dipifr-session18 d08 employee benefits

7/27/2019 DipIFR-Session18 d08 Employee Benefits

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SESSION 18 IAS 19 EMPLOYEE BENEFITS

Accountancy Tuition Centre (International Holdings) Ltd 2008 1801

Overview

Objectives

To prescribe the accounting treatment in respect of employment and post-

employment benefit costs and the disclosures that should be made.

SHORT TERMBENEFITS

Types Accounting for short-term

employee benefits Introduction IAS 19 approach Accounting basics Complication Expense

POSTRETIREMENT

BENEFITS

INTRODUCTION

DEFINEDCONTRIBUTION

PLANS

Introduction Accounting for defined

contribution plans Recognition and

measurement Disclosure

DEFINEDBENEFITPLANS

SUNDRYGUIDANCE

Actuarial valuation method Discount rate Regularity Past service costs Asset ceiling Settlements and curtailments

PRESENTATIONAND

DISCLOSURE

Key problem

Objective Scope

Definition

Presentation Disclosure defined

benefit plans


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1 Introduction

1.1 Key problem

Companies remunerate their staff by means of a wide range of benefits.

These include wages and salaries, retirement benefits.

Cost to employer needs to be matched with benefits derived from employeesservices.

1.2 Objective

The objective of IAS 19 is to prescribe the accounting and disclosure foremployee benefits.

An entity must recognise:

a liability when an employee has provided service in exchange foremployee benefits to be paid in the future; and

an expense when the entity consumes the economic benefit arising fromservice provided by an employee in exchange for employee benefits.

Commentary

Accounting for retirement benefit costs causes particular problems becausepayments made by a company into a pension plan fluctuate significantly fromone year to the next. However, accounting is relatively straightforward

where pension plans are unfunded (i.e. financed by provisions).

1.3 Scope

The standard applies to allemployee benefits.

Employee benefits include:

short-term employee benefits (e.g. wages, salaries and socialsecurity contributions, paid annual leave and paid sick leave etc);

post-employment benefits (e.g. pensions, other retirement benefits, post-

employment life insurance and post-employment medical care);

other long-term employee benefits (e.g. long-service or sabbatical leave);

termination benefits; and

equity compensation benefits.

The standard does not deal with reporting by employee benefit plans.

Commentary

And IAS 26 is outside the scope of the Diploma syllabus.


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1.4 Definitions

Employee benefits all forms of consideration given in exchange for servicerendered by employees.

Commentary

Including permanent health insurance, maternity/paternity leave, mobilephones, etc.

Short-term employee benefits those which fall due wholly within twelvemonths after the end of the period in which the employees render the relatedservice (other than termination benefits and equity compensation benefits).

Commentary

Termination benefits are payable as a result of the entitys decision to

terminate employment before the normal retirement date or an employeesdecision to accept voluntary redundancy.

Post-employment benefits those which are payable after the completion ofemployment (other than termination benefits and equity compensation benefits).

Post-employment benefit plans are arrangements under which an entity providespost-employment benefits for one or more employees.

Commentary

Arrangements may be formal or informal.

Defined contribution plans are post-employment benefit plans under whichan entity:

pays fixed contributions into a separate entity (a plan); and

has no legal or constructive obligation to pay further contributionsif the plan does not hold sufficient assets to pay all employee

benefits for service in the current and prior periods.

Commentary

It is the employee who is exposed to the risk of losses.

Defined benefit plans are post-employment benefit plans other than definedcontribution plans.

Commentary

The risk of further obligations is to the employer. Defined benefit plans aremanaged by fiduciaries (i.e. trustees) and underwritten by the sponsoring employer.


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Multi-employer plans are defined contribution or defined benefit plans (otherthan state plans) that:

pool the assets contributed by various entities that are not undercommon control; and

use those assets to provide benefits to employees of more than oneentity.

Commentary

Contribution and benefit levels are determined without regard to the identityof the entity that employs the employees concerned.

The present value of a defined benefit obligation is the present value, withoutdeducting any plan assets, of expected future payments required to settle theobligation resulting from employee service in the current and prior periods.

Current service costis the increase in the present value of the defined benefitobligation resulting from employee service in the current period.

Interest costis the increase during a period in the present value of a defined benefitobligation which arises because the benefits are one period closer to settlement.

Past service costis the increase in the present value of a defined benefitobligation resulting from the introduction of, or changes to, post-employmentor other long-term employee benefits.

Plan assets comprise:

assets held by a long-term employee benefit plan; and qualifying insurance policies.

Assets held by a long-term employee benefit plan are assets (other than non-transferable financial instruments issued by the reporting entity) that:

are held by an entity (a plan) that is legally separate from the reportingentity and exists solely to pay or fund employee benefits; and

are available to be used only to pay or fund employee benefits, are notavailable to the reporting entitys own creditors (even in bankruptcy),

and cannot be returned to the reporting entity, unless either:

the remaining assets of the plan are sufficient to meet allthe related employee benefit obligations of the plan or thereporting entity; or

the assets are returned to the reporting entity to reimburseit for employee benefits already paid.


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A qualifying insurance policy is an insurance policy issued by an insurer thatis not a related party (as defined in IAS 24) of the reporting entity, if the

proceeds of the policy:

can be used only to pay or fund employee benefits under a definedbenefit plan;

are not available to the reporting entitys own creditors (asdescribed above).

Actuarial gains and losses comprise:

experience adjustments (the effects of differences between the previousactuarial assumptions and what has actually occurred); and

the effects of changes in actuarial assumptions.

Vested employee benefits are not conditional on future employment.

2 Short term benefits

2.1 Types

Wages, salaries and social security contributions;

Short-term compensated absences (e.g. paid annual leave and paid sick leave) wherethe absences are expected to occur within twelve months after the end of the period inwhich the employees render the related employee service;

Profit sharing and bonuses payable within twelve months after the end of theperiod in which the employees render the related service; and

Non-monetary benefits (e.g. medical care, housing, cars and free orsubsidised goods or services) for current employees.

2.2 Accounting for short-term employee benefits

When an employee has rendered service to an entity during an accountingperiod, the entity should recognise the amount of short-term employeebenefits expected to be paid in exchange for that service as:

a liability (accrued expense), after deducting any amount alreadypaid; and

an expense (unless another IAS requires or permits the inclusion ofthe benefits in the cost of an asset).

Commentary

Inshort, the entity must account for the expense on an accruals basis.


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3 Post retirement benefits

Arrangements whereby an entity provides post-employment benefits are post-employment benefit plans.

An entity may or may not establish a separate entity to receive contributions and topay benefits, though it is convenient to think of the plan as a separate entity.

THE ENTITY

Transfer ofcash (funding)

THE PLAN

Payment of postretirement benefits

EMPLOYEE

Post-employment benefit plans are classified as either defined contribution plans ordefined benefit plans, according to the economic substance of the plan.

4 Defined contribution plans

4.1 Introduction

The entitys obligation is limited to the amount that it agrees to contribute to the plan.

Thus, the amount of the post-employment benefits received by the employeeis determined by the amount of contributions paid to the plan, together withinvestment returns arising from the contributions.

In consequence any risks with regard to the size of the pension paid fall on the employee.

4.2 Accounting for defined contribution plans

Accounting for defined contribution plans is straightforward because thereporting entitys obligation for each period is determined by the amounts to

be contributed for that period.

4.3 Recognition and measurement

The accruals concept is applied, i.e.

charge contributions payable in respect of period to the statement ofcomprehensive income; and

reflect any outstanding or prepaid contributions in the statement offinancial position.

4.4 Disclosure

An entity should disclose the amount recognised as an expense for definedcontribution plans.


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5 Defined benefit plans

5.1 Introduction

The entitys obligation is to provide the agreed benefits to current employees.

There is a risk that the plan will be insufficient to pay the agreed pension fallon the entity that will have to provide for any shortfall. (For example planswhere an employee is guaranteed a specified return.)

The entity will set cash aside which is then invested to earn a return and thiswill then grow and hopefully enable the entity to meet its future obligations.

The estimation of the amount to set aside is very difficult. Usuallycompanies will use the services of an actuary (an expert in post retirement

benefits). The actuary will perform a calculation in which he includesestimates of all the variables which will effect the growth of assets andliabilities. These include:

Required post retirement benefit; Rate of return on the stock market; Interest (discount) rate; Inflation; Rate of leavers; Death in service probability.

The actuary will then tell the company how much it needs to set aside, thecurrent service cost in order to meet the obligation. This is usually stated

as a percentage of salary and is usually paid to the plan on a monthly basis.

The actuary will never be absolutely accurate in respect of his estimates. Thismeans that the value of the plan assets and liabilities at the end of each reporting

period will be different to that forecast at the last actuarial valuation. The standardgives rules on how (or whether) to account for such differences.


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Illustration 1 Actuarial calculations

Assets Liabilities Surplus

$ $ $Balance at beginning 962 (758) 204Contributions 25 25Improvements to benefits (12) (12)Actual less expected return on assets * 480 480Changes in assumptions underlying

present value * (146) (146)Experience losses * (58) (58)Expected return on assets 73 73Interest on liabilities (53) (53)Benefits paid (52) 52 Current service cost (34) (34)

_______ _______ _______

Balance at end 1,488 (1,009) 479_______ _______ _______

Commentary

The above would be done by an actuary. Components of actuarial gains/lossesinclude the asterisked (*) items (i.e. actual less expected return on assets, changesin assumptions and experience losses). Experience losses would include, forexample, the decline in value of the plans securities. The current service costwould be given to you in an examination question.

5.2 IAS 19 approach

In keeping with The Framework IAS 19 adopts a balance sheet approach.

The difference between the value of plans assets and liabilities is recognisedIn the statement of financial position.

The standard sets outs rules for the treatment of actuarial differences.

The standard givesguidance on:

valuation methods; the discount rate for valuation of liabilities; valuation frequency.

5.3 Accounting basics

An entity makes payments to a plan (a separate legal entity). This cash isinvested and used to pay retirement benefits when they fall due for payment.The plan is an entity with assets and liabilities (to the pensioners).

At the end of each reporting period the assets and liabilities are valued and

the entity recognises the net liability (or, more rarely, the net asset) in thestatement of financial position.


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Commentary

This seems a little strange at first. The entity is recognising a net liability of a separatelegal entity. But remember that the ultimate obligation to the employees is owed by theentity. The plan is merely a vehicle which allows the entity to meet this obligation. In

substance the assets and liabilities of the plan are a special area of the entitys ownstatement of financial position even though they are held by a separate entity.

Illustration 2

The following information relates to the assets and liabilities of the retirement benefitplan of entity X. (This is not a summary of Xs statement of financial position but thatof the plan.)

2006 2007

$m $m

Fair value of plan assets 100 110Present value of plan obligations (120) (135)

Net liability of the plan (20) (25)

The basic rule (simplified) is that:

In 2006 X must recognise a liability of $20m

In 2007 X must recognise a liability of $25m

If X had made a payment of $1m to the plan in 2007 the full journal would be:

Dr Profit or loss 6Cr Liability (25 20) 5Cr Cash 1

Commentary

This basic rule is made more complicated by actuarial gains and losses (aswill be seen later).

5.4 Complication

5.4.1 Plan assets and liabilities

Firstly we must understand what causes the movement in the values of theplan assets and liabilities.


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At the end of the reporting period the entity knows the following:

value of the plan assets and liabilities at the start of the period; the amount of cash paid to the plan during the period; the amount of cash paid by the plan to pensioners during the period; the current service cost for the period (information supplied by the actuary);

the actuarial assumptions made for the period.

An entity can calculate the values of the assets and liabilities that it would expect toexist at the end of the period if all of the information was accurate.

Illustration 3

The following information relates to the assets and liabilities of the retirement benefitplan of entity Q. (This is not a summary of Qs statement of financial position but thatof the plan.)

Start of the period $Fair value of plan assets 1,000

Present value of plan obligations (1,000)

During the period

Current service cost 125Contributions paid to the plan 80Benefits paid 130

Actuarial assumptions

Interest rate 9%Return on investments 12%

Analysis Liability Asset$ $

At start of the year 1,000 1,000Current service cost 125 Interest expense (9% 1,000) 90 Benefits paid (130) (130)Expected return on assets (12% 1,000) 120

Contributions 80

Expected value (This is what the valuation at the end ofthe period would show if all of the actuarial assumptionsmade at the start of the period had been 100% correct)

1,085 1,070

Suppose the actual values at the end of the period were: 1,215 1,147

The difference is called the actuarial gain or loss:

Actuarial loss 130

Actuarial gain 77


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5.4.2 Actuarial gains and losses

Actuarial gains and losses may result from increases or decreases in either :

the present value of a defined benefit obligation; or the fair value of any related plan assets.

Causes include:

unexpectedly high or low rates of employee turnover, earlyretirement or mortality;

increases in salaries, benefits etc;

the effect of changes in the discount rate; and

differences between the actual return on plan assets and theexpected return on plan assets.

5.4.3 Liability recognised

In the above illustration there is no actuarial gain/loss at the start of theperiod. At the end of the period:

Liability Asset Netliability

Expected value 1,085 1,070 15

Actual value 1,215 1,147 68

Actuarial difference (130) 77 53

IAS 19 requires that an entity recognises a liability based on the values of theplan assets and liabilities at the end of the reporting period.

If the entity recognised a liability of $68 then this would mean that it wouldrecognise the actuarial loss of $53. The double entry would be:

Dr Profit or loss (balancing figure) 148

Cr Liability (68 0) 68

Cr Cash 80

Commentary

IAS 19 permits, but does not require, that the whole amount of $148 be charged toprofit or loss. A lesser amount can be charged under the corridor method.


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5.4.4 The corridor

Actuarial differences arise every year. Some years they will be a loss and inothers they will be a gain.

The IASC believed that if they are always taken to profit or loss this would

lead to misleading fluctuations in profits.

To avoid this IAS 19 contains a materiality test. Only that part of the gain or losswhich falls outside a test figure (the corridor) is taken to profit or loss. Even then,this amount is not expensed immediately but recognised over the average remainingservice lives of the employees starting nextyear.

Commentary

Actuarial differences are not recognised in the year in which they originate.Net cumulative unrecognised actuarial gains and losses at the end of theprevious period are compared with the corridor.

The corridor is the higher of:

10% of the fair value of the plan assets at the end of the previous period; and

10% of the present value of the plan obligations at the end of theprevious period.

Illustration 3 Continued Corridor calculations

None of the actuarial loss of $53 is recognised in the period in which it arises.

Recognition at the end of the current reporting period: $

Net liability at the end of the period 68

Less the unrecognised actuarial difference (53)

Net liability actually recognised 15


Cr Liability (15 0) 15Cr Cash 80

The unrecognised actuarial difference is compared with the corridor:$

10% of plan assets at the end of the previous period(10% 1,000)

100

10% of plan liabilities at the end of the previous(10% 1,000) 100

Therefore, corridor 100

Unrecognised actuarial difference

Amount to be recognised


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Commentary

Even if there was an amount to be recognised it would be spread over theaverage remaining service lives of the employees.

5.4.5 Amendment to IAS 19

In December 2004, IASB issued an amendment to IAS 19Employee Benefits.

The IASB has decided to allow the option of recognising actuarial gains andlosses:

in full; in theperiod in which they occur; in other comprehensive income.

Commentary

This option is similar to the requirements of the UK standard, FRS 17Retirement Benefits.

5.5 Expense

The expense can be analysed into its component parts (i.e. the plan incomesand expenses).

The expense will be made up of:

$

Current service cost 125

Interest cost 90

Expected return on plan assets (120)

Actuarial gains and losses

95


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Activity 1

(This continues the illustration above into the next 2 years)

2007 2008 2009

$ $ $

Current service cost 125 140 155

Benefits paid 130 150 170

Contributions paid 80 90 100

Present value of the obligation at 31 December 1,215 1,413 1,600

Fair value of the plan assets at 31 December 1,147 1,137 1,200

Discount rate at the start of the year 9% 8% 8%

Expected return on plan assets 12% 11% 11%

The present value of the obligation and the fair value of the plan assets were both$1,000 at 1 January 2007 and there were no actuarial gains or losses at this date.

The average remaining working lives of the employees was estimated to be 10 years.

Required:

In respect each of the three years ending 2007, 2008, 2009:(a) Calculate the actuarial gain/loss arising in the period.

(b) Calculate how much of the gain or loss should be recognised and in

which period.

(c) Calculate the liability to be included in the statement of financial

position at each year end.

(d) Construct the necessary journal to record the above transactions.

(e) Explain the composition of amount recognised in profit or loss.


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Proforma solution

(a) Actuarial loss/(gain)2007

Liabilities Assets

$ $Present value/Fair value at 1 January 1,000 1,000Interest cost (9%) 90Expected return (12%) 120Current service cost 125Benefits paid (130) (130)Contributions 80

Expected value1 1,085 1,070Actuarial loss/gain a balancing figure 130 77 53 Net loss

Present value/Fair value at 31 December 1,215 1,147

Commentary

The activity has been completed for the first year.

2008Liabilities Assets

$ $Present value/Fair value at 1 January 1,215 1,147

Interest cost (8%)

Expected return (11%)

Current service cost

Benefits paid

Contributions

Expected value

Actuarial loss/gain a balancing figure Net loss/(gain)

Present value/Fair value at 31 December

1 If all estimates made at the start of the period had been 100% accurate.


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$ $Present value/Fair value at 1 January

Interest cost (8%)

Expected return (11%)

Current service cost

Benefits paid

Contributions

Expected value

Actuarial loss/gain a balancing figure Net loss/(gain)

Present value/Fair value at 31 December

(b) Amount of actuarial difference recognised

2007 2008 2009 2010

$ $ $ $

b/f 53

Gain /(loss) in the year(see (a) above) 53

Recognised in the period (W)

Net loss unrecognised at the end of the period 53

WORKING2007 2008 2009 2010

Corridor limits: $ $ $ $

10% of plan obligations 100

10% of plan assets 100

Limit is the greater of the above 100

Actuarial loss at the end of the period 53

Amount which falls outside the corridor

Amount to be recognised next year ( 10)


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(c) Statement of financial position at 31 December

2007 2008 2009

$ $ $

Present value of the obligation 1,215

Fair value of the plan assets 1,147

68

Unrecognised actuarial (loss) (53)

Recognised in the statement of financial position 15

(d) Journal2007 2008 2009


Cr Liability (W) 15

Cr Cash (contributions paid) 80

WORKING2007 2008 2009

Movements on the liability: $ $ $

Opening liability

Net movement 15

Closing liability 15

(e) Profit or loss2007 2008 2009

$ $ $

Current service costs 125

Interest cost 90

Expected return on plan assets (120)

Net actuarial gain or loss recognised in the year

Expense 95


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6 Sundry guidance

6.1 Actuarial valuation method

An entity should use the projected unit credit method to determine:

the present value of its defined benefit obligations;

the related current service cost; and

past service cost (where applicable).

This method sees each period of service as giving rise to an additional unit of benefitentitlement and measures each unit separately to build up the final obligation.

The method requires an entity to attribute benefit to:

the current period (to determine current service cost); and current and prior periods (to determine the present value of defined

benefit obligations).

Illustration 4

The present value of defined benefit obligations is calculated in accordance with IAS 19

(Employee Benefits) by the projected unit credit method. The future benefit obligations

are valued by actuarial methods on the basis of a prudent assessment of the relevant

parameters. The fair value of plan assets is deducted from the present value of the obligation

for pensions and other post-employment benefits. The obligations and plan assets are valued at

regular intervals of not more than three years. For all major plans, comprehensive actuarialvaluations are performed annually as of December 31.

The difference between the defined benefit obligation after deducting the fair value of plan

assets and the net liability recognized in the balance sheet is attributable to unrecognized past

service cost.

Plan assets in excess of the benefit obligation are reflected in other receivables, subject to the

asset limitation specified in IAS 19 (Employee Benefits).

Benefits expected to be payable after retirement are spread over each employees entire

period of employment, allowing for future changes in remuneration.

Notes to the Consolidated Financial Statements of the Bayer Group 2006

6.2 Discount rate

The discount rate should be determined by reference to market yields on highquality corporate bonds at the end of the reporting period (i.e. AAA-rated).

Commentary

In countries where there is no deep market in such bonds, the market yieldson government bonds should be used.


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6.3 Regularity

Valuations should be carried out with sufficient regularity that the amountsrecognised in the financial statements do not differ materially from theamounts that would be determined at the end of the reporting period .

An entity is encouraged to use a qualified actuary in the measurement of allmaterial post-employment benefit obligations.

6.4 Past service cost

Past service cost should be recognised as an expense on a straight-line basisover the average period until the benefits become vested.

If the benefits are already vested immediately following the introduction of, or changesto, a defined benefit plan, the past service cost must be recognised immediately.

Illustration 5

An entity operates a pension plan that provides a pension of 2% of final salary for eachyear of service. The benefits become vested after five years of service. On 1 January2008 the entity improves the pension to 2.5% of final salary for each year of servicestarting from 1 January 2006. At the date of the improvement, the present value of theadditional benefits for service from 1 January 2006 to 1 January 2008 is as follows:

$000Employees with more than five years service at 1 January 2008 150Employees with less than five years serviceat 1 January 2008 (average period until vesting: three years) 120

_____

270_____

The entity recognises $150,000 immediately because those benefits are already vested.The entity recognises $120,000 on a straight-line basis over three years from 1 January2008.

6.5 Asset ceiling

The calculation of the amount to be included in the statement of financial position mayresult in an asset being recognised.

IAS 19 sets an asset ceiling on how much of that asset can be recognised asthe lowerof the sum of:

present value of theobligation; plus

any unrecognised actuarialgains, less any unrecognisedactuarial losses;

less any unrecognised pastservice cost;

less the fair value of the planassets.

vs any cumulative unrecognised netactuarial losses and past servicecost; and

the present value of any economicbenefits available in the form ofrefunds from the plan or reductionsin future contributions into the

plan.


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Commentary

The standard is in effect applying a degree of prudence by setting a limit onthe amount of the asset that can be recognised.

The asset may arise in circumstances where a plan has been overfunded orwhere actuarial gains are recognised. The entity recognises an asset because:

the entity controls a resource, which is the ability to use the surplusto generate future economic benefits;

the control is as the result of a past event; and

future economic benefits are available in the form of a reduction infuture contributions or as a cash refund.

6.6 Settlements and curtailments

The settlement of a plan occurs when an entity eliminates all furtherobligations that were provided under a defined benefit plan. This couldhappen when the entity makes a one-off payment to members of the plan inreturn for the cancellation of any future obligations.

A curtailment occurs if the entity is committed to make a material reductionin the number of employees covered by the plan or amends the terms of the

plan so that future service will no longer qualify for benefits (or, if stillqualifying, benefits will be much reduced from the original plan).

An entity must recognise a gain or loss when it settles or curtails a plan. The

gain or loss will comprise:

the net resulting change in the present value of the obligation andthe fair value of the assets; and

the related actuarial gains and losses and past service cost that hadpreviously not been recognised.

7 Presentation and disclosure

7.1 Presentation

An asset relating to one plan should be offset against a liability relating toanother when, and only when, the entity:

has a legal right of offset (i.e. to use a surplus in one plan to settleobligations in another); and

intends to settle the obligations on a net basis or realise the surplusand settle the obligation simultaneously.


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7.2 Disclosure defined benefit plans

The entitys accounting policy for recognising actuarial gains and losses.

A general description of the type of plan.

A reconciliation of the assets and liabilities recognised, showing at least:

the present value at the end of the reporting period of definedbenefit obligations that are wholly unfunded, wholly funded andpartly funded;

the fair value of any plan assets at the end of the reporting period ;

the net actuarial gains or losses not recognised in the statement offinancial position ;

the past service cost not yet recognised in the statement of financial

position ;

any amount not recognised as an asset, because of the asset ceilinglimit; and

the amounts recognised in the statement of financial position .


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Illustration 6

25. Provisions for pensions and other post-employment benefits (extract)

The status of unfunded and funded defined benefit obligations, computed using the

appropriate parameters, is as follows:Germany Pension

obligationsOther post-

employmentbenefit obligations

million 2005 2006 2005 2006

Defined benefit obligation as of January 1 8,866 10,256 184 158

Acquisitions 14 1,703 6

Divestitures/changes in the scope of consolidation (10) 0

Current service cost 138 195 17 19

Interest cost 432 466 5 4

Employee contributions 26 26

Plan changes 56 (8) Net actuarial (gain) loss 1,160 (487)

Benefit paid (436) (489) (48) (46)

Plan curtailments (2)

Reclassifications to current assets/liabilities (293) (2)

Defined benefit obligation as of December 31 10,256 11,357 158 139

Fair value of plan assets as of January 1 4,373 4,599

Acquisitions 1,497

Divestitures/changes in the scope of consolidation (5)

Actual return on plan assets 330 116

Employer contributions 306 325 48 46

Employee contributions 26 26

Benefits paid (436) (489) (48) (46)

Reclassifications to current assets/liabilities (16)

Fair value plan assets as of December 31 4,599 6,053

Net recognized liability as of December 31 (5,657) (5,304) (158) (139)


A reconciliation showing the movements during the period in the net liability(or asset) recognised in the statement of financial position .

The total expense recognised in profit or loss for each of the following, and theline item(s) in which they are included:

current service cost; interest cost; expected return on plan assets; actuarial gains and losses;

past service cost; and the effect of any curtailment or settlement.


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Illustration 7

25. Provisions for pensions and other post-employment benefits (extract

The costs for defined-benefit pension plans for the continuing and discontinued operations

are comprised as follows:

Germany

million 2005 2006

Current service cost 138 195

Past service cost 56 (8)

Interest cost 432 466

Expected return on plan assets (237) (270)

Plan curtailments (2)

Plan settlements

389 381


The actual return on plan assets.

The principal actuarial assumptions used as at the end of the reporting period,including, where applicable:

the discount rates; the expected rates of return on any plan assets for the periods presented;

the expected rates of salary increases; medical cost trend rates; and any other material actuarial assumptions used.

Illustration 8

25. Provisions for pensions and other post-employment benefits (extract)

All defined benefit plans necessitate actuarial computations and valuations. These

are based not only on life expectancy and staff fluctuation, but also on the following

parameters, which vary from country to country according to economic conditions.

The weighted parameters used to value pension obligations as of December 31 of the

respective year were as follows:

Germany

% 2005 2006

Pension obligation

Discount rate 4.25 4.60

Projected future renumeration increases 2.50 2.60

Projected future benefit increases 1.25 1.50

Other post-employment benefit obligations

Discount rate 3.25 4.30


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8 EXAMINATION TECHNIQUE

Commentary

The basic information that is required, in order to arrive at the asset or liabilityto be included in the statement of financial position and the make up of theitems to be included in the statement of comprehensive income, is set out below.

8.1 Statement of Financial Position

An entitys asset or liability can be found using the following equation:

PV of the obligation; plus Unrecognised actuarial gains, or minus unrecognised actuarial losses; less Past service cost not yet recognised; less

FV of the plan assets.

If the result is positive then a liability will be recognised in the entitysstatement of financial position, and if the result is negative then an asset will

be recognised.

8.2 Statement of Comprehensive Income

The following items will be included within profit or loss in the statement ofcomprehensive income:

Interest on opening plan liability

Return on opening plan assets Current service cost Past service cost recognised in period Actuarial gain or loss to be recognised in the period, based upon the

opening position, if the corridor approach is being followed.

If a question requires recognition of all actuarial gains or losses immediately,then this can be recognised either within profit or loss or within othercomprehensive income if the 2004 amendment is being followed.

Focus

You should now be able to:

describe the nature of defined contribution, multi-employers and definedbenefits plans (IAS 19);

explain the recognition and measurement of defined benefit plans undercurrent proposals;

account for defined benefit plans including the amounts shown in the statement of financialposition , statement of comprehensive income and notes to the account;

identify perceived problems with current proposals on accounting for post-employment benefit costs.


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Activity solution

Solution 1

(a) Actuarial loss/(gain)2007

Liabilities Assets$ $

Present value/Fair value at 1 January 1,000 1,000Interest cost (9%) 90Expected return (12%) 120Current service cost 125Benefits paid (130) (130)Contributions 80

Expected value

2 1,085 1,070

Actuarial loss/gain a balancing figure 130 77 53 Net loss



$ $Present value/Fair value at 1 January 1,215 1,147Interest cost (8%) 97Expected return (11%) 126Current service cost 140Benefits paid (150) (150)Contributions 90

Expected value 1,302 1,213Actuarial loss/gain 111 (76) 187 Net loss


2009

Liabilities Assets$ $

Present value/Fair value at 1 January 1,413 1,137

Interest cost (8%) 113Expected return (11%) 125Current service cost 155Benefits paid (170) (170)Contributions 100

Expected value 1,511 1,192Actuarial loss/gain 89 8 81 Net loss


2 If all estimates made at the start of the period had been 100% accurate.


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(b) Amount of actuarial difference recognised

2007 2008 2009 2010

$ $ $ $

b/f 53 240 311

Loss/(gain) in the year(see (a) above) 53 187 81 x

Recognised in the period (W) (10) (15)

Net cumulative unrecognised at the end of the period 53 240 311 x

Net cumulative unrecognised loss/(gain) at the end of theprevious reporting period

53 240 311

WORKING

2007 2008 2009 2010

Corridor limits: $ $ $ $

10% of plan obligations at end of previous period 100 122 141 160

10% of plan assets at end of previous period 100 115 113 120

Limit is the greater of the above 100 122 141 160

Net cumulative unrecognised loss/(gain) at the end of theprevious period

_ 53 240 311

Amount which falls outside the corridor 99 151

Amount to be recognised ( 10) 10 15

(c) Statement of financial position at 31 December

2007 2008 2009

$ $ $

Present value of the obligation 1,215 1,413 1,600

Fair value of the plan assets 1,147 1,137 1,200

68 276 400

Unrecognised actuarial (loss) (53) (240) (311)

Recognised in the statement of financial position 15 36 89


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(d) Journal

2007$

2008$

2009$

Dr Profit or loss (balancing figure) 95 111 153

Cr Liability (W) 15 21 53

Cr Cash (contributions paid) 80 90 100

WORKING2007 2008 2009

Movements on the liability: $ $ $

Opening liability 15 36

Net movement 15 21 53

Closing liability 15 36 89

(e) Profit or loss

2007 2008 2009

$ $ $

Current service costs 125 140 155

Interest cost 90 97 113

Expected return on plan assets (120) (126) (125)

Net actuarial gain or loss recognised in the year 10

Expense 95 111 153


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dipifr-session18 d08 employee benefits

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