ifrs compliance

8/8/2019 IFRS Compliance

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ASSOCHAM IFRS Master Class

IFRS Compliance for Employee Benefits

Ben Facer, Regional Consulting Leader

14 July 2010


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Agenda

Our discussion today will cover:

The scope of retirement plan accounting

AS-15 vs IAS19 where are the

differences?

IAS19 Getting it right

Potential changes to IAS19


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The Scope of

Retirement Plan

Accounting


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Focus on retirement benefits

Post-employment benefits

Retirement indemnities Medical plans for retirees

Other long-term benefits

Long service awards

Long-term compensated

absences

Long-term disability plans

Long-termcompensated

absences

RetirementBenefits

Medical plans

Long termservice awards

Long-term

disabilityplans

cope of - and I


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Scope: Defined benefit vs defined contribution

Your DC fundmigh

tb

e included when: Guaranteed minimum interest rate

Interest rate linkedtoa particular index

Guaranteed minimum benefit

Interest rate smoothing, with a potential

call onthe employer

Q: What is defined benefit

A: Anything that is notdefined contribution

Q: What is definedcontribution

A: A structure where: Employer pays a fixed rate of contributions; and

Following payment, employer has no further legal or

constructive obligation, even if plan goes into deficit

IAS19 covers employee benefits indefinedbenefit form

Example:

Exempt

Provident

Fund


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AS-15 vs IAS19

What are the

Differences?


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AS-15 vs IAS19Where are the differences?

AS-15 (Revised 2005) was issued

as a stepping stone to full IFRS,

hence the standards are identical

in most respects.

Three keydifferences:

Discount rate

Recognitionofactuarial gains

and losses

Balance Sheet (Statementof

Financial Position) Liability


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Discount RateWhatdothe Standards say?

AS-15, Paragraph 78:

78. The rate used to discount post-employment benefit obligations

(both funded and unfunded) should be determined by reference to marketyields at the balance sheet date on government bonds. The currency and

term of the government bonds should be consistent with the currency and

estimated term of the post-employment benefit obligations.

IAS19, Paragraph 78:

78. The rate used to discount post-employment benefit obligations

(both funded and unfunded) should be determined by reference to marketyields at the balance sheet date on government bondsend of the reporting

period on high quality corporate bonds. In countries where there is not

deep market in such bonds, the market yields (at the end of the reporting

period) on government bonds shall be used.The currency and term of the

government bonds should be consistent with the currency and estimated

term of the post-employment benefit obligations.


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Recognising actuarial gains and losses

Actuarial gains and losses arise from twobroad sources:

Changes inassumptions used from yeartoyear

The experience ofthe Plan, relative tothe assumptions chosen

UnderAS-15,all actuarial gains and losses mustbe immediately

recognised inthe Profit & Loss account

IAS19allows three methods of recognition:

Deferredthrough the P&L the Corridor approach

Immediatelythrough the P&L

Immediatelythrough the Statementof Comprehensive Income


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IAS19 Getting it right!


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Ensure that you include all plans within scope

1. Cap onGratuityto increase from Rs350,000 to Rs1,000,000

2. Exempt ProvidentFunds

Shouldtheybe valued?

How?

3. Other employee benefits:

Leave encashment

Jubilee / LongService Awards

Post Retirement Medical

Gratuity CapImpact:

Increase to past service benefits

Increase to future accrual ofbenefits

Treatment:

Increase to past service benefitdisclosedas a PastService Cost

Immediate recognition forvested employees

Straight line amortisationoveraverage term tovesting, for

non-vested employees

Exempt ProvidentFunds

Shouldtheybe valued?

13%of companies surveyeddo

Even fora DC Exempt PF, interest rate guarantee mustb

evalued

How?

IAS19 Para83: Make assumptions regarding state benefits

impacting planbenefits ifpast history, or other reliable

evidence, indicates that those state benefits will change in

some predictable manner, for example, in line with futurechanges in general price levels or general salary levels

Other Employee Benefits

Leave Encashment

Providedbyall companies surveyed

8

2%

have accounting provision,36%

provide disclosures

LongServiceAwards Providedby12%of companies surveyed

75% have accounting provision, 25% provide disclosures

Post Retirement Medical

Providedby35%of companies surveyed 92% have accounting provisionanddisclosures


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Ensure that you set assumptions correctly

Assumptions include:

IAS19:

72. Actuarial assumptions shall be unbiasedand mutually

compatible.

73. Actuarial assumptions are anentitys best estimates ofthe

variables that will determine the ultimate costof providing post

employmentbenefits

Demographic Assumptions

Mortality

Disability

Resignation

Retirement

Medical claim rates

Employees with dependents

Financial Assumptions

Discount rate

Return on assets Salary Inflation

Future benefit levels

Future medical costs


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Effects of Changes in Actuarial Assumptions

Assumption Increase Decrease

Discount rateLiab woulddecrease and leads to

actuarial gain

Liab would increase and leads

toactuarial loss

SalaryIncrease

Rate

Liab would increase and leads to

actuarial loss

Liab woulddecrease and will

leadtoactuarial gain

Expected long-term

rate of return

High expected return results in low

pension cost

Low expected return results in

high pension cost


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Assumptions: Setting the discount rateWhich bonds to reference?

Corporate vs GovernmentBonds

IAS19 requires reference to high quality corporate bonds,unless no

deep market

High qualitytypically consideredAA rating

SpreadbetweenAA Corporate and Central Govt10 yearbonds was

130 bps at31 March 2010

State Governmentvs Central GovernmentBonds?

Central GovtBonds holda sovereignguarantee

Sovereign Rating (S&P)BBB-

State GovtBonds are offering higheryields byaround100 bps

At lower security


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Assumptions: Setting the Discount RateThe Yield Curve inIndia- Duration

Cent a o e nment Bon Yie s: n ia

4

4.5

5

5.5

6

6.5

7

7.5

8

8.5

0 5 10 15 20 25 30

Te m to atu it

YT

(%p.a.

Mar-10 Mar-0 Lo . Mar-10 Lo . Mar-0


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Ensure that your disclosures are compliant

Para120A sets out indetail specific disclosure items thatare required.

Lets lookat some simplified examples:

Balance Sheet

Profit & Loss

TreatmentofGains and Losses

IAS19:

120. An entity shall disclose informationthat enables users of financial

statements to evaluate the nature of its definedbenefit plans andthe

financial effects of changes inthose plans duringthe period.


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Disclosures: Balance Sheet

31 December 2010 31 December 2009

Benefit Obligation 12,000,000 11,200,000

Fair value of plan assets 3,000,000 5,000,000

Funded status (9,000,000) (6,200,000)

Unrecognised net actuarial

gain/(loss)

0 0

Unrecognised past service

(cost)/benefit

0 0

Net amount recognised (9,000,000) (6,200,000)


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Assets

Mustbe valuedat fairvalue

Exchangedby willing parties inanarms length transaction

May comprise:

Assets inan employee benefits fund

An insurance policy

To qualify,assets inan employee benefits fund mustgenerally:

Be held inan entity which is legally separate from the company

Are available onlyto payor fund employee benefits

Reconciled from yeartoyear with:

Contributions

Benefit payments

Expected returnonassets

Actuarial gains / losses


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Actuarial gain/loss: Assets

Market value

of assets

YearStart

Benefit

Payments

leavers

YearEnd

Contributions

and Expected

Investment Return

Year EndExpected

Asset Gain

Year EndActual

Asset gain/(loss)

Actual - Expected market value of assets


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Disclosures: Balance Sheet


Benefit Obligation 12,000,000 11,200,000

Fair value of plan assets 3,000,000 5,000,000

Funded status (9,000,000) (6,200,000)

Unrecognised net actuarial

gain/(loss)

0 0

Unrecognised past service

(cost)/benefit

0 0

Net amount recognised (9,000,000) (6,200,000)


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Disclosures: Benefit Obligation

Namedthe DefinedBenefit Obligation,or DBO

The actuarial presentvalue ofall benefits attributedto employee service

renderedtodate

Gradual accrual ofbenefits promised,notbenefits vested

ProjectedUnit Credit method includes expected future salary increases Presentvalue is calculatedusingdiscount rate assumption (bondyield)

Reconciled from yeartoyear with:

Service cost

Interest cost

Benefit payments Actuarial gains / losses


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Actuarial gain/loss: Liability

Liability

earStart

Benefit

Payments

leavers

earEnd

Extra years

interest and

benefit accrual

earEndExpected

Liability Loss

earEndActual

Actuarial Loss/(gain) =

Actual liability - Expected liability


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Disclosures: Profit & Loss


Current service cost 780,000 585,000

Interest cost 20,000 15,000

Expected return on assets (10,000) (15,000)

Amortisation of net gain/(loss) 0 0

Curtailment (gain)/loss

recognised

0 0

Settlement (gain)/loss

recognised

0 0

Total pension expense 790,000 585,000


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Key components of pension cost

Service cost

The increase in DBO resulting from one extrayearof employee service

Interest cost

The increase in DBO resulting from the passage oftime

Expected returnonassets

The amountofthe DBO increase that is expected tobe funded from

investment returns

Credit forthe expected risk premium


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Disclosures: Reporting gains and losses

IAS19allows three methods to reportthe unrecognizednetactuarial gainand loss.

10 corridor

allows for some annual variability in experience

corridor = 10%of max (assets, liabilities)

Excess unrecognizedgain/(loss) excess is spreadover expectedaverage

remaining working lifetime and included in pension expense

Example Immediate Recognition Balance sheet = FundedStatus

Noamortizationofgain/loss immediately recognizedonthe Balance

Sheet

Gains/losses may pass though either:

Profit & Loss,via pension expense

Statementof Comprehensive Income10% x Max (Assets, Liabilities) = 150

Deficit outside corridor = 500 150 = 350

Expected Remaining Working Lifetime = 15 years

Amortisation = 350 / 15 = 23 per year

Assets = 1,000

Liabilities = 1,500Deficit = 500


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Hot Off The Press! Potential Changes to IAS19


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IASB Exposure DraftCurrent Requirements in IAS19

Source: IASB


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IASB Exposure DraftProposed Requirements in IAS19

Source: IASB


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Summary

IAS19 is nota material change from AS-15

Key change is the allowable methods ofgain/loss recognition

Consider carefullyyourassumption setting process

Are assumptions your realistic best estimate

Avoidunnecessaryvolatility resulting from poorly chosenassumptions

ConsiderALL ofyour employee benefits,and ensure youare appropriately

accounting foryour expense and liability

And finally some ofthis may change anyway!


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