Employees Benefit – IAS 19

Presented By: Mr. Qanit Khalil, FCA

Post Retirement / Long Term Employee 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 upon performance of the fund over time. • Investment risk is with the employee.

DC Schemes – Impact on the financial statements

Income statement: Record contribution as expense in Income Statement Balance sheet: No impact on balance sheet other than outstanding contributions payable to the investment funds.

.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 Contribution (DC) Examples: • A Company agrees to pay 5% of an employee’s salary into a third party fund. • The company pays Rs10.

Defined Benefit Schemes • May be pension or lump-sum. • Risk remains with Employer . • Usually based on salary and years of service. • Liability calculated by actuary. • The calculation of pension benefits is based on Final pay or Average pay. • The company is making a promise and therefore bears the risk of meeting the future obligation.

If the plan rules do not meet the definition of DC. the plan must be treated as DB.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.

longer life) • Cost certainty • Less attractive to employees DB DB • Benefit certainty • No investment risk • Subject to Financial viability of employer • Retention • Exposed to financial risks and increasing life expectancy .Comparison of DC & DB Plans EMPLOYEES Pros Cons Pros COMPANY Cons DC DC • Portability • • Not subject toFinancial viability of employer Risk of insufficient funds to cover retirement (investment risk.

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 .

• 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 .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.

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 .

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 .

Definitions Of DB Components .

Defined Benefit Plan Pension Obligation Pension Assets (if any) Exclude: Unrecognised gains /losses Related Deferred Tax .Balance Sheet .

– The obligation is discounted using the interest rate of high quality corporate bonds. Key Drivers: – Actuarial assumptions – Business decisions .Define DBO – The expected future payments required to settle the benefits resulting from employee service in the current and prior periods. – The obligation is calculated by the actuary.

Alternatively.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. it is vested portion of ABO This assumes the employee leaves service immediately. .

PBO is the liability recognised in the Balance Sheet. This recognises that the liability for benefits earned by service to date will increase as salaries rise in the future.Measures of Defined Benefit Obligation Projected Benefit Obligations The Pension Liability based on service to date but taking into account future expected salary levels. .

4 119 476 476 47.9 98 196 196 19.Current year (1%) Current and prior year Opening obligation Interest @ 10% Current service cost Closing obligation 0 131 131 262 262 131 393 393 131 524 524 131 655 131 131 0 0 89 89 89 8.8 131 655 .6 108 324 324 33.Calculation of DBO Data for Illustration: Salary in Year 1 = 10. Assumed annual increase 7% Discount Rate: 10% 1 2 3 4 5 Year Benefit Attributed to: .Prior year .000.

property etc. • Held in legal entities (eg trusts) separate to Unilever. • Assets measured at fair value • May be equities. at fair value (e. • If market price not available. using a discount rate that reflects the associated risk and the maturity) .Pension Fund Assets • Specific assets to meet future pension obligations. bonds.g.

Defined Benefit Plan • Gross Service Cost • Past Service Costs • Settlements • Curtailments • Interest Cost • Expected Return on Plan assets .Profit and loss .

Example Payroll cost Rs1.000 x 15% = €150.000 Accounting Entry Dr Operating Profit – Gross Service Cost Cr Pension Liability Liability Asset .000.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.

Unvested benefits are recognised on a straight line method over the average vesting period Accounting Entry Dr Operating Profit – Past Service Cost Cr Pension Liability Example: Retirees receive a pension of 50% of their final salary. Liability Asset . resulting in a PSC.  The amount recognised is the cost (ie additional liability created) as a result of the improved benefits .Past Service Costs /Plan amendments  Occur when plan benefits are improved beyond the current terms and effect past service.  Recognise cost immediately when irrevocable decision is made and benefit is vested. The company then increases this to 60%.

 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 Entry Dr Pension Liability Cr Pension Assets Dr Operating Profit – Settlement Cost Liability Asset .Settlements  Arise where the liability is settled by some action eg business disposal or transferring the DB liability to an insurance company.

 Amount calculated by actuary.  Usually results in a credit to P&L (TR) Accounting Entry Dr Pension Liability Cr Operating Profit – Curtailment Cost Liability Asset . large restructuring programmes  No fixed recognition criteria for what constitutes a Curtailment.Curtailments  Result from significant reductions in employees and thus liability.  Record the reduction in the present value of the pensions liability.  Examples are factory closures.

Calculation is: Average liability for the period Accounting Entry Dr Interest Cr Pension Liability X % discount rate = Interest on Liability Liability Asset .  The discount rate is agreed at the last valuation based on the appropriate bond yields for that country.Interest on Liability  Interest cost – is the unwinding of the discount of the pensions liability for the current period.

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: Average assets for the period X % rate of return = Expected Return on Assets Liability Asset Accounting Entry Dr Pension Assets X Cr Operating Profit Variance from the expected return is taken in the Actuarial gain/loss or SORIE. .

Cash Movements .Defined Benefit Plan • Company contributions • Benefit Payments .

 Must record only the company contribution.Company Contributions  Payments from Employer to funded plans to increase plan assets.  Only applies to Funded plans. not any employee contributions  Any refunds (where applicable) from a surplus in the pension fund. should be recorded here as a negative value Accounting Entry Dr Pension Assets Cr Cash Liability Asset .

 Relates to both: • Funded schemes .Benefit Payments  Records the amounts of payments paid to pensioners. Accounting Entry Dr Pension Liability Cr Pension Assets Liability Asset .benefits paid from pension fund assets. • Unfunded schemes – benefits paid from Company funds.

Actuarial Assumptions .

Actuarial Assumptions  Main Assumptions Discount rate Rate of salary increase Expected rate of return on plan assets Demographic variables (e. staff turnover. mortality etc.g.)  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 .

 This entry posts the difference so that the closing asset values are at fair value.  All assets must be recorded at fair value at year end.Actual less Expected Return  This entry records the difference between the actual return and the expected return on assets. Accounting Entry Dr/Cr Pension Assets (for fair valuation of assets) Dr/Cr Reserves OR Un-recognized Actuarial gain / loss Liability Asset .

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 Entry Dr/Cr Pension liability (to record difference on the basis of latest assumptions) Liability Asset Dr/Cr Reserves OR Un-recognised actuarial gain/loss .

salary increases.  Entry performed when new actuarial valuation performed  Amount calculated by actuary Liability Asset .  Different variables = different liability. inflation. mortality rates etc.Changes in Actuarial Assumptions  Records effect on liability caused by changes in discount rates.

3 and 5 D) 1.Actuarial Assumptions What are the key drivers in the actuarial assumptions impacting a company’s pension plans? 1.2. 2. 4. 5.3 and 4 . 3. Inflation Discount rate Salary growth Life expectancy The mix of equity and bonds held in the plan QUESTION: Which of the items above are correct? A) All of the above B) 1 and 2 only C) 1.

Inflation Discount rate Salary growth Life expectancy The mix of equity and bonds held in the plan QUESTION: Which of the items above are correct? A) All of the above B) 1 and 2 only C) 1.Actuarial Assumptions What are the key drivers in the actuarial assumptions impacting a company’s pension plans? 1.3 and 5 D) 1. 5.3 and 4 . 4. 3.2. 2.

Elements of Defined Benefit Plan Liability Unrecognised actuarial losses Unrecognised past service cost Present value of DBO The defined benefit obligation (DBO) recognised in the balance sheet is: Present value of DBO Plus actuarial gains not yet recognized Less actuarial losses not yet recognized Less past services costs not yest recognized Less fair value of plan assets Plan assets at fair value Net liability in the B/S .

Amortization of Actuarial Gains and Losses 10% corridor Unrecognised actuarial losses Amortise: Present value of DBO  Corridor is the higher of 10% of PV DBO Unrecognised 10% of plan assets past service cost  Limit is separate for each plan  Amortize actuarial gains/ loss Plan existing at the beginning of the period assets over remaining average working lives at fair of employees value  Faster recognition method if consistently applied to both gains & losses Net liability in the B/S .

!0% Corridor Approach On 1 January 20X5 PV of the defined benefit obligation was 500 and fair value of plan assets was 400 B Recognize loss > 50 (10% of 500) Losses A 41 A <50 B A Recognize gain > 50 <50 (10% of 500) +10% -10% Gains Corridor B Spread excess greater than 50 over employees’ service lives .Amortization of Actuarial Gains and Losses .

Actuarial gains/losses may also be recognised through ‘SORIE” Profit or Loss: Corridor Approach any faster recognition method Statement of recognized income & expense: Immediate recognition for all plans .

Section 6 – Further Info .

• 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 .Disclosure Requirements IAS 19 requires company to disclose: • Closing positions of liabilities and assets • Key assumptions used to calculate these figures.

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 .

DB accounting by sponsoring employer Other entities expense their contributions payable Related party disclosures .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.

Surplus available as refund Plan assets at fair value Asset ceiling Unrecognised past service cost Unrecognised actuarial losses .Asset Ceiling Test PV of DBO Net asset is subject to an 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 Improve employee benefits etc.

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 .

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