IMPACT OF GRAP 25 (EMPLOYEE BENEFITS): CHANGES TO DEFINED BENEFIT PLANS FOR 2013/14 AFS The Accounting Standards Board (ASB) issued Directive 5 Determining the GRAP Reporting frameworks which determines the GRAP Reporting frameworks that are applicable to the various entities (Municipalities and municipal entities; Public entities, constitutional institutions, Parliament and the provincial legislatures (read together with Directive 8 as to specific transitional arrangements and provisions); Trading entities). As per appendix H of the ASB s Directive 5, the adoption of the GRAP 25 Employee benefits became effective for the accounting framework applicable for the 2013/14 financial year (i.e. for financial periods commencing on or after 1 April 2013), effectively replacing (International Public Sector Accounting Standard (IPSAS) 25 on Employee Benefits which was effective previously. This article provides details from the ASB s summary of GRAP 25 and a comparison with the previous standard applicable for employee benefits and accounting for defined benefit plans. ASB DIRECTIVE 5: Moving from IAS 19 (IPSAS 25) to GRAP 25? The ASB issued an executive summary on the Standard of GRAP on Employee Benefits (GRAP 25), providing a summary of the key requirements of GRAP as well as a comparison with the IAS 19 (IPSAS 25). GRAP 25 is drawn primarily from IPSAS 25 on Employee Benefits, which is based on International Accounting Standard (IAS) 19 on Employee Benefits. From Part B of the ASB s executive summary, the ASB sought to simplify the complex accounting requirements for defined benefit plans of IPSAS 25 / IAS 19 when they developed GRAP 25. As to also allow for greater comparability of public sector entities financial statement, the following principles and defined benefit plan elements as applied and accounted for in IPSAS 25 were impacted and deviated from in the development of GRAP 25: (i) The amount of actuarial gains and losses that are recognised in a reporting period. (ii) Where actuarial gains and losses are presented. (iii) The amount of past service costs that are recognised. This impact of these changes as well as an illustration of the accounting adjustments required when changing the accounting policy on employee benefits are set out below.
DEFINED BENEFIT PLAN: Differences between IAS 19 (IPSAS 25) and GRAP 25? Part B of the ASB s GRAP 25 Executive Summary sets out the following the ASB considerations per IAS 19 (IPSAS 25) and the ASB s Boards conclusions for GRAP 25. ELEMENT IPSAS 25 and IAS 19 ASB conclusion for GRAP 25 Amount of actuarial gains and losses recognised in a reporting period IPSAS 25 and IAS 19 allow entities to recognise actuarial gains and losses using one of three alternatives: Using a corridor approach which represents a minimum amount of actuarial gains and losses that must be recognised; Full recognition of actuarial gains and losses; or An amount which results in faster recognition of actuarial gains and losses when compared to the corridor approach above but is less than full recognition of actuarial gains and losses. After consulting with stakeholders in the South African public sector, it was noted that the 2 nd option of full recognition of actuarial gains and losses, was favoured since it is the simplest to apply in practice, results in uniform accounting policies being applied in the public sector and does not result in arbitrary amounts of actuarial gains and losses being recognised in the financial statements. The Board therefore concluded that actuarial gains and losses should be recognised in full in the year in which they arise. Presentation of actuarial gains and losses in the financial statements Where an entity chooses not to apply the corridor method in IPSAS 25 and IAS 19, it may recognise actuarial gains and losses outside of surplus or deficit, i.e. in the statement of changes in net assets/equity for IPSAS 25, and the statement of comprehensive income for IAS 19. Since the Board agreed that all actuarial gains and losses should be recognised in full in the year in which they arise, it considered whether entities should be allowed a choice of where actuarial gains and losses are presented in the financial statements as in IPSAS 25 and IAS 19. The Board concluded that it would only allow one method of presenting actuarial gains and losses so as to achieve comparability across entities financial statements. As actuarial gains and losses represent an adjustment to items recognised in surplus or deficit, i.e. a change in accounting estimate, it concluded that these gains and losses should be recognised in surplus or deficit. By recognising actuarial gains and losses in surplus or deficit, users of the financial statements are also given a complete view of the cost of operating an entity s defined benefit plans. Recognition of past service costs Entities may change (either increase or decrease) the amount of benefits provided to employees based on past services rendered. The change in benefits results in an increase or decrease in the defined benefit obligation (which affects both the statement of financial position and the statement of financial performance) and for purposes of GRAP 25 is called past service cost. IPSAS 25 and IAS 19 require entities to recognise past service costs to the extent that they are vested or, where they are unvested, recognise them on a straight line basis over their vesting period. The Board agreed that, where plan benefits have been changed, the increase or decrease should be reflected in the financial statements in the year that the change is made. Any vesting period associated with the change in benefits affects the measurement rather than the recognition of the liability and cost. Past service costs under GRAP 25 are therefore recognised in the year that they arise. This approach also greatly simplifies the accounting for such costs, as well as in the determination of the net defined benefit obligation or asset that is recognised in the financial statements. Ducharme comment: Following this, the distinction between vested and unvested past service cost is no longer relevant.
The ASB executive summary also recommended the following presentation and disclosures pertaining to the defined benefit plans, obligations and plan assets: Financial performance impact: Defined benefit plans In order to explain the impact of entities defined benefit plans on their financial performance for the year to users of the financial statements, appropriate disclosure should be provided in the financial statements, including: Significant changes in defined benefit obligation & plan assets It would also be useful to explain any significant changes in the defined benefit obligation and plan assets in the management commentary included in the annual report, what assumptions were used in calculating the defined benefit obligation and plan assets, and how movements in these assumptions may affect measurement of the plans and surplus or deficit. how or why they arose, risks that affect the measurement of the plans, how defined benefit plans are funded and so on. ILLUSTRATIVE EXAMPLES: Accounting adjustments required when changing accounting policy on employee benefits Example 1: Actuarial gains and losses The following is a simplified illustrative example of how actuarial gains and losses would have been accounted for based on the requirements of IAS 19 (versions before the latest version that became effective for periods starting on or after 1 January 2013) and the adjustments required under a new accounting policy in accordance with the requirements of GRAP 25: On 30 June 2011 a municipality obtains an actuarial valuation of its defined benefit liability (post-retirement medical aid benefits) based on ruling actuarial assumptions. The defined benefit liability is accounted for as required by IAS 19. Assume no plan assets to meet the defined benefit obligation exist. No actuarial gains or losses can arise in 2011 due it being the first year that the municipality determines the defined benefit liability. Actuarial assumptions are revised a year later on 30 June 2012 during next actuarial valuation of the defined benefit liability based on ruling actuarial assumptions at that date. The actuarial valuation is different a year later based on the revised assumptions, thus defined benefit plan obligation needs to be adjusted to reflect the latest valuation. The actuaries calculate and actuarial loss for 2012 of R500. The municipality elects to apply the corridor approach as per IAS 19.92 and.93 in measuring and recognising the portion of actuarial losses to be recognised (and not the allowed alternative as per IAS 19.93 -.93A of recognising actuarial losses or gains at another amount or in the period in which they occur), thus no actuarial losses are recognised in 2012. However the full un-recognised actuarial losses are accounted for in 2012: Dr Unrecognised actuarial losses (Pos) 500 Pre-2013/14 financial year, assuming IAS 19 was applied: Cr Defined benefit liability (Pos) 500 At 30 June 2013 the municipality applies the corridor test to determine whether it can recognise any of the un-recognised actuarial losses that have been brought forward from 2012. It applies IAS 19.92 -.93 and calculates an amount of R60 that should be recognised in 2013 as part of expenditure: Dr Actuarial Losses (Perf) 60 Cr Unrecognised actuarial losses (Pos) 60 Application of GRAP 25 instead of IAS 19 for 2013/14 financial year, with retrospective change in accounting policy. As from 1 July 2013 the municipality applies GRAP 25 instead of IAS 19. GRAP 25 does not allow an entity to defer the recognition of changes in net defined benefit liability, thus actuarial gains and losses must be recognised in full in the year in which they arise - in this example the full un-recognised actuarial losses should thus have been recognised as expenditure in 2012. The change in accounting policy from IAS 19 to GRAP 25 requires that a retrospective adjustment is made to reflect the new accounting policy as per GRAP 25.
made in the AFS during 2014 are as follows: made in the AFS during 2014 are as follows: The entries passed during 2013 to recognise a portion of unrecognised actuarial losses need to be reversed: Dr Unrecognised actuarial losses (Pos) 60 Cr Actuarial Losses (Perf) 60 The opening balances for the 2013 financial year, i.e. 1 July 2012, need to be adjusted in AFS to reflect the full recognition of unrecognised actuarial losses as expenditure in year that it arose, i.e. 2011/ 2012. Dr Accumulated Surplus (Pos) 500 Cr Unrecognised actuarial losses (Pos ) 500 No adjustments are necessary for 2011. Also please note that at 30 June 2014 all actuarial gains and losses that arise in 2014 will be recognised as income and expense in 2014 in terms of GRAP25. Thus if actuarial losses arise, the entry for 2014 will be as follows: Dr Actuarial losses (Perf) xxx made in the GL during 2014 are as follows: made in the General Ledger (GL) during 2014 are as follows: The opening balances for the 2014 financial year, i.e. 1 July 2013, need to be adjusted in the GL to reflect the full recognition of any unrecognised actuarial losses that were brought forward from previous years. All actuarial losses should have been recognised as expenditure in year that it arose, i.e. 2012: Dr Accumulated Surplus (pos) 440 Cr Unrecognised actuarial losses (Pos) 440 No further adjustments are necessary. Please note that at 30 June 2014 all actuarial gains and losses that arise in 2014 will be recognised as income and expense in 2014 in terms of GRAP 25. Thus if actuarial losses arise, the entry for 2014 will be as follows: Dr Actuarial losses (Perf) xxx Example 2: Past service cost The following is a simplified illustrative example of how past service costs were accounted for based on the requirements of IAS 19 (versions before the latest version that became effective for periods starting on or after 1 January 2013) and the adjustments required under a new accounting policy in accordance with the requirements of GRAP 25. An entity operates a pension plan that provides a pension of 2% of final salary for each year of service. The benefits become vested after five years of service. On 1 April 2011 the entity improved the pension to 2.5% of final salary for each year of service starting from 1 April 2006. At the date of the improvement, the present value of the additional benefits for service from 1 April 2006 to 1 April 2011 were as follows: Employees with more than five years service at 1 April 2011: 150 Employees with less than five years service at 1 April 2011: (average period until vesting: three years, thus 40 per year) 120 Total employees 270
The entity thus recognised 150 immediately because those benefits were already vested at that date. The entity recognises 120 on a straight-line basis over three years starting from 1 April 2011: Pre-2013/14 financial year, assuming IAS 19 was applied: Application of GRAP 25 instead of IAS 19 for 2013/14 financial year, with retrospective change in accounting policy. made in the AFS of for 2013/14 financial year: 1 April 2011 Dr Deferred past service cost (Pos) 120 Dr Past service cost (Perf) 150 31 March 2012 Cr Defined benefit liability (Pos) 270 Dr Past service cost (Perf) 40 31 March 2013 Cr Deferred past service cost (Pos) 40 Dr Past service cost (Perf) 40 Cr Deferred past service cost (Pos) 40 As from 1 April 2013 the entity applies GRAP 25 instead of IAS 19. GRAP 25 does not allow an entity to defer the recognition of changes in net defined benefit liability, thus past service cost must be recognised in full in the year in which it arises - in this example the full deferred past service cost should have been recognised as expenditure during the 2012 financial year. The change in accounting policy from IAS 19 to GRAP 25 requires that a retrospective adjustment is made to reflect the new accounting policy as per GRAP 25. made in the AFS during 2014 are as follows: The entries passed during 2013 to recognise a portion of deferred past service cost need to be reversed: Dr Deferred past service cost (Pos) 40 Cr Past service cost (Perf) 40 The opening balances for the 2013 financial year, i.e. 1 April 2012, need to be adjusted in AFS to reflect the full recognition of past service cost as expenditure in year that it arose, i.e. 2011/2012 (R40 was recognised correctly in the 2011/2012 year, thus the remaining R80 still needs to recognised) : Dr Accumulated Surplus (Pos) 80 Cr Deferred past service cost (Pos) 80 Please note that at 31 March 2014 all past service cost that arise in 2014 will be recognised as expense in 2014 in terms of GRAP 25. Thus if past service cost arise, the entry for 2014 will be as follows: Dr Past service cost (Perf) xxx made in the GL during 2014 are as follows: made in the General Ledger (GL) of the 2013/14 financial year The opening balances for the 2014 financial year, i.e. 1 April 2013, need to be adjusted in the GL to reflect the full recognition of any deferred past service cost that were brought forward from previous years. All past service should have been recognised as expenditure in year that it arose, i.e. 2012 (R80 in total was recognised correctly in the 2011/2012 and the 2012/2013 years, thus the remaining R40 still needs to recognised): Dr Accumulated Surplus (Pos) 40 Cr Deferred past service cost (Pos) 40 Please note that at 31 March 2014 all past service cost that arise in 2014 will be recognised as expense in 2014 in terms of GRAP 25. Thus if past service cost arise, the entry for 2014 will be as follows: Dr Past service cost (Perf) xxx
For more information For more information on the implementation of GRAP Standards, give us a call or send us an email: DC CENTRAL BLOEMFONTEIN OFFICE Danie Grobler CA(SA) 071 603 8543 dgrobler@ducharmeconsulting.co.za DC COASTAL CAPE TOWN OFFICE Francois Conradie CA(SA) 082 926 1780 fconradie@ducharmeconsulting.co.za DC COASTAL KING WILLIAM S TOWN Luyanda Mbekeni CA(SA) 083 261 9684 lmbekeni@ducharmeconsulting.co.za DC NORTHERN PRETORIA OFFICE Marnus Coetzee CA(SA) 082 826 1782 mcoetzee@ducharmeconsulting.co.za DUCHARME TRAINING INSTITUTE Anton Slabbert CA(SA) 072 232 5335 aslabbert@ducharmeconsulting.co.za As at issue of this article, the information in this article is correct in considerations of these matters. These may change over time with new requirements and information. This article does not represent a legal opinion or professional advice, and it is advised that due consideration be given to all the applicable facts on the application of accounting standards, with necessary professional guidance, prior to its application.