Download - 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
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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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
31 December 2010 31 December 2009
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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