28(c) believe that the actuarial
present value of promised retirement benefits should not be included in a statement of
net assets available for benefits as in the format described in paragraph 28(a) or even
be disclosed in a note as in 28(b), because it will be compared directly with plan
assets and such a comparison may not be valid. They contend that actuaries do not
necessarily compare actuarial present value of promised retirement benefits with
market values of investments but may instead assess the present value of cash flows
expected from the investments. Therefore, those in favour of this format believe that
such a comparison is unlikely to reflect the actuary's overall assessment of the plan
and that it may be misunderstood. Also, some believe that, regardless of whether
quantified, the information about promised retirement benefits should be contained
solely in the separate actuarial report where a proper explanation can be provided.

31. This Standard accepts the views in favour of permitting disclosure of the information
concerning promised retirement benefits in a separate actuarial report. It rejects
arguments against the quantification of the actuarial present value of promised
retirement benefits. Accordingly, the formats described in paragraphs 28(a) and 28(b)
are considered acceptable under this Standard, as is the format described in
paragraph 28(c) so long as the financial statements contain a reference to, and are
accompanied by, an actuarial report that includes the actuarial present value of
promised retirement benefits.

All Plans

Valuation of Plan Assets

32. Retirement benefit plan investments shall be carried at fair value. In the case of
marketable securities fair value is market value. Where plan investments are
held for which an estimate of fair value is not possible disclosure shall be made
of the reason why fair value is not used.

33. In the case of marketable securities fair value is usually market value because this is
considered the most useful measure of the securities at the report date and of the
investment performance for the period. Those securities that have a fixed redemption
value and that have been acquired to match the obligations of the plan, or specific
parts thereof, may be carried at amounts based on their ultimate redemption value
assuming a constant rate of return to maturity. Where plan investments are held for
which an estimate of fair value is not possible, such as total ownership of an entity,
disclosure is made of the reason why fair value is not used. To the extent that
investments are carried at amounts other than market value or fair value, fair value is
generally also disclosed. Assets used in the operations of the fund are accounted for
in accordance with the applicable Hong Kong Financial Reporting Standards.

Disclosure
34. The financial statements of a retirement benefit plan, whether defined benefit or
defined contribution, shall also contain the following information:

(a) a statement of changes in net assets available for benefits;

(b) material accounting policy information; and

(c) a description of the plan and the effect of any changes in the plan
during the period.

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35. Financial statements provided by retirement benefit plans include the following, if
applicable:

(a) a statement of net assets available for benefits disclosing:

(i) assets at the end of the period suitably classified;

(ii) the basis of valuation of assets;

(iii) details of any single investment exceeding either 5% of the net assets
available for benefits or 5% of any class or type of security;

(iv) details of any investment in the employer; and

(v) liabilities other than the actuarial present value of promised retirement
benefits;

(b) a statement of changes in net assets available for benefits showing the
following:

(i) employer contributions;

(ii) employee contributions;

(iii) investment income such as interest and dividends;

(iv) other income;

(v) benefits paid or payable (analysed, for example, as retirement, death

and disability benefits, and lump sum payments);

(vi) administrative expenses;

(vii) other expenses;

(viii) taxes on income;

(ix) profits and losses on disposal of investments and changes in value of

investments; and

(x) transfers from and to other plans;

(c) a description of the funding policy;

(d) for defined benefit plans, the actuarial present value of promised retirement
benefits (which may distinguish between vested benefits and non-vested
benefits) based on the benefits promised under the terms of the plan, on
service rendered to date and using either current salary levels or projected
salary levels; this information may be included in an accompanying actuarial
report to be read in conjunction with the related financial statements; and

(e) for defined benefit plans, a description of the significant actuarial assumptions
made and the method used to calculate the actuarial present value of
promised retirement benefits.

36. The report of a retirement benefit plan contains a description of the plan, either as part
of the financial statements or in a separate report. It may contain the following:

(a) the names of the employers and the employee groups covered;

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(b) the number of participants receiving benefits and the number of other
participants, classified as appropriate;

(c) the type of plan - defined contribution or defined benefit;

(d) a note as to whether participants contribute to the plan;

(e) a description of the retirement benefits promised to participants;

(f) a description of any plan termination terms; and

(g) changes in items (a) to (f) during the period covered by the report.

It is not uncommon to refer to other documents that are readily available to users and
in which the plan is described, and to include only information on subsequent
changes.

Effective Date
37. The accounting practices set out in this Standard should be regarded as standard in
respect of financial statements relating to periods beginning on or after 1 January
2005.

38. Disclosure of Accounting Policies, which amends HKAS 1 Presentation of Financial

Statements and HKFRS Practice Statement 2 Making Materiality Judgements, and
was issued in April 2021, amended paragraph 34. An entity shall apply that
amendment for annual reporting periods beginning on or after 1 January 2023. Earlier
application is permitted. If an entity applies the amendment for an earlier period, it
shall disclose that fact.

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Appendix A

Guidance on Preparing Financial Statements of Mandatory

Provident Fund Schemes and Occupational Retirement Schemes
Ordinance Schemes
This guidance accompanies, but is not part of, HKAS 26.

Part 1 – Introduction

Objective
1. This Appendix sets out additional guidance on preparing financial statements of
Mandatory Provident Fund Schemes (“MPF schemes”) and Occupational Retirement
Schemes Ordinance Schemes (“ORSO schemes”) (hereafter collectively referred to
as “schemes”). This Appendix is based on the Mandatory Provident Fund Schemes
Ordinance (“MPFSO”) and the Occupational Retirement Schemes Ordinance
(“ORSO”) in effect as at 31 December 2003.

2. The MPFSO contains numerous specific disclosure requirements and the preparers of
financial statements of schemes registered under the MPFSO would need to refer to
the detailed disclosure requirements contained therein.

3. To be of value to the users, the information for schemes should be provided on a

timely basis. MPF schemes and ORSO schemes are required to submit their audited
financial statements to the Mandatory Provident Fund Schemes Authority (“MPFA”)
not later than six months after the financial year-end.

Form and context in which the financial statements of a MPF

scheme or an ORSO scheme appear
4. It is common for the financial statements of a MPF scheme or an ORSO scheme to be
presented as part of an annual report that provides additional information about the
scheme.

5. The form and context in which the financial statements appear can have a significant
effect on the overall message conveyed to the users. It is therefore important that
where an annual report is prepared, the separate components of the report are
consistent with each other and do not omit any information which could affect the view
given by the annual report as a whole. For example, the review of the financial
development of the scheme in the trustees’/administrator’s report would need to be
both a fair review and consistent with the financial statements.

6. When preparing scheme financial statements one would have to consider the contents
of the remainder of the annual report in order to ensure that the financial statements
submitted to members, employers and the MPFA are not misleading in form or
context.

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Types of schemes
7. Schemes are normally described as either defined contribution schemes or defined
benefit schemes, each having their own distinctive characteristics. Occasionally
schemes exist that contain characteristics of both. Such hybrid schemes are
considered to be defined benefit schemes for the purposes of this Appendix. A MPF
scheme can only be a defined contribution scheme. An ORSO scheme, however, may
be either a defined contribution scheme or a defined benefit scheme.

Scheme arrangements

8. There are many different types of scheme arrangements. It is particularly important to

establish the precise arrangements in effect when drawing up the financial statements.

9. A scheme may be either “governed by a trust” or “the subject of or regulated by an

insurance arrangement”. An “insurance arrangement” is, in effect, a contract with an
authorised insurer in respect of a scheme (see also paragraphs 12 and 13 below).
Schemes, which are the subject of or regulated by an insurance arrangement, may be
“insured” or “fully insured” schemes.

Directly invested schemes

10. A directly invested scheme is a scheme, generally governed by trust, whose assets
will usually comprise one or more investments including shares, securities, holdings in
unit trusts or investment funds. Such schemes may use “in-house” investment
managers employed by the trustees or an external investment manager.

11. Some directly invested schemes invest in managed funds administered by insurance
companies that are run on unit trust principles. They must not be confused with
insured schemes.

Insured schemes

12. An “insured scheme” is one where the relevant employer pays premiums/contributions
to the insurer in return for which the insurer undertakes to return the principal plus
investment earnings in respect of members of the scheme. Under an insurance
arrangement, premiums/contributions are paid to the insurer and become his property.
An insurance arrangement will not necessarily guarantee the benefits promised under
the scheme rules. These schemes will generally be insurance arrangements which fall
within the definition of Class G or H of long term business as set out in Part 2 of the
First Schedule to the Insurance Companies Ordinance.

13. A “fully insured scheme” is one where insurance policies, such as group endowment
policies, are effected in respect of each member and which match and fully guarantee
the benefits to be paid to individual members. These schemes fall within the definition
of Class I of long term business as set out in Part 2 of the First Schedule to the
Insurance Companies Ordinance.

14. Care needs to be taken as insurers also issue policies generally known as “managed
fund” policies which are in substance investment management contracts, by which
insurers contract with individual schemes to manage or invest their assets. Under
such asset management contracts, assets of the schemes do not become the property
of the insurer. Typically, the insurer offers participation in one or more funds operated
on similar lines to unit trusts or other investment funds. Managed funds may be
unitised (i.e. represented by units in, or a proportion of, a fund which are valued
periodically to take account of reinvested income and capital growth) or segregated,
whereby the investments of particular schemes are distinguished from each other.

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15. In each of the above contracts, the liability of the life assurance company depends
upon the terms of the policy. However, the liability of the employer to his employees
and pensioners is governed by the terms of the scheme the employer has set up. If it
is a defined benefit scheme the contract will require periodic actuarial valuations to
ensure that the funding is sufficient to meet the eventual liabilities promised by the
employer.

16. Most small companies use insured schemes because the insurer will generally
undertake much of the administration of the scheme.

Pooling agreement or arrangement

17. A “pooling agreement or arrangement” is a convenient way of administering two or

more schemes together, as permitted by the ORSO. Under a pooling agreement a
number of individual schemes can participate through a master trust deed or a master
insurance policy depending on whether the pooling agreement is governed by a single
trust or is the subject of or regulated by an insurance arrangement (or a series of
insurance arrangements which are of the same class or description). In the case of a
pooling agreement governed by trust, the assets of its participating schemes are
vested with the administrator of the agreement. This kind of arrangement or
agreement governed by a single trust must be managed by a registered trust company
as required by the ORSO. In the case of a pooling agreement regulated by insurance
arrangement, the administrator of the pooling agreement must be an insurer
authorised to carry on business under the Insurance Companies Ordinance. In relation
to a pooling agreement, and its participating schemes, the ORSO requires that proper
accounts and records are kept, such that the value of the assets attributable to, and
the liabilities of, each of its participating schemes are readily determinable from such
accounts and records.

Forms of MPF schemes

18. A registered MPF scheme, which must be a defined contribution scheme, may take
one of the following three forms as defined in section 2 of the MPFSO:

a. Master trust scheme;

b. Employer sponsored scheme; or

c. Industry scheme.

MPF schemes are required to be “directly invested schemes established under trust”.
The MPFSO requires that every MPF scheme shall be administered, managed and
maintained by an approved trustee.

Constituent funds

19. An MPF scheme may have one or more constituent funds, each of which must be
approved by the MPFA and each of which will have a different investment policy, so
that members of the scheme have a choice in investing their accrued benefits.

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Part 2 - Definitions
20. The terms used in this Appendix follow closely with those set out in the MPFSO and
ORSO. Accordingly, some of the terms used in this Appendix are not the same as
those used in the Standard even though they have the same meaning. The following
table sets out the terms used in this Appendix and the equivalent terms used in the
Standard.

Terms used in the appendix Equivalent terms used in the Standard

Retirement Schemes Retirement Benefit Plans

Schemes Plans
Members Participants
Accrued Benefits Promised Retirement Benefits

21. In addition to the definitions set out in the Standard, the following terms are used in
this Appendix with the meanings specified:

a. Accrued benefits

The benefits for service up to a given point in time, whether vested rights or
not. They may be calculated in relation to current earnings or projected
earnings.

b. Actuarial assumptions

The set of assumptions as to rates of return, inflation, increase in

earnings, dividend rate, and mortality etc, used by the actuary in an
actuarial valuation or other actuarial calculations. There are both
financial and demographical assumptions. Financial assumptions
include the valuation rate of interest, the rate of earnings increases
and the rate of any pension increases. Demographical assumptions
include mortality and rates of early retirement and withdrawal.

c. Actuary’s certificate

In the case of defined benefit schemes, an actuary’s certificate is required.

This is a statement by an actuary on the ability of the scheme assets to meet
the aggregate vested liability of the scheme as well as the adequacy of the
scheme assets plus future contributions to meet promised benefits.

The financial statements and the actuary’s certificate are two separate
reports, having fundamentally different objectives. The former is a record of
the financial transactions and current size and disposition of the assets and
liabilities of the scheme and the latter is a statement based on an investigation
into, and report on, the present and future ability of the scheme to meet the
accrued and prospective obligations to its members. These two reports would
need to be presented in conjunction with each other.

d. Additional voluntary contributions 1

The contributions (over and above the mandatory or regular contributions, if

any, required from a member or employer by the scheme rules or law) which a
member or employer elects to pay in order to secure additional benefits to the
member.

1 The term “Additional voluntary contributions” also includes the special contributions under the MPFSO.

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e. Administrator

The term “administrator” refers to the trustee if a scheme is governed by trust

or the insurer if a scheme is the subject of or regulated by an insurance
arrangement or, in any other case, the person who is principally responsible
for the management of the scheme and its assets otherwise than as a person
who is solely concerned with the investment and custody of the assets.

f. Aggregate past service liability

As defined in section 2(1) of the ORSO.

g. Aggregate vested liability

As defined in section 2(1) of the ORSO.

h. Associates

As defined in section 2(1) of the ORSO and Schedule 8 to the MPFSO.

i. Past service liability

As defined in section 2(1) of the ORSO. Under the ORSO, the past service
liability for a defined benefit scheme is defined as the value on that particular
day, as determined by an actuary, of the benefit entitlement under the scheme
of, or in respect of, the members which, having regard to his qualifying
service, could reasonably be expected to be received prospectively or
contingently or, where appropriate, both; the actuary having made a
reasonable allowance the effects of mortality, what he considers to be
prospective future salary increases, withdrawal from service rates and such
other factors (if any) as he considers relevant.2

j. Self investment

Investment of all or part of a scheme’s assets in the business of the employer

of members of the scheme and any Associates, and includes money currently
due to the scheme but held by the employer or any Associates, such as
employer and employee contributions.

k. Vested liability

As defined in section 2(1) of the ORSO.

2 The definition of a past service liability for a defined benefit scheme in the ORSO should be noted when applying
paragraph 23 of the Standard.

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Part 3 – Additional guidance on accounting and disclosures

Content of financial statements

22. In addition to the report content of a retirement scheme as specified in the Standard,
the financial statements of a MPF scheme would comprise a revenue statement and a
statement of movement in capital account of the scheme and, for each constituent
fund, a revenue statement, a statement of assets and liabilities and a statement of
movement in capital account. A revenue statement and a statement of movement in
capital account of a scheme may be combined in order to form a statement of
changes in net assets available for benefits as required under the Standard.

Basis of accounting
Scheme arrangements

23. In the case of directly invested schemes, or schemes participating in a pooling

agreement governed by a single trust, the statement of assets and liabilities will show
the nature of the investments of the scheme. Where the investments of schemes
participating in a pooling agreement governed by a single trust are not individually
identifiable for the purposes of this disclosure, it is recommended that the analysis of
the investments would be provided in respect of the entire pool, in a note to the
financial statements, together with disclosure of the scheme’s share of that pool.

24. In the case of fully insured schemes, where policies have been purchased in the name
or names of individual members and the scheme has no further obligations in respect
of payment of benefits to those members, it is not appropriate for them to be included
in the statement of assets and liabilities. Instead the cost of acquiring the policies
would be treated as the cost of discharging the retirement obligation at the time of
purchase. Where such policies constitute the entire assets of a scheme, the revenue
statement of such schemes will be confined to a statement of the transactions of the
scheme (i.e. contributions received and passed to the insurance company and
benefits paid by the insurance company to the beneficiaries).

25. In the case of insurance arrangements that fall within the definition of Class G or H of
the Insurance Companies Ordinance, the insurance policies (or more accurately, the
right to claim under such policies) will be reported as an asset in the statement of
assets and liabilities. The financial statements will also disclose the obligation of the
scheme to pay benefits. Such obligation is normally based on the total accumulated
contributions and declared returns credited to the accounts of the members of the
scheme at the date of the statement of assets and liabilities.

Contributions received by trustees pending allocation to members’

investment accounts

26. Contributions which can be clearly identified as scheme assets (for example, cheques
made payable to certain MPF schemes) and which are held in a MPF scheme’s bank
account pending investment should be presented as cash in the financial statements
of the MPF scheme. In those instances where contributions cannot be identified as
scheme assets (for example, cheques made payable to the trustee only without the
scheme name) and which are held temporarily in the trustee’s client account should
be presented as a receivable in the financial statements of the MPF scheme.

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Long-term insurance policies

27. If long-term insurance policies are held which match, and fully guarantee, the
retirement benefit obligations of the scheme in respect of specific individual members,
the acquisition costs of the policy would be treated as the cost of discharging the
obligations at the time of purchase. Such a policy would not be included in the
statement of assets and liabilities.

28. All other long-term insurance policies would be included in the statement of assets
and liabilities.

Forfeitures

29. Where an employee leaves a scheme, part or all of the employer’s contributions plus
the investment return thereon in respect of that member may not be paid to the
member. These forfeitures may be applied (depending upon the rules of the scheme)
in reducing the contributions of the employer, or be retained in the scheme for the
benefit of members, or be returned to the employer. Forfeitures that have not been
designated for the benefit of existing members of the scheme as at the financial year
end and which have not been returned to the employer would be treated as liabilities
of the scheme.

Additional voluntary contributions (AVCs)

30. Where AVCs are made to purchase added years or additional specific benefits within
the provisions for benefits under the principal scheme, they would be included as
contributions receivable from members and be separately shown in the scheme’s
statement of movement in capital account and the assets acquired with them would be
included in the statement of assets and liabilities.

31. Where AVCs are separately invested in such a way that the proceeds from the
investment determine the benefit to the members, they would be disclosed separately
from the transactions and the assets and liabilities of the scheme but accounted for
within the financial statements of the scheme or the notes thereto.

Additional financial statement disclosures

Constituent funds

32. In respect of each of the constituent funds of an MPF scheme, the following would be
disclosed:

a. Statement of assets and liabilities

i. Total value of investments

ii. Bank balances

iii. Amounts of subscription receivable

iv. Dividends and other receivables

v. Amounts payable on redemption

vi. Other liabilities

vii. Bank loans and overdrafts or other borrowings

viii. Total value of all assets

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ix. Total value of all liabilities

x. Net asset value

xi. Number of units in issue for a unitised fund

xii. Net asset value per unit for a unitised fund

b. Revenue statement

i. Total investment income, broken down by category

ii. Total other income, broken down by category, including security

lending

iii. Equalisation on issue and cancellation of units for a unitised fund

iv. Investment management fees

v. Trustee fees

vi. Custodian fees

vii. Compensation fund levy paid to the MPFA

viii. Fees paid to any Associates of the trustee, custodian or investment

manager

ix. Safe custody and bank charges

x. Auditors’ remuneration

xi. Interest on borrowings

xii. Legal and other professional fees

xiii. Other expenses

xiv. Taxes

xv. Amounts transferred to and from the capital account

c. Statement of movement in capital account

i. Value of the constituent fund at the beginning of the year

ii. Number of units issued and the amounts received on issue (after
equalisation if applicable) for unitised funds or amounts of
subscriptions for non-unitised funds

iii. Number of units redeemed and the amounts paid on redemption

(after equalisation if applicable) for unitised funds or amounts of
redemptions for non-unitised funds

iv. Amounts transferred to and from the revenue account

v. Value of the constituent fund at the end of the year

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Notes to the financial statements

33. In addition to those required under the Standard, the notes to the financial statements
of a MPF or an ORSO scheme would include the following disclosures, when
applicable. The notes to the financial statements of a MPF scheme would be
presented in respect of each constituent fund as well as for the scheme itself. It would
therefore need to be made clear in the text of each note whether it applies to all funds
and the scheme, or only to certain of them.

a. Transactions with Associates

The following would be disclosed:

i. A description of the nature of any transactions entered into, during the

financial year, with the investment manager of the constituent fund
(including any of its delegates) or any entity in which those parties or
their Associates have a material interest, together with a statement
confirming that these transactions have been entered into in the
ordinary course of business and on normal commercial terms.

ii. - the total aggregate value of the transactions effected through

brokers who are Associates of the trustee or investment
manager of the constituent fund or of the investment
manager’s delegates;

- the percentage of such transactions in value to the total

transactions in value of the constituent fund during the year;

- the total brokerage commission paid to such brokers in

relation to transactions effected through them;

- the total brokerage commission paid in respect of the

constituent fund; and

- the average rate of commission effected through such broker.

iii. Details of all transactions which are outside the ordinary course of
business or not on normal commercial terms entered into, during the
financial year, with the investment manager of the constituent fund
(including any of its delegates) or any entity in which these parties or
their Associates have a material interest.

iv. Name of the investment manager of the constituent fund (including

any of its delegates) or any Associates of such company if any of
them becomes entitled to profits from management of the constituent
fund and the amount of profits to which each of them becomes
entitled.

v. Where the constituent fund does not have any transactions with
Associates of the investment manager or of its delegates during the
year, a nil statement to that effect.

vi. The basis of the fee charged for the investment management of the
constituent fund and the name of the investment manager of the
constituent fund (including any of its delegates). In addition, where a
performance fee is charged to the constituent fund, the basis of
calculation and amount of performance fee charged would be
separately disclosed.

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b. Details of any soft commission arrangements relating to dealings in the

property of the constituent fund or a nil statement if no such arrangements
exist during the year.

c. State the amount of any advertising expenses, promotional expenses or

commissions or brokerage fees payable to the MPF intermediaries of the
registered scheme deducted from the constituent fund during the year.

d. State whether the borrowings entered into are secured or unsecured and the
duration of the borrowings.

e. Details of any contingent liabilities and commitments of the constituent fund.

f. If the free negotiability of any asset is restricted by statutory or contractual

requirements, this would be stated.

g. Defined contribution schemes

i. For a defined contribution scheme, the accumulated scheme benefits

(aggregate past service liability) will normally be the amount shown as
the balance of the capital account at the financial year-end.

ii. The aggregate vested liability of a defined contribution scheme at the

financial year-end would be disclosed in a note to the financial
statements.

h. Defined benefit schemes

i. The note to the financial statements referring to the aggregate past

service liability of a defined benefit scheme would include the
following:

- the name of the actuary of the scheme and his professional

qualifications;

- a short statement regarding the main assumptions used by

the actuary in determining the accumulated scheme benefits
(past service liability) of the scheme. This disclosure would
include assumptions such as those relating to salary
increases, life expectancy of members and investment
returns;

- a statement to the effect that the use of such actuarial

assumptions gives rise to a figure that may not be directly
comparable with the basis of valuation of net assets available
for benefits which have been presented in accordance with
generally accepted accounting principles in Hong Kong;

- where, in the opinion of the actuary, the assets of the scheme

were not sufficient to meet its aggregate vested liability and/or
its aggregate past service liability at the date of the actuarial
review, the recommended funding rate and funding period(s)
required to ensure that the assets of the scheme will be
sufficient to meet its aggregate vested and/or aggregate past
service liabilities, would be disclosed;

- the date as at which the actuary carried out his review;

- if the aggregate past service liability was not calculated as at

the same date as the financial year end of the scheme, a note

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would be added to emphasise this fact; such a note might

take the following form:

“The aggregate past service liability was last calculated by the

actuary of the scheme [name] as at [date]. The net assets
available for benefits as shown on page [ ] of these financial
statements are stated as at [date]. In considering these two
figures, it should be borne in mind that changes in
membership, contributions and other circumstances of the
scheme between those dates will mean that these two figures
are not comparable.”

ii. The aggregate vested liability of a defined benefit scheme, as

calculated by the actuary of the scheme, would be disclosed in a note
to the financial statements. This note would state the date as at which
the aggregate vested liability was calculated and, if that date was
different from the financial year-end of the scheme, a statement
similar to that indicated in sub-paragraph (i) above would also be
included. It may also be appropriate, in some circumstances, to refer
to the information contained in sub-paragraph (i) above.

i. If the assets of a scheme consist of restricted investments (as defined in the

MPFSO or the ORSO as applicable), then this would be disclosed in a note to
the financial statements, together with details of the nature and value of the
investment involved.

j. Where long-term insurance policies form a material part of the net assets of
the scheme, the main characteristics relevant to the overall investment
criteria, for instance whether the policies are with or without profits, would be
disclosed.

k. Insurance policies purchased to match and guarantee a scheme’s retirement

benefit obligation in respect of specific individuals as stipulated in paragraph
27 would be disclosed by way of a note. Particulars of policies and the names
of the insurer would also be disclosed.

l. MPF schemes - Mandatory Provident Fund Schemes (General) Regulation

section 81

The following would also be disclosed:

i. The fees for administrative expenses deducted or deductible by the

trustee from the scheme members’ accounts under the MPF
Regulation.

ii. The contributions and contribution surcharge (if any) paid and payable
by, and recovered from, scheme members and (where
appropriate) their employers.

iii. The total return derived from investing in the funds of the scheme
(taking into account any capital appreciation and depreciation).

iv. The total amount of accrued benefits that were paid, and of accrued
benefits that became payable but were not paid, to or in respect of
scheme members.

v. The amount of accrued benefits transferred to and from the scheme.

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Part 4 - Notes on legal requirements in Hong Kong

34. MPF schemes are governed by the MPFSO and ORSO schemes are governed by the
ORSO. The following paragraphs, based on the MPFSO and ORSO in effect at
31 December 2003, are for guidance only and are not a substitute for reference to the
detailed requirements of the MPFSO and the ORSO.

MPFSO
35. Section 81 of Mandatory Provident Fund Schemes (General) Regulation (“General
Regulation”) provides that the approved trustee of a registered scheme must prepare
a balance sheet of the scheme showing a true and fair view of its financial position
and also a statement of account of the scheme showing a true and fair view of its
financial transactions, for each of its financial periods.

36. Section 86 of the General Regulation provides that the approved trustee of a
registered scheme must prepare a scheme report for the scheme for each of its
financial periods.

37. Section 87 of the General Regulation provides that the approved trustee of a
registered scheme must prepare an investment report of the scheme for each of its
financial periods.

38. The financial statements, the auditor’s report thereon, the scheme report and the
investment report form part of the consolidated report prescribed under section 89 of
the General Regulation. Section 110(3)(a) of the General Regulation stipulates that
the consolidated report must be included in the annual statement prescribed under
section 22A(1) of the MPFSO.

39. Guideline II.4 on Annual Statements of Registered Schemes prescribes:

a. the statistical information in relation to a registered scheme under section

110(2)(d) of the General Regulation; and

b. the information in relation to the constituent funds of a registered scheme that

should be included in the financial statements and the investment report of the
scheme under sections 81 and 87 of the General Regulation respectively.

40. An MPF scheme, whether employer sponsored, master trust or industry scheme, may
consist of one or more constituent funds. Section 6 of Schedule 1 to the General
Regulation provides that the assets of a constituent fund of a registered scheme may
be invested in an approved pooled investment fund (“APIF”). Section 6(1) of the
General Regulation provides that an investment fund is an APIF for the purposes of
the Regulation if it is an insurance policy, authorised unit trust or authorised mutual
fund that complies with the requirements set out in section 17(2) of Schedule 1 to the
General Regulation and is approved by the MPFA. Section 17(2)(h) of Schedule 1 to
the General Regulation stipulates that the financial statements, investment reports and
auditor’s reports of an APIF must be lodged with the MPFA and additional information
relating to those statements and reports must be provided to the MPFA whenever the
MPFA requests.

ORSO
41. Section 20(1)(a) of the ORSO requires the administrator of a registered scheme to
keep proper accounts and records as regards all assets, liabilities and financial
transactions of the scheme and to cause to be prepared financial statements in
respect of each financial year.

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42. Section 20(2) of the ORSO requires that the financial statements shall show a true
and fair view of the financial transactions of the scheme during the financial year and
of the disposition, at the last day of the financial year, of its assets and liabilities and
shall contain any such other information as the Registrar of Occupational Retirement
Schemes may specify in guidelines issued by him.

43. Under section 67(1C) of the ORSO,

a. “grouping of companies” means companies that are associated companies or

are within a group of companies and includes associated companies of a
member of a group of companies;

b. “group of companies” means a holding company and its subsidiaries;

c. companies are regarded as being associated companies if –

i. one of the companies holds, or is entitled to control the exercise of,

20% or more of the voting power in the other company’s general
meetings;

ii. one of the companies is a subsidiary of an associated company; or

iii. they are partners under a written partnership agreement.

44. For schemes participating in a pooling agreement, financial statements of each of the
schemes, rather than the pooling agreement itself, would be prepared. Section
20(7C)(a) of the ORSO requires the appointment of a common accounting year for
each of the schemes within the pooling agreement. Financial statements of such
schemes would be prepared on the basis of the appointed common accounting year
unless exemption has been given by the Registrar of Occupational Retirement
Schemes under section 20(7C) of the ORSO.

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Appendix B

Comparison with International Accounting Standards

This comparison appendix, which was prepared as at July 2004 and deals only with significant
differences in the standards extant, is produced for information only and does not form part of
the standards in HKAS 26.

The International Accounting Standard comparable with HKAS 26 is IAS 26 Accounting and
Reporting by Retirement Benefit Plans.

There are no textual differences between HKAS 26 and IAS 26. However, HKAS 26 includes
an appendix that sets out additional guidance on preparing financial statements of Mandatory
Provident Fund Schemes and Occupational Retirement Schemes Ordinance Schemes.

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