7. Summary Employee benefits

Transcription

1 Gripping IFRS Employee benefits 7. Summary Employee benefits Short-term benefits Post-employment benefits Other long-term benefits Termination benefits Defined in IAS 19 as: Those that fall wholly within 12 months after the end of the period in which the employee renders the service Other than termination benefits Defined in IAS 19 as: Those that are payable after the completion of employment Other than termination benefits Defined in IAS 19 as: Those that do not fall wholly within 12 months after the end of the period in which the employee renders the service Other than postemployment and termination benefits Defined in IAS 19 as: Those that are payable as a result of either the: entity s decision to terminate the employment before normal retirement date employee s decision to accept a voluntary redundancy package in exchange for those benefits 534 Chapter 16

2 Gripping IFRS Employee benefits Short-term benefits Wages, salaries and social security contributions (e.g. medical aid) Short-term compensated absences (s-t paid leave) Profit sharing and/ or bonuses Use of nonmonetary benefits (e.g. a company car) Short-term compensated absences (i.e. paid leave) Accumulating: unused leave Recognise when: Employee renders the service Measure at: Non-accumulating: unused leave Recognise when: Employee is absent Measure at: Vesting Non-vesting Not applicable (no liability or expense because the employee service does not increase the amount of the benefit: the wage or salary etc is recognised whether the employee is at the office or not) Expected cost of: all accumulated unused leave Expected cost of: the accumulated unused leave that will probably be used in the future number of employees x number of unused days leave per year (all or part thereof) x average cost per day Short-term profit sharing and bonuses (i.e. those due within 12 months of year-end) Recognise when: entity has an obligation, the settlement of which cannot be reasonably avoided, and a reliable estimate is possible Measurement: Measure using: Formula stipulated in the plan (or contract); The entity determined amount; or Past practice where this gives a clear indication of amount of the obligation Factor into the calculation the probability that the employee may leave without receiving his profit share/ bonus. 535 Chapter 16

3 Gripping IFRS Employee benefits Post-employment benefits Defined contribution (e.g. a provident fund) Defined benefit (e.g. a pension fund) Economic substance Obligation: limited to agreed upon contributions Risks: belong to the employee Economic substance Obligation: provide certain benefits to the employee Risks: belong to the employer Variations Single employer plans Multi-employer plans Group administration plans Common control shared risk plans State plans Insured benefit plans Post-employment benefit: Defined contribution plans (i.e. obligations limited to contributions) Recognise: as and when the employee provides the services Measurement: The amount of the contributions: no actuarial assumptions needed undiscounted normally (but will need to discount if the contributions become payable after 12 months from the end of the period in which the employee provides the service) 536 Chapter 16

4 Gripping IFRS Employee benefits Post-employment benefit: Defined benefit plans (i.e. obligations = benefit promised) Recognise: As and when the employee provides the services Measurement: Statement of financial position: net asset or liability: Obligation: PV of benefit promised Plan assets: FV of separate plan assets Subtotal: surplus/ (deficit) Unrecognised actuarial losses/ (gains): corridor Unrecognised past service costs: amortised Net asset or liability Balance (Credit) Debit Dr/ (Cr) Dr/ (Cr) Debit Dr/ (Cr) Statement of comprehensive income: employee benefit expense: movement in the net asset/ liability The measurements are subject to: actuarial assumptions: actuarial gains and losses recognised are limited (the corridor approach) past service costs are recognised over a period (amortised) discounting 537 Chapter 16

5 Gripping IFRS Employee benefits Other long-term employee benefit: (e.g. long-service benefits) Recognise: As and when the employee provides the services Measurement: Statement of financial position: net asset or liability: Obligation: PV of benefit promised Plan assets: FV of separate plan assets Net asset or liability Balance (Credit) Debit Dr/ (Cr) Statement of comprehensive income: employee benefit expense: movement in the net asset/ liability The measurements are subject to: actuarial assumptions: the actuarial gains/ losses are all recognised immediately (i.e. no corridor approach) past service costs are recognised immediately discounting 538 Chapter 16

6 Gripping IFRS Employee benefits Termination benefit: (e.g. retrenchment package) Recognise: When entity is demonstrably committed to the termination Measurement: Statement of financial position: liability (or credit bank): amount of the benefit Statement of comprehensive income: employee benefit expense: amount of the benefit The measurements are subject to: discounting only if the termination is payable more than 12 months after the end of the reporting period 539 Chapter 16

7 IAS 19 constructive obligation as employees render service that increases the amount to be paid if they remain in service until the end of the specified period. The measurement of such constructive obligations reflects the possibility that some employees may leave without receiving profit-sharing payments. Example illustrating paragraph 20 A profit-sharing plan requires an entity to pay a specified proportion of its profit for the year to employees who serve throughout the year. If no employees leave during the year, the total profit-sharing payments for the year will be 3 per cent of profit. The entity estimates that staff turnover will reduce the payments to 2.5 per cent of profit. The entity recognises a liability and an expense of 2.5 per cent of profit. 21 An entity may have no legal obligation to pay a bonus. Nevertheless, in some cases, an entity has a practice of paying bonuses. In such cases, the entity has a constructive obligation because the entity has no realistic alternative but to pay the bonus. The measurement of the constructive obligation reflects the possibility that some employees may leave without receiving a bonus. 22 An entity can make a reliable estimate of its legal or constructive obligation under a profit-sharing or bonus plan when, and only when: (a) (b) (c) the formal terms of the plan contain a formula for determining the amount of the benefit; the entity determines the amounts to be paid before the financial statements are authorised for issue; or past practice gives clear evidence of the amount of the entity s constructive obligation. 23 An obligation under profit-sharing and bonus plans results from employee service and not from a transaction with the entity s owners. Therefore, an entity recognises the cost of profit-sharing and bonus plans not as a distribution of profit but as an expense. 24 If profit-sharing and bonus payments are not expected to be settled wholly before twelve months after the end of the annual reporting period in which the employees render the related service, those payments are other long-term employee benefits (see paragraphs ). Disclosure 25 Although this Standard does not require specific disclosures about short-term employee benefits, other IFRSs may require disclosures. For example, IAS 24 requires disclosures about employee benefits for key management personnel. IAS 1 Presentation of Financial Statements requires disclosure of employee benefits expense. Post-employment benefits: distinction between defined contribution plans and defined benefit plans 26 Post-employment benefits include items such as the following: A962 IFRS Foundation

8 IAS An entity shall measure the expected cost of accumulating paid absences as the additional amount that the entity expects to pay as a result of the unused entitlement that has accumulated at the end of the reporting period. 17 The method specified in the previous paragraph measures the obligation at the amount of the additional payments that are expected to arise solely from the fact that the benefit accumulates. In many cases, an entity may not need to make detailed computations to estimate that there is no material obligation for unused paid absences. For example, a sick leave obligation is likely to be material only if there is a formal or informal understanding that unused paid sick leave may be taken as paid annual leave. Example illustrating paragraphs 16 and 17 An entity has 100 employees, who are each entitled to five working days of paid sick leave for each year. Unused sick leave may be carried forward for one calendar year. Sick leave is taken first out of the current year s entitlement and then out of any balance brought forward from the previous year (a LIFO basis). At 31 December 20X1 the average unused entitlement is two days per employee. The entity expects, on the basis of experience that is expected to continue, that 92 employees will take no more than five days of paid sick leave in 20X2 and that the remaining eight employees will take an average of six and a half days each. The entity expects that it will pay an additional twelve days of sick pay as a result of the unused entitlement that has accumulated at 31 December 20X1 (one and a half days each, for eight employees). Therefore, the entity recognises a liability equal to twelve days of sick pay. 18 Non-accumulating paid absences do not carry forward: they lapse if the current period s entitlement is not used in full and do not entitle employees to a cash payment for unused entitlement on leaving the entity. This is commonly the case for sick pay (to the extent that unused past entitlement does not increase future entitlement), maternity or paternity leave and paid absences for jury service or military service. An entity recognises no liability or expense until the time of the absence, because employee service does not increase the amount of the benefit. Profit-sharing and bonus plans 19 An entity shall recognise the expected cost of profit-sharing and bonus payments under paragraph 11 when, and only when: (a) (b) the entity has a present legal or constructive obligation to make such payments as a result of past events; and a reliable estimate of the obligation can be made. A present obligation exists when, and only when, the entity has no realistic alternative but to make the payments. 20 Under some profit-sharing plans, employees receive a share of the profit only if they remain with the entity for a specified period. Such plans create a IFRS Foundation A961

9 IAS 19 (a) to apply an actuarial valuation method (see paragraphs 67 69); (b) to attribute benefit to periods of service (see paragraphs 70 74); and (c) to make actuarial assumptions (see paragraphs 75 98). Actuarial valuation method 67 An entity shall use the projected unit credit method to determine the present value of its defined benefit obligations and the related current service cost and, where applicable, past service cost. 68 The projected unit credit method (sometimes known as the accrued benefit method pro-rated on service or as the benefit/years of service method) sees each period of service as giving rise to an additional unit of benefit entitlement (see paragraphs 70 74) and measures each unit separately to build up the final obligation (see paragraphs 75 98). Example illustrating paragraph 68 A lump sum benefit is payable on termination of service and equal to 1 per cent of final salary for each year of service. The salary in year 1 is CU10,000 and is assumed to increase at 7 per cent (compound) each year. The discount rate used is 10 per cent per year. The following table shows how the obligation builds up for an employee who is expected to leave at the end of year 5, assuming that there are no changes in actuarial assumptions. For simplicity, this example ignores the additional adjustment needed to reflect the probability that the employee may leave the entity at an earlier or later date. Year Benefit attributed to: CU CU CU CU CU prior years current year (1% of final salary) current and prior years Opening obligation Interest at 10% Current service cost Closing obligation continued... IFRS Foundation A971

10 IAS 19...continued Example illustrating paragraph 68 Note: 1 The opening obligation is the present value of the benefit attributed to prior years. 2 The current service cost is the present value of the benefit attributed to the current year. 3 The closing obligation is the present value of the benefit attributed to current and prior years. 69 An entity discounts the whole of a post-employment benefit obligation, even if part of the obligation is expected to be settled before twelve months after the reporting period. Attributing benefit to periods of service 70 In determining the present value of its defined benefit obligations and the related current service cost and, where applicable, past service cost, an entity shall attribute benefit to periods of service under the plan s benefit formula. However, if an employee s service in later years will lead to a materially higher level of benefit than in earlier years, an entity shall attribute benefit on a straight-line basis from: (a) (b) the date when service by the employee first leads to benefits under the plan (whether or not the benefits are conditional on further service) until the date when further service by the employee will lead to no material amount of further benefits under the plan, other than from further salary increases. 71 The projected unit credit method requires an entity to attribute benefit to the current period (in order to determine current service cost) and the current and prior periods (in order to determine the present value of defined benefit obligations). An entity attributes benefit to periods in which the obligation to provide post-employment benefits arises. That obligation arises as employees render services in return for post-employment benefits that an entity expects to pay in future reporting periods. Actuarial techniques allow an entity to measure that obligation with sufficient reliability to justify recognition of a liability. A972 IFRS Foundation

11 6.2 Asset ceiling test When we looked at the recognition of the net defined benefit liability/ (asset) in the statement of financial position at the beginning of Section 5 the term asset ceiling was mentioned. This term relates to a threshold established by IAS 19 to ensure that any defined benefit asset (ie a pension surplus) is carried at no more than its recoverable amount. In simple terms, this means that any net asset is restricted to the amount of cash savings that will be available to the entity in future. 6.3 Net defined benefit assets A net defined benefit asset may arise if the plan has been overfunded or if actuarial gains have arisen. This meets the definition of an asset (as stated in the Conceptual Framework) because all of the following apply. (a) (b) (c) The entity controls a resource (the ability to use the surplus to generate future benefits). That control is the result of past events (contributions paid by the entity and service rendered by the employee). Future benefits are available to the entity in the form of a reduction in future contributions or a cash refund, either directly or indirectly to another plan in deficit. The asset ceiling is the present value of those future benefits. The discount rate used is the same as that used to calculate the net interest on the net defined benefit liability/ (asset). The net defined benefit asset would be reduced to the asset ceiling threshold. Any related write down would be treated as a remeasurement and recognised in other comprehensive income. If the asset ceiling adjustment was needed in a subsequent year, the changes in its value would be treated as follows: (a) (b) Interest (as it is a discounted amount) recognised in profit or loss as part of the net interest amount Other changes recognised in profit or loss 6.4 Suggested approach and question The suggested approach to defined benefit schemes is to deal with the change in the obligation and asset in the following order. Step Item Recognition 1 Record opening figures: Asset Obligation 2 Interest cost on obligation Based on discount rate and PV obligation at start of period. Should also reflect any changes in obligation during period. 3 Interest on plan assets Based on discount rate and asset value at start of period. Technically, this interest is also time apportioned on contributions less benefits paid in the period. DEBIT CREDIT DEBIT CREDIT Interest cost (P/L) (x% b/d obligation) PV defined benefit obligation (SOFP) Plan assets (SOFP) Interest cost (P/L) (x% b/d assets) 132 4: Employee benefits Part B Accounting standards

12 Step Item Recognition 4 Current service cost Increase in the present value of the obligation resulting from employee service in the current period. 5 Contributions 6 Benefits As advised by actuary. Actual pension payments made. 7 Past service cost Increase/decrease in PV obligation as a result of introduction or improvement of benefits. 8 Gains and losses on settlement Difference between the value of the obligation being settled and the settlement price. 9 Re-measurements: actuarial gains and losses Arising from annual valuations of obligation. On obligation, differences between actuarial assumptions and actual experience during the period, or changes in actuarial assumptions. 10 Re-measurements: return on assets (excluding amounts in net-interest) Arising from annual valuations of plan assets DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT Current service cost (P/L) PV defined benefit obligation (SOFP) Plan assets (SOFP) Company cash PV defined benefit obligation (SOFP) Plan assets (SOFP) Positive (increase in obligation): DEBIT CREDIT Past service cost (P/L) PV defined benefit obligation (SOFP) Negative (decrease in obligation): DEBIT CREDIT Gain DEBIT CREDIT Loss DEBIT CREDIT Gain DEBIT CREDIT Loss DEBIT CREDIT Gain DEBIT CREDIT Loss DEBIT CREDIT PV defined benefit obligation (SOFP) Past service cost (P/L) PV defined benefit obligation (SOFP) Service cost (P/L) Service cost (P/L) PV defined benefit obligation (SOFP) PV defined benefit obligation (SOFP) Other comprehensive income Other comprehensive income PV defined benefit obligation (SOFP) FV plan assets (SOFP) Other comprehensive income Other comprehensive income FV plan assets (SOFP) 11 Disclose in accordance with the standard See comprehensive question. Exam focus point It would be useful for you to do one last question on accounting for post-employment defined benefit schemes. Questions on these are likely in the exam. Part B Accounting standards 4: Employee benefits 133

13 5.12 Example At 1 January 20X2 the fair value of the assets of a defined benefit plan were valued at $1,100,000 and the present value of the defined benefit obligation was $1,250,000. On 31 December 20X2, the plan received contributions from the employer of $490,000 and paid out benefits of $190,000. The current service cost for the year was $360,000 and a discount rate of 6% is to be applied to the net liability/ (asset). After these transactions, the fair value of the plan's assets at 31 December 20X2 was $1.5m. The present value of the defined benefit obligation was $1,553,600. Required Calculate the gains or losses on remeasurement through OCI and the return on plan assets and illustrate how this pension plan will be treated in the statement of profit or loss and other comprehensive income and statement of financial position for the year ended 31 December 20X2. Solution It is always useful to set up a working reconciling the assets and obligation: Assets Obligation $ $ Fair value/present value at 1/1/X2 1,100,000 1,250,000 Interest (1,100,000 6%)/ (1,250,000 6%) 66,000 75,000 Current service cost 360,000 Contributions received 490,000 Benefits paid (190,000) ( 190,000) Return on plan assets excluding amounts in net interest (balancing figure) 34,000 - (OCI) Loss on re-measurement (balancing figure) (OCI) - 58,600 1,500,000 1,553,600 The following accounting treatment is required. (a) In the statement of profit or loss and other comprehensive income, the following amounts will be recognised In profit or loss: $ Current service cost 360,000 Net interest on net defined benefit liability (75,000 66,000) 9,000 In other comprehensive income (34,000 58,600) 24,600 (b) In the statement of financial position, the net defined benefit liability of $53,600 (1,553,600 1,500,000) will be recognised Section summary The recognition and measurement of defined benefit plan costs are complex issues. Learn and understand the definitions of the various elements of a defined benefit pension plan Learn the outline of the method of accounting (see Paragraph 5.1) Learn the recognition method for the: Statement of financial position Statement of profit or loss and other comprehensive income 130 4: Employee benefits Part B Accounting standards

14 8 Estoil 49 mins (a) An assessment of accounting practices for asset impairments is especially important in the context of financial reporting quality in that it requires the exercise of considerable management judgement and reporting discretion. The importance of this issue is heightened during periods of ongoing economic uncertainty as a result of the need for companies to reflect the loss of economic value in a timely fashion through the mechanism of asset write-downs. There are many factors which can affect the quality of impairment accounting and disclosures. These factors include changes in circumstance in the reporting period, the market capitalisation of the entity, the allocation of goodwill to cash generating units, valuation issues and the nature of the disclosures. Required 12/14 Discuss the importance and significance of the above factors when conducting an impairment test under IAS 36 Impairment of assets. (13 marks) (b) (i) Estoil is an international company providing parts for the automotive industry. It operates in many different jurisdictions with different currencies. During 20X4, Estoil experienced financial difficulties marked by a decline in revenue, a reorganisation and restructuring of the business and it reported a loss for the year. An impairment test of goodwill was performed but no impairment was recognised. Estoil applied one discount rate for all cash flows for all cash generating units (CGUs), irrespective of the currency in which the cash flows would be generated. The discount rate used was the weighted average cost of capital (WACC) and Estoil used the 10-year government bond rate for its jurisdiction as the risk free rate in this calculation. Additionally, Estoil built its model using a forecast denominated in the functional currency of the parent company. Estoil felt that any other approach would require a level of detail which was unrealistic and impracticable. Estoil argued that the different CGUs represented different risk profiles in the short term, but over a longer business cycle, there was no basis for claiming that their risk profiles were different. (ii) Required Fariole specialises in the communications sector with three main CGUs. Goodwill was a significant component of total assets. Fariole performed an impairment test of the CGUs. The cash flow projections were based on the most recent financial budgets approved by management. The realised cash flows for the CGUs were negative in 20X4 and far below budgeted cash flows for that period. The directors had significantly raised cash flow forecasts for 20X5 with little justification. The projected cash flows were calculated by adding back depreciation charges to the budgeted result for the period with expected changes in working capital and capital expenditure not taken into account. Discuss the acceptability of the above accounting practices under IAS 36 Impairment of assets. Professional marks will be awarded in question 4 for clarity and quality of presentation. 9 Preparation question: Defined benefit plan (10 marks) (2 marks) (Total = 25 marks) BPP Note. In this question, proformas are given to you to help you get used to setting out your answer. You may wish to transfer them to a separate sheet, or alternatively to use a separate sheet for your workings. Brutus Co operates a defined benefit pension plan for its employees conditional on a minimum employment period of six years. The present value of the future benefit obligations and the fair value of its plan assets on 1 January 20X1 were $110 million and $150 million respectively. The pension plan received contributions of $7m and paid pensions to former employees of $10m during the year. Questions 9

15 Extracts from the most recent actuary's report show the following: Present value of pension plan obligation at 31 December 20X1 $116m Fair value of plan assets at 31 December 20X1 $140m Present cost of pensions earned in the period $11m Yield on high quality corporate bonds at 1 January 20X1 10% On 1 January 20X1, the rules of the pension plan were changed to improve benefits for plan members. The actuary has advised that this will cost $10 million. Required Produce the extracts for the financial statements for the year ended 31 December 20X1. Assume contributions and benefits were paid on 31 December. Statement of profit or loss and other comprehensive income notes Defined benefit expense recognised in profit or loss Current service cost Past service cost Net interest on the net defined benefit asset $m Other comprehensive income (items that will not be reclassified to profit or loss) Remeasurement of defined benefit plans Actuarial gain on defined benefit obligation Return on plan assets (excluding amounts in net interest) $m Statement of financial position notes Net defined benefit asset recognised in the statement of financial position Present value of pension obligation Fair value of plan assets Net asset 31 December 31 December 20X1 20X0 $m $m Changes in the present value of the defined benefit obligation Opening defined benefit obligation Interest on obligation Current service cost Past service cost Benefits paid Gain on remeasurement of obligation(balancing figure) Closing defined benefit obligation Changes in the fair value of plan assets Opening fair value of plan assets Interest on plan assets Contributions Benefits paid Loss on remeasurement of assets (balancing figure) Closing fair value of plan assets $m $m 10 Questions

16 (ii) Cash flow forecasts IAS 36 requires that any cash flow projections are based upon reasonable and supportable assumptions over a maximum period of five years unless it can be proven that longer estimates are reliable. The assumptions should represent management s best estimate of the range of economic conditions expected to obtain over the remaining useful life of the asset. Management must also assess the reasonableness of the assumptions by examining the reasons for any differences between past forecasted cash flows and actual cash flows. The assumptions that form the basis for current cash flow projections must be consistent with past actual outcomes. Fariole has failed to comply with the requirements of IAS 36 in the preparation of its cash flow forecasts. Although the realised cash flow forecasts for 20X4 were negative and well below projected cash flows, the directors significantly increased budgeted cash flows for 20X5. This increase was not justified, and casts doubts on Fariole s ability to budget realistically. IAS 36 requires estimates of future cash flows to include: (1) Projections of cash inflows from the continuing use of the asset (2) Projections of cash outflows which are necessarily incurred to generate the cash inflows from continuing use of the asset (3) Net cash flows to be received (or paid) for the disposal of the asset at the end of its useful life. Forecast cash outflows must include those relating to the day-to-day servicing of the asset. This will include future cash outflows needed to maintain the level of economic benefits expected to be generated by the asset in its current condition. Fariole has not taken into account expected changes in working capital and capital expenditure, but it is very likely that investments in working capital and capital expenditure would be necessary to maintain the assets of the CGUs in their current condition. In conclusion, the cash flow forecasts used by Fariole are not in accordance with IAS Preparation question: Defined benefit plan Statement of profit or loss and other comprehensive income notes Defined benefit expense recognised in profit or loss $m Current service cost 11 Past service cost 10 Net interest on the net defined benefit asset (10% ( )) (10% 150) (3) Other comprehensive income (items that will not be reclassified to profit or loss) Remeasurement of defined benefit plans $m Actuarial gain on defined benefit obligation 17 Return on plan assets (excluding amounts in net interest) (22) (5) Statement of financial position notes Net defined benefit asset recognised in the statement of financial position 31 December 20X1 31 December 20X0 $m $m Present value of pension obligation Fair value of plan assets (140) (150) Net asset (24) (40) Answers

17 Changes in the present value of the defined benefit obligation $m Opening defined benefit obligation 110 Interest on obligation (10% ( )) 12 Current service cost 11 Past service cost 10 Benefits paid (10) Gain on remeasurement through OCI (balancing figure) (17) Closing defined benefit obligation 116 Changes in the fair value of plan assets $m Opening fair value of plan assets 150 Interest on plan assets (10% 150) 15 Contributions 7 Benefits paid (10) Loss on remeasurement through OCI (balancing figure) (22) Closing fair value of plan assets Macaljoy Text reference. Pensions are covered in Chapter 5; provisions in Chapter 9. Top tips. Part (a)(i) is very straightforward, but make sure you relate your answer to the pension schemes of Macaljoy. Similarly in Part (b)(i), you need to write specifically about warranty provisions, as well as more generally about provisions. Note that IAS 19 was revised in Actuarial gains and losses must now be recognised immediately in other comprehensive income (not reclassified to profit or loss). Easy marks. Two marks are available for presentation and communication, and would be silly marks to lose. Plus there are marks for straightforward bookwork that you can get even if you don't get all the calculations right. Examiner's comments. The question was quite well answered and candidates often produced good quality answers. The ACCA examination/examining team was surprised to see that several candidates confused defined benefit and defined contribution schemes. Also at this level, it is important that candidates have an in depth knowledge of the differences between the two schemes rather than just a general view of the differences. Professional marks were awarded for the structure of the report and consideration of certain factors, that is: (a) (b) (c) (d) (e) (f) (g) The intended purpose of the document Its intended users and their needs The appropriate type of document Logical and appropriate structure/format Nature of background information and technical language Detail required Clear, concise and precise presentation Marking scheme (a) Pensions (i) Explanation 7 (ii) Calculation 7 (b) Provisions (i) Explanation 6 (ii) Calculation 3 Structure of report 2 Maximum 25 Marks Answers 119

18 Question Comprehensive For the sake of simplicity and clarity, all transactions are assumed to occur at the year end. The following data applies to the post employment defined benefit compensation scheme of BCD Co. Discount rate: 10% (each year) Present value of obligation at start of 20X2: $1m Market value of plan assets at start of 20X2: $1m The following figures are relevant. 20X2 20X3 20X4 $'000 $'000 $'000 Current service cost Benefits paid out Contributions paid by entity Present value of obligation at year end 1,200 1,650 1,700 Fair value of plan assets at year end 1,250 1,450 1,610 Additional information: (1) At the end of 20X3, a division of the company was sold. As a result of this, a large number of the employees of that division opted to transfer their accumulated pension entitlement to their new employer s plan. Assets with a fair value of $48,000 were transferred to the other company s plan and the actuary has calculated that the reduction in BCD s defined benefit liability is $50,000. The year end valuations in the table above were carried out before this transfer was recorded. (2) At the end of 20X4, a decision was taken to make a one-off additional payment to former employees currently receiving pensions from the plan. This was announced to the former employees before the year end. This payment was not allowed for in the original terms of the scheme. The actuarial valuation of the obligation in the table above includes the additional liability of $40,000 relating to this additional payment. Required Show how the reporting entity should account for this defined benefit plan in each of years 20X2, 20X3 and 20X4. Answer The actuarial gain or loss is established as a balancing figure in the calculations, as follows. Present value of obligation 20X2 20X3 20X4 $'000 $'000 $'000 PV of obligation at start of year 1,000 1,200 1,600 Interest cost (10%) Current service cost Past service cost 40 Benefits paid (120) (140) (150) Settlements (50) Actuarial (gain)/loss on obligation: balancing figure (100) PV of obligation at end of year 1,200 1,600 * 1,700 *(1,650 50) 134 4: Employee benefits Part B Accounting standards

19 Market value of plan assets 20X2 20X3 20X4 $'000 $'000 $'000 Market value of plan assets at start of year 1,000 1,250 1,402 Interest on plan assets (10%) Contributions Benefits paid (120) (140) (150) Settlements - (48) - Gain on remeasurement through OCI: balancing figure Market value of plan assets at year end 1,250 1,402* 1,610 *(1,450 48) In the statement of financial position, the liability that is recognised is calculated as follows. 20X2 20X3 20X4 $'000 $'000 $'000 Present value of obligation 1,200 1,600 1,700 Market value of plan assets 1,250 1,402 1,610 Liability/(asset) in statement of financial position (50) The following will be recognised in profit or loss for the year: 20X2 20X3 20X4 $'000 $'000 $'000 Current service cost Past service cost Net interest on defined benefit liability (asset) - (5) 20 Gain on settlement of defined benefit liability - (2) - Expense recognised in profit or loss The following re-measurements will be recognised in other comprehensive income for the year: 20X2 20X3 20X4 $'000 $'000 $'000 Actuarial (gain)/loss on obligation (100) Return on plan assets (excluding amounts in net-interest) (160) (95) (98) 7 Other long term benefits 7.1 Definition IAS 19 defines other long-term employee benefits as all employee benefits other than short-term employee benefits, post-employment benefits and termination benefits if not expected to be settled wholly before twelve months after the end of the annual reporting period in which the employees render the related service. The types of benefits that might fall into this category include: (a) (b) (c) (d) Long-term paid absences such as long-service or sabbatical leave Jubilee or other long-service benefits Long-term disability benefits; profit-sharing and bonuses Deferred remuneration 7.2 Accounting treatment for other long-term benefits There are many similarities between these types of benefits and defined benefit pensions. For example, in a long-term bonus scheme, the employees may provide service over a number of periods to earn their entitlement to a payment at a later date. In some case, the entity may put cash aside, or invest it in some way (perhaps by taking out an insurance policy) to meet the liabilities when they arise. Part B Accounting standards 4: Employee benefits 135

20 IAS There may be a contractual agreement between the multi-employer plan and its participants that determines how the surplus in the plan will be distributed to the participants (or the deficit funded). A participant in a multi-employer plan with such an agreement that accounts for the plan as a defined contribution plan in accordance with paragraph 34 shall recognise the asset or liability that arises from the contractual agreement and the resulting income or expense in profit or loss. Example illustrating paragraph 37 An entity participates in a multi-employer defined benefit plan that does not prepare plan valuations on an IAS 19 basis. It therefore accounts for the plan as if it were a defined contribution plan. A non-ias 19 funding valuation shows a deficit of CU100 million (a) in the plan. The plan has agreed under contract a schedule of contributions with the participating employers in the plan that will eliminate the deficit over the next five years. The entity s total contributions under the contract are CU8 million. The entity recognises a liability for the contributions adjusted for the time value of money and an equal expense in profit or loss. (a) In this Standard monetary amounts are denominated in currency units (CU). 38 Multi-employer plans are distinct from group administration plans. A group administration plan is merely an aggregation of single employer plans combined to allow participating employers to pool their assets for investment purposes and reduce investment management and administration costs, but the claims of different employers are segregated for the sole benefit of their own employees. Group administration plans pose no particular accounting problems because information is readily available to treat them in the same way as any other single employer plan and because such plans do not expose the participating entities to actuarial risks associated with the current and former employees of other entities. The definitions in this Standard require an entity to classify a group administration plan as a defined contribution plan or a defined benefit plan in accordance with the terms of the plan (including any constructive obligation that goes beyond the formal terms). 39 In determining when to recognise, and how to measure, a liability relating to the wind-up of a multi-employer defined benefit plan, or the entity s withdrawal from a multi-employer defined benefit plan, an entity shall apply IAS 37 Provisions, Contingent Liabilities and Contingent Assets. Defined benefit plans that share risks between entities under common control 40 Defined benefit plans that share risks between entities under common control, for example, a parent and its subsidiaries, are not multi-employer plans. 41 An entity participating in such a plan shall obtain information about the plan as a whole measured in accordance with this Standard on the basis of assumptions that apply to the plan as a whole. If there is a contractual agreement or stated policy for charging to individual group entities the net defined benefit cost for IFRS Foundation A965

21 IAS 19 Examples illustrating paragraph 71 1 A defined benefit plan provides a lump sum benefit of CU100 payable on retirement for each year of service. A benefit of CU100 is attributed to each year. The current service cost is the present value of CU100. The present value of the defined benefit obligation is the present value of CU100, multiplied by the number of years of service up to the end of the reporting period. If the benefit is payable immediately when the employee leaves the entity, the current service cost and the present value of the defined benefit obligation reflect the date at which the employee is expected to leave. Thus, because of the effect of discounting, they are less than the amounts that would be determined if the employee left at the end of the reporting period. 2 A plan provides a monthly pension of 0.2 per cent of final salary for each year of service. The pension is payable from the age of 65. Benefit equal to the present value, at the expected retirement date, of a monthly pension of 0.2 per cent of the estimated final salary payable from the expected retirement date until the expected date of death is attributed to each year of service. The current service cost is the present value of that benefit. The present value of the defined benefit obligation is the present value of monthly pension payments of 0.2 per cent of final salary, multiplied by the number of years of service up to the end of the reporting period. The current service cost and the present value of the defined benefit obligation are discounted because pension payments begin at the age of Employee service gives rise to an obligation under a defined benefit plan even if the benefits are conditional on future employment (in other words they are not vested). Employee service before the vesting date gives rise to a constructive obligation because, at the end of each successive reporting period, the amount of future service that an employee will have to render before becoming entitled to the benefit is reduced. In measuring its defined benefit obligation, an entity considers the probability that some employees may not satisfy any vesting requirements. Similarly, although some post-employment benefits, for example, post-employment medical benefits, become payable only if a specified event occurs when an employee is no longer employed, an obligation is created when the employee renders service that will provide entitlement to the benefit if the specified event occurs. The probability that the specified event will occur affects the measurement of the obligation, but does not determine whether the obligation exists. IFRS Foundation A973

22 IAS 19 Examples illustrating paragraph 72 1 A plan pays a benefit of CU100 for each year of service. The benefits vest after ten years of service. A benefit of CU100 is attributed to each year. In each of the first ten years, the current service cost and the present value of the obligation reflect the probability that the employee may not complete ten years of service. 2 A plan pays a benefit of CU100 for each year of service, excluding service before the age of 25. The benefits vest immediately. No benefit is attributed to service before the age of 25 because service before that date does not lead to benefits (conditional or unconditional). A benefit of CU100 is attributed to each subsequent year. 73 The obligation increases until the date when further service by the employee will lead to no material amount of further benefits. Therefore, all benefit is attributed to periods ending on or before that date. Benefit is attributed to individual accounting periods under the plan s benefit formula. However, if an employee s service in later years will lead to a materially higher level of benefit than in earlier years, an entity attributes benefit on a straight-line basis until the date when further service by the employee will lead to no material amount of further benefits. That is because the employee s service throughout the entire period will ultimately lead to benefit at that higher level. Examples illustrating paragraph 73 1 A plan pays a lump sum benefit of CU1,000 that vests after ten years of service. The plan provides no further benefit for subsequent service. A benefit of CU100 (CU1,000 divided by ten) is attributed to each of the first ten years. The current service cost in each of the first ten years reflects the probability that the employee may not complete ten years of service. No benefit is attributed to subsequent years. continued... A974 IFRS Foundation

23 IAS 19...continued Examples illustrating paragraph 73 2 A plan pays a lump sum retirement benefit of CU2,000 to all employees who are still employed at the age of 55 after twenty years of service, or who are still employed at the age of 65, regardless of their length of service. For employees who join before the age of 35, service first leads to benefits under the plan at the age of 35 (an employee could leave at the age of 30 and return at the age of 33, with no effect on the amount or timing of benefits). Those benefits are conditional on further service. Also, service beyond the age of 55 will lead to no material amount of further benefits. For these employees, the entity attributes benefit of CU100 (CU2,000 divided by twenty) to each year from the age of 35 to the age of 55. For employees who join between the ages of 35 and 45, service beyond twenty years will lead to no material amount of further benefits. For these employees, the entity attributes benefit of 100 (2,000 divided by twenty) to each of the first twenty years. For an employee who joins at the age of 55, service beyond ten years will lead to no material amount of further benefits. For this employee, the entity attributes benefit of CU200 (CU2,000 divided by ten) to each of the first ten years. For all employees, the current service cost and the present value of the obligation reflect the probability that the employee may not complete the necessary period of service. 3 A post-employment medical plan reimburses 40 per cent of an employee s post-employment medical costs if the employee leaves after more than ten and less than twenty years of service and 50 per cent of those costs if the employee leaves after twenty or more years of service. Under the plan s benefit formula, the entity attributes 4 per cent of the present value of the expected medical costs (40 per cent divided by ten) to each of the first ten years and 1 per cent (10 per cent divided by ten) to each of the second ten years. The current service cost in each year reflects the probability that the employee may not complete the necessary period of service to earn part or all of the benefits. For employees expected to leave within ten years, no benefit is attributed. continued... IFRS Foundation A975

24 IAS 19...continued Examples illustrating paragraph 73 4 A post-employment medical plan reimburses 10 per cent of an employee s post-employment medical costs if the employee leaves after more than ten and less than twenty years of service and 50 per cent of those costs if the employee leaves after twenty or more years of service. Service in later years will lead to a materially higher level of benefit than in earlier years. Therefore, for employees expected to leave after twenty or more years, the entity attributes benefit on a straight-line basis under paragraph 71. Service beyond twenty years will lead to no material amount of further benefits. Therefore, the benefit attributed to each of the first twenty years is 2.5 per cent of the present value of the expected medical costs (50 per cent divided by twenty). For employees expected to leave between ten and twenty years, the benefit attributed to each of the first ten years is 1 per cent of the present value of the expected medical costs. For these employees, no benefit is attributed to service between the end of the tenth year and the estimated date of leaving. For employees expected to leave within ten years, no benefit is attributed. 74 Where the amount of a benefit is a constant proportion of final salary for each year of service, future salary increases will affect the amount required to settle the obligation that exists for service before the end of the reporting period, but do not create an additional obligation. Therefore: (a) (b) for the purpose of paragraph 70(b), salary increases do not lead to further benefits, even though the amount of the benefits is dependent on final salary; and the amount of benefit attributed to each period is a constant proportion of the salary to which the benefit is linked. Example illustrating paragraph 74 Employees are entitled to a benefit of 3 per cent of final salary for each year of service before the age of 55. Benefit of 3 per cent of estimated final salary is attributed to each year up to the age of 55. This is the date when further service by the employee will lead to no material amount of further benefits under the plan. No benefit is attributed to service after that age. Actuarial assumptions 75 Actuarial assumptions shall be unbiased and mutually compatible. 76 Actuarial assumptions are an entity s best estimates of the variables that will determine the ultimate cost of providing post-employment benefits. Actuarial assumptions comprise: A976 IFRS Foundation

25 IAS 19 Example illustrating paragraphs Background As a result of a recent acquisition, an entity plans to close a factory in ten months and, at that time, terminate the employment of all of the remaining employees at the factory. Because the entity needs the expertise of the employees at the factory to complete some contracts, it announces a plan of termination as follows. Each employee who stays and renders service until the closure of the factory will receive on the termination date a cash payment of CU30,000. Employees leaving before closure of the factory will receive CU10,000. There are 120 employees at the factory. At the time of announcing the plan, the entity expects 20 of them to leave before closure. Therefore, the total expected cash outflows under the plan are CU3,200,000 (ie 20 CU10, CU30,000). As required by paragraph 160, the entity accounts for benefits provided in exchange for termination of employment as termination benefits and accounts for benefits provided in exchange for services as short-term employee benefits. Termination benefits The benefit provided in exchange for termination of employment is CU10,000. This is the amount that an entity would have to pay for terminating the employment regardless of whether the employees stay and render service until closure of the factory or they leave before closure. Even though the employees can leave before closure, the termination of all employees employment is a result of the entity s decision to close the factory and terminate their employment (ie all employees will leave employment when the factory closes). Therefore the entity recognises a liability of CU1,200,000 (ie 120 CU10,000) for the termination benefits provided in accordance with the employee benefit plan at the earlier of when the plan of termination is announced and when the entity recognises the restructuring costs associated with the closure of the factory. Benefits provided in exchange for service The incremental benefits that employees will receive if they provide services for the full ten-month period are in exchange for services provided over that period. The entity accounts for them as short-term employee benefits because the entity expects to settle them before twelve months after the end of the annual reporting period. In this example, discounting is not required, so an expense of CU200,000 (ie CU2,000,000 10) is recognised in each month during the service period of ten months, with a corresponding increase in the carrying amount of the liability. Disclosure 171 Although this Standard does not require specific disclosures about termination benefits, other IFRSs may require disclosures. For example, IAS 24 requires IFRS Foundation A995