Sri Lanka Accounting Standard SLAS 16. Retirement Benefit Costs

Sri Lanka Accounting Standard SLAS 16 Retirement Benefit Costs

Contents Sri Lanka Accounting Standard SLAS 16 Retirement Benefit Costs paragraphs OBJECTIVE SCOPE 1-3 DEFINITIONS 4-14 Retirement Benefit Plans 5 Funding 6-8 Types of Retirement Benefit Plans 9-14 Accounting for Retirement Benefit Costs 15-16 DEFINED CONTRIBUTION PLANS 17-22 Recognition of Retirement Benefit Expense 17-20 Disclosure 21-22 DEFINED BENEFIT PLANS 23-26 Retirement Benefit Expense 23 Recognition of Current Service Cost 24-26 Recognition of Retirement Benefit Cost other than Current Service Cost 27-38 Existing Employees 27-31 Plan Terminations, Curtailments and Settlements 32-36 2

Retired Employees 37-38 Actuarial Valuation Methods 39-44 Benchmark Treatment 41-42 Allowed Alternative Treatment 43-44 Actuarial Assumptions 45-48 Change in Actuarial Valuation Method 49 Disclosure 50-51 COMPLIANCE WITH INTERNATIONAL ACCOUNTING STANDARDS 52 EFFECTIVE DATE 53 APPENDIX Principal Actuarial Valuation Methods Amendments to SLAS 16 3

Sri Lanka Accounting Standard SLAS 16 Retirement Benefit Costs Sri Lanka Accounting Standard SLAS 16 Retirement Benefit Costs is set out in paragraphs 1-53. All the paragraphs have equal authority. SLAS 16 should be read in the context of its objective, the Preface to Sri Lanka Accounting Standards and the Framework for the Preparation and Presentation of Financial Statements. SLAS 10 Accounting Policies, Changes in Accounting Estimates and Errors (Revised 2005) provides a basis for selecting and applying accounting policies in the absence of explicit guidance. Objective The provision of retirement benefits is a significant element of an entity's remuneration package for its employees. It is important that the cost of providing these retirement benefits is properly accounted for and that appropriate disclosures are made in the financial statements of the entity. The objective of this Standard is to prescribe when the cost of providing retirement benefits shall be recognised as an expense and the amount that shall be recognised. It also prescribes the information to be disclosed in the entity's financial statements. Scope 1. This Standard shall be applied in accounting for the cost of retirement benefit plans. 4

5 SLAS 16 2. This Standard applies to all retirement benefits provided under a retirement benefit plan, however described, irrespective of whether the plans are formal or informal, or whether the plans are funded or unfunded. It also applies when an entity is required, pursuant to law or industry plans, to contribute to national, provincial, industry or other multi-employer retirement benefit plans, and to employment termination indemnity arrangements which meet the definition of a retirement benefit plan. 3. Many employers provide other forms of employee remuneration or post-employment benefits including deferred compensation arrangements, long-service leave benefits, health and welfare plans, and bonus plans. These arrangements are not dealt with by this Standard although it is appropriate to account for and disclose their costs in a similar manner to the costs of retirement benefit plans if the substance of an arrangement is the same as that of a retirement benefit plan. Definitions 4. The following terms are used in this Standard with the meanings specified: Retirement benefit plans are arrangements whereby an entity provides benefits for its employees on or after termination of service (either in the form of an annual income or as a lump sum) when such benefits, or the employer's contributions towards them, can be determined or estimated in advance of retirement from the provisions of a document or from the entity's practices. Defined contribution plans are retirement benefit plans under which amounts to be paid as retirement benefits are

determined by reference to contributions to a fund together with investment earnings thereon. Defined benefit plans are retirement benefit plans under which amounts to be paid as retirement benefits are determined by reference to a formula usually based on employees' remuneration and/or years of service. Funding is the transfer of assets to an entity (the fund) separate from the entity to meet future obligations for the payment of retirement benefits. Current service cost is the cost to an entity under a retirement benefit plan for the services rendered in the current period by participating employees. Past service cost is the cost to an entity under a retirement benefit plan for services rendered in prior periods by participating employees and resulting from: (a) (b) the introduction of a retirement benefit plan; or the making of amendments to such a plan. Experience adjustments are adjustments arising from the differences between the previous actuarial assumptions as to future events and what has actually occurred. Retirement Benefit Plans 5. Most retirement benefit plans are formal agreements between an entity and its employees or their representatives. The plans may be established by the entity as a normal part of the remuneration package for its employees. The plans may be established by law or through industry arrangements whereby 6

Funding SLAS 16 entities are required to contribute to national, provincial, industry or other multi-employer retirement benefit plans. Retirement benefit plans may also be informal arrangements or evidenced only by an entity's practices. 6. Many retirement benefit plans involve a separate fund into which the entity, and sometimes its employees, make contributions and from which payments are made in order to meet some of, or all, the entity's obligation for retirement benefits. Such funds are separate entities and are often administered by third parties who may be appointed by the entity or its employees and who may have total discretion as to the investment of the funds and the payment of benefits. In some cases the entity retains the obligation to provide the agreed retirement benefits to employees, while in other cases the third party may assume this obligation. 7. In some cases, the fund takes the form of an insurance contract. The benefits insured by such a contract need not have a direct or automatic relationship with the entity's obligation for retirement benefits. Retirement benefit plans involving insurance contracts are similar to other funded plans and are subject to the same distinction between accounting and funding as other funded plans. 8. Under some retirement benefit plans, the entity retains the obligation for the payment of retirement benefits under the plan without the establishment of a separate fund. Such retirement benefit plans are described as being unfunded. 7

Types of Retirement Benefit Plans 9. For the purposes of this Standard, retirement benefit plans are classified as either defined contribution plans or defined benefit plans. 10. Under a defined contribution plan, an entity's obligation is the amount that it agrees to contribute to a separate fund to provide for the payment of retirement benefits to its employees. The amount of an employee's future retirement benefits is determined by reference to the contributions paid to the fund by the entity and the employee, and the performance of that fund. An actuary's advice is not required when accounting for the costs of defined contribution plans but is sometimes used to estimate future retirement benefits that may be achievable based on contribution levels and estimates of the performance of the fund. 11. Under a defined benefit plan, the entity's obligation is to provide retirement benefits to existing and retired employees, determined by reference to a formula normally based on employees' remuneration and/or years of service. The entity measures the present value of the promised retirement benefits with the periodic advice of an actuary. The actuary may also assess the financial condition of the plan and recommend the future contribution levels to any fund. 12. Defined benefit plans may be funded, partially funded or not funded. However, in a defined benefit plan, the entity is obliged either by the provisions of a document or by the entity's practices to provide the promised retirement benefits irrespective of the funding arrangements made, if any. When a plan is funded, the payment of retirement benefits when they fall due depends on the financial position and the investment performance of the fund, as well as the ability of the entity to 8

make good any shortfall in fund assets. When a plan is not funded, the payment of retirement benefits depends on the ability of the entity to meet the retirement benefit obligations as they fall due. 13. Retirement benefit plans may contain characteristics of both defined benefit and defined contribution plans. For example, a retirement benefit plan may stipulate the basis of contributions on which the retirement benefits are determined and, because of this, appear to be a defined contribution plan. However, the plan may make the entity responsible for specific retirement benefits, a specified level of retirement benefits or a guaranteed rate of return on plan assets. In such cases, the plan is, in substance, a defined benefit plan and an entity's cost of providing retirement benefits is determined and accounted for accordingly. A retirement benefit plan is classified as either defined benefit or defined contribution depending on the economic substance of the plan as derived from its principal terms and conditions. The key determinant is whether or not the entity is obliged either by the provisions of a document or by practice to provide the agreed retirement benefits. 14. The payment of retirement benefits under national, provincial, industry or other multi-employer plans may not be the responsibility of the entity and the cost of such plans may be assessed generally for entities on a national, provincial, industry or multi-employer basis. Despite the differing characteristics of such plans, these arrangements can be characterised as either defined benefit or defined contribution in nature based on the entity's obligation under the plan. If the entity's obligation under the plan is to provide the agreed level of retirement benefits, the plan is considered to be a defined benefit plan. If the entity's obligation is limited to specified contributions to the plan, the plan is considered to be a defined contribution plan. 9

Accounting for Retirement Benefit Costs 15. The cost to an entity of providing retirement benefits arises as services are rendered by the employees who will be entitled to receive such benefits. Consequently, the cost of retirement benefits is recognised as an expense in the periods during which the services are rendered. The recognition of retirement benefit costs only when employees retire or receive retirement benefits does not allocate those costs to the periods in which the services were rendered. Even when a plan permits an entity to terminate its obligation under the plan, it is usually difficult for an employer to cancel a plan if employees are to be retained. In the absence of evidence to the contrary, an employer's accounting for the cost of retirement benefits is based on the assumption that an entity which is currently promising retirement benefits to employees will continue to do so over the expected remaining working lives of employees. Therefore, the cost of retirement benefits is recognised as an expense whether or not it results in a legal liability. 16. In the case of a funded plan, the amount contributed by an entity to the fund during a period is not necessarily the amount recognised as an expense in the period. There is a clear distinction between the funding of retirement benefits and the allocation of the cost of providing those benefits for purposes of recognising the expense. Funding is a financial procedure and, in determining the periodic amounts to be funded, the entity may be influenced by such factors as the availability of cash and tax considerations. In contrast, the objective of accounting is to ensure that the cost of retirement benefits is recognised as an expense as services are rendered by the employees who will be entitled to receive benefits. 10

Defined Contribution Plans Recognition of Retirement Benefit Expense 17. The entity's contributions to a defined contribution plan in respect of service in a particular period shall be recognised as an expense in that period. 18. The entity's contribution to a defined contribution plan is usually determined by a formula stated under the terms of the plan. Therefore, the current service cost is normally the contribution due for the period. 19. An entity may agree to make additional contributions under a defined contribution plan. The increased contributions are recognised as an expense in the periods during which the associated services are rendered by employees. For example, when the additional contributions are determined by reference to employee service in prior periods and are in return for services to be rendered by existing employees in the current and future periods, the increased contributions are recognised as an expense systematically over the expected remaining working lives of those employees. When the additional contributions relate to retired employees, the contributions are recognised as an expense in the period in which the promise of additional contributions is made, since no further services are expected to be received by the entity from those employees. 11

20. The contributions agreed by the entity determine the amount of the expense recognised and the amount of the entity's obligation under a defined contribution plan. Therefore, plan termination does not usually result in any additional obligation requiring recognition as a liability and an expense. However, to the extent that increased contributions have been agreed but not recognised as an expense, an additional obligation needs to be recognised as a liability and expense when it is probable that the plan will be terminated. Disclosure 21. The financial statements shall disclose the following in respect of an entity's defined contribution plans: (a) (b) (c) a general description of each plan, including employee groups covered; the amount recognised as an expense during the period; and any other significant matters related to retirement benefits that affect comparability with the previous period. 22. When an entity has more than one defined contribution plan, the disclosures in the financial statements may be reported in total for all such plans, separately for each plan, or in such groupings as are considered to be the most useful. 12

Defined Benefit Plans Retirement Benefit Expense 23. Under a defined benefit plan, the expense in the current period includes: (a) (b) (c) the current service cost; amounts recognised in the current period in respect of past service costs of current and retired employees, experience adjustments and changes in actuarial assumptions; and the result of any plan terminations, settlements or curtailments. Recognition of Current Service Cost 24. The current service cost in respect of a defined benefit plan shall be recognised as an expense in the current period. 25. Defined benefit plans, especially those that promise retirement benefits based on remuneration at or near retirement, present significant difficulties in the estimation of costs. The extent of the entity's obligation under such plans is usually uncertain because there are many variables that influence the amount of the ultimate benefits and hence, the cost of those retirement benefits. This uncertainty is likely to remain so over a long period of time. For example, the amount of future retirement benefits may be determined by employees' remuneration at retirement and by their years of service, both of which are uncertain. Moreover, in estimating the obligation, assumptions need to be made regarding future conditions and events which 13

are largely outside the entity's control, such as the investment earnings on the assets of any fund and employee turnover. Furthermore, these long term uncertainties may give rise to changes of estimates that can be very significant in relation to current service cost. 26. Because of the potentially significant effect of differences between assumptions and experience, it is necessary to determine the cost of retirement benefits by obtaining actuarial valuations at frequent intervals; at least every three years is appropriate. Additional valuations are appropriate in intervening years when significant changes in the circumstances of the plan are known to have taken place or when events indicate that one or more of the assumptions may have to be modified. Recognition of Retirement Benefit Cost other than Current Service Cost Existing Employees 27. Past service costs, experience adjustments, the effects of changes in actuarial assumptions and the effects of plan amendments in respect of existing employees in a defined benefit plan shall be recognised as an expense or as income systematically over the expected remaining working lives of those employees except in the situations covered in paragraph 32 and except in the case of certain plan amendments when the use of a shorter time period is necessary to reflect the receipt of economic benefits by the entity. 14

28. Past service costs arise on the introduction of a retirement benefit plan or the making of amendments to a plan. Employees who have been employed by the entity or who have been members of the existing plan for longer than others are promised additional benefits. A plan may be improved to provide additional benefits, for example, when retirement benefits are deemed to be inadequate, because of inflation or for other reasons. Such entitlements to retirement benefits are in return for services to be rendered by those employees in the future. Therefore, the past service cost is usually allocated over the current and future periods during which the services are to be rendered, regardless of the fact that these costs are computed by reference to employee service in previous periods. 29. Experience adjustments arise because actual events inevitably differ from actuarial assumptions. For example, the rate of employee turnover may be different from that assumed in the last actuarial valuation. These experience adjustments may give rise to either expense or income. The actuarially determined cost is intended to provide a more reliable measure of expense in each period than an expense determined substantially by actual experience to date. Furthermore, in the long term, experience adjustments may offset one another. Therefore, experience adjustments are usually allocated over the expected remaining working lives of existing employees. 30. Changes in actuarial assumptions are made when actual experience in the long term consistently differs from the original actuarial assumptions. These changes may give rise to expense or income. They are equivalent to changes in accounting estimates arising from new information (see Sri Lanka Accounting Standard SLAS 10, Accounting Policies Changes in Accounting Estimates and Errors (Revised 2005)). Therefore, the effects of changes in actuarial assumptions are 15

usually allocated over the expected remaining working lives of existing employees. 31. Retirement benefit costs other than current service costs for existing employees may provide an entity with economic benefits over a shorter time period than the expected remaining working lives of the employees concerned. Such costs are recognised as an expense over that shorter period. For example, when plan amendments are made regularly, the additional cost may be recognised as an expense or income systematically over the period to the next expected plan amendment. Plan Terminations, Curtailments and Settlements 32. When it is probable that a defined benefit plan will be terminated or that there will be a curtailment or settlement of the retirement benefits payable under that plan: (a) (b) any resulting increase in the entity's retirement benefit cost shall be recognised as an expense immediately; and any resulting gain shall be recognised as income in the period in which the termination, curtailment or settlement occurs. 33. A curtailment occurs either when there is a significant reduction in the number of employees covered by a plan or when an element of future service in respect of existing employees will no longer qualify for benefits. A curtailment may arise from an isolated event, such as the closing of a plant or discontinuation of a segment that results in a significant reduction in the number of employees participating in a retirement benefit plan. Alternatively, a curtailment may result from termination or suspension of a plan. 16

34. Past service costs in respect of employees who are made redundant do not provide the employer with future economic benefits and are recognised as an expense immediately. 35. A settlement occurs when an entity discharges its retirement benefit obligation. This occurs, for example, when a lump-sum cash payment is made to plan participants in exchange for their rights to receive specified retirement benefits. 36. The gain or loss arising from a plan termination, curtailment or settlement includes appropriate adjustments to recognise past service costs, experience adjustments, the effect of changes in actuarial assumptions and the effects of plan amendments which have not previously been recognised as income or expense. Retired Employees 37. The effects of plan amendments in respect of retired employees in a defined benefit plan shall be measured as the present value of the effect of the amended benefits and shall be recognised as an expense or as income in the period in which the plan amendment is made. 38. The effect of providing amended retirement benefits for retired employees is recognised as an expense or as income in the period in which the plan amendment is made since no further benefits in the nature of future services are expected to be received by the entity from those employees. 17

Actuarial Valuation Methods 39. A number of actuarial valuation methods have been developed to estimate the entity's obligation under defined benefit plans. While primarily designed to calculate funding requirements, these methods are frequently used for accounting purposes to determine the cost to the entity of providing retirement benefits and to determine the expense to be recognised each period. The Appendix describes these methods. 40. In allocating the retirement benefit cost over the periods in which employees' services are rendered, it is usually appropriate to determine the actuarial present value of promised retirement benefits on the basis of methods and assumptions that result in annual current service cost that bears a systematic relationship to remuneration. The actuarial present value of promised retirement benefits is the present value of the expected payments by a retirement benefit plan to existing and retired employees, attributable to the service already rendered. The cost recognised as an expense may differ significantly depending on the actuarial valuation method used and the assumptions about the variable elements affecting the computations. Benchmark Treatment 41. The cost of providing retirement benefits under a defined benefit plan shall be determined using an accrued benefit valuation method. 42. Accrued benefit valuation methods are actuarial valuation methods that determine the cost of providing retirement benefits on the basis of services rendered by employees to the date of the actuarial valuation. Under accrued benefit methods the annual current service cost applicable to each employee 18

increases as his or her retirement approaches. This increase occurs because the discounted present value of the benefit earned for service in the current period increases as the date of payment draws closer and the probability of the employee remaining in the plan to retirement increases. This effect is compounded when retirement benefits are based on final salary and discounted for the impact of inflation on salary levels. However, for a retirement benefit plan as a whole, annual current service cost tends to bear a systematic relationship to remuneration of each period provided the number and age distribution of participating employees remains relatively unchanged. Allowed Alternative Treatment 43. The cost of providing retirement benefits under a defined benefit plan shall be determined using a projected benefit valuation method. 44. Projected benefit valuation methods are actuarial valuation methods that determine the cost of providing retirement benefits on the basis of service both rendered and to be rendered by employees as at the date of the actuarial valuation. These methods spread the cost evenly, either in absolute amounts or as a percentage of salaries, over all periods of service making up the working lives of participating employees. These methods achieve a relatively level annual current service cost. Actuarial Assumptions 45. Appropriate and compatible assumptions, incorporating projected salary levels to the date of retirement, shall be used in determining the cost of retirement benefits. 19

46. The uncertainty inherent in projecting future trends in rates of inflation, salary levels and earnings on investments is taken into consideration in the actuarial valuations by using a set of compatible assumptions. This compatibility is achieved by actuarial assumptions that reflect the long term economic relationships between inflation, rates of salary increase, earnings on investments held as plan assets and discount rates, even though the absolute values used in one or more of the assumptions may not reflect current short term experience. These assumptions are projected until the expected date of death of the last pensioner and are, accordingly, long-term in nature. 47. The following actuarial assumptions are among those normally used in determining the cost to the entity of providing retirement benefits: (a) (b) (c) the discount rate assumed in determining the actuarial present value of promised retirement benefits in respect of services rendered to the valuation date reflects the long-term rates, or an approximation thereto, at which such obligations are expected to be settled; plan assets are valued at fair value. When fair values are estimated by discounting future cash flows, the long-term rate of return reflects the average rate of total income (interest, dividends and appreciation in value) expected to be earned on the plan assets during the time period until benefits are paid; when retirement benefits are based on future salaries, as is the case in final salary and career average plans, salary increases to the date of termination reflect factors such as inflation, promotion and merit awards; and 20

(d) automatic retirement benefit increases, such as cost of living adjustments, are taken into account. When, in the absence of formal requirements to increase benefits, it is the practice of the entity or the plan to grant such increases on a regular basis, it is assumed that the increases will continue. 48. The actuarial assumptions used in determining the cost to the employer of providing retirement benefits are based on long-term considerations. It may be necessary to modify these assumptions from time to time as is the case when salary increases exceed the assumed rate of increase and this trend is expected to continue. On the other hand, the higher salaries may have been due to special circumstances that are not expected to recur so that the initial assumption about salary increases is expected to be valid in the future. In the latter case, the previous salary assumption would not be changed. Change in Actuarial Valuation Method 49. The effect of a change in the actuarial valuation method from the allowed alternative treatment to the benchmark treatment, or vice versa, shall be accounted for and disclosed as a change in accounting policy in accordance with Sri Lanka Accounting Standard SLAS 10, Accounting Policies, Changes in Accounting Estimates and Errors (Revised 2005). Disclosure 50. The financial statements shall disclose the following in respect of a defined benefit plan: 21

(a) (b) (c) (d) (e) (f) (g) a general description of the plan, including employee groups covered; the accounting policies adopted for retirement benefit costs, including a general description of the actuarial valuation method or methods used (see Sri Lanka Accounting Standard SLAS 3, Presentation of Financial Statements (Revised 2005)); whether or not the plan is funded; the amount recognised as an expense or as income during the period; the actuarial present value of promised retirement benefits at the date of the most recent actuarial valuation; if the plan is funded, the fair value of the plan assets at the date of the most recent actuarial valuation; if the amounts funded since the inception of the plan are different from the amounts recognised as expense or income (or charged or credited to retained earnings on a change in accounting policy) over the same period, the amount of the resulting liability or asset and the funding approach adopted. When an employer has more than one plan and this results in there being both a liability and an asset, the liability or asset shall not be reduced by deducting one from the other; (h) the principal actuarial assumptions used in determining the cost of retirement benefits and any significant changes in those assumptions; 22

(i) (j) the date of the most recent actuarial valuation and the frequency with which valuations are made; and any other significant matters related to retirement benefits, including the effects of a plan termination, curtailment or settlement, that affect comparability with the previous period. 51. When an entity has more than one defined benefit plan, the disclosures in the financial statements may be reported in total for all such plans, separately for each plan, or in such groupings as are considered to be the most useful. However, the value of the information is lessened if the amount of a surplus in one plan or plans is offset against a deficit in another plan or plans, and such offsetting is not therefore appropriate. Compliance with International Accounting Standards 52. Compliance with this SLAS ensures compliance in all material respects with International Accounting Standard IAS 19, Retirement Benefit Costs. Effective Date 53. This Sri Lanka Accounting Standard becomes operative for financial statements covering periods beginning on or after 1 January 1996. 23

Appendix Principal Actuarial Valuation Methods The appendix is illustrative only and does not form part of the standards. The purpose of the appendix is to illustrate the application of the standards to assist in clarifying their meaning. The information included in this appendix describes the essential features of the two main types of actuarial valuation methods, and provides examples of the methods commonly used by actuaries in each category. Certain aspects of some of the methods described may be inconsistent with the requirements of the Standard, in particular the Individual Level Premium Method and the Aggregate Method which do not separately identify past service costs. Actuarial valuation methods generally fall into two broad categories: the accrued benefit valuation method and projected benefit valuation methods. Accrued Benefit Valuation Methods Under these methods: current service cost is the present value of retirement benefits payable in the future in respect of service in the current period; past service cost is the present value on the introduction of a retirement benefit plan, or on the making of amendments to such a plan, of the units of benefits payable in the future in respect of services rendered prior to the occurrence of one or more of those events; and 24

25 SLAS 16 the accrued actuarial liability is the present value of benefits payable in the future in respect of service to date. Assuming no inflation or deflation, this method produces a current service cost applicable to an employee that increases each year as the period to retirement shortens, because the discounted present value of the benefit earned for service in the current period increases as the date of payment draws closer and the probability of the employee remaining in the plan to retirement increases. For a retirement benefit plan as a whole, annual current service cost tends to be approximately the same each year provided the number and age distribution of participating employees remains relatively unchanged. In a salary related plan, inflation adds to the rate of increase each year and, accordingly, this method is often modified for final pay plans by introducing salary projections. As a result, employees' final salaries are estimated and the benefits based on these final salaries are allocated to years of service in calculating each year's cost. The most commonly used form of accrued benefit valuation method is the Projected Unit Credit Method which is described below. Projected Unit Credit Method This method sees each year of service as giving rise to an additional unit of pension entitlement and values each unit separately to build up a total retirement benefit obligation. The current service cost for the following year is calculated as the present value of benefits which will accrue in the next twelve months (by reference to the number of employees providing service in that year and projected final earnings). For example, if a plan provides benefits of Rs.20,000 per month of retirement for each year of completed service, the normal cost for one employee for the next twelve months is the

present value of an annuity of Rs.20,000 per month purchased on the expected date of retirement and terminating at the expected date of death. On an aggregate basis for all employees, the calculation takes into account expected turnover prior to retirement. Past service cost under this method is the present value of any units of future benefit credited to employees for service in periods prior to the commencement or subsequent amendment of the plan. The annual normal cost for an equal unit of benefit increases each year because the period to the employee's retirement continually shortens, and the probability of reaching retirement increases. In the example above, the present value of the Rs.20,000 per month annuity increases over time as the discount factor (representing the number of years remaining to expected retirement date and the risk of not reaching retirement) moves closer to one. For the employee group as a whole, however, the increasing cost is masked as older employees generating the highest annual cost are continually replaced by new employees generating the lowest. For a mature employee group, the normal cost would tend to be similar each year. Projected Benefit Valuation Methods Projected benefit valuation methods reflect retirement benefits based on service both rendered and to be rendered by employees as at the date of the actuarial valuation. These methods allocate the cost of employees' retirement benefits evenly (either in absolute amounts or as a percentage of salaries) over the full period of employment. There are four principal forms of the projected benefit valuation method: 26

The Entry Age Normal Method Under this method, each employee is assumed to have entered the plan when first employed or as soon as he or she became eligible. When a new plan is introduced the assumed date of entry is that on which the employee would have become eligible to join if the plan had been in existence at the time. The current service cost is a level annual amount or a fixed percentage of salary which, when invested at the rate of interest assumed in the actuarial valuation, is sufficient to provide the required retirement benefit at the employee's retirement. Under this method, past service cost is the present value of the excess of projected retirement benefits over the amount expected to be provided by future contributions based on the current service cost. The application of this method conceptually requires calculations to be made for each individual employee. However, in practice it is often used for groups of employees and the application of the method is often simplified by using one entry date for all employees. The Individual Level Premium Method This method is generally used in conjunction with individual annuity insurance policies. It allocates the cost of each employee's retirement benefit over the period from the date of entry into the plan to the date of retirement by level annual amounts or by a fixed percentage of salary. There is no separate calculation of past service cost because the whole cost of the ultimate benefit is spread between the date the employee enters the plan and his or her retirement date. Under this method, annual current service costs are higher than those which would result from the use of the entry age normal method. The reason for this is that, under this method, the costs otherwise identified 27

as past service costs are charged as current service costs. For this reason, the use of the Individual Level Premium method may be inconsistent with the requirements of the Standard. The Aggregate Method This method uses the same basic principles as the individual level premium method but it is applied to the plan as a whole rather than to individual employees. The cost of benefits is allocated over the average working lives of active employees. The effect of averaging the cost for all employees or groups of employees under this method is that the relatively high annual cost in the early years of the plan is less pronounced than under the individual level premium method. Past service cost and experience adjustments are not identified but are spread over future periods through regular computations using this method. For this reason this method may be inconsistent with the requirements of the Standard. The Attained Age Normal Method This method is similar to the aggregate method and the individual level premium method except that, under this method, the past service cost is calculated and identified using the accrued benefit valuation method. Current service costs are determined using the aggregate method but applied only to retirement benefits in respect of service in the future. 28

AMENDMENT TO SLAS 16 RETIREMENT BENEFIT COST In terms of Section 4(1) of the Sri Lanka Accounting and Auditing Standards Act No. 15 of 1995, the Institute is empowered to amend any Standard, whenever necessary. Accordingly ICASL Council has adopted the following amendment to this Standard. The existing Standard prescribes an Actuarial Valuation Method as the means of determining the gratuity liability. While retaining the Actuarial Valuation Method as the Benchmark Treatment, it is recommended that the calculation of the gratuity liability based on a minimum of half month s salary for each completed year of service commencing from the first year of service, be treated as an Allowed Alternative. This amendment will be effective for a period of three years commencing from 1 st January, 1999. 29

AMENDMENT TO AMENDMENT 1 OF SLAS 16 RETIREMENT BENEFIT COST In terms of Section 4(1) of the Sri Lanka Accounting and Auditing Standards Act No. 15 of 1995, the Institute is empowered to amend any Standard, whenever necessary. Accordingly ICASL Council had adopted the following amendment to this Standard. The existing Standard prescribes an Actuarial Valuation Method as the means of determining the gratuity liability. In Amendment 1 of Gazette No. 1103/18 of 28 th October 1999, it was recommended that while retaining the Actuarial Valuation Method as the Benchmark Treatment the calculation of gratuity based on a minimum of half month's salary for each completed year of service commencing from the first year of service, be treated as an Allowed Alternative. This Amendment 1 was effective for a period of three years commencing from 1 st January, 1999. By this Amendment 2, the validity of the earlier Amendment is extended for a further period of three years, commencing on 1 st January 2002 and ending on 31 st December 2004. This Amendment 3, extends the validity of the previous Amendment for a further period of two years, commencing on 1 st January 2005 and ending on 31 st December 2006. 30