Provident Fund Valuation Under Ind AS19. - K Sriram - D C Khansili - Manasi Patra - Kaushik Karmakar

Transcription

1 Provident Fund Valuation Under Ind AS19 - K Sriram - D C Khansili - Manasi Patra - Kaushik Karmakar

2 Agenda Issues for Deliberation Ind AS19 Compared with AS15R GN 29 Guidance Disclosures under IND AS19 Key Discussion Points

3 Issues for Deliberation Revised Disclosure Tables Remeasurement costs to go through OCI Enhanced Disclosures in terms of information on risk exposures, sensitivity analysis, etc.

4 IND AS19 Compared with AS15R While drawing the distinction between DC Plans and DB Plans, Paragraph 29(b) of Ind AS19 states that in the case of a DC plan, an entity s obligation is not limited to the amount it agrees to contribute to the fund when the entity guarantees a specified return on contributions. Paragraph 26(b) of AS15R is identical to Paragraph 29(b) of Ind AS19 Hence the driver for valuing interest rate guarantee in Exempt Provident Fund (EPF, hereafter) Plan remains the same under the two Accounting Standards.

5 GN 29 Guidance Recommended Practice Recommends methodologies for valuing Interest Rate Guarantee embedded in Exempt Provident Fund Plans Deterministic Approach Option Pricing Approach Stochastic Modelling Approach States that disclosures are optional

6 Disclosures under Ind AS19 Ind AS19 calls for Principles Based Disclosures Paragraph 135 of Ind AS19 requires an entity to disclose information that a) Explains the characteristics of its defined benefit plans and risks associated with them b) Identifies and explains the amounts in its financial statements arising from its defined benefit plans c) Describes how its defined benefit plans may affect the amount timing and uncertainty of the entity s future cash flows. Paragraph 136 of Ind AS19 states that to meet the objectives in paragraph 135, an entity must consider a) The level of detail necessary to satisfy the disclosure requirements; b) How much emphasis to place on each of the various requirements; c) How much aggregation or disaggregation to undertake, and d) Whether users of financial statements need additional information to evaluate the quantitative information disclosed.

7 Characteristics of DB Plans and Associated Risks Paragraph 139 (a) requires an entity to disclose information about the characteristics of the DB Plan Nature of the Benefits Provided by the Plan (e.g.: Final salary DB Plan or Contribution Based Plan with guarantee) The Exempt Provident Fund Plan is a defined contribution plan with an interest rate guarantee provided by the plan sponsor that the credited rate of interest under this Plan will not be less than the rate of interest declared by the EPFO from time to time

8 Characteristics of DB Plans and Associated Risks A description of the regulatory framework in which the plan operates Section 17 of the Employees Provident Funds and Miscellaneous Provisions Act (EPFMP) Act,, 1952 empowers the Government to exempt any establishment from the provisions of the Employees Provident Fund Scheme 1952 provided the rules of the provident fund set up by the establishment are not less favourable than those specified in section 6 of the EPFMP Act and the employees are also in enjoyment of other provident fund benefits provided under the Act. Such exemptions are for a period of 3 years and it can be revoked if the conditions applicable to such an exemption are not complied with.

9 Characteristics of DB Plans and Associated Risks A description of any other entity s responsibilities for the governance of the plan, for example responsibilities of trustees. Salient Rules of the Exempt Provident Fund Plan including a specific reference to the trustees discretion with regard to the utilisation of the interest rate surplus that might arise from time to time

10 Risks Associated with DB Plans Paragraph 139(b) requires a description of the risks to which the plan exposes the entity, focussed on any unusual, entity specific or plan specific risks Entity is exposed to the risk of investment return on PF plan assets being less than the rate declared by the EPFO. This can be a significant risk for those entities which have not created a reserve from interest rate surpluses (which may have arisen in the past) to fund future interest rate shortfalls Part 139(c) calls for a description of any plan amendments, curtailments and settlements

11 Explanation of Amounts in the Financial Statements Paragraphs of Ind AS19 covers the typical disclosure tables that are required for DB plans. GN 29 states that the actuary is not required to provide the disclosure tables in the context of EPF plans because the actuary only values the interest rate guarantee Hence what may be relevant is only paragraph 144 which requires the entity to disclose the significant actuarial assumptions used to determine the present value of the defined benefit obligation. The significant actuarial assumptions used to determine the value of interest rate guarantee will include Guaranteed Rate of Interest Expected Return on PF Plan Assets Discount Rate Attrition Rate

12 Amount, Timing and Uncertainty of Future Cash Flows Paragraph 145 requires the entity to disclose a sensitivity analysis for each significant actuarial assumption The significant actuarial assumptions which can be sensitivity tested are : Guaranteed Rate of Interest plus or minus 50 Basis Points Expected Rate of Return on Plan Assets plus or minus 50 Basis Points Discount Rate plus or minus 50 Basis Points Paragraph 146 requires a description of any asset-liability matching strategies used by the plan or entity, to manage risk The entity s policy, if any,- for creating a interest reserve from interest surpluses to fund future interest shortfalls- can be discussed Paragraph 147 requires, among other things, to disclose information about the maturity profile of the defined benefit obligation Information about the weighted average duration of the interest rate guarantee obligation can be disclosed

13 Key Discussion Points Changes to GN29: Guidance on Qualitative Disclosures Sensitivity Testing Duration Calculation which is sensitive to the method used for valuing interest rate guarantee Explanation of Amounts in Financial statements Role of Actuaries: Should we revisit GN29? May not be required given that Ind AS19 calls for principles based disclosures and value of interest rate guarantee may not be material in the overall context of the EPF plan which is predominantly a DC plan.

14 Inputs for valuation The basic inputs for a valuation are: Period of Valuation Membership Data (Individual member wise PF ledger containing all the details) example : ID,DOB, DOJ, Date of Leaving, PF closing balance. Actuarial Assumptions Financial Demographic EPFO Rate Fund Details ( Audited/Unaudited Balance sheet)

15 Financial Reporting and Disclosure: Disaggregate cost into P&L account and OCI P&L under AS 15 Rev (immediate recognition) 1. Service Cost 34, Interest Cost 12, Expected Return on Assets (11,531) 4. Past Service Cost Plan Amendments 0 P&L under IND AS Service Cost 34, Net Interest on the net defined liability/ (asset) Any Past Service Cost and gain or loss on settlement Total 35, Settlement Cost/(Credit) 0 6. Curtailment Cost/(Credit) 0 7. Actuarial (Gains)/Losses 5, Expense / (income) recognised in the profit or loss 41,110 OCI under IND AS Actuarial (Gains)/Losses due to liability 2, Return on Plan assets, excluding amounts included in the net interest on the net defined liability (asset) 3,175 Total 5,853

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