Employee Benefits (IAS 19) By CA. Rajkumar S Adukia B.Com (Hons.) FCA, ACS, MBA, AICWA, LLB,Dip IFRS(UK) DLL& LW rajkumarfca@gmail.com www.carajkumarradukia.com com 09820061049/09323061049 www.carajkumarradukia.com 1
Employee Benefits In 1983, IAS 19 was titled as Accounting for Retirement t Benefits in Financial i Statements of Employers In 1993, IAS 19 was titled as Retirement Benefit Costs In 1998, it was titled as Employee Benefits www.carajkumarradukia.com 2
Objectives of IAS 19 IAS 19 Employee Benefits prescribes the accounting and disclosure by employers for employee benefits. The Standard d requires an entity to recognize: (a) A Liability: A liability when an employee has provided service in exchange for employee benefits to be paid in the future; and (b) An Expense: An expense when the entity consumes the economic benefit arising from service provided by an employee in exchange for employee benefits. www.carajkumarradukia.com 3
Scope of IAS 19 The scope is broad and includes wages, vacation or holiday pay, bonus, termination benefits, etc. as well as retirement plans Covers full-time, part-time, temporary staff and directors www.carajkumarradukia.com 4
Basic Principle of IAS 19 The cost of providing employee benefits should be recognized in the period in which the benefit is earned by the employee, rather than when it is paid or payable. www.carajkumarradukia.com 5
IAS 19 Employee Benefits - The Standard identifies following categories of employee benefits to be covered Short term employee benefits Post-employment benefits Other long term employee benefits Termination benefits It covers formal plans, state plans, constructive obligation (informal practices) www.carajkumarradukia.com 6
IAS 19 Applies to 1. Wages and Salaries 2. Compensated Absences (paid vacation and sick leave) 3. Profit Sharing Plans 4. Bonuses 5. Medical and Life Insurance Benefits during employment 6. Housing Benefits 7. Free or Subsidised goods or services given to employees 8. Pension Benefits 9. Post-Employment Medical and Life Insurance Benefits 10. Long-Service or Sabbatical Leave 11. Jubilee' Benefits 12. Deferred Compensation Programmes 13. Termination Benefits. www.carajkumarradukia.com 7
The Standard Does not apply to This standard does not apply to benefits which h needs to cover under the IFRS2 share-based payment This Standard does not deal with reporting by employee benefit plans (covered under IAS 26) e.g. accounting and reporting by trust plans www.carajkumarradukia.com 8
Revised IAS 19 The IASB had published a revised version of IAS 19 Employee Benefits on 16th June 2011. The revised standard will be applicable for reporting period starting on or after 1st January 2013 www.carajkumarradukia.com 9
Highlights of Revised IAS 19 Revised IAS 19 requires full recognition of deficit or surplus (actuarial gains and losses) to be fully recognized on the balance sheet date. Under the revised standard the net interest income is included is introduced as the equivalent of expected return on plan assets under IAS 19. The defined benefit cost under the revised standard comprises of service cost, net interest and remeasurements. A very extensive disclosure requirements are put forth under the revised standard d especially those relating to characteristics, risk and the presented figures in the financial statements regarding defined benefit plans www.carajkumarradukia.com 10
The Revision impact on Enterprises The corridor approach being removed Assumption for the expected return on assets eliminated Immediate recognition of the plan based amendments in the Profit or Loss account Increased requirements on disclosure of information Removal of recognition of gains or losses in the profit or loss account Application of mark-to market approach and ceiling tests on plan based assets www.carajkumarradukia.com 11
Revised Goal of Enterprises after Revision Multinational companies with multiple pension funds should definitely increase their efforts to manage the risk of their pension funds. Listing of the most important local pension funds and stakeholders Evaluating the impact of the changed IAS 19 for your pensions Looking at the possible IAS 19 proof solutions www.carajkumarradukia.com 12
Revised Goal of Enterprises after Revision Fix the corporate pension budget and redesign pension benefits within that budget Set up pension ambitions and acceptable levels of risk Fix a timeframe for derisking (if desired). Initiate communications programme to support the employer and employees Given that pension risks have become more obvious, companies are no longer rewarded with lower pension expenses resulting in increased risk www.carajkumarradukia.com 13
Type of Employee Benefit Plans Defined Benefit : Some formula/monetary promise. Defined Contribution : Just contribution defined no promise of benefit. www.carajkumarradukia.com 14
Type of Employee Benefit Plans Hybrid Plans : Where employer s obligation is not limited to contributions to the fund but has legal or constructive obligation such as Scheme having benefit formula that is not linked solely with accumulation (hybrid schemes) Scheme providing guarantee, either indirectly through a plan or directly, of a specified return on contributions www.carajkumarradukia.com 15
Termination Benefits Termination benefits are employee benefits payable as a result of Employer s decision to terminate an employee s employment Employee s decision to accept voluntary redundancy in exchange for those benefits www.carajkumarradukia.com 16
Termination Benefits An entity is committed to a termination when, and only when, the entity has a detailed formal plan (with specified minimum contents) for the termination and is without realistic possibility of withdrawal. Where termination benefits fall due more than 12 months after the balance sheet date, they should be discounted. In the case of an offer made to encourage voluntary redundancy, the measurement of termination benefits should be based on the number of employees expected to accept the offer www.carajkumarradukia.com 17
Multi Employer Plans Where it is defined benefit plan and information is available, account and disclose proportionate share as though it were defined benefit plan of reporting entity If information is not available, account for it as though it were e a defined ed contribution o plan www.carajkumarradukia.com 18
Defined Contribution Plan - DCP www.carajkumarradukia.com 19
Defined Contribution Plan Employer 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. Employees run the risk of investment www.carajkumarradukia.com 20
DCP Financial Statement 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. www.carajkumarradukia.com 21
Example of Defined Contribution A Company agrees to pay 8% 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. Contribution is fixed The obligation on part of the employer ceases on payment of contribution www.carajkumarradukia.com 22
Defined Benefit Plan - DBP www.carajkumarradukia.com 23
Defined Benefit Plan Expected Future Payments are required to settle the benefits An Actuary calculates the Obligation The obligation can be arrived at Based on the Service and current Salary levels Based on the Service and future Salary levels Based not on the future employee services www.carajkumarradukia.com 24
Defined Benefit Schemes It may be monthly pension or lump sum Calculated based on the salary and years of service Pay is Final Pay or Average Pay The actuary calculates the liability Company bears the risk of meeting the future obligation www.carajkumarradukia.com 25
Example of Defined Benefit The company agrees to pay 6% of their final salary for each year of service or The company agrees to provide a lump sum amount, amounting to 5 times of the final salary Where any scheme does not fall within the rules of Defined Contribution it automatically falls under Defined Benefit www.carajkumarradukia.com 26
Arriving at DBP Liability The defined benefit obligation (DBO) recognized 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 www.carajkumarradukia.com 27
Accounting for Defined Benefit Plan www.carajkumarradukia.com 28
Valuation of Defined Benefit Plan Actuarial mathematics is typically used and it is specified by IAS 19 (Para 50(a)) It deals with how liabilities should be apportioned in respect of earned and unearned service It also deals with calculation of cost pertaining to accrual of benefits in the plan over the most recent accounting gperiod Actuarial funding method known as projected unit method is prescribed by IAS 19 www.carajkumarradukia.com 29
Various Asset Valuation Methods Asset valuation methods can be classified into four groups and nine specific methods Fair market value (1 method) Discounted cash flow (1 method) Book value ( 3 methods cost, amortized, contract) Smoothed value ( blend of cost and market, write-up, deferred d recognition, average market value). www.carajkumarradukia.com 30
List of 9 asset valuation methods 1. Fair Market Value Method 2. Discounted Cash Flow Method 3. Cost Book Value Method 4. Amortized Book Value Method 5. Contract Book Value Method 6. Blend of Cost and Market Value Method 7. Write Up Value Method 8. Deferred recognition Method 9. Average Market Value Method www.carajkumarradukia.com 31
Actuarial Gains & Losses Recognized Immediately under revised IAS 19 Immediate Recognition of all Plans in the Statement of recognized income & expense. www.carajkumarradukia.com 32
Funding of Pension Plans www.carajkumarradukia.com 33
Funding of Pension Plans Contribution of Assets to a legal entity separate from that t of the Employer The Legal Entity being a Trust Value of Assets < or> Value of Liability The scheme is funded in surplus if Assets are more The scheme is funded in deficit if Liabilities are more www.carajkumarradukia.com 34
Pension Plans with no Funding A very less secure Plan Company Funds are used to pay the Pension Plans There is no question setting aside of assets for payment of pension liabilities www.carajkumarradukia.com 35
Actuarial Assumptions www.carajkumarradukia.com 36
Actuarial Valuation Assumptions Financial Assumptions Demographic Assumptions www.carajkumarradukia.com 37
How assumptions are arrived at? Set by the Employer with advise from a actuary or auditor Estimate that are compatible Market expectation as at the balance sheet date www.carajkumarradukia.com 38
Financial Assumptions Discount Rate Salary Rate Hikes Expected Return on Assets (EROA) www.carajkumarradukia.com 39
Demographic Assumptions Mortality, Morbidity, Turnover, retirement rates Vary by age, seniority Turnover within first 5 years (Vesting) reduces gratuity liability Turnover after first 5 years (Vesting) may increase gratuity liability www.carajkumarradukia.com 40
Effects of changes in actuarial assumptions Assumption Increase Decrease Liab would Liab would decrease Discount increase and and leads to actuarial rate leads to actuarial gain loss Liab would Salary Liab would increase decrease and will Increase and leads to actuarial lead to actuarial Rate loss gain Expected High expected return Low expected long-term results in low return results in rate of pension cost high pension cost www.carajkumarradukia.com 41 return
Asset Ceiling Test www.carajkumarradukia.com 42
Asset Ceiling Test (ACT) The amount of Net Asset (NA ) is limited to the ACT The NA is limited to Amt available in the form of refunds or reductions in contributions + unrecognized actuarial losses +unrecognized past service cost www.carajkumarradukia.com 43
Why ACT? To prevent gains to be recognized solely as a result of the deferred d recognition of past service cost and actuarial losses Issue arises when an entity defers recognition of actuarial losses or past service cost. Results in the entity recognizing increased asset www.carajkumarradukia.com 44
IFRIC 14: IAS 19 - The Limit on a Defined Benefit Asset, Minimum Funding Requirement and their Interaction The issues addressed d in this interpretation t ti are: When refunds or reductions in future contributions ti should be regarded d as available in accordance of IAS 19 How a minimum funding requirement might affect the availability of reduction in future contributions When a minimum funding requirement might give rise to a liability www.carajkumarradukia.com 45
AS 15 Employee Benefits It covers all type of employees, full time, part time, permanent, casual or temporary basis. This statement does not deal with accounting and reporting by employee benefit plan. Employee benefit expense should be charged to P & L, unless other accounting standard requires It to be debited d to cost of assets (e.g. AS-10). It does not apply to only benefits provided under formal plans and arrangement, it also applies to those informal practices that give rise to an obligation (i.e where enterprise has no alternative but to pay employee benefit). www.carajkumarradukia.com 46
AS 15 Employee Benefits The rate of discount should be determined with reference to market yields on government bonds, the currency and terms of which should be consistent with the estimated terms of the obligation. Where an enterprise has its own Provident Fund, there is an obligation to pay the minimum interest prescribed by the authorities irrespective of the interest actually earned by the Fund. In such an event this would need to be treated as a defined benefit plan instead of as defined contribution plan and additional provisioning for any expected shortfall in interest may need to be made. www.carajkumarradukia.com 47
Ind AS 19 Ind AS 19 does not currently cover all of the above aspects of IAS 19 revised in 2011, but it does require actuarial gains and dlosses to be recognised din other comprehensive income (OCI). www.carajkumarradukia.com 48
Ind AS 19 Vs IAS 19 Actuarial gains and losses for post-employment defined benefit plans and other long-term employee benefit plans Ind AS - All actuarial gains and losses for post-employment defined benefit plans and other-long term employment benefit plans are recognised in OCI. IAS - Actuarial gains and losses for defined benefit plans can be recognised using one of the following three alternatives: in profit or loss; or in OCI or using corridor approach( no corridor approach available and immediate recognition (June 2011 amendment), IAS - Actuarial gains and losses for other-long term employment benefit plans are recognised in profit or loss. www.carajkumarradukia.com 49
Ind AS 19 Vs IAS 19 Discount rate for employee benefit obligations Ind As - Discount rate used to discount employee benefit obligations shall be determined by reference to market yields at the end of the reporting period on government bonds only. IAS - Discount rate used to discount employee benefit obligations shall be determined by reference to market yields at the end of the reporting period on high quality corporate bonds. www.carajkumarradukia.com 50
FAS 158 -Employers Accounting for Defined Benefit Pension and Other Postretirement Plans This Statement requires an employer that is a business entity and sponsors one or more single-employer defined benefit plans to: Recognize the funded status of a benefit plan Recognize as a component of other comprehensive income, net of tax, the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit cost pursuant www.carajkumarradukia.com 51
FAS 158 -Employers Accounting for Defined Benefit Pension and Other Postretirement Plans to FASB Statement No. 87, Employers Accounting for Pensions, or No. 106, Employers Accounting for Postretirement Benefits Other Than Pensions. Measure defined benefit plan assets and obligations as of the date of the employer s fiscal year-end statement of financial position (with limited exceptions). www.carajkumarradukia.com 52
FAS 158 -Employers Accounting for Defined Benefit Pension and Other Postretirement Plans Disclose in the notes to financial statements additional information about certain effects on net periodic benefit cost for the next fiscal year that arise from delayed recognition of the gains or losses, prior service costs or credits, and transition asset or obligation. This Statement also applies to a not-for-profit organization or other entity that does not report other comprehensive income. This Statement s reporting requirements are tailored for those entities. www.carajkumarradukia.com 53
Other FAS on Employee Benefits FAS Statement No. 87, Employers' Accounting for Pensions FAS Statement No. 88, Employers Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits, FAS Statement t t No 106, Employers' Accounting for Postretirement Benefits Other Than Pensions FAS Statement No. 132 (revised 2003), Employers Disclosures about Pensions and Other Postretirement Benefits www.carajkumarradukia.com 54
Disclosure Requirements www.carajkumarradukia.com 55
Disclosure under IAS 19 IAS 19 requires company to disclose: Positions of liabilities and assets Key assumptions used to calculate these figures. Explanations for the movement in balances P&L expense recognized 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 www.carajkumarradukia.com 56
Questions/ Suggestions/ Comments??? www.carajkumarradukia.com 57
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