You are on page 1of 5

IFRS1

Tutorial Assignment Week 3

Ejona Gjata
(11085800)

Tutorial Assignments Week 3 IAS 19 and IFRS 2


Amsterdam Business School IFRS
Philips states in their financial statements 2014 about her Dutch pension plan:
The pension plan in the Netherlands (the Flex plan) was changed in 2014 following
the new funding agreement agreed with the Trustees of the Company Pension Fund.
Under the new funding agreement, which became effective January 1, 2014, the
Company has no further financial obligation to the Pension Fund other than to pay an
agreed fixed contribution for the annual accrual of active members. [] Although the
new funding agreement de-risked the plan, the annual premium can be subject to
variability after five years due to potential discounts and as a result, the plan
continued to be accounted for as a plan.
(1) How does Philips classify their pension arrangement in the Netherlands, DC or
DB? Please motivate your answer
The direct answer to this question is: Philips classifies their pension arrangements in the
Netherlands as DC. Why is that so? In the above paragraph it is stated that with the new
funding agreement, Philips has no further financial obligation to the Pension Fund
other than to pay a fixed contribution for the annual accrual of active members. The
words in bold are exactly the criteria that should be met in order for these pension
arrangements to classify as DC. According to paragraph 8 of IAS 19, DC plans are
referred as post-employment plans for which an entity pays fixed contributions to a
separate entity (such as the Pension Fund). The contributing entity (Philips in this
case) has no legal or constructive obligation to pay further contributions fund fails to pay
all employee benefits. In contrast, DB plans require the contributing entity to make
further payments if the fund is unable to pay all the benefits accruing to members for
their past service. For this reason the right answer is DC. No risk!
Companies with funded defined benefit schemes have two major items for pensions
in the income statement (1) Service cost, and (2) Net financing expenses + settlement
cost + curtailment cost + past service cost
(2) How are the net financing expenses calculated? Which interest rate needs to be
used?
The net financing expense also known as the net interest expense/income represents
the change in the defined benefit obligation and the plan assets as a result of the passage
of time. It is calculated as follows: Interest expense on obligation minus nominal
interest income on plan assets. So, it is clear that nominal interest rate is the one that
needs to be used. Paragraph 83 requires the nominal interest rate (which is the stated
interest rate of a given bond or loan) to be determined with reference to market yields
on high-quality bonds. I(DB0 PA) -----. Funded Status (PA/NPL)
(3) Which types of actuarial results does IAS 19 recognize? Give for each of
them an example.
IAS 19 recognizes 2 types of actuarial results:
-Actuarial gains and losses that result from changes in actuarial assumptions for
example: unexpectedly high/low rates of employee turnover, changes in salaries or
benefits and changes in the discount rate.

IFRS1

Tutorial Assignment Week 3

Ejona Gjata
(11085800)

-Actuarial gains and losses that result from experience adjustments (differences
between the actual results and previous actuarial estimates used to measure the defined
benefit obligations) for instance: the difference between the estimated employee
turnover for the year and the actual employee turnover during the year; other examples
include early retirement, mortality rates and the rate of increase in salaries.
See note 3.4 in the notes to the financial statements 2014 of Post NL.
(4) Please calculate the real return on assets that Post NL realized over 2014?
Since we know that Actuarial gains and losses = Assumed returns Actual
returns on plan assets, we need to check the the financial statements of the report
in order to get the amount of actuarial results and of the assumed/expected return on
assets.
Assumed return on plan assets = 223 million
+ Actuarial gain = 837 million
h
Real (Actual) Return on assets = 1,060 million
(5) Please indicate the components (as indicated with question 3) of the actuarial
results and in which primary statement they are recognized?
From PostNLs annual report, we notice that actuarial results are recognized in the
consolidated statement of comprehensive income, included in the Other comprehensive
income section. In its accounting policies PostNL states that it uses actuarial
calculations to measure the obligations and the costs. For the calculations, assumptions
are made about financial variables (such as the discount rate and the rate of benefit
increases) and demographic variables (such as employee turnover and mortality). The
discount rate is determined by reference to market rates using high-quality corporate
bonds. Furthermore, deviations between the expected and actual development of the
pension obligation and plan assets, resulting in actuarial gains and losses, are
immediately recognized within Other Comprehensive Income. The actuarial losses of
253 million during 2014 can be split into the following developments:
The change in discount rate from 3.5% to 2.3% accounted for 1,650 million of
actuarial losses
The change in the rate of benefit increases from 1.4% to 1.1% accounted for
455 million of actuarial gains
The changes in demographic assumptions accounted for 40 million of
actuarial gains
Experience adjustments accounted for 65 million of actuarial gains
A positive difference of 837 million between the assumed return on plan assets
and the actual investment return
(The actuarial result = -1650 + 455 + 40 + 65 + 837 = 253 million $ )
The net charge within other comprehensive income amounted to 189 million.
Philips provides a lot of detail about its share based compensation in its 2011
Annual
Report (Note 30)
(6) What explains the fall in the expense for share based compensation between
2009 and 2011? Is this related to the development of the companys share
price in these years?
If Philips would be an equity settled share based than the price is not significant
not the main driver of a equity settled company.

IFRS1

Tutorial Assignment Week 3

Ejona Gjata
(11085800)

The granting of numbers of options has dropped a lot- this is important!!


(7) How do traded Philips options differ from the stock options that are granted to
Philips employees?
Philips employee stock options have characteristics significantly different from those of
traded options. The main differences include: 1) the fact that options trading (to public)
involves buying and selling options as a speculative endeavor, while employee stock
options are used as a form of compensation that a company offers employees as an
incentive; 2) the fact that according to the report the stock options granted to employees
are conditional on the employee working for the company for the next 3 years (the
vesting condition) depending on employment status. This means that employees can
only exercise their stock options 3 years from the date of grant and only if they still
continue to work for Philips. Besides that, in the report it is also stated that these stock
options expire after 10 years (which applies the same to all of them). On the other hand
traded options have no vesting restrictions and are fully transferable. Moreover
different assumptions are included when estimating the fair value of each type of option.
In 2014, company ABC grants senior management 1000 employee stock options per
manager with a fair value of EUR 3 per option. Senior management consists of 100
managers. The vesting period of the employee stock options is 5 years. The company
expects 10% of senior management to leave the firm before their options vest. The
companys share price was EUR 34 on the date of grant. The options will be settled in
shares.
(8) What is the expense for employee stock option that the company
recognizes in the year of grant?

Year
1

Calculation
(1,000*100*90%)* 3 * 1/5

Examples of the slides (share based

Remuneration
expense for period $
54,000

Cumulative
remuneration
expense $
54,000

payments)

Example 1.1 (in this example if you calculate the first year, its the same for the
following years)
Year 1
Number of employees = 500
Leave company =<100>
Eligible = 400
Nr of options = 100/person
Total options = 40000
FV of options = 40000*15$=600000
Vesting = 1/3
=200000

IFRS1

Example 1.2

Tutorial Assignment Week 3

Ejona Gjata
(11085800)

IFRS1

Tutorial Assignment Week 3

Year 1

Year 2

Number of employees = 500

=500

Leave company =<75>


Eligible = 425

= 60
=440

Nr of options = 100/person

=100

Total options = 42500

=44000

Ejona Gjata
(11085800)

Calculate grant of year 2 and remeasure


grant of year 1
Earning increased = no market condition

FV of options = 42500*15=637500 =44000*15


Vesting = 1/3
=2/3
=212500
= 440000
212500
2275000
Example 2
Number of employees = 500

500

Leave company = 60
Eligible =440

83
417

Nr of options = 100/person

100

Total options ==44000

41700

FV of options =44000*30=1320000
Vesting =
=

E= 13% * 2 years = 26%


If year 1 = 14%
then year 2> 12%

41700*30= 1251000
2/3