AS 15 (1995) Vs.

AS 15 (Revised, 2005)

Issues in transition

Actuarial Society of India

2nd CIRB Presented By:Session S2 Anshuman Anand, AASI

23 December 2005

Agenda Current AS 15 (1995)

ASIs guidance on AS 15 (1995)

Proposed AS 15 (Revised, 2005)

Transition Issues

Comparison between AS 15 (Revised, 2005) and IAS 19

Current AS 15 (1995)

Current Accounting Standard 15 (1995) Current AS 15 primarily gives guidance in respect

of employee retirement benefits

For DC Schemes The contributions payable by the employer for a

year should be charged to the statement of profit & loss for the year.

Current Accounting Standard 15 (1995)

For DB Schemes For Non-Funded Schemes

An appropriate charge to the statement of profit & loss should be made through a provisions for the accruing liability. The accruing liability should be calculated according to actuarial valuation

Trustee-administered Funded Schemes The cost incurred for the year should be determined

actuarially. Such actuarial valuation should be conducted at least once in three years

Insured Retirement Benefit Schemes An actuarial certificate or a confirmation from the insurer

should be obtained that the contribution payable to the insurer is the appropriate accrued of the liability for the year

ASIs Guidance on

Current AS 15

Guidance Note 12 of ASI

GN12 of ASI is practice standard for Actuaries Relates only to actuarial valuations carried out for AS 15 Valuation will be as per Projected Accrued Benefit Method ( also

called Projected Unit Credit Method) Deals with Choice of Actuarial assumptions Provides a cap: minimum or maximum as the case may before the

values of actuarial assumptions Encourages actuaries to adopt assumptions more prudently than the

limits laid down by GN 12

Guidance Note 12 Contd

Discounting rate:not to be higher than 20 year gilt rate plus 2% p.a. rounded up to nearest quarter per cent p.a.

Salary escalation rate: not to be lower than discounting rate minus 4% p.a.However management can choose the salary escalation rate

Annuity rates: For unfunded schemes, annuity rates arrived at by using

adopted discount rate and annuitants mortality table For funded schemes, immediate annuity rates of

insurance companies

Guidance Note 12 - Contd

Pension escalation rate: Not to be lower than discounting rate minus 5% p.a.

Withdrawal, Mortality and Morbidity rates : Actuary to decide

Transition Period: Transition period is allowed up to the valuation to be

conducted for the accounting period ending on or immediately before 31-03-2007

Proposed AS 15 (Revised, 2005)

Accounting Standard 15 (Revised, 2005) [herein after called AS 15 (R)]

ICAI have finalized the text of the revised Accounting Standard 15 Revised Standard has been captioned Accounting Standard AS 15

(Revised, 2005) ICAI have not yet decided on the date for commencement of the

revised standard Revised Standard, when it commences, will be mandatory Till such time, current AS 15 will remain in force AS 15 (R) is modeled after International Accounting Standard 19

(IAS 19) AS 15 ( R ) covers not only the post-employment benefits but also

the employee benefits while in service AS 15 ( R ) requires that the reporting entity should use actuarial

techniques for valuing employee liabilities of long term DB typeemployee benefits

Applicability of AS 15 (R)(Based on draft proposed limited revision of AS 15 (R))

The original draft on the website implied that the revised standard would apply to all commercial organisations

Recently, there has been an addendum to AS 15 (R) which lays down the categories of organisations and in what detail the standard would apply to such organisations

For organisations with turnover over Rs. 50 crores p.a. or is a listed entity, AS 15 (R) would apply in its entirety

For organisations having turnover of Rs. 50 crores p.a. or less and whose average number of persons employed during the year is 50 or more, there seems to be an exception for providing elaborate details which we will discuss later

For organisations having employees less than 50, it points the adoption of non-actuarial methods

Revised Standard-Treatment in Balance Sheet Balance sheet to show accrued liability as follows:

9 PBO (+)9 Fair value of plan assets (-)9 Unrecognized portion of past service cost (-)

How it is different from current AS 15 requirement? Fair Value of Assets current standard is silent Deferred recognition of unvested portion of past service cost

current standard requires immediate recognition

Revised Standard-Treatment in P & L A/C Expenditure in P&L A/C should be the net total of the following:

9 Current service cost (+)9 Interest cost (+)9 Expected return on plan assets (-)9 Actuarial gain (-) or loss(+)9 Portion of past service cost recognized in the year(+)9 Curtailment or settlement-Gain(-) or Loss(+)

Each item has to be independently quantified Current standard has no such requirement

Transition Issues

Definition of Actuary

According to AS 15 (1995): Actuary means an actuary within the meaning of sub-section (1) of section (2) of the Insurance Act, 1938, which is now replaced by IRDA, Definition of actuary Regulations, meaning FASI.

According to AS 15 (R): It remains silent on the definition of actuary

Issue Arising: Who is an Actuary? after the AS 15 (R) gets implemented (Exposure draft GN 26 refers to it)

Actuarial Assumptions

Actuarial assumptions Should be enterprises best estimates Are to be unbiased i.e. neither imprudent nor excessively

conservative Are to be mutually compatible

Actuary will have an advisory role in determination of assumptions

Actuary will have to set up a process for playing his advisory role

Actuarial Assumptions -Discounting Rate

There is specific guidance in Revised AS 15 To be determined by reference to gilt rate on balance sheet date for

term to be consistent with the estimated term of the benefits It is prescriptive This is significant departure from current situation AS 15 was not prescriptive and GN12 has allowed 2% margin over

gilt rate of 20years The adoption of the proposed norm can cause a major and abrupt

jump in liability (PBO) causing upset in P&L A/C and BS

Should ASI consider tightening of GN12 norm immediately pending introduction of AS 15 ( R )?

Rates to take into account inflation, seniority, promotion and other relevant factors

There is no further prescription in the Standard

ASI will have to provide guidance

Will current GN 12 guidance require modification?

ASI should consider the need or otherwise of tightening the permitted gap of 4% with reference to adopted discounting rate

Should salary escalation rate move differently from discounting rate to capture enterprises situation?

4% gap may look too wide if Gilt Rate is used as discounting rate

Actuarial Assumptions - Salary Escalation Rate

Actuarial Assumptions- Annuity Rates No specific guidance in the Standard

Existing GN12 Guidance may continue to be appropriate

Actuarial Assumptions-Pension Escalation Rate No specific guidance in the Standard

Existing GN12 guidance provides for 5% gap below the discountingrate

As discounting rate is to be gilt rate without markup, 5% gap may look inappropriate and will provide inadequately for inflation

Assuming real rate to be around 3%,should permitted gap be restricted to 3%?

Actuarial Assumptions-Withdrawal, Mortality and Morbidity rates

No specific guidance in the Standard

Existing GN12 guidance can continue to be appropriate

Other Transition Issues

Periodicity of Actuarial Valuation

Standard prescribes detailed actuarial valuation at intervals not exceeding 3 years

There would still be need for roll forward valuation every year

Fair value of plan assets has to be determined at every balance sheet

In the current standard there is no concept of detailed and not so detailed valuations

Actuarial Gain or Loss in PBO

Interest cost is computed by multiplying discount rate at the start of the period by the PBO netting out benefit payouts, weighted for the timing of the payout (para 82)

Current service cost is the present value of benefits attributed to the current year (para 67)

Actuarial gain or loss in PBO is a balancing item in PBO reconciliation:

9 PBO at the beginning (+)9 Current Service Cost (+)9 Interest Cost (+)9 Benefit payout (-)9 Actuarial Gain (-) or Actuarial Loss (+)9 Curtailment or settlement Gain(-) or Loss(+)= PBO at the end

Actuarial Gain or Loss in Assets

Actuarial gain or loss in Assets is a balancing item in asset reconciliation:

9 Fair value of assets at the beginning (+)9 Expected Return on Assets (+)9 Contributions during the year (+)9 Benefits Payout (-)9 Asset Gain (+) or Asset Loss (-)= Fair value of assets at the end

Actuarial gain or loss in assets captures fluctuations in fair values of assets

Actuarial Gain or Loss

Actuarial gain or loss is a total of

1. gain or loss in PBO2. gain or loss in Assets

Actuarial gain/loss has to be specifically identified in AS 15 (R)

Actuarial gain/loss should be recognised immediately in P&L

Even in current standard this component is accounted for immediately by implication but it is not required to be specifically identified

Past Service Cost

In current standard, past service cost is accounted for immediately

In new standard, cost of benefits for past service ( only such as are not vested at BS date) should be spread over a period till vesting is to occur

This requires separate determination of non-vested past service benefits cost

Curtailments and Settlements

New Standard requires specific identification of these material events

Gain or loss arising due to these specific events have to be computed

These computations affect the computation of Actuarial Gain or Loss

Disclosures

New standard requires many new disclosures

Some of these are:

Details of Assets such as for each major category of plan asset, % to the total fair value

Reconciliation of PBO from one year to another Reconciliation of Assets from one year to another Detailed breakdown of expensing in P & L Account Effect of increase and decrease in 1% point for medical

cost trend Employers best estimate of contributions to be paid during

the coming year

Comparison between Revised AS 15 and IAS 19

Item AS 15 (R) IAS 19

Discount Rate Gilt Rate Corporate Bond Rate

Actuarial Assumptions Managements best estimates Managements best estimates

Treatment of Actuarial Gain/Loss

Immediate recognition Amortisation over average balance service time

Past Service Cost Amortisation of non-vested benefits cost over average period to full vesting

Amortisation of non-vested benefits cost over average period to full vesting

Transition Cost Immediate- Should be adjusted against opening balance of revenue reserves and surplus (This, therefore, will not affect P&L but will reduce net worth)

Amortisation over 5 years

Curtailment-Settlement Loss/ Gain

Immediate recognition Immediate recognition

Termination benefits Allows deferment upto 31st March 2010 if such termination happens on or before 31stMarch 2009

Immediate when formal plan is announced

Disclosures

Sensitivity Information Yes (only for medical; not for interest) Yes

5 year history of PBO Yes (As per addendum) Yes

5 year history of Fair Value of Plan Assets

Yes (As per addendum) Yes

Thank you !

AS 15 (1995) Vs. AS 15 (Revised, 2005)Issues in transitionAgendaCurrent Accounting Standard 15 (1995) Current Accounting Standard 15 (1995)Guidance Note 12 of ASIGuidance Note 12 ContdGuidance Note 12 - ContdAccounting Standard 15 (Revised, 2005) [herein after called AS 15 (R)]Applicability of AS 15 (R)(Based on draft proposed limited revision of AS 15 (R))Revised Standard-Treatment in Balance SheetRevised Standard-Treatment in P & L A/CDefinition of ActuaryActuarial Assumptions Actuarial Assumptions-Withdrawal, Mortality and Morbidity ratesPeriodicity of Actuarial ValuationActuarial Gain or Loss in PBOActuarial Gain or Loss in AssetsActuarial Gain or LossPast Service CostCurtailments and SettlementsDisclosuresComparison between Revised AS 15 and IAS 19