Company Valuation Under IFRS : Interpreting and Forecasting ...

Chapter Four – Key issues in accounting and their treatment under IFRS
4.2.5 Accounting for Defined Benefit Plans
A defined benefit pension scheme will be reflected in the financials as follows:
Income Statement Charge
The actual cost of providing a defined benefit scheme in any year will be the
increase in the obligation minus the increase in the fund assets. This concept is
reflected in the income statement calculation below.
Income statement charge (expense)
Service cost*
X
+ Interest on PBO* X
- Expected return on fund assets** X
+/- Amortisation of gains/losses** X
€
Net pension cost
X
IAS 19 does not specify if these items should be presented as a single line or
disaggregated as most analysts would want (see below).
Notes
*Actual events
These two events are simply a record of what has happened
** Smoothed events
1. The expected ROA is based on an estimate of the long term rate of
return. Pension cost includes this expected level rather than the
actual return. Any difference is deferred and accumulated
2. The Amortisation of prior service cost is over the remaining service
life of employees (rather than expensed as incurred). This might
arise where the company’s management will make a discretionary
improvement to the pension provision for existing pensioners
3. The amortisation of gains/loss refers to, for example, changing
assumptions and the difference between actual gains/losses and
expected gain/losses
However, the impact of such gains/losses is generally not recognised in one
particular period. Instead these items are smoothed. This is to avoid excessive
volatility. IAS 19 uses a rather bizarre concept of a corridor to achieve this
smoothing. An enterprise can smooth any gains/losses in excess of the greater of:
• 10% of the plan assets (@ fair value) and
• 10% of the present value of the projected benefit obligation.
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