Employees Benefit – IAS 19

Presented By: Mr. Qanit Khalil, FCA

Post Retirement / Long Term
Employee Benefits - Pensions
Defined Contribution Schemes

• dkkdkEmployer pays fixed contribution to an

external fund (usually % of salary).

• Employer’s obligation is discharged upon

payment of the contribution.

• Members benefits depend upon

performance of the fund over time.

• Investment risk is with the employee.

DC Schemes – Impact on the financial statements

Income statement:
Record contribution as expense
in Income Statement
Balance sheet:
No impact on balance sheet other
than outstanding contributions
payable to the investment funds.
Defined Contribution (DC)

Examples:
• A Company agrees to pay 5% of an
employee’s salary into a third party fund.
• The company pays Rs10,000 pa for each
employee into a third party fund following each
year of service.

Key criteria:
• Fixed amount of contribution.
• Employer’s obligation ceases upon payment of
contribution.
Defined Benefit Schemes

• May be pension or lump-sum.

• Usually based on salary and years of service.

• The calculation of pension benefits is based

on Final pay or Average pay.

• Liability calculated by actuary.

• The company is making a promise and

therefore bears the risk of meeting the future
obligation.

• Risk remains with Employer

Defined Benefit (DB) cont…

Examples:
• The company agrees to provide employees
with a pension of x% of their final salary for
each year of service.
• The company agrees to provide a lump sum of
5 times the employee’s final salary.

If the plan rules do not meet the definition of DC,

the plan must be treated as DB.
Comparison of DC & DB Plans

EMPLOYEES COMPANY

Pros Cons Pros Cons

• Portability • Risk of insufficient • Cost certainty • Less attractive

DC
DC • Not subject funds to cover to employees
toFinancial viability retirement
of employer (investment risk,
longer life)

DB
DB • Benefit certainty • Subject to Financial • Retention • Exposed to
• No investment viability of employer financial risks
risk and increasing
life expectancy
Funding

Pension plans can be:

• Funded Retirement Benefits (FRB)
• Unfunded Retirement Benefits (URB)

Funding decisions are usually based on factors

such as:
• Cash position of the company
• Local tax regulations
• Local legal requirements
• Suitable investments available
• Market norms
Funded Retirement Benefits (FRBs)

Funded Plans:
• Assets have been contributed into a separate
legal entity to the employer
• Is usually a trust, governed by trustees.
• The value of the assets may be less or more
than the value of the liability
• Assets> Liabilities = Funded plan in Surplus
• Liabilities> Assets = Funded plan in Deficit
Unfunded Retirement Benefits (URBs)

Unfunded Plans:
• No assets have been put aside by the
employer to meet pension obligations.
• Benefits are paid from company funds
• Viewed by employees as being less secure.
Question

If you have a Funded scheme in deficit, this

means that:

(A) Company has no specific assets put

aside to meet it’s pension liability
(B) Liabilities exceed Assets
(C) Assets exceed Liabilities
(D) The actuaries are doing a terrible job
Question

If you have a Funded scheme in deficit, this

means that:

(A) Company has no specific assets put

aside to meet it’s pension liability
(B) Liabilities exceed Assets
(C) Assets exceed Liabilities
(D) The actuaries are doing a terrible job
Definitions Of DB Components
Balance Sheet - Defined Benefit Plan

Pension Obligation

Pension Assets (if any)

Exclude: Unrecognised gains /losses

Related Deferred Tax

Define DBO

– The expected future payments required to

settle the benefits resulting from employee
service in the current and prior periods.

– The obligation is discounted using the

interest rate of high quality corporate bonds.

– The obligation is calculated by the actuary.

Key Drivers:
– Actuarial assumptions
– Business decisions
Measures of Defined Benefit Obligation

Accrued Benefit Obligations :

The Pension Liability based on service to date and
current salary levels.

Vested Benefit Obligation :

The portion of the benefit obligation that does not
depend on future employee service. Alternatively,
it is vested portion of ABO

This assumes the employee leaves service

immediately.
Measures of Defined Benefit Obligation

Projected Benefit Obligations

The Pension Liability based on service to date but

taking into account future expected salary levels.

This recognises that the liability for benefits earned

by service to date will increase as salaries rise in the
future. PBO is the liability recognised in the Balance
Sheet.
 Data for Illustration:
Calculation of DBO Salary in Year 1 = 10,000;
Assumed annual increase 7%
Discount Rate: 10%

Year 1 2 3 4 5

Benefit Attributed to:

- Prior year 0 131 262 393 524

- Current year (1%) 131 131 131 131 131

Current and prior year 131 262 393 524 655

Opening obligation 0 89 196 324 476

Interest @ 10% 0 8.9 19.6 33.4 47.8
Current service cost 89 98 108 119 131

Closing obligation 89 196 324 476 655

Pension Fund Assets

• Specific assets to meet future pension

obligations.
• Held in legal entities (eg trusts) separate to
Unilever.
• Assets measured at fair value
• May be equities, bonds, property etc.
• If market price not available, at fair value (e.g.
using a discount rate that reflects the
associated risk and the maturity)
Profit and loss - Defined Benefit Plan

• Gross Service Cost

• Past Service Costs

• Settlements

• Curtailments

• Interest Cost

• Expected Return on Plan assets

Gross Service Cost

 Increase in the present value of a defined Liability Asset

benefit obligation resulting form employee
service in the current period
 The Net Present Value of the extra future
benefits earned through the current period of
service
 The actuary will calculate this as part of the
valuation report and normally express this as
a percentage of payroll.

Example
Payroll cost Rs1,000,000 x 15% = €150,000

Accounting Entry
Dr Operating Profit – Gross Service Cost
Cr Pension Liability
Past Service Costs /Plan amendments

 Occur when plan benefits are improved Liability Asset

beyond the current terms and effect past
service.
 The amount recognised is the cost (ie
additional liability created) as a result of the
improved benefits .
 Recognise cost immediately when irrevocable
decision is made and benefit is vested.
Unvested benefits are recognised on a
straight line method over the average vesting
period

Accounting Entry
Dr Operating Profit – Past Service Cost
Cr Pension Liability
Example: Retirees receive
a pension of 50% of their
final salary. The company
then increases this to
60%,
resulting in a PSC.
Settlements

 Arise where the liability is settled by some Liability Asset

action eg business disposal or transferring
the DB liability to an insurance company.
 Amount to record is the difference between
the liability disposed of and the assets
given in settlement.
 Usually result in a cost to P&L
 Amount will be calculated in conjunction
with the actuary.

Accounting Entry
Dr Pension Liability
Cr Pension Assets
Dr Operating Profit – Settlement Cost
Curtailments

 Result from significant reductions in Liability Asset

employees and thus liability.
 Examples are factory closures, large
restructuring programmes
 No fixed recognition criteria for what
constitutes a Curtailment.
 Record the reduction in the present value of
the pensions liability.
 Amount calculated by actuary.
 Usually results in a credit to P&L (TR)

Accounting Entry
Dr Pension Liability
Cr Operating Profit – Curtailment Cost
Interest on Liability

 Interest cost – is the unwinding of the Liability Asset

discount of the pensions liability for the
current period.
 The discount rate is agreed at the last
valuation based on the appropriate
bond yields for that country.

Calculation is:
Average liability X % discount = Interest
for the period rate on Liability

Accounting Entry
Dr Interest
Cr Pension Liability
Expected Return on Assets

The credit taken in the Profit and Loss Liability Asset

Account for the return on plan assets based
on the actual value of the plan assets and the
long term expected return on those assets

Calculation is:

Average assets X % rate of = Expected Return

for the period return on Assets

Accounting Entry
X Assets
Dr Pension
Cr Operating Profit

Variance from the expected return is taken in

the Actuarial gain/loss or SORIE.
Cash Movements - Defined Benefit Plan

• Company contributions
• Benefit Payments
Company Contributions

 Payments from Employer to funded Liability Asset

plans to increase plan assets.
 Only applies to Funded plans.
 Must record only the company
contribution, not any employee
contributions
 Any refunds (where applicable) from a
surplus in the pension fund, should be
recorded here as a negative value

Accounting Entry
Dr Pension Assets
Cr Cash
Benefit Payments

 Records the amounts of payments paid to Liability Asset

pensioners.
 Relates to both:

• Funded schemes - benefits paid from

pension fund assets;
• Unfunded schemes – benefits paid
from Company funds.

Accounting Entry
Dr Pension Liability
Cr Pension Assets
Actuarial Assumptions
Actuarial Assumptions

 Main Assumptions
Discount rate
Rate of salary increase
Expected rate of return on plan assets
Demographic variables (e.g. staff
turnover, mortality etc.)
 Can lead to volatile results
 Can result in unexpected funding shortfalls
 Actuarial assumptions should be unbiased
& mutually compatible
Actuarial Gains and losses

• Actual less Expected Return

• Experience Gains/ Losses
• Changes in Actuarial Assumptions
Actual less Expected Return

 This entry records the difference between Liability Asset

the actual return and the expected return
on assets.

 All assets must be recorded at fair value

at year end.

 This entry posts the difference so that the

closing asset values are at fair value.

Accounting Entry
Dr/Cr Pension Assets (for fair valuation of
assets)
Dr/Cr Reserves OR Un-recognized
Actuarial gain / loss
Experience Gains & Losses

 Records effect on liability caused by

differences between actual experience Liability Asset
and the latest assumptions.
 Latest assumptions vs what actually
happened
 Entry performed when new actuarial
valuation performed
 Amount calculated by actuary

Accounting Entry
Dr/Cr Pension liability (to record difference
on the basis of latest assumptions)
Dr/Cr Reserves OR Un-recognised
actuarial gain/loss
Changes in Actuarial Assumptions

 Records effect on liability caused by

changes in discount rates, inflation, Liability Asset
salary increases, mortality rates etc.

 Different variables = different liability.

 Entry performed when new actuarial

valuation performed

 Amount calculated by actuary

Actuarial Assumptions

What are the key drivers in the actuarial assumptions

impacting a company’s pension plans?

1. Inflation
2. Discount rate
3. Salary growth
4. Life expectancy
5. The mix of equity and bonds held in the plan

QUESTION: Which of the items above are correct?

A) All of the above
B) 1 and 2 only
C) 1,3 and 5
D) 1,2,3 and 4
Actuarial Assumptions

What are the key drivers in the actuarial

assumptions impacting a company’s pension
plans?

1. Inflation
2. Discount rate
3. Salary growth
4. Life expectancy
5. The mix of equity and bonds held in the plan

QUESTION: Which of the items above are correct?

A) All of the above
B) 1 and 2 only
C) 1,3 and 5
D) 1,2,3 and 4
Elements of Defined Benefit Plan Liability

Unrecognised

Present value of DBO

actuarial
losses
The defined benefit obligation (DBO)
recognised in the balance sheet is:
Unrecognised
past
Present value of DBO service cost
Plus actuarial gains not yet recognized
Less actuarial losses not yet recognized Plan
assets
Less past services costs not yest recognized at
Less fair value of plan assets fair
value

Net liability
in the B/S
Amortization of Actuarial Gains and Losses

10% corridor Unrecognised

Present value of DBO

actuarial
Amortise: losses
 Corridor is the higher of
10% of PV DBO Unrecognised
10% of plan assets past
 Limit is separate for each plan service cost
 Amortize actuarial gains/ loss
existing at the beginning of the period Plan
assets
over remaining average working lives at
of employees fair
value
 Faster recognition method if consistently
applied to both gains & losses
Net liability
in the B/S
Amortization of Actuarial Gains and Losses - !0%
Corridor Approach

On 1 January 20X5 PV of the defined benefit

obligation was 500 and fair value of plan
assets was 400

B B
Recognize loss A A Recognize gain
> 50 <50 <50 > 50
(10% of 500) (10% of 500)

Losses -10% +10% Gains

A Corridor B Spread excess greater than 50

41 over employees’ service lives
Actuarial gains/losses may also be recognised
through ‘SORIE”

Profit or Loss:
Corridor Approach
any faster recognition method

Statement of recognized income & expense:

Immediate recognition
for all plans
Section 6 – Further Info
Disclosure Requirements

IAS 19 requires company to disclose:

• Closing positions of liabilities and assets
• Key assumptions used to calculate these
figures.
• Explanations for the movement in balances
• P&L expense recognised in the period
• Material “one-off” transactions
• Analysis of funded/ unfunded balances
• Sensitivity information about medical cost
trend rates
• Five year history of experience adjustments
on DBO and on plan assets
Amendments to IAS 19: Multi-employer Plans

DB accounting for the proportional

share of assets and defined
benefit obligation

Defined contribution accounting if

insufficiant information

Recognize an asset or liability

resulting from contractual sharing
for surpluses / deficits
Amendments to IAS 19: Entities Under Common
Control

Measure the plan as a whole as required by IAS

19
Recognise net defined benefit cost charged if
there is contract or policy to charge it
If no contract or policy exists, DB accounting by
sponsoring employer
Other entities expense their contributions payable
Related party disclosures
Asset Ceiling Test

PV of DBO
Net asset is subject to an asset
ceiling test
Plan
Limit the net asset to: assets
Improve at
 Amount available in form of
refunds or reductions in
employee fair
benefits etc.
contributions value
 Plus unrecognized actuarial Surplus
available as

Asset ceiling
losses (net)
refund
 Plus unrecognized past
service costs Unrecognised
past
service cost

Unrecognised
actuarial
losses
Asset Ceiling Concept

– The objective of the asset ceiling is to prevent gains

being recognised solely as a result of the deferred
recognition of past service cost and actuarial losses
– The problem arises when an entity defers recognition
of actuarial losses or past service cost in determining
the amount specified in paragraph 54 but is required
to measure the defined benefit asset at the net total
specified in paragraph 58(b). Recognising asset
equal to unrecognised past service cost and actuarial
losses could result in the entity recognising an
increased asset
Thank You