DipIFR-Session18 d08 Employee Benefits

SESSION 18 IAS 19 EMPLOYEE BENEFITS
Accountancy Tuition Centre (International Holdings) Ltd 2008 1801

Overview
Objectives
To prescribe the accounting treatment in respect of employment and post-
employment benefit costs and the disclosures that should be made.

SHORT TERM
BENEFITS
Types
Accounting for short-term
employee benefits
Introduction
IAS 19 approach
Accounting basics
Complication
Expense
POST
RETIREMENT
BENEFITS
INTRODUCTION
DEFINED
CONTRIBUTION
PLANS
Introduction
Accounting for defined
contribution plans
Recognition and
measurement
Disclosure
DEFINED
BENEFIT
PLANS
SUNDRY
GUIDANCE
Actuarial valuation method
Discount rate
Regularity
Past service costs
Asset ceiling
Settlements and curtailments
PRESENTATION
AND
DISCLOSURE
Key problem
Objective
Scope
Definition
Presentation
Disclosure defined
benefit plans

1 Introduction
1.1 Key problem
Companies remunerate their staff by means of a wide range of benefits.
These include wages and salaries, retirement benefits.
Cost to employer needs to be matched with benefits derived from employees
services.
1.2 Objective
The objective of IAS 19 is to prescribe the accounting and disclosure for
employee benefits.
An entity must recognise:
a liability when an employee has provided service in exchange for
employee benefits to be paid in the future; and
an expense when the entity consumes the economic benefit arising from
service provided by an employee in exchange for employee benefits.

Commentary
Accounting for retirement benefit costs causes particular problems because
payments made by a company into a pension plan fluctuate significantly from
one year to the next. However, accounting is relatively straightforward
where pension plans are unfunded (i.e. financed by provisions).
1.3 Scope
The standard applies to all employee benefits.
Employee benefits include:
short-term employee benefits (e.g. wages, salaries and social
security contributions, paid annual leave and paid sick leave etc);
post-employment benefits (e.g. pensions, other retirement benefits, post-
employment life insurance and post-employment medical care);
other long-term employee benefits (e.g. long-service or sabbatical leave);
termination benefits; and
equity compensation benefits.
The standard does not deal with reporting by employee benefit plans.

Commentary
And IAS 26 is outside the scope of the Diploma syllabus.
1.4 Definitions
Employee benefits all forms of consideration given in exchange for service
rendered by employees.

Commentary
Including permanent health insurance, maternity/paternity leave, mobile
phones, etc.
Short-term employee benefits those which fall due wholly within twelve
months after the end of the period in which the employees render the related
service (other than termination benefits and equity compensation benefits).

Commentary
Termination benefits are payable as a result of the entitys decision to
terminate employment before the normal retirement date or an employees
decision to accept voluntary redundancy.
Post-employment benefits those which are payable after the completion of
employment (other than termination benefits and equity compensation benefits).
Post-employment benefit plans are arrangements under which an entity provides
post-employment benefits for one or more employees.

Commentary
Arrangements may be formal or informal.
Defined contribution plans are post-employment benefit plans under which
an entity:
pays fixed contributions into a separate entity (a plan); and
has no legal or constructive obligation to pay further contributions
if the plan does not hold sufficient assets to pay all employee
benefits for service in the current and prior periods.

Commentary
It is the employee who is exposed to the risk of losses.
Defined benefit plans are post-employment benefit plans other than defined
contribution plans.

Commentary
The risk of further obligations is to the employer. Defined benefit plans are
managed by fiduciaries (i.e. trustees) and underwritten by the sponsoring employer.
Multi-employer plans are defined contribution or defined benefit plans (other
than state plans) that:
pool the assets contributed by various entities that are not under
common control; and
use those assets to provide benefits to employees of more than one
entity.

Commentary
Contribution and benefit levels are determined without regard to the identity
of the entity that employs the employees concerned.
The present value of a defined benefit obligation is the present value, without
deducting any plan assets, of expected future payments required to settle the
obligation resulting from employee service in the current and prior periods.
Current service cost is the increase in the present value of the defined benefit
obligation resulting from employee service in the current period.
Interest cost is the increase during a period in the present value of a defined benefit
obligation which arises because the benefits are one period closer to settlement.
Past service cost is the increase in the present value of a defined benefit
obligation resulting from the introduction of, or changes to, post-employment
or other long-term employee benefits.
Plan assets comprise:
assets held by a long-term employee benefit plan; and
qualifying insurance policies.
Assets held by a long-term employee benefit plan are assets (other than non-
transferable financial instruments issued by the reporting entity) that:
are held by an entity (a plan) that is legally separate from the reporting
entity and exists solely to pay or fund employee benefits; and
are available to be used only to pay or fund employee benefits, are not
available to the reporting entitys own creditors (even in bankruptcy),
and cannot be returned to the reporting entity, unless either:
the remaining assets of the plan are sufficient to meet all
the related employee benefit obligations of the plan or the
reporting entity; or
the assets are returned to the reporting entity to reimburse
it for employee benefits already paid.
A qualifying insurance policy is an insurance policy issued by an insurer that
is not a related party (as defined in IAS 24) of the reporting entity, if the
proceeds of the policy:
can be used only to pay or fund employee benefits under a defined
benefit plan;
are not available to the reporting entitys own creditors (as
described above).
Actuarial gains and losses comprise:
experience adjustments (the effects of differences between the previous
actuarial assumptions and what has actually occurred); and
the effects of changes in actuarial assumptions.
Vested employee benefits are not conditional on future employment.
2 Short term benefits
2.1 Types
Wages, salaries and social security contributions;
Short-term compensated absences (e.g. paid annual leave and paid sick leave) where
the absences are expected to occur within twelve months after the end of the period in
which the employees render the related employee service;
Profit sharing and bonuses payable within twelve months after the end of the
period in which the employees render the related service; and
Non-monetary benefits (e.g. medical care, housing, cars and free or
subsidised goods or services) for current employees.
2.2 Accounting for short-term employee benefits
When an employee has rendered service to an entity during an accounting
period, the entity should recognise the amount of short-term employee
benefits expected to be paid in exchange for that service as:
a liability (accrued expense), after deducting any amount already
paid; and
an expense (unless another IAS requires or permits the inclusion of
the benefits in the cost of an asset).

Commentary
In short, the entity must account for the expense on an accruals basis.
3 Post retirement benefits
Arrangements whereby an entity provides post-employment benefits are post-
employment benefit plans.
An entity may or may not establish a separate entity to receive contributions and to
pay benefits, though it is convenient to think of the plan as a separate entity.

THE ENTITY
Transfer of
cash (funding)

THE PLAN

Payment of post
retirement benefits

EMPLOYEE

Post-employment benefit plans are classified as either defined contribution plans or
defined benefit plans, according to the economic substance of the plan.
4 Defined contribution plans
4.1 Introduction
The entitys obligation is limited to the amount that it agrees to contribute to the plan.
Thus, the amount of the post-employment benefits received by the employee
is determined by the amount of contributions paid to the plan, together with
investment returns arising from the contributions.
In consequence any risks with regard to the size of the pension paid fall on the employee.
4.2 Accounting for defined contribution plans
Accounting for defined contribution plans is straightforward because the
reporting entitys obligation for each period is determined by the amounts to
be contributed for that period.
4.3 Recognition and measurement
The accruals concept is applied, i.e.
charge contributions payable in respect of period to the statement of
comprehensive income; and
reflect any outstanding or prepaid contributions in the statement of
financial position.
4.4 Disclosure
An entity should disclose the amount recognised as an expense for defined
contribution plans.
5 Defined benefit plans
5.1 Introduction
The entitys obligation is to provide the agreed benefits to current employees.
There is a risk that the plan will be insufficient to pay the agreed pension fall
on the entity that will have to provide for any shortfall. (For example plans
where an employee is guaranteed a specified return.)
The entity will set cash aside which is then invested to earn a return and this
will then grow and hopefully enable the entity to meet its future obligations.
The estimation of the amount to set aside is very difficult. Usually
companies will use the services of an actuary (an expert in post retirement
benefits). The actuary will perform a calculation in which he includes
estimates of all the variables which will effect the growth of assets and
liabilities. These include:
Required post retirement benefit;
Rate of return on the stock market;
Interest (discount) rate;
Inflation;
Rate of leavers;
Death in service probability.
The actuary will then tell the company how much it needs to set aside, the
current service cost in order to meet the obligation. This is usually stated
as a percentage of salary and is usually paid to the plan on a monthly basis.
The actuary will never be absolutely accurate in respect of his estimates. This
means that the value of the plan assets and liabilities at the end of each reporting
period will be different to that forecast at the last actuarial valuation. The standard
gives rules on how (or whether) to account for such differences.

Illustration 1 Actuarial calculations

Assets Liabilities Surplus
$ $ $
Balance at beginning 962 (758) 204
Contributions 25 25
Improvements to benefits (12) (12)
Actual less expected return on assets * 480 480
Changes in assumptions underlying
present value * (146) (146)
Experience losses * (58) (58)
Expected return on assets 73 73
Interest on liabilities (53) (53)
Benefits paid (52) 52
Current service cost (34) (34)

_______ _______ _______
Balance at end 1,488 (1,009) 479

_______ _______ _______

Commentary
The above would be done by an actuary. Components of actuarial gains/losses
include the asterisked (*) items (i.e. actual less expected return on assets, changes
in assumptions and experience losses). Experience losses would include, for
example, the decline in value of the plans securities. The current service cost
would be given to you in an examination question.
5.2 IAS 19 approach
In keeping with The Framework IAS 19 adopts a balance sheet approach.
The difference between the value of plans assets and liabilities is recognised
In the statement of financial position.
The standard sets outs rules for the treatment of actuarial differences.
The standard gives guidance on:
valuation methods;
the discount rate for valuation of liabilities;
valuation frequency.
5.3 Accounting basics
An entity makes payments to a plan (a separate legal entity). This cash is
invested and used to pay retirement benefits when they fall due for payment.
The plan is an entity with assets and liabilities (to the pensioners).
At the end of each reporting period the assets and liabilities are valued and
the entity recognises the net liability (or, more rarely, the net asset) in the
statement of financial position.

Commentary
This seems a little strange at first. The entity is recognising a net liability of a separate
legal entity. But remember that the ultimate obligation to the employees is owed by the
entity. The plan is merely a vehicle which allows the entity to meet this obligation. In
substance the assets and liabilities of the plan are a special area of the entitys own
statement of financial position even though they are held by a separate entity.
Illustration 2

The following information relates to the assets and liabilities of the retirement benefit
plan of entity X. (This is not a summary of Xs statement of financial position but that
of the plan.)
2006 2007
$m $m
Fair value of plan assets 100 110
Present value of plan obligations (120) (135)
Net liability of the plan (20) (25)

The basic rule (simplified) is that:
In 2006 X must recognise a liability of $20m
In 2007 X must recognise a liability of $25m

If X had made a payment of $1m to the plan in 2007 the full journal would be:
Dr Profit or loss 6
Cr Liability (25 20) 5
Cr Cash 1

Commentary
This basic rule is made more complicated by actuarial gains and losses (as
will be seen later).
5.4 Complication
5.4.1 Plan assets and liabilities
Firstly we must understand what causes the movement in the values of the
plan assets and liabilities.
At the end of the reporting period the entity knows the following:
value of the plan assets and liabilities at the start of the period;
the amount of cash paid to the plan during the period;
the amount of cash paid by the plan to pensioners during the period;
the current service cost for the period (information supplied by the actuary);
the actuarial assumptions made for the period.
An entity can calculate the values of the assets and liabilities that it would expect to
exist at the end of the period if all of the information was accurate.
Illustration 3

The following information relates to the assets and liabilities of the retirement benefit
plan of entity Q. (This is not a summary of Qs statement of financial position but that
of the plan.)
Start of the period $
Fair value of plan assets 1,000
Present value of plan obligations (1,000)
During the period
Current service cost 125
Contributions paid to the plan 80
Benefits paid 130
Actuarial assumptions
Interest rate 9%
Return on investments 12%
Analysis Liability Asset
$ $
At start of the year 1,000 1,000
Interest expense (9% 1,000) 90
Benefits paid (130) (130)
Expected return on assets (12% 1,000) 120
Contributions 80
Expected value (This is what the valuation at the end of
the period would show if all of the actuarial assumptions
made at the start of the period had been 100% correct)

1,085

1,070

Suppose the actual values at the end of the period were: 1,215 1,147
The difference is called the actuarial gain or loss:
Actuarial loss 130
Actuarial gain 77

5.4.2 Actuarial gains and losses
Actuarial gains and losses may result from increases or decreases in either :
the present value of a defined benefit obligation; or
the fair value of any related plan assets.
Causes include:
unexpectedly high or low rates of employee turnover, early
retirement or mortality;
increases in salaries, benefits etc;
the effect of changes in the discount rate; and
differences between the actual return on plan assets and the
expected return on plan assets.
5.4.3 Liability recognised
In the above illustration there is no actuarial gain/loss at the start of the
period. At the end of the period:
Liability Asset Net
liability

Expected value 1,085 1,070 15
Actual value 1,215 1,147 68
Actuarial difference (130) 77 53

IAS 19 requires that an entity recognises a liability based on the values of the
plan assets and liabilities at the end of the reporting period.
If the entity recognised a liability of $68 then this would mean that it would
recognise the actuarial loss of $53. The double entry would be:
Dr Profit or loss (balancing figure) 148
Cr Cash 80

Commentary
IAS 19 permits, but does not require, that the whole amount of $148 be charged to
profit or loss. A lesser amount can be charged under the corridor method.
5.4.4 The corridor
Actuarial differences arise every year. Some years they will be a loss and in
others they will be a gain.
The IASC believed that if they are always taken to profit or loss this would
lead to misleading fluctuations in profits.
To avoid this IAS 19 contains a materiality test. Only that part of the gain or loss
which falls outside a test figure (the corridor) is taken to profit or loss. Even then,
this amount is not expensed immediately but recognised over the average remaining
service lives of the employees starting next year.

Commentary
Actuarial differences are not recognised in the year in which they originate.
Net cumulative unrecognised actuarial gains and losses at the end of the
previous period are compared with the corridor.
The corridor is the higher of:
10% of the fair value of the plan assets at the end of the previous period; and
10% of the present value of the plan obligations at the end of the
previous period.

Illustration 3 Continued Corridor calculations

None of the actuarial loss of $53 is recognised in the period in which it arises.
Recognition at the end of the current reporting period: $
Net liability at the end of the period 68
Less the unrecognised actuarial difference (53)
Net liability actually recognised 15
Cr Cash 80
The unrecognised actuarial difference is compared with the corridor:
$
10% of plan assets at the end of the previous period
(10% 1,000)
100
10% of plan liabilities at the end of the previous
(10% 1,000)

100

Therefore, corridor 100
Unrecognised actuarial difference
Amount to be recognised


Commentary
Even if there was an amount to be recognised it would be spread over the
average remaining service lives of the employees.
5.4.5 Amendment to IAS 19
In December 2004, IASB issued an amendment to IAS 19 Employee Benefits.
The IASB has decided to allow the option of recognising actuarial gains and
losses:
in full;
in the period in which they occur;
in other comprehensive income.

Commentary
This option is similar to the requirements of the UK standard, FRS 17
Retirement Benefits.
5.5 Expense
The expense can be analysed into its component parts (i.e. the plan incomes
and expenses).
The expense will be made up of:
$
Interest cost 90
Expected return on plan assets (120)
Actuarial gains and losses

95


Activity 1

(This continues the illustration above into the next 2 years)
2007 2008 2009
$ $ $
Current service cost 125 140 155
Benefits paid 130 150 170
Contributions paid 80 90 100

Present value of the obligation at 31 December 1,215 1,413 1,600
Fair value of the plan assets at 31 December 1,147 1,137 1,200

Discount rate at the start of the year 9% 8% 8%
Expected return on plan assets 12% 11% 11%

The present value of the obligation and the fair value of the plan assets were both
$1,000 at 1 January 2007 and there were no actuarial gains or losses at this date.
The average remaining working lives of the employees was estimated to be 10 years.
Required:
In respect each of the three years ending 2007, 2008, 2009:
(a) Calculate the actuarial gain/loss arising in the period.
(b) Calculate how much of the gain or loss should be recognised and in
which period.
(c) Calculate the liability to be included in the statement of financial
position at each year end.
(d) Construct the necessary journal to record the above transactions.
(e) Explain the composition of amount recognised in profit or loss.
Proforma solution
(a) Actuarial loss/(gain)
2007
Liabilities Assets
$ $
Present value/Fair value at 1 January 1,000 1,000
Interest cost (9%) 90
Expected return (12%) 120
Contributions 80

Expected value
1
1,085 1,070
Actuarial loss/gain a balancing figure 130 77 53 Net loss

Present value/Fair value at 31 December 1,215 1,147

Commentary
The activity has been completed for the first year.
2008
Liabilities Assets
$ $
Interest cost (8%)
Expected return (11%)
Current service cost
Benefits paid
Contributions

Expected value
Actuarial loss/gain a balancing figure Net loss/(gain)

Present value/Fair value at 31 December

1
If all estimates made at the start of the period had been 100% accurate.
2009
Liabilities Assets
$ $
Present value/Fair value at 1 January
Interest cost (8%)
Expected return (11%)
Benefits paid
Contributions

Expected value
Actuarial loss/gain a balancing figure Net loss/(gain)

Present value/Fair value at 31 December

(b) Amount of actuarial difference recognised
2007 2008 2009 2010
$ $ $ $
b/f 53
Gain /(loss) in the year (see (a) above) 53
Recognised in the period (W)
Net loss unrecognised at the end of the period 53

WORKING
2007 2008 2009 2010
Corridor limits: $ $ $ $
10% of plan obligations 100
10% of plan assets 100
Limit is the greater of the above 100
Actuarial loss at the end of the period 53
Amount which falls outside the corridor
Amount to be recognised next year ( 10)

(c) Statement of financial position at 31 December
2007 2008 2009
$ $ $
Present value of the obligation 1,215
Fair value of the plan assets 1,147
68
Unrecognised actuarial (loss) (53)
Recognised in the statement of financial position 15
(d) Journal
2007 2008 2009
Cr Liability (W) 15
Cr Cash (contributions paid) 80
WORKING
2007 2008 2009
Movements on the liability: $ $ $
Opening liability
Net movement 15
Closing liability 15
(e) Profit or loss
2007 2008 2009
$ $ $
Current service costs 125
Interest cost 90
Expected return on plan assets (120)
Net actuarial gain or loss recognised in the year
Expense 95

6 Sundry guidance
6.1 Actuarial valuation method
An entity should use the projected unit credit method to determine:
the present value of its defined benefit obligations;
the related current service cost; and
past service cost (where applicable).
This method sees each period of service as giving rise to an additional unit of benefit
entitlement and measures each unit separately to build up the final obligation.
The method requires an entity to attribute benefit to:
the current period (to determine current service cost); and
current and prior periods (to determine the present value of defined
benefit obligations).
Illustration 4

The present value of defined benefit obligations is calculated in accordance with IAS 19
(Employee Benefits) by the projected unit credit method. The future benefit obligations
are valued by actuarial methods on the basis of a prudent assessment of the relevant
parameters. The fair value of plan assets is deducted from the present value of the obligation
for pensions and other post-employment benefits. The obligations and plan assets are valued at
regular intervals of not more than three years. For all major plans, comprehensive actuarial
valuations are performed annually as of December 31.
The difference between the defined benefit obligation after deducting the fair value of plan
assets and the net liability recognized in the balance sheet is attributable to unrecognized past
service cost.
Plan assets in excess of the benefit obligation are reflected in other receivables, subject to the
asset limitation specified in IAS 19 (Employee Benefits).
Benefits expected to be payable after retirement are spread over each employees entire
period of employment, allowing for future changes in remuneration.

Notes to the Consolidated Financial Statements of the Bayer Group 2006

6.2 Discount rate
The discount rate should be determined by reference to market yields on high
quality corporate bonds at the end of the reporting period (i.e. AAA-rated).

Commentary
In countries where there is no deep market in such bonds, the market yields
on government bonds should be used.
6.3 Regularity
Valuations should be carried out with sufficient regularity that the amounts
recognised in the financial statements do not differ materially from the
amounts that would be determined at the end of the reporting period .
An entity is encouraged to use a qualified actuary in the measurement of all
material post-employment benefit obligations.
6.4 Past service cost
Past service cost should be recognised as an expense on a straight-line basis
over the average period until the benefits become vested.
If the benefits are already vested immediately following the introduction of, or changes
to, a defined benefit plan, the past service cost must be recognised immediately.
Illustration 5

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 January
2008 the entity improves the pension to 2.5% of final salary for each year of service
starting from 1 January 2006. At the date of the improvement, the present value of the
additional benefits for service from 1 January 2006 to 1 January 2008 is as follows:
$000
Employees with more than five years service at 1 January 2008 150
Employees with less than five years service
at 1 January 2008 (average period until vesting: three years) 120

_____
270

_____
The entity recognises $150,000 immediately because those benefits are already vested.
The entity recognises $120,000 on a straight-line basis over three years from 1 January
2008.

6.5 Asset ceiling
The calculation of the amount to be included in the statement of financial position may
result in an asset being recognised.
IAS 19 sets an asset ceiling on how much of that asset can be recognised as
the lower of the sum of:
present value of the
obligation; plus
any unrecognised actuarial
gains, less any unrecognised
actuarial losses;
less any unrecognised past
service cost;
less the fair value of the plan
assets.
vs any cumulative unrecognised net
actuarial losses and past service
cost; and
the present value of any economic
benefits available in the form of
refunds from the plan or reductions
in future contributions into the
plan.

Commentary
The standard is in effect applying a degree of prudence by setting a limit on
the amount of the asset that can be recognised.
The asset may arise in circumstances where a plan has been overfunded or
where actuarial gains are recognised. The entity recognises an asset because:
the entity controls a resource, which is the ability to use the surplus
to generate future economic benefits;
the control is as the result of a past event; and
future economic benefits are available in the form of a reduction in
future contributions or as a cash refund.
6.6 Settlements and curtailments
The settlement of a plan occurs when an entity eliminates all further
obligations that were provided under a defined benefit plan. This could
happen when the entity makes a one-off payment to members of the plan in
return for the cancellation of any future obligations.
A curtailment occurs if the entity is committed to make a material reduction
in the number of employees covered by the plan or amends the terms of the
plan so that future service will no longer qualify for benefits (or, if still
qualifying, benefits will be much reduced from the original plan).
An entity must recognise a gain or loss when it settles or curtails a plan. The
gain or loss will comprise:
the net resulting change in the present value of the obligation and
the fair value of the assets; and
the related actuarial gains and losses and past service cost that had
previously not been recognised.

7 Presentation and disclosure
7.1 Presentation
An asset relating to one plan should be offset against a liability relating to
another when, and only when, the entity:
has a legal right of offset (i.e. to use a surplus in one plan to settle
obligations in another); and
intends to settle the obligations on a net basis or realise the surplus
and settle the obligation simultaneously.
7.2 Disclosure defined benefit plans
The entitys accounting policy for recognising actuarial gains and losses.
A general description of the type of plan.
A reconciliation of the assets and liabilities recognised, showing at least:
the present value at the end of the reporting period of defined
benefit obligations that are wholly unfunded, wholly funded and
partly funded;
the fair value of any plan assets at the end of the reporting period ;
the net actuarial gains or losses not recognised in the statement of
financial position ;
the past service cost not yet recognised in the statement of financial
position ;
any amount not recognised as an asset, because of the asset ceiling
limit; and
the amounts recognised in the statement of financial position .
Illustration 6
25. Provisions for pensions and other post-employment benefits (extract)

The status of unfunded and funded defined benefit obligations, computed using the
appropriate parameters, is as follows:

Germany
Pension
obligations
Other post-
employment
benefit obligations
million 2005 2006 2005 2006
Defined benefit obligation as of January 1 8,866 10,256 184 158
Acquisitions 14 1,703 6
Divestitures/changes in the scope of consolidation (10) 0
Current service cost 138 195 17 19
Interest cost 432 466 5 4
Employee contributions 26 26
Plan changes 56 (8)
Net actuarial (gain) loss 1,160 (487)
Benefit paid (436) (489) (48) (46)
Plan curtailments (2)
Reclassifications to current assets/liabilities (293) (2)
Defined benefit obligation as of December 31 10,256 11,357 158 139

Fair value of plan assets as of January 1 4,373 4,599
Acquisitions 1,497
Divestitures/changes in the scope of consolidation (5)
Actual return on plan assets 330 116
Employer contributions 306 325 48 46
Employee contributions 26 26
Benefits paid (436) (489) (48) (46)
Reclassifications to current assets/liabilities (16)
Fair value plan assets as of December 31 4,599 6,053

Net recognized liability as of December 31 (5,657) (5,304) (158) (139)


A reconciliation showing the movements during the period in the net liability
(or asset) recognised in the statement of financial position .
The total expense recognised in profit or loss for each of the following, and the
line item(s) in which they are included:
current service cost;
interest cost;
expected return on plan assets;
actuarial gains and losses;
past service cost; and
the effect of any curtailment or settlement.
Illustration 7


The costs for defined-benefit pension plans for the continuing and discontinued operations
are comprised as follows:
Germany
million 2005 2006
Current service cost 138 195
Past service cost 56 (8)
Interest cost 432 466
Expected return on plan assets (237) (270)
Plan curtailments (2)
Plan settlements
389 381


The actual return on plan assets.
The principal actuarial assumptions used as at the end of the reporting period,
including, where applicable:
the discount rates;
the expected rates of return on any plan assets for the periods presented;
the expected rates of salary increases;
medical cost trend rates; and
any other material actuarial assumptions used.

Illustration 8


All defined benefit plans necessitate actuarial computations and valuations. These
are based not only on life expectancy and staff fluctuation, but also on the following
parameters, which vary from country to country according to economic conditions.
The weighted parameters used to value pension obligations as of December 31 of the
respective year were as follows:
Germany
% 2005 2006
Pension obligation
Discount rate 4.25 4.60
Projected future renumeration increases 2.50 2.60
Projected future benefit increases 1.25 1.50
Other post-employment benefit obligations
Discount rate 3.25 4.30


8 EXAMINATION TECHNIQUE

Commentary
The basic information that is required, in order to arrive at the asset or liability
to be included in the statement of financial position and the make up of the
items to be included in the statement of comprehensive income, is set out below.
8.1 Statement of Financial Position
An entitys asset or liability can be found using the following equation:
PV of the obligation; plus
Unrecognised actuarial gains, or minus unrecognised actuarial losses; less
Past service cost not yet recognised; less
FV of the plan assets.
If the result is positive then a liability will be recognised in the entitys
statement of financial position, and if the result is negative then an asset will
be recognised.
8.2 Statement of Comprehensive Income
The following items will be included within profit or loss in the statement of
comprehensive income:
Interest on opening plan liability
Return on opening plan assets
Past service cost recognised in period
Actuarial gain or loss to be recognised in the period, based upon the
opening position, if the corridor approach is being followed.
If a question requires recognition of all actuarial gains or losses immediately,
then this can be recognised either within profit or loss or within other
comprehensive income if the 2004 amendment is being followed.
Focus
You should now be able to:
describe the nature of defined contribution, multi-employers and defined
benefits plans (IAS 19);
explain the recognition and measurement of defined benefit plans under
current proposals;
account for defined benefit plans including the amounts shown in the statement of financial
position , statement of comprehensive income and notes to the account;
identify perceived problems with current proposals on accounting for post-
employment benefit costs.
Activity solution
Solution 1
(a) Actuarial loss/(gain)
2007
Liabilities Assets
$ $
Contributions 80

Expected value
2
1,085 1,070
Actuarial loss/gain a balancing figure 130 77 53 Net loss


2008
Liabilities Assets
$ $
Contributions 90

Expected value 1,302 1,213
Actuarial loss/gain 111 (76) 187 Net loss


2009
Liabilities Assets
$ $
Contributions 100

Expected value 1,511 1,192
Actuarial loss/gain 89 8 81 Net loss


2
If all estimates made at the start of the period had been 100% accurate.
(b) Amount of actuarial difference recognised
2007 2008 2009 2010
$ $ $ $
b/f 53 240 311
Loss/(gain) in the year (see (a) above) 53 187 81 x
Recognised in the period (W) (10) (15)
Net cumulative unrecognised at the end of the period 53 240 311 x

Net cumulative unrecognised loss/(gain) at the end of the
previous reporting period
53 240 311

WORKING
2007 2008 2009 2010
Corridor limits: $ $ $ $
10% of plan obligations at end of previous period 100 122 141 160
10% of plan assets at end of previous period 100 115 113 120
Limit is the greater of the above 100 122 141 160
Net cumulative unrecognised loss/(gain) at the end of the
previous period
_ 53 240 311
Amount which falls outside the corridor 99 151
Amount to be recognised ( 10) 10 15
(c) Statement of financial position at 31 December
2007 2008 2009
$ $ $
Present value of the obligation 1,215 1,413 1,600
Fair value of the plan assets 1,147 1,137 1,200
68 276 400
Unrecognised actuarial (loss) (53) (240) (311)
Recognised in the statement of financial position 15 36 89

(d) Journal
2007
$
2008
$
2009
$
Dr Profit or loss (balancing figure) 95 111 153
Cr Liability (W) 15 21 53
Cr Cash (contributions paid) 80 90 100
WORKING
2007 2008 2009
Movements on the liability: $ $ $
Opening liability 15 36
Net movement 15 21 53
Closing liability 15 36 89

(e) Profit or loss
2007 2008 2009
$ $ $
Current service costs 125 140 155
Interest cost 90 97 113
Expected return on plan assets (120) (126) (125)
Net actuarial gain or loss recognised in the year 10
Expense 95 111 153


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SESSION 18 IAS 19 EMPLOYEE BENEFITS

Accountancy Tuition Centre (International Holdings) Ltd 2008 1801

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