Reporting Update December 2013, 13RU-016 KEY POINTS Revised AASB 119 Employee Benefits is applicable for reporting periods commencing on or after 1 January 2013 Applying the revised AASB 119 Employee Benefits Most significant impacts are to defined benefit superannuation obligations and annual leave liabilities Comparative periods need to be restated The revised version of AASB 119 Employee Benefits (AASB 119R) is applicable for reporting periods commencing on or after 1 January 2013. Key changes from the previous version of AASB 119 include: immediate recognition of all actuarial gains and losses in other comprehensive income a revised basis for the calculation of net finance costs ACTION POINTS Ensure financial statement disclosures adequately reflect the changes in accounting policy clarity on recognising taxes payable by the plan revised presentation of defined benefit costs additional disclosures for defined benefit plans possible changes to the timing of the recognition of termination benefits amended definitions of short-term and other long-term employee benefits, which will likely impact the measurement and classification of annual leave liabilities On initial application of the revised AASB 119, financial statements will need to reflect the changes in accounting policy, as well as the quantitative impact of those changes. In addition, the transitional provisions require restatement of the earliest prior period.
Summary of changes Immediate recognition of all actuarial gains and losses in other comprehensive income AASB 119R requires all remeasurements, including actuarial gains and losses, to be recognised in other comprehensive income. Entities that used the corridor method or that recognised actuarial gains and losses immediately in profit or loss will be affected by this change. All actuarial gains and losses, being the changes that result from experience adjustments and changes in actuarial assumptions, now need to be recognised immediately in other comprehensive income. Revised basis for the calculation of finance costs Net interest recognised in profit or loss is now calculated as the net defined benefit liability (asset) multiplied by the discount rate used to measure the defined benefit obligation. As such, the net finance charge or credit will no longer be impacted by the nature of the plan assets held. The difference between the actual rate of return on plan assets and the discount rate used to measure the defined benefit obligation is included in the remeasurement of the net defined benefit liability (asset) recognised in other comprehensive income. Revised presentation of defined benefit costs Under AASB 119R, the cost of defined benefit plans includes the following components: service cost: recognised in profit or loss net interest on net defined benefit liability (asset): recognised in profit or loss; and remeasurements of the net defined benefit liability (asset): recognised in other comprehensive income Refer to KPMG First Impressions: Employee benefits p.18 for a table comparing the amended standard s presentation requirements to those of the superseded AASB 119. Additional disclosures for defined benefit plans AASB 119R introduces a number of new or expanded requirements, including: narrative descriptions of characteristics of, and risks associated with, defined benefit plans additional numerical reconciliations and disclosures of amounts in the financial statements arising from defined benefit plans; and sensitivity analysis as to how reasonably possible changes in the actuarial assumptions could affect the amount, timing and uncertainty of the entity s future cash flows. Entities will need to consider the level of detail necessary to satisfy the disclosure objectives, the extent to which some disclosures should be disaggregated to distinguish plans or groups of plans with materially different risks, and how to present the information. Transitional disclosure relief is provided in respect of comparative disclosures about the sensitivity of the defined benefit obligation in the year of adopting AASB 119R. 2
Clarity on taxes payable by the plan AASB 119R distinguishes between taxes payable by the plan on contributions relating to service before the reporting date or on benefits resulting from that service and all other taxes payable by the plan. Taxes on contributions are included in determining the defined benefit obligation at each reporting date. Changes in the expected timing or amount of contributions tax payable will lead to actuarial gains and losses, which are recognised in other comprehensive income. All other taxes payable by the plan, such as taxes on investment income, are included in the return on plan assets. Due to the method of calculating net interest cost, such other taxes will effectively be remeasurements. Possible changes to the timing and recognition of termination benefits Under AASB 119R, termination benefits are recognised at the earlier of when the entity recognises related restructuring costs and when the entity can no longer withdraw the offer of those benefits. Previously, the recognition criteria for termination benefits was when the entity was demonstrably committed to either terminate employment mandatorily or provide voluntary termination benefits. Depending on the details of the termination, entities providing termination benefits as part of a wider restructuring may end up recognising termination benefits earlier than under the previous standard. Amended definitions of short-term and other long-term employee benefits The superseded AASB 119 defined short-term employee benefits as those due to be settled within 12 months after the end of the period in which employees render the related services. AASB 119R defines them as benefits that are expected to be settled wholly within 12 months after the end of the annual reporting period in which the employees render the related service. The change in definition shifts the focus to the benefit as a whole, and to when the entity expects the benefit to be settled, as opposed to when settlement is due. This may result in benefits previously classified as short-term being treated as other long-term employee benefits, which will require measurement on a discounted basis. In addition, it will change the presentation of employee benefit amounts for key management personnel under AASB 124 Related Party Disclosures, and in Remuneration Reports in accordance with the Corporations Act 2001. The change in classification affects the measurement of the liability, but may not affect the presentation of the liability as a current liability (e.g. annual leave) on the statement of financial position. Example An entity has employees in both Australia and in county X. Employees in Australia are entitled to four weeks annual leave per year, annual leave accrued can be carried forward to future financial periods, and is paid to employees upon termination. Employees in country X are entitled to two weeks annual leave per year, which must be taken within 12 months of being earned, and is not paid out on termination. Annual leave for employees in country X will continue to be classified as a short-term employee benefit under AASB 119R, as it is expected to be settled wholly within 12 months after the end of the annual reporting period. The measurement of the liability will be estimated based on the expected rate of employee termination within the following financial year, and on an undiscounted basis. Annual leave for Australian employees is not expected to be wholly used before the end of the next reporting period and will therefore be classified as an other long-term employee benefit under 3
AASB 119R. The present value of the annual leave liability will therefore be measured by using the projected unit credit method and by applying actuarial assumptions such as expected settlement date, future salary increases, discount rates etc. As the entity does not have an unconditional right to defer settlement for at least twelve months after the reporting period, the obligation for employees in both countries will continue to be presented as a current liability under AASB 101 Presentation of Financial Statements. In a Remuneration Report, and disclosures of key management personnel under AASB 124 Related Party Disclosures paragraph 17, annual leave for any Australian key management personnel will no longer be included as part of short-term employee benefits, but within other longterm employee benefits, such as long service leave. For further details regarding the impacts outlined above, refer to KPMG First Impressions: Employee benefits and Insights into IFRS 10 th Edition - Chapter 4.4. Impact on financial statement disclosures The disclosure impacts on financial statements on initial application of the revised AASB 119 include the following: comparative figures in the statements of profit or loss and other comprehensive income, financial position and changes in equity are restated; a third period is presented in the statement of financial position if the impact of the retrospective application of AASB 119R has a material effect on the opening position, either alone or in conjunction with other changes in accounting policies; and additional or revised note disclosures are included in relation to: (a) the change in accounting policy (b) the impact of the change in accounting policy on the current and prior periods; (c) the new accounting policy note (d) additional disclosures in accordance with revised requirements. Examples of some of the impacts are outlined below. For further examples, including examples of accounting policy notes and the additional defined benefit plan disclosures, please refer to Example Public Company Limited: Illustrative Disclosures 2013-2014. 4
Example A Annual Leave Changes in accounting policies Annual leave In the current year, the Group adopted AASB 119 Employee Benefits (2011), which revised the definition of short-term employee benefits to benefits that are expected to be settled wholly within 12 months after the end of the annual reporting period in which the employees render the related service. As a result of the change, the annual leave liability for certain of the Group s employees is now considered to be an other long-term employee benefit, when previously it was a short-term benefit. The Group s obligation is determined as the amount of future benefit that employees have earned in return for their service in the current and prior periods, applying actuarial assumptions, discounted to determine its present value. Remeasurements are recognised in profit or loss in the period in which they arise. The Group has applied the new policy retrospectively in accordance with the transitional provision of the standard. Consequently, the comparative figures and opening statement of financial position of the earliest comparative period presented (1 January 2012) have been restated. The impact of the change is set out below: Impacts to consolidated statement of financial position 1 January 2012 As previously reported Impact of change in accounting policy As restated Deferred tax assets 4,438 (53) 4,385 Total assets 80,042 (53) 79,989 Employee benefits (5,020) 176 (4,844) Total liabilities (22,809) 176 (22,633) Retained earnings (99,870) (123) (99,993) Total equity (120,550) (123) (120,673) 31 December 2012 As previously reported Impact of change in accounting policy As restated Deferred tax assets 4,321 (113) 4,208 Total assets 80,042 (113) 79,929 Employee benefits (5,321) 375 (4,946) Total liabilities (22,809) 375 (22,434) Retained earnings (104,681) (262) (104,943) Total equity (125,709) (262) (125,971) 31 December 2013 Impact of changes in accounting policy Decrease in deferred tax assets (175) Decrease in total assets (175) Decrease in employee benefits 582 Decrease in total liabilities 582 Increase in retained earnings (407) Increase in equity (407) 5
Example A Annual Leave (cont d) Impacts to consolidated statement of profit or loss and OCI For the year ended 31 December 2012 As previously reported Impact of change in accounting policy As restated Selling and distribution expenses (35,020) 87 (34,933) Administrative expenses (27,809) 112 (27,697) Income tax expense (1,538) (60) (1,598) Profit 4,811 139 4,950 OCI, net of tax 348-348 Total comprehensive income 5,159 139 5,298 For the year ended 31 December 2013 Impact of changes in accounting policy Selling and distribution expenses 118 Administrative expenses 89 Income tax expense (62) Decrease in profit 145 Impact on OCI - Overall impact on total comprehensive income 145 The Group has not disclosed the effects of the change in accounting policy on the statement of cash flow and earnings per share because they are not material. Example B Post-employment defined benefit plans Changes in accounting policies Post-employment defined benefit plans In the current year, the Group adopted AASB 119 Employee Benefits (2011). As a result, the Group has changed its accounting policy with respect to accounting for defined benefit plans as follows: Under AASB 119 (2011), changes in the net defined benefit liability (asset) are recognised in other comprehensive income when they occur. The Group therefore no longer applies the corridor method and now immediately recognises all remeasurements of the net defined liability (asset), including actuarial gains and losses, in other comprehensive income. AASB 119 (2011) replaces the interest cost and expected return on plan assets under the previous version of AASB 119 with a net interest amount. The Group therefore determines the net interest expense (income) on the net defined benefit liability (asset) for the period by applying the discount rate used to measure the defined benefit obligation at the beginning of the annual period to the opening net defined benefit liability (asset), taking into account any changes in the net defined benefit liability (asset) during the period as a result of contributions and benefit payments. This has no effect on total comprehensive income as the impact to profit or loss is offset by the impact to other comprehensive income. Under AASB 119 (2011), taxes payable on future investment income of the plan are included in the return on plan assets and are therefore charged to other comprehensive income as part of the excess or shortfall of the overall return on plan assets over the amount included in net interest on the net defined benefit liability (asset). A gross of tax discount rate is therefore used when measuring the defined benefit obligation, as opposed to a net of tax discount rate. A net of tax discount rate was previously used, as taxes payable on future investment income were previously included in the measurement of the defined benefit obligation. 6
Example B Post-employment defined benefit plans (cont d) The group has applied the standard retrospectively in accordance with the transitional provision of the standard. Consequently, the comparative figures and opening statement of financial position of the earliest comparative period presented (1 January 2012) have been restated. The quantitative impact of the change is set out below: Impacts to consolidated statement of financial position 1 January 2012 As previously reported Impact of change in accounting policy As restated Retirement benefit obligation (5,790) 650 (5,140) Deferred tax liabilities (3,750) (195) (3,945) Total liabilities (25,145) 455 (24,690) Retained earnings (99,870) (455) (100,325) Total equity (104,650) (455) (105,105) 31 December 2012 As previously reported Impact of change in accounting policy As restated Retirement benefit obligation (5,450) 83 (5,533) Deferred tax liabilities (4,605) (25) (4,630) Total liabilities (26,140) 58 (26,082) Retained earnings (109,154) (58) (109,212) Total equity (113,934) (58) (113,992) For the year ended 31 December 2013 Impact of changes in accounting policy Decrease in retirement benefit obligation 726 Increase in deferred tax liabilities (218) Increase in total liabilities 508 Increase in retained earnings (508) Increase in total equity (508) Impacts to consolidated statement of profit or loss and OCI For the year ended 31 December 2012 As previously reported Impact of change in accounting policy As restated Selling and distribution expenses (34,438) 358 (34,080) Administrative expenses (27,987) 222 (27,765) Income tax expense (1,981) (174) (2,155) Profit 7,563 406 7,969 Defined benefit plan remeasurements/defined benefit plan actuarial gains 1,808 (1,147) 661 (losses) Tax on items that will never be reclassified to profit or loss (542) 344 (198) OCI, net of tax 1,266 (803) 463 Total comprehensive income 8,829 (397) 8,432 7
Example B Post-employment defined benefit plans (cont d) For the year ended 31 December 2013 Impact of changes in accounting policy Selling and distribution expenses 76 Administrative expenses 50 Income tax expense (38) Profit 88 Defined benefit plan remeasurements 600 Tax on items that will never be reclassified to profit or (180) Increase in OCI, net of tax 420 Overall impact on total comprehensive income 508 Example C Reduced disclosure requirements The example below provides illustrative disclosure requirements of AASB 119R, as provided in KPMG Example Public Company Limited: Illustrative Disclosures 2013-2014. Disclosure requirements that do not apply to entities preparing general purpose financial statements under Australian Accounting Standards Reduced Disclosure Requirements (RDR) are highlighted in grey. In addition, AASB 101 Presentation of Financial Statements RDR exempts entities from presenting a balance sheet at the beginning of the earliest comparative period, even though AASB 119R is applied retrospectively. 12. Other employee benefits See accounting policies in Notes 44(g)(i), (g)(iii), (g)(iv), (g)(v) and (g)(vi). In thousands of euro Note 2013 2012 Restated* Net defined benefit asset (Plan A) (671) (731) Total employee benefit asset (671) (731) Net defined benefit liability (Plan B) 285 280 Liability for long-service leave 207 181 Cash-settled share-based payment liability 11 440 380 Total employee benefit liabilities 932 841 * See Note 43. For details on the related employee benefit expenses, see Note 13. AASB 119.139(a) AASB 119.139(b) The Group contributes to the following post-employment defined benefit plans. Plan A entitles a retired employee to receive an annual pension payment. Directors and executive officers (see Note 40(b)(ii)) retire at age 60 and are entitled to receive annual payments equal to 70% of their final salary until the age of 65, at which time their entitlement falls to 50% of their final salary. Other retired employees are entitled to receive annual payments equal to 1/60 of final salary for each year of service that the employee provided. Plan B reimburses certain medical costs for retired employees. The defined benefit plans are administered by a single pension fund that is legally separated from the Group. The board of the pension fund comprises three employee and two employer representatives and an independent chair. The board of the pension fund is required by law to act in the best interests of the plan participants and is responsible for setting certain policies (e.g. investment, contribution and indexation policies) of the fund. These defined benefit plans expose the Group to actuarial risks, such as longevity risk, currency risk, interest rate risk and market (investment) risk. 8
Example C Reduced disclosure requirements (cont d) 12. Other employee benefits (continued) (a) Funding AASB 119.147(a) Plan A is fully funded by the Group s subsidiaries, except for the obligation for directors and executive officers, which is funded by the Company. The funding requirements are based on the pension fund s actuarial measurement framework set out in the funding policies of the plan. The funding of Plan A is based on a separate actuarial valuation for funding purposes for which the assumptions may differ from the assumptions above. Employees are not required to contribute to the plans. Plan B is unfunded. The Group has determined that, in accordance with the terms and conditions of the defined benefit plans, and in accordance with statutory requirements (including minimum funding requirements for Plan A) of the plans of the respective jurisdictions, the present value of refunds or reductions in future contributions is not lower than the balance of the total fair value of the plan assets less the total present value of obligations. This determination has been made on a plan-by-plan basis. As such, no decrease in the defined benefit asset was necessary at 31 December 2013 and 31 December 2012. AASB 119.147(b) The Group expects to pay 350 thousand in contributions to its defined benefit plans in 2014. (b) Movement in net defined benefit (asset) liability The following table shows a reconciliation from the opening balances to the closing balances for net defined benefit liability (asset) and its components. a In thousands of euro Defined benefit obligation Fair value of plan assets 2013 d 2012 c 2013 d 2012 c Restated * Net defined benefit liability (asset) 2013 d 2012 c Restated * AASB 119.140 Balance at 1 January 3,218 3,198 (3,669) (3,706) (451) (508) Included in profit or loss b AASB 119.141(a) Current service cost 497 503 - - 497 503 AASB 119.141(d) Past service credit (100) - - - (100) - AASB 119.141(b) Interest cost (income) 154 134 (176) (155) (22) (21) AASB 119.141(c) AASB 119.141(c)(ii) AASB 119.141(c)(iii) AASB 119.141(c)(i) AASB 119.141(e) Included in OCI b 551 637 (176) (155) 375 482 Remeasurements loss (gain): Actuarial loss (gain) arising from: - demographic assumptions (31) 4 - - (31) 4 - financial assumptions (21) 8 - - (21) 8 - experience adjustment (30) 6 - - (30) 6 Return on plan assets excluding interest income - - 10 (3) 10 (3) Effect of movements in exchange rates 21-76 - 97 - Other (61) 18 86 (3) 25 15 AASB 119.141(f) Contributions to the plan - - (299) (379) (299) (379) AASB 119.141(g) Benefits paid (588) (635) 552 574 (36) (61) (588) (635) 253 195 (335) (440) AASB 119.140 Balance at 31 December 3,120 3,218 (3,506) (3,669) (386) (451) 9
Example C Reduced disclosure requirements (cont d) 12. Other employee benefits (continued) (b) Movement in net defined benefit (asset) liability (continued) Represented by: In thousands of euro 2013 2012 Net defined benefit asset (Plan A) (671) (731) Net defined benefit liability (Plan B) 285 280 (386) (451) * See Note 43. AASB 119.139(c) During 2013, the pension arrangements for a number of employees in [Country X] were adjusted to reflect new legal requirements in that country regarding the retirement age. As a result of the plan amendment, the Group s defined benefit obligation decreased by 100 thousand (31 December 2012: nil). A corresponding past service credit was recognised in profit or loss during 2013. (c) Plan assets AASB 119.140(a)(i), 142 Plan assets comprise: e AASB 119.142(b) In thousands of euro 2013 2012 Equity securities: Consumer markets 785 900 Pharmaceuticals 274 271 Oil and Gas 99 117 Telecoms 156 127 Financial institutions 97 274 1,411 1,689 AASB 119.142(c) Government bonds 1,632 1,590 AASB 119.142(e) Derivatives: Interest rate swaps 13 18 Forward foreign currency contracts 84 34 Longevity swaps 44 19 141 71 AASB 119.143 Property occupied by the Group 239 243 AASB 119.143 Company s own ordinary shares 83 76 3,506 3,669 AASB 119.142 AASB 119.146 All equity securities and government bonds have quoted prices in active markets. All government bonds are issued by European governments and are rated AAA or AA, based on rating agency [y] ratings. At each reporting date, an Asset-Liability Matching (ALM) study is performed by the pension fund s asset manager in which the consequences of the strategic investment policies are analysed. The strategic investment policy of the pension fund can be summarised as follows: a strategic asset mix comprising 40 50% equity securities, 40 50% government bonds and 0 10% other investments; interest rate risk is managed with the objective of reducing the cash flow interest rate risk by 40% through the use of debt instruments (government bonds) and interest rate swaps; currency risk is managed with the objective of reducing the risk by 30% through the use of forward foreign currency contracts; and longevity risk is managed with the objective of reducing the risk by 25% through the use of longevity swaps. 10
Example C Reduced disclosure requirements (cont d) 12. Other employee benefits (continued) AASB 101.125, 119.144 (d) Defined benefit obligation (i) Actuarial assumptions f The following were the principal actuarial assumptions at the reporting date (expressed as weighted averages). 2013 2012 Discount rate 5.1% 4.8% Future salary growth 2.5% 2.5% Future pension growth 3.0% 2.0% Medical cost trend rate 4.5% 4.0% Assumptions regarding future mortality have been based on published statistics and mortality tables. The current longevities underlying the values of the defined benefit obligation at the reporting date were as follows. 2013 2012 Plan A Plan B Plan A Plan B Longevity at age 65 for current pensioners Males 18.5 18.2 18.3 18.0 Females 21.0 19.0 21.0 18.8 Longevity at age 65 for current members aged 45 Males 19.2 19.0 19.0 18.7 Females 22.9 20.5 22.9 20.0 AASB 119.147(c) At 31 December 2013, the weighted-average duration of the defined benefit obligation was 17.1 years (2012: 17.5 years). (ii) Sensitivity analysis g AASB 101.125, 129, 119.145 Reasonably possible changes at the reporting date to one of the relevant actuarial assumptions, holding other assumptions constant, would have affected the defined benefit obligation by the amounts shown below. 31 December 2013 Defined benefit obligation Effect in thousands of euro Increase Decrease Discount rate (1% movement) (335) 350 Future salary growth (1% movement) 180 (172) Future pension growth (1% movement) 175 (168) Medical cost trend rate (1% movement) 380 (250) Future mortality (1% movement) (70) 67 Although the analysis does not take account of the full distribution of cash flows expected under the plan, it does provide an approximation of the sensitivity of the assumptions shown. AASB 119.138 a. The Group has more than one defined benefit plan and has generally provided aggregated disclosures in respect of these plans, on the basis that these plans are not exposed to materially different risks. Further disaggregation of some or all of the disclosures e.g. by geographic locations or by different characteristics would be required if this were not the case. AASB 119.RDR140.1 b. c. Although it is not specifically required by AASB 119 Employee Benefits, the Group has disclosed the subtotals of items recognised in profit or loss and OCI. An entity applying Australian Accounting Standards Reduced Disclosure Requirements (RDR) is not required to disclose the reconciliations specified in paragraphs 140 and 141 for prior periods. 11
Example C Reduced disclosure requirements (cont d) d. e. f. g. While an entity is required to provide a reconciliation from the opening balance to the closing balance of these items, in accordance with RDR, it is not required to show each of the items listed in AASB 119.141(a)-(e), (h). An entity applying RDR is required to disaggregate the fair value of the plan assets into classes that distinguish the nature and risks of those assets. However, it is not required to subdivide each class of plan assets into those that have a quoted market price in an active market and those that do not. It is also not required to consider distinguishing plan assets amongst the categories outlined in AASB 119.142(a)-(h). An entity applying RDR is required to disclose the significant actuarial assumptions used to determine the present value of the defined benefit obligation. However, the requirement that these disclosures be in absolute terms (e.g. as an absolute percentage, and not just as a margin between different percentages and other variables), does not apply. In addition, where the disclosures are provided in total for a group of plans, the requirement to provide the disclosures in the form of weighted averages or relatively narrow ranges, also does not apply. RDR does not require an entity to make the disclosures in relation to amount, timing and uncertainty of future cash flows in AASB 119.145. However, if the assumptions, and other major sources of estimation uncertainty at the end of the reporting period, have a significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities within the next financial year, then disclosures will be required in accordance with AASB 101.125,129. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. 12