ias-19 employee benefits
TRANSCRIPT
Employees Benefit – IAS 19Presented By: Mr. Qanit Khalil, FCA
Post Retirement / Long TermEmployee Benefits - Pensions
Defined Contribution Schemes
• dkkdkEmployer pays fixed contribution to an external fund (usually % of salary).
• Employer’s obligation is discharged upon payment of the contribution.
• Members benefits depend uponperformance of the fund over time.
• Investment risk is with the employee.
DC Schemes – Impact on the financial statements
Income statement:Record contribution as expensein Income Statement
Balance sheet:No impact on balance sheet otherthan outstanding contributions payable to the investment funds.
Defined Contribution (DC)
Examples:• A Company agrees to pay 5% of an
employee’s salary into a third party fund.• The company pays Rs10,000 pa for each
employee into a third party fund following each year of service.
Key criteria:• Fixed amount of contribution.• Employer’s obligation ceases upon payment of
contribution.
Defined Benefit Schemes
• May be pension or lump-sum.
• Usually based on salary and years of service.
• The calculation of pension benefits is based on Final pay or Average pay.
• Liability calculated by actuary.
• The company is making a promise and therefore bears the risk of meeting the future obligation.
• Risk remains with Employer
Defined Benefit (DB) cont…
Examples:• The company agrees to provide employees
with a pension of x% of their final salary for each year of service.
• The company agrees to provide a lump sum of 5 times the employee’s final salary.
If the plan rules do not meet the definition of DC, the plan must be treated as DB.
Comparison of DC & DB Plans
EMPLOYEES COMPANY
• Cost certainty • Less attractive to employees
• Benefit certainty• No investment
risk
• Subject to Financial viability of employer
• Retention • Exposed to financial risks and increasing life expectancy
DCDC
DBDB
• Portability • Not subject
toFinancial viability of employer
• Risk of insufficient funds to cover retirement (investment risk, longer life)
Pros Cons ConsPros
Funding
Pension plans can be:• Funded Retirement Benefits (FRB)• Unfunded Retirement Benefits (URB)
Funding decisions are usually based on factors such as:• Cash position of the company • Local tax regulations• Local legal requirements• Suitable investments available• Market norms
Funded Retirement Benefits (FRBs)
Funded Plans:• Assets have been contributed into a separate
legal entity to the employer• Is usually a trust, governed by trustees.• The value of the assets may be less or more
than the value of the liability• Assets> Liabilities = Funded plan in Surplus• Liabilities> Assets = Funded plan in Deficit
Unfunded Retirement Benefits (URBs)
Unfunded Plans:• No assets have been put aside by the
employer to meet pension obligations.• Benefits are paid from company funds• Viewed by employees as being less secure.
Question
If you have a Funded scheme in deficit, this means that:
(A) Company has no specific assets put aside to meet it’s pension liability
(B) Liabilities exceed Assets
(C) Assets exceed Liabilities
(D) The actuaries are doing a terrible job
If you have a Funded scheme in deficit, this means that:
(A) Company has no specific assets put aside to meet it’s pension liability
(B) Liabilities exceed Assets
(C) Assets exceed Liabilities
(D) The actuaries are doing a terrible job
Question
Definitions Of DB Components
Pension Obligation
Pension Assets (if any)
Exclude: Unrecognised gains /losses
Related Deferred Tax
Balance Sheet - Defined Benefit Plan
Define DBO
– The expected future payments required to settle the benefits resulting from employee service in the current and prior periods.
– The obligation is discounted using the interest rate of high quality corporate bonds.
– The obligation is calculated by the actuary.
Key Drivers:– Actuarial assumptions– Business decisions
Measures of Defined Benefit Obligation
Accrued Benefit Obligations : The Pension Liability based on service to date and current salary levels.
Vested Benefit Obligation :The portion of the benefit obligation that does not depend on future employee service. Alternatively, it is vested portion of ABO
This assumes the employee leaves service immediately.
Projected Benefit Obligations
The Pension Liability based on service to date but taking into account future expected salary levels.
This recognises that the liability for benefits earned by service to date will increase as salaries rise in the future. PBO is the liability recognised in the Balance Sheet.
Measures of Defined Benefit Obligation
1311191089889Current service cost
Benefit Attributed to:
196
8.9
89
262
131
131
2
131131131131- Current year (1%)
5243932620- Prior year
655524393131Current and prior year
65547632489Closing obligation
47.833.419.60Interest @ 10%4763241960Opening obligation
5431Year
Data for Illustration: Salary in Year 1 = 10,000; Assumed annual increase 7%Discount Rate: 10%
Calculation of DBO
Pension Fund Assets
• Specific assets to meet future pension obligations.
• Held in legal entities (eg trusts) separate to Unilever.
• Assets measured at fair value• May be equities, bonds, property etc.• If market price not available, at fair value (e.g.
using a discount rate that reflects the associated risk and the maturity)
Profit and loss - Defined Benefit Plan
• Gross Service Cost
• Past Service Costs
• Settlements
• Curtailments
• Interest Cost
• Expected Return on Plan assets
Gross Service Cost
Increase in the present value of a defined benefit obligation resulting form employee service in the current period
The Net Present Value of the extra future benefits earned through the current period of service
The actuary will calculate this as part of the valuation report and normally express this as a percentage of payroll.
ExamplePayroll cost Rs1,000,000 x 15% = €150,000
Accounting EntryDr Operating Profit Dr Operating Profit –– Gross Service CostGross Service CostCr Pension LiabilityCr Pension Liability
AssetLiability
Past Service Costs /Plan amendments
Occur when plan benefits are improved beyond the current terms and effect past service.
The amount recognised is the cost (ieadditional liability created) as a result of the improved benefits .
Recognise cost immediately when irrevocable decision is made and benefit is vested. Unvested benefits are recognised on a straight line method over the average vesting period
Accounting EntryDr Operating Profit Dr Operating Profit –– Past Service CostPast Service CostCr Pension LiabilityCr Pension Liability
Example: Retirees receive a pension of 50% of their final salary. The company then increases this to 60%, resulting in a PSC.
AssetLiability
Settlements
Arise where the liability is settled by some action eg business disposal or transferring the DB liability to an insurance company.
Amount to record is the difference between the liability disposed of and the assets given in settlement.
Usually result in a cost to P&L Amount will be calculated in conjunction
with the actuary.
Accounting EntryDr Pension LiabilityDr Pension LiabilityCr Pension AssetsCr Pension AssetsDr Operating Profit Dr Operating Profit –– Settlement Cost Settlement Cost
AssetLiability
Curtailments
Result from significant reductions in employees and thus liability.
Examples are factory closures, large restructuring programmes
No fixed recognition criteria for what constitutes a Curtailment.
Record the reduction in the present value of the pensions liability.
Amount calculated by actuary. Usually results in a credit to P&L (TR)
Accounting EntryDr Pension LiabilityDr Pension LiabilityCr Operating Profit Cr Operating Profit –– Curtailment Cost Curtailment Cost
AssetLiability
Interest on Liability
Interest cost – is the unwinding of the discount of the pensions liability for the current period.
The discount rate is agreed at the last valuation based on the appropriate bond yields for that country.
Calculation is:Average liability X % discount = Interest
for the period rate on Liability
Accounting EntryDr InterestCr Pension Liability
AssetLiability
Expected Return on Assets
The credit taken in the Profit and Loss Account for the return on plan assets based on the actual value of the plan assets and the long term expected return on those assets
Calculation is:
Accounting EntryDr Pension AssetsCr Operating Profit
Variance from the expected return is taken in the Actuarial gain/loss or SORIE.
Average assets X % rate of = Expected Returnfor the period return on Assets
X
AssetLiability
Cash Movements - Defined Benefit Plan
• Company contributions• Benefit Payments
Company Contributions
Payments from Employer to funded plans to increase plan assets.
Only applies to Funded plans. Must record only the company
contribution, not any employee contributions
Any refunds (where applicable) from a surplus in the pension fund, should be recorded here as a negative value
Accounting EntryDr Pension AssetsCr Cash
AssetLiability
Benefit Payments
Records the amounts of payments paid to pensioners.
Relates to both:
• Funded schemes - benefits paid from pension fund assets;• Unfunded schemes – benefits paid from Company funds.
Accounting EntryDr Pension LiabilityCr Pension Assets
AssetLiability
Actuarial Assumptions
Actuarial Assumptions
Main AssumptionsDiscount rateRate of salary increaseExpected rate of return on plan assetsDemographic variables (e.g. staffturnover, mortality etc.)
Can lead to volatile results Can result in unexpected funding shortfalls Actuarial assumptions should be unbiased & mutually compatible
Actuarial Gains and losses
• Actual less Expected Return• Experience Gains/ Losses• Changes in Actuarial Assumptions
Actual less Expected Return
This entry records the difference between the actual return and the expected return on assets.
All assets must be recorded at fair value at year end.
This entry posts the difference so that the closing asset values are at fair value.
Accounting EntryDr/Cr Pension Assets (for fair valuation of assets)Dr/Cr Reserves OR Un-recognizedActuarial gain / loss
AssetLiability
Experience Gains & Losses
Records effect on liability caused by differences between actual experience and the latest assumptions.
Latest assumptions vs what actually happened
Entry performed when new actuarial valuation performed
Amount calculated by actuary
Accounting EntryDr/Cr Pension liability (to record difference
on the basis of latest assumptions)Dr/Cr Reserves OR Un-recognisedactuarial gain/loss
AssetLiability
Changes in Actuarial Assumptions
Records effect on liability caused by changes in discount rates, inflation, salary increases, mortality rates etc.
Different variables = different liability.
Entry performed when new actuarial valuation performed
Amount calculated by actuary
AssetLiability
Actuarial Assumptions
What are the key drivers in the actuarial assumptions impacting a company’s pension plans?
1. Inflation 2. Discount rate3. Salary growth4. Life expectancy5. The mix of equity and bonds held in the plan
QUESTION: Which of the items above are correct?A) All of the aboveB) 1 and 2 onlyC) 1,3 and 5D) 1,2,3 and 4
Actuarial Assumptions
What are the key drivers in the actuarial assumptions impacting a company’s pension plans?
1. Inflation 2. Discount rate3. Salary growth4. Life expectancy5. The mix of equity and bonds held in the plan
QUESTION: Which of the items above are correct?A) All of the aboveB) 1 and 2 onlyC) 1,3 and 5D) 1,2,3 and 4
Elements of Defined Benefit Plan Liability
The defined benefit obligation (DBO) recognised in the balance sheet is:
Present value of DBOPlus actuarial gains not yet recognizedLess actuarial losses not yet recognizedLess past services costs not yest recognizedLess fair value of plan assets
Present value of DB
O
Plan assets
at fair
value
Unrecognised actuarial
losses
Unrecognised past
service cost
Net liability in the B/S
Amortization of Actuarial Gains and LossesPresent value of D
BO
Plan assets
at fair
value
Unrecognised actuarial
losses
Unrecognised past
service cost
Net liability in the B/S
10% corridor
Amortise: Corridor is the higher of
10% of PV DBO10% of plan assets
Limit is separate for each plan Amortize actuarial gains/ loss
existing at the beginning of the periodover remaining average working lives of employees
Faster recognition method if consistently applied to both gains & losses
41
BRecognize loss
> 50 (10% of 500)
A<50
A<50
BRecognize gain
> 50 (10% of 500)
Losses Gains-10% +10%
CorridorA Spread excess greater than 50 over employees’ service lives
B
On 1 January 20X5 PV of the defined benefit obligation was 500 and fair value of plan assets was 400
Amortization of Actuarial Gains and Losses - !0% Corridor Approach
Actuarial gains/losses may also be recognised through ‘SORIE”
Profit or Loss:Corridor Approachany faster recognition method
Statement of recognized income & expense:Immediate recognitionfor all plans
Section 6 – Further Info
Disclosure Requirements
IAS 19 requires company to disclose:• Closing positions of liabilities and assets• Key assumptions used to calculate these
figures.• Explanations for the movement in balances• P&L expense recognised in the period• Material “one-off” transactions• Analysis of funded/ unfunded balances• Sensitivity information about medical cost
trend rates• Five year history of experience adjustments
on DBO and on plan assets
Amendments to IAS 19: Multi-employer Plans
DB accounting for the proportional share of assets and defined benefit obligation
Defined contribution accounting if insufficiant information
Recognize an asset or liability resulting from contractual sharing for surpluses / deficits
Amendments to IAS 19: Entities Under Common Control
Measure the plan as a whole as required by IAS 19
Recognise net defined benefit cost charged if there is contract or policy to charge it
If no contract or policy exists, DB accounting by
sponsoring employer
Other entities expense their contributions payable
Related party disclosures
Net asset is subject to an asset ceiling test
PV of DB
O Plan assets
at fair
value
Unrecognised actuarial
losses
Unrecognised past
service cost
Asset ceiling
Surplus available as
refund
Improve employee
benefits etc.
Asset Ceiling Test
Limit the net asset to:
Amount available in form of refunds or reductions in contributions Plus unrecognized actuarial losses (net) Plus unrecognized past service costs
Asset Ceiling Concept
– The objective of the asset ceiling is to prevent gains being recognised solely as a result of the deferred recognition of past service cost and actuarial losses
– The problem arises when an entity defers recognition of actuarial losses or past service cost in determining the amount specified in paragraph 54 but is required to measure the defined benefit asset at the net total specified in paragraph 58(b). Recognising asset equal to unrecognised past service cost and actuarial losses could result in the entity recognising an increased asset
Thank You