Employee Benefits (IAS 19) - Actuarial Society of India

Basic Principle of IAS 19• The cost of providing employee benefitsshould be recognized in the period inwhich the benefit is earned by theemployee, rather than when it is paid orpayable.www.carajkumarradukia.com 5

IAS 19 – Employee Benefits -• The Standard identifies followingcategories of employee benefits to becovered– Short term employee benefits– Post-employment benefits– Other long term employee benefits– Termination benefits• It covers formal plans, state plans,constructive obligation (informal practices)www.carajkumarradukia.com 6

IAS 19 Applies to1. Wages and Salaries2. Compensated Absences (paid vacation and sick leave)3. Profit Sharing Plans4. Bonuses5. Medical and Life Insurance Benefits during employment6. Housing Benefits7. Free or Subsidised goods or services given to employees8. Pension Benefits9. Post-Employment Medical and Life Insurance Benefits10. Long-Service or Sabbatical Leave11. ‘Jubilee' Benefits12. Deferred Compensation Programmes13. Termination Benefits.www.carajkumarradukia.com 7

The Standard Does not apply to• This standard does not apply to benefitswhich h needs to cover under the IFRS2share-based payment• This Standard does not deal with reportingby employee benefit plans (covered underIAS 26) e.g. accounting and reporting bytrust planswww.carajkumarradukia.com 8

Revised IAS 19• The IASB had published a revised versionof IAS 19 Employee Benefits on 16th June2011.• The revised standard will be applicable forreporting period starting on or after 1stJanuary 2013www.carajkumarradukia.com 9

Highlights of Revised IAS 19• Revised IAS 19 requires full recognition of deficit orsurplus (actuarial gains and losses) to be fullyrecognized on the balance sheet date.• Under the revised standard the net interest income isincluded is introduced as the equivalent of expectedreturn on plan assets under IAS 19.• The defined benefit cost under the revised standardcomprises of service cost, net interest andremeasurements.• A very extensive disclosure requirements are put forthunder the revised standard d especially those relating tocharacteristics, risk and the presented figures in thefinancial statements regarding defined benefit planswww.carajkumarradukia.com 10

The Revision impact onEnterprises• The “corridor approach” being removed• Assumption for the expected return on assetseliminated• Immediate recognition of the plan basedamendments in the Profit or Loss account• Increased requirements on disclosure ofinformation• Removal of recognition of gains or losses in theprofit or loss account• Application of mark-to market approach and‘ceiling tests’ on plan based assetswww.carajkumarradukia.com 11

Revised Goal of Enterprises afterRevision• Multinational companies with multiplepension funds should definitely increasetheir efforts to manage the risk of theirpension funds.• Listing of the most important local pensionfunds and stakeholders• Evaluating the impact of the changed IAS19 for your pensions• Looking at the possible IAS 19 proofsolutionswww.carajkumarradukia.com 12

Revised Goal of Enterprises afterRevision• Fix the corporate pension budget and redesignpension benefits within that budget• Set up pension ambitions and acceptable levelsof risk• Fix a timeframe for derisking (if desired).• Initiate communications programme to supportthe employer and employees• Given that pension risks have become moreobvious, companies are no longer rewarded withlower pension expenses resulting in increasedriskwww.carajkumarradukia.com 13

Type of Employee BenefitPlans• Defined Benefit : Some formula/Monetarypromise.• Defined Contribution : Just contributiondefined no promise of benefit.www.carajkumarradukia.com 14

Type of Employee Benefit Plans• Hybrid Plans : Where employer’sobligation is not limited to contributions tothe fund but has legal or constructiveobligation such as– Scheme having benefit formula that is notlinked solely with accumulation (hybridschemes)– Scheme providing guarantee, either indirectlythrough a plan or directly, of a specified returnon contributionswww.carajkumarradukia.com 15

Termination Benefits• Termination benefits are employeebenefits payable as a result of– Employer’s decision to terminate anemployee’s employment– Employee’s decision to accept voluntaryredundancy in exchange for those benefitswww.carajkumarradukia.com 16

Termination Benefits• An entity is committed to a termination when,and only when, the entity has a detailed formalplan (with specified minimum contents) for thetermination and is without realistic possibility ofwithdrawal.• Where termination benefits fall due more than12 months after the balance sheet date, theyshould be discounted.• In the case of an offer made to encouragevoluntary redundancy, the measurement oftermination benefits should be based on thenumber of employees expected to accept theofferwww.carajkumarradukia.com 17

Multi Employer Plans• Where it is defined benefit plan and information isavailable, account and disclose proportionate share asthough it were defined benefit plan of reporting entity• If information is not available, account for it as though itwere e a defined ed contribution o planwww.carajkumarradukia.com 18

Defined Contribution Plan - DCPwww.carajkumarradukia.com 19

Defined Contribution Plan• Employer pays fixed contribution to anexternal fund (usually % of salary).• Employer’s obligation is discharged uponpayment of the contribution.• Members benefits depend uponperformance of the fund over time.• Employees run the risk of investmentwww.carajkumarradukia.com 20

DCP – Financial Statement• Income statement:– Record contribution as expense in IncomeStatement• Balance sheet:– No impact on balance sheet other thanoutstanding contributions payable to theinvestment funds.www.carajkumarradukia.com 21

Example of Defined Contribution• A Company agrees to pay 8% of anemployee’s salary into a third party fund.• The company pays Rs10,000 pa for eachemployee into a third party fund followingeach year of service.• Contribution is fixed• The obligation on part of the employerceases on payment of contributionwww.carajkumarradukia.com 22

Defined Benefit Plan - DBPwww.carajkumarradukia.com 23

Defined Benefit Plan• Expected Future Payments are required tosettle the benefits• An Actuary calculates the Obligation• The obligation can be arrived at– Based on the Service and current Salarylevels– Based on the Service and future Salary levels– Based not on the future employee serviceswww.carajkumarradukia.com 24

Defined Benefit Schemes• It may be monthly pension or lump sum• Calculated based on the salary and yearsof service• Pay is Final Pay or Average Pay• The actuary calculates the liability• Company bears the risk of meeting thefuture obligationwww.carajkumarradukia.com 25

Example of Defined Benefit• The company agrees to pay 6% of theirfinal salary for each year of service or• The company agrees to provide a lumpsum amount, amounting to 5 times of thefinal salaryWhere any scheme does not fall within therules of Defined Contribution itautomatically falls under Defined Benefitwww.carajkumarradukia.com 26

Arriving at DBP Liability• The defined benefit obligation (DBO)recognized in the balance sheet is:– Present value of DBO– Plus actuarial gains not yet recognized– Less actuarial losses not yet recognized– Less past services costs not yest recognized– Less fair value of plan assetswww.carajkumarradukia.com 27

Accounting for Defined Benefit Planwww.carajkumarradukia.com 28

Valuation of Defined Benefit Plan• Actuarial mathematics is typically used and it isspecified by IAS 19 (Para 50(a))• It deals with – how liabilities should beapportioned in respect of “earned” and“unearned” service• It also deals with calculation of cost pertaining toaccrual of benefits in the plan over the mostrecent accounting gperiod• Actuarial funding method known as “projectedunit method” is prescribed by IAS 19www.carajkumarradukia.com 29

Various Asset Valuation Methods• Asset valuation methods can be classifiedinto four groups and nine specific methods– Fair market value (1 method)– Discounted cash flow (1 method)– Book value ( 3 methods cost, amortized,contract)– Smoothed value ( blend of cost and market,write-up, deferred d recognition, averagemarket value).www.carajkumarradukia.com 30

List of 9 asset valuation methods1. Fair Market Value Method2. Discounted Cash Flow Method3. Cost Book Value Method4. Amortized Book Value Method5. Contract Book Value Method6. Blend of Cost and Market Value Method7. Write Up Value Method8. Deferred recognition Method9. Average Market Value Methodwww.carajkumarradukia.com 31

Actuarial Gains & LossesRecognized Immediately underrevised IAS 19• Immediate Recognition of all Plans in theStatement of recognized income &expense.www.carajkumarradukia.com 32

Funding of Pension Planswww.carajkumarradukia.com 33

Funding of Pension Plans• Contribution of Assets to a legal entityseparate from that t of the Employer• The Legal Entity being a Trust• Value of Assets < or> Value of Liability• The scheme is funded in surplus if Assetsare more• The scheme is funded in deficit if Liabilitiesare morewww.carajkumarradukia.com 34

Pension Plans with no Funding• A very less secure Plan• Company Funds are used to pay thePension Plans• There is no question setting aside ofassets for payment of pension liabilitieswww.carajkumarradukia.com 35

Actuarial Assumptionswww.carajkumarradukia.com 36

Actuarial Valuation Assumptions• Financial Assumptions• Demographic Assumptionswww.carajkumarradukia.com 37

How assumptions are arrived at?• Set by the Employer with advise from aactuary or auditor• Estimate that are compatible• Market expectation as at the balancesheet datewww.carajkumarradukia.com 38

Financial Assumptions• Discount Rate• Salary Rate Hikes• Expected Return on Assets (EROA)www.carajkumarradukia.com 39

Demographic Assumptions• Mortality, Morbidity, Turnover, retirementrates• Vary by age, seniority• Turnover within first 5 years (Vesting)reduces gratuity liability• Turnover after first 5 years (Vesting) mayincrease gratuity liabilitywww.carajkumarradukia.com 40

Effects of changes in actuarialassumptionsAssumption Increase DecreaseLiab wouldLiab would decreaseDiscountincrease andand leads to actuarialrateleads to actuarialgainlossLiab wouldSalaryLiab would increasedecrease and willIncrease and leads to actuariallead to actuarialRatelossgainExpectedHigh expected return Low expectedlong-term results in low return results inrate ofpension cost high pension costwww.carajkumarradukia.com 41return

Asset Ceiling Testwww.carajkumarradukia.com 42

Asset Ceiling Test (ACT)• The amount of Net Asset (NA ) is limited tothe ACT• The NA is limited to– Amt available in the form of refunds orreductions in contributions– + unrecognized actuarial losses– +unrecognized past service costwww.carajkumarradukia.com 43

Why ACT?• To prevent gains to be recognized solelyas a result of the deferred d recognition ofpast service cost and actuarial losses• Issue arises when an entity defersrecognition of actuarial losses or pastservice cost. Results in the entityrecognizing increased assetwww.carajkumarradukia.com 44

IFRIC 14: IAS 19 - The Limit on aDefined Benefit Asset, Minimum FundingRequirement and their Interaction• The issues addressed d in this interpretation t ti are:• When refunds or reductions in futurecontributions ti should be regarded d as available inaccordance of IAS 19• How a minimum funding requirement mightaffect the availability of reduction in futurecontributions• When a minimum funding requirement mightgive rise to a liabilitywww.carajkumarradukia.com 45

AS 15 – Employee Benefits• It covers all type of employees, full time, part time,permanent , casual or temporary basis.• This statement does not deal with accounting andreporting by employee benefit plan.• Employee benefit expense should be charged to P & L,unless other accounting standard requires It to bedebited d to cost of assets (e.g. AS-10).• It does not apply to only benefits provided under formalplans and arrangement, it also applies to those informalpractices that give rise to an obligation (i.e whereenterprise has no alternative but to pay employeebenefit).www.carajkumarradukia.com 46

AS 15 – Employee Benefits• The rate of discount should be determined withreference to market yields on government bonds, thecurrency and terms of which should be consistent withthe estimated terms of the obligation.• Where an enterprise has its own Provident Fund, there isan obligation to pay the minimum interest prescribed bythe authorities irrespective of the interest actually earnedby the Fund. In such an event this would need to betreated as a defined “benefit” plan instead of as defined“contribution” plan and additional provisioning for anyexpected shortfall in interest may need to be made.www.carajkumarradukia.com 47

Ind AS 19• Ind AS 19 does not currently cover all ofthe above aspects of IAS 19 revised in2011, but it does require actuarial gainsand dlosses to be recognised din othercomprehensive income (OCI).www.carajkumarradukia.com 48

Ind AS 19 Vs IAS 19• Actuarial gains and losses for post-employment definedbenefit plans and other long-term employee benefit plans– Ind AS - All actuarial gains and losses for post-employmentdefined benefit plans and other-long term employment benefitplans are recognised in OCI.– IAS - Actuarial gains and losses for defined benefit plans can berecognised using one of the following three alternatives: in profitor loss; or in OCI or using corridor approach( no corridorapproach available and immediate recognition (June 2011amendment),– IAS - Actuarial gains and losses for other-long term employmentbenefit plans are recognised in profit or loss.www.carajkumarradukia.com 49

Ind AS 19 Vs IAS 19• Discount rate for employee benefit obligations– Ind As - Discount rate used to discount employeebenefit obligations shall be determined by referenceto market yields at the end of the reporting period ongovernment bonds only.– IAS - Discount rate used to discount employee benefitobligations shall be determined by reference tomarket yields at the end of the reporting period onhigh quality corporate bonds.www.carajkumarradukia.com 50

FAS 158 -Employers’ Accountingfor Defined Benefit Pension andOther Postretirement PlansThis Statement requires an employer that is abusiness entity and sponsors one or moresingle-employer defined benefit plans to:• Recognize the funded status of a benefit plan• Recognize as a component of othercomprehensive income, net of tax, the gains orlosses and prior service costs or credits thatarise during the period but are not recognized ascomponents of net periodic benefit cost pursuantwww.carajkumarradukia.com 51

FAS 158 -Employers’ Accountingfor Defined Benefit Pension andOther Postretirement Plans• to FASB Statement No. 87, Employers’Accounting for Pensions, or No. 106,Employers’ Accounting for PostretirementBenefits Other Than Pensions.• Measure defined benefit plan assets andobligations as of the date of theemployer’s fiscal year-end statement offinancial position (with limited exceptions).www.carajkumarradukia.com 52

FAS 158 -Employers’ Accountingfor Defined Benefit Pension andOther Postretirement Plans• Disclose in the notes to financial statementsadditional information about certain effects onnet periodic benefit cost for the next fiscal yearthat arise from delayed recognition of the gainsor losses, prior service costs or credits, andtransition asset or obligation.• This Statement also applies to a not-for-profitorganization or other entity that does not reportother comprehensive income. This Statement’sreporting requirements are tailored for thoseentities.www.carajkumarradukia.com 53

Other FAS on Employee Benefits• FAS Statement No. 87, Employers' Accountingfor Pensions• FAS Statement No. 88, Employers’ Accountingfor Settlements and Curtailments of DefinedBenefit Pension Plans and for TerminationBenefits,• FAS Statement t t No 106, Employers' Accountingfor Postretirement Benefits Other Than Pensions• FAS Statement No. 132 (revised 2003),Employers’ Disclosures about Pensions andOther Postretirement Benefitswww.carajkumarradukia.com 54

Disclosure Requirementswww.carajkumarradukia.com 55

Disclosure under IAS 19IAS 19 requires company to disclose:• Positions of liabilities and assets• Key assumptions used to calculate these figures.• Explanations for the movement in balances• P&L expense recognized 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 andon plan assetswww.carajkumarradukia.com 56

Questions/ Suggestions/Comments???www.carajkumarradukia.com 57

www.carajkumarradukia.com 58