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7/27/2019 DipIFR-Session18 d08 Employee Benefits
1/28
SESSION 18 IAS 19 EMPLOYEE BENEFITS
Accountancy Tuition Centre (International Holdings) Ltd 2008 1801
Overview
Objectives
To prescribe the accounting treatment in respect of employment and post-
employment benefit costs and the disclosures that should be made.
SHORT TERMBENEFITS
Types Accounting for short-term
employee benefits Introduction IAS 19 approach Accounting basics Complication Expense
POSTRETIREMENT
BENEFITS
INTRODUCTION
DEFINEDCONTRIBUTION
PLANS
Introduction Accounting for defined
contribution plans Recognition and
measurement Disclosure
DEFINEDBENEFITPLANS
SUNDRYGUIDANCE
Actuarial valuation method Discount rate Regularity Past service costs Asset ceiling Settlements and curtailments
PRESENTATIONAND
DISCLOSURE
Key problem
Objective Scope
Definition
Presentation Disclosure defined
benefit plans
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1 Introduction
1.1 Key problem
Companies remunerate their staff by means of a wide range of benefits.
These include wages and salaries, retirement benefits.
Cost to employer needs to be matched with benefits derived from employeesservices.
1.2 Objective
The objective of IAS 19 is to prescribe the accounting and disclosure foremployee benefits.
An entity must recognise:
a liability when an employee has provided service in exchange foremployee benefits to be paid in the future; and
an expense when the entity consumes the economic benefit arising fromservice provided by an employee in exchange for employee benefits.
Commentary
Accounting for retirement benefit costs causes particular problems becausepayments made by a company into a pension plan fluctuate significantly fromone year to the next. However, accounting is relatively straightforward
where pension plans are unfunded (i.e. financed by provisions).
1.3 Scope
The standard applies to allemployee benefits.
Employee benefits include:
short-term employee benefits (e.g. wages, salaries and socialsecurity contributions, paid annual leave and paid sick leave etc);
post-employment benefits (e.g. pensions, other retirement benefits, post-
employment life insurance and post-employment medical care);
other long-term employee benefits (e.g. long-service or sabbatical leave);
termination benefits; and
equity compensation benefits.
The standard does not deal with reporting by employee benefit plans.
Commentary
And IAS 26 is outside the scope of the Diploma syllabus.
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1.4 Definitions
Employee benefits all forms of consideration given in exchange for servicerendered by employees.
Commentary
Including permanent health insurance, maternity/paternity leave, mobilephones, etc.
Short-term employee benefits those which fall due wholly within twelvemonths after the end of the period in which the employees render the relatedservice (other than termination benefits and equity compensation benefits).
Commentary
Termination benefits are payable as a result of the entitys decision to
terminate employment before the normal retirement date or an employeesdecision to accept voluntary redundancy.
Post-employment benefits those which are payable after the completion ofemployment (other than termination benefits and equity compensation benefits).
Post-employment benefit plans are arrangements under which an entity providespost-employment benefits for one or more employees.
Commentary
Arrangements may be formal or informal.
Defined contribution plans are post-employment benefit plans under whichan entity:
pays fixed contributions into a separate entity (a plan); and
has no legal or constructive obligation to pay further contributionsif the plan does not hold sufficient assets to pay all employee
benefits for service in the current and prior periods.
Commentary
It is the employee who is exposed to the risk of losses.
Defined benefit plans are post-employment benefit plans other than definedcontribution plans.
Commentary
The risk of further obligations is to the employer. Defined benefit plans aremanaged by fiduciaries (i.e. trustees) and underwritten by the sponsoring employer.
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Multi-employer plans are defined contribution or defined benefit plans (otherthan state plans) that:
pool the assets contributed by various entities that are not undercommon control; and
use those assets to provide benefits to employees of more than oneentity.
Commentary
Contribution and benefit levels are determined without regard to the identityof the entity that employs the employees concerned.
The present value of a defined benefit obligation is the present value, withoutdeducting any plan assets, of expected future payments required to settle theobligation resulting from employee service in the current and prior periods.
Current service costis the increase in the present value of the defined benefitobligation resulting from employee service in the current period.
Interest costis the increase during a period in the present value of a defined benefitobligation which arises because the benefits are one period closer to settlement.
Past service costis the increase in the present value of a defined benefitobligation resulting from the introduction of, or changes to, post-employmentor other long-term employee benefits.
Plan assets comprise:
assets held by a long-term employee benefit plan; and qualifying insurance policies.
Assets held by a long-term employee benefit plan are assets (other than non-transferable financial instruments issued by the reporting entity) that:
are held by an entity (a plan) that is legally separate from the reportingentity and exists solely to pay or fund employee benefits; and
are available to be used only to pay or fund employee benefits, are notavailable to the reporting entitys own creditors (even in bankruptcy),
and cannot be returned to the reporting entity, unless either:
the remaining assets of the plan are sufficient to meet allthe related employee benefit obligations of the plan or thereporting entity; or
the assets are returned to the reporting entity to reimburseit for employee benefits already paid.
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A qualifying insurance policy is an insurance policy issued by an insurer thatis not a related party (as defined in IAS 24) of the reporting entity, if the
proceeds of the policy:
can be used only to pay or fund employee benefits under a definedbenefit plan;
are not available to the reporting entitys own creditors (asdescribed above).
Actuarial gains and losses comprise:
experience adjustments (the effects of differences between the previousactuarial assumptions and what has actually occurred); and
the effects of changes in actuarial assumptions.
Vested employee benefits are not conditional on future employment.
2 Short term benefits
2.1 Types
Wages, salaries and social security contributions;
Short-term compensated absences (e.g. paid annual leave and paid sick leave) wherethe absences are expected to occur within twelve months after the end of the period inwhich the employees render the related employee service;
Profit sharing and bonuses payable within twelve months after the end of theperiod in which the employees render the related service; and
Non-monetary benefits (e.g. medical care, housing, cars and free orsubsidised goods or services) for current employees.
2.2 Accounting for short-term employee benefits
When an employee has rendered service to an entity during an accountingperiod, the entity should recognise the amount of short-term employeebenefits expected to be paid in exchange for that service as:
a liability (accrued expense), after deducting any amount alreadypaid; and
an expense (unless another IAS requires or permits the inclusion ofthe benefits in the cost of an asset).
Commentary
Inshort, the entity must account for the expense on an accruals basis.
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3 Post retirement benefits
Arrangements whereby an entity provides post-employment benefits are post-employment benefit plans.
An entity may or may not establish a separate entity to receive contributions and topay benefits, though it is convenient to think of the plan as a separate entity.
THE ENTITY
Transfer ofcash (funding)
THE PLAN
Payment of postretirement benefits
EMPLOYEE
Post-employment benefit plans are classified as either defined contribution plans ordefined benefit plans, according to the economic substance of the plan.
4 Defined contribution plans
4.1 Introduction
The entitys obligation is limited to the amount that it agrees to contribute to the plan.
Thus, the amount of the post-employment benefits received by the employeeis determined by the amount of contributions paid to the plan, together withinvestment returns arising from the contributions.
In consequence any risks with regard to the size of the pension paid fall on the employee.
4.2 Accounting for defined contribution plans
Accounting for defined contribution plans is straightforward because thereporting entitys obligation for each period is determined by the amounts to
be contributed for that period.
4.3 Recognition and measurement
The accruals concept is applied, i.e.
charge contributions payable in respect of period to the statement ofcomprehensive income; and
reflect any outstanding or prepaid contributions in the statement offinancial position.
4.4 Disclosure
An entity should disclose the amount recognised as an expense for definedcontribution plans.
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5 Defined benefit plans
5.1 Introduction
The entitys obligation is to provide the agreed benefits to current employees.
There is a risk that the plan will be insufficient to pay the agreed pension fallon the entity that will have to provide for any shortfall. (For example planswhere an employee is guaranteed a specified return.)
The entity will set cash aside which is then invested to earn a return and thiswill then grow and hopefully enable the entity to meet its future obligations.
The estimation of the amount to set aside is very difficult. Usuallycompanies will use the services of an actuary (an expert in post retirement
benefits). The actuary will perform a calculation in which he includesestimates of all the variables which will effect the growth of assets andliabilities. These include:
Required post retirement benefit; Rate of return on the stock market; Interest (discount) rate; Inflation; Rate of leavers; Death in service probability.
The actuary will then tell the company how much it needs to set aside, thecurrent service cost in order to meet the obligation. This is usually stated
as a percentage of salary and is usually paid to the plan on a monthly basis.
The actuary will never be absolutely accurate in respect of his estimates. Thismeans that the value of the plan assets and liabilities at the end of each reporting
period will be different to that forecast at the last actuarial valuation. The standardgives rules on how (or whether) to account for such differences.
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Illustration 1 Actuarial calculations
Assets Liabilities Surplus
$ $ $Balance at beginning 962 (758) 204Contributions 25 25Improvements to benefits (12) (12)Actual less expected return on assets * 480 480Changes in assumptions underlying
present value * (146) (146)Experience losses * (58) (58)Expected return on assets 73 73Interest on liabilities (53) (53)Benefits paid (52) 52 Current service cost (34) (34)
_______ _______ _______
Balance at end 1,488 (1,009) 479_______ _______ _______
Commentary
The above would be done by an actuary. Components of actuarial gains/lossesinclude the asterisked (*) items (i.e. actual less expected return on assets, changesin assumptions and experience losses). Experience losses would include, forexample, the decline in value of the plans securities. The current service costwould be given to you in an examination question.
5.2 IAS 19 approach
In keeping with The Framework IAS 19 adopts a balance sheet approach.
The difference between the value of plans assets and liabilities is recognisedIn the statement of financial position.
The standard sets outs rules for the treatment of actuarial differences.
The standard givesguidance on:
valuation methods; the discount rate for valuation of liabilities; valuation frequency.
5.3 Accounting basics
An entity makes payments to a plan (a separate legal entity). This cash isinvested and used to pay retirement benefits when they fall due for payment.The plan is an entity with assets and liabilities (to the pensioners).
At the end of each reporting period the assets and liabilities are valued and
the entity recognises the net liability (or, more rarely, the net asset) in thestatement of financial position.
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Commentary
This seems a little strange at first. The entity is recognising a net liability of a separatelegal entity. But remember that the ultimate obligation to the employees is owed by theentity. The plan is merely a vehicle which allows the entity to meet this obligation. In
substance the assets and liabilities of the plan are a special area of the entitys ownstatement of financial position even though they are held by a separate entity.
Illustration 2
The following information relates to the assets and liabilities of the retirement benefitplan of entity X. (This is not a summary of Xs statement of financial position but thatof the plan.)
2006 2007
$m $m
Fair value of plan assets 100 110Present value of plan obligations (120) (135)
Net liability of the plan (20) (25)
The basic rule (simplified) is that:
In 2006 X must recognise a liability of $20m
In 2007 X must recognise a liability of $25m
If X had made a payment of $1m to the plan in 2007 the full journal would be:
Dr Profit or loss 6Cr Liability (25 20) 5Cr Cash 1
Commentary
This basic rule is made more complicated by actuarial gains and losses (aswill be seen later).
5.4 Complication
5.4.1 Plan assets and liabilities
Firstly we must understand what causes the movement in the values of theplan assets and liabilities.
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At the end of the reporting period the entity knows the following:
value of the plan assets and liabilities at the start of the period; the amount of cash paid to the plan during the period; the amount of cash paid by the plan to pensioners during the period; the current service cost for the period (information supplied by the actuary);
the actuarial assumptions made for the period.
An entity can calculate the values of the assets and liabilities that it would expect toexist at the end of the period if all of the information was accurate.
Illustration 3
The following information relates to the assets and liabilities of the retirement benefitplan of entity Q. (This is not a summary of Qs statement of financial position but thatof the plan.)
Start of the period $Fair value of plan assets 1,000
Present value of plan obligations (1,000)
During the period
Current service cost 125Contributions paid to the plan 80Benefits paid 130
Actuarial assumptions
Interest rate 9%Return on investments 12%
Analysis Liability Asset$ $
At start of the year 1,000 1,000Current service cost 125 Interest expense (9% 1,000) 90 Benefits paid (130) (130)Expected return on assets (12% 1,000) 120
Contributions 80
Expected value (This is what the valuation at the end ofthe period would show if all of the actuarial assumptionsmade at the start of the period had been 100% correct)
1,085 1,070
Suppose the actual values at the end of the period were: 1,215 1,147
The difference is called the actuarial gain or loss:
Actuarial loss 130
Actuarial gain 77
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5.4.2 Actuarial gains and losses
Actuarial gains and losses may result from increases or decreases in either :
the present value of a defined benefit obligation; or the fair value of any related plan assets.
Causes include:
unexpectedly high or low rates of employee turnover, earlyretirement or mortality;
increases in salaries, benefits etc;
the effect of changes in the discount rate; and
differences between the actual return on plan assets and theexpected return on plan assets.
5.4.3 Liability recognised
In the above illustration there is no actuarial gain/loss at the start of theperiod. At the end of the period:
Liability Asset Netliability
Expected value 1,085 1,070 15
Actual value 1,215 1,147 68
Actuarial difference (130) 77 53
IAS 19 requires that an entity recognises a liability based on the values of theplan assets and liabilities at the end of the reporting period.
If the entity recognised a liability of $68 then this would mean that it wouldrecognise the actuarial loss of $53. The double entry would be:
Dr Profit or loss (balancing figure) 148
Cr Liability (68 0) 68
Cr Cash 80
Commentary
IAS 19 permits, but does not require, that the whole amount of $148 be charged toprofit or loss. A lesser amount can be charged under the corridor method.
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5.4.4 The corridor
Actuarial differences arise every year. Some years they will be a loss and inothers they will be a gain.
The IASC believed that if they are always taken to profit or loss this would
lead to misleading fluctuations in profits.
To avoid this IAS 19 contains a materiality test. Only that part of the gain or losswhich falls outside a test figure (the corridor) is taken to profit or loss. Even then,this amount is not expensed immediately but recognised over the average remainingservice lives of the employees starting nextyear.
Commentary
Actuarial differences are not recognised in the year in which they originate.Net cumulative unrecognised actuarial gains and losses at the end of theprevious period are compared with the corridor.
The corridor is the higher of:
10% of the fair value of the plan assets at the end of the previous period; and
10% of the present value of the plan obligations at the end of theprevious period.
Illustration 3 Continued Corridor calculations
None of the actuarial loss of $53 is recognised in the period in which it arises.
Recognition at the end of the current reporting period: $
Net liability at the end of the period 68
Less the unrecognised actuarial difference (53)
Net liability actually recognised 15
Dr Profit or loss (balancing figure) 95
Cr Liability (15 0) 15Cr Cash 80
The unrecognised actuarial difference is compared with the corridor:$
10% of plan assets at the end of the previous period(10% 1,000)
100
10% of plan liabilities at the end of the previous(10% 1,000) 100
Therefore, corridor 100
Unrecognised actuarial difference
Amount to be recognised
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Commentary
Even if there was an amount to be recognised it would be spread over theaverage remaining service lives of the employees.
5.4.5 Amendment to IAS 19
In December 2004, IASB issued an amendment to IAS 19Employee Benefits.
The IASB has decided to allow the option of recognising actuarial gains andlosses:
in full; in theperiod in which they occur; in other comprehensive income.
Commentary
This option is similar to the requirements of the UK standard, FRS 17Retirement Benefits.
5.5 Expense
The expense can be analysed into its component parts (i.e. the plan incomesand expenses).
The expense will be made up of:
$
Current service cost 125
Interest cost 90
Expected return on plan assets (120)
Actuarial gains and losses
95
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Activity 1
(This continues the illustration above into the next 2 years)
2007 2008 2009
$ $ $
Current service cost 125 140 155
Benefits paid 130 150 170
Contributions paid 80 90 100
Present value of the obligation at 31 December 1,215 1,413 1,600
Fair value of the plan assets at 31 December 1,147 1,137 1,200
Discount rate at the start of the year 9% 8% 8%
Expected return on plan assets 12% 11% 11%
The present value of the obligation and the fair value of the plan assets were both$1,000 at 1 January 2007 and there were no actuarial gains or losses at this date.
The average remaining working lives of the employees was estimated to be 10 years.
Required:
In respect each of the three years ending 2007, 2008, 2009:(a) Calculate the actuarial gain/loss arising in the period.
(b) Calculate how much of the gain or loss should be recognised and in
which period.
(c) Calculate the liability to be included in the statement of financial
position at each year end.
(d) Construct the necessary journal to record the above transactions.
(e) Explain the composition of amount recognised in profit or loss.
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Proforma solution
(a) Actuarial loss/(gain)2007
Liabilities Assets
$ $Present value/Fair value at 1 January 1,000 1,000Interest cost (9%) 90Expected return (12%) 120Current service cost 125Benefits paid (130) (130)Contributions 80
Expected value1 1,085 1,070Actuarial loss/gain a balancing figure 130 77 53 Net loss
Present value/Fair value at 31 December 1,215 1,147
Commentary
The activity has been completed for the first year.
2008Liabilities Assets
$ $Present value/Fair value at 1 January 1,215 1,147
Interest cost (8%)
Expected return (11%)
Current service cost
Benefits paid
Contributions
Expected value
Actuarial loss/gain a balancing figure Net loss/(gain)
Present value/Fair value at 31 December
1 If all estimates made at the start of the period had been 100% accurate.
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2009Liabilities Assets
$ $Present value/Fair value at 1 January
Interest cost (8%)
Expected return (11%)
Current service cost
Benefits paid
Contributions
Expected value
Actuarial loss/gain a balancing figure Net loss/(gain)
Present value/Fair value at 31 December
(b) Amount of actuarial difference recognised
2007 2008 2009 2010
$ $ $ $
b/f 53
Gain /(loss) in the year(see (a) above) 53
Recognised in the period (W)
Net loss unrecognised at the end of the period 53
WORKING2007 2008 2009 2010
Corridor limits: $ $ $ $
10% of plan obligations 100
10% of plan assets 100
Limit is the greater of the above 100
Actuarial loss at the end of the period 53
Amount which falls outside the corridor
Amount to be recognised next year ( 10)
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(c) Statement of financial position at 31 December
2007 2008 2009
$ $ $
Present value of the obligation 1,215
Fair value of the plan assets 1,147
68
Unrecognised actuarial (loss) (53)
Recognised in the statement of financial position 15
(d) Journal2007 2008 2009
Dr Profit or loss (balancing figure) 95
Cr Liability (W) 15
Cr Cash (contributions paid) 80
WORKING2007 2008 2009
Movements on the liability: $ $ $
Opening liability
Net movement 15
Closing liability 15
(e) Profit or loss2007 2008 2009
$ $ $
Current service costs 125
Interest cost 90
Expected return on plan assets (120)
Net actuarial gain or loss recognised in the year
Expense 95
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6 Sundry guidance
6.1 Actuarial valuation method
An entity should use the projected unit credit method to determine:
the present value of its defined benefit obligations;
the related current service cost; and
past service cost (where applicable).
This method sees each period of service as giving rise to an additional unit of benefitentitlement and measures each unit separately to build up the final obligation.
The method requires an entity to attribute benefit to:
the current period (to determine current service cost); and current and prior periods (to determine the present value of defined
benefit obligations).
Illustration 4
The present value of defined benefit obligations is calculated in accordance with IAS 19
(Employee Benefits) by the projected unit credit method. The future benefit obligations
are valued by actuarial methods on the basis of a prudent assessment of the relevant
parameters. The fair value of plan assets is deducted from the present value of the obligation
for pensions and other post-employment benefits. The obligations and plan assets are valued at
regular intervals of not more than three years. For all major plans, comprehensive actuarialvaluations are performed annually as of December 31.
The difference between the defined benefit obligation after deducting the fair value of plan
assets and the net liability recognized in the balance sheet is attributable to unrecognized past
service cost.
Plan assets in excess of the benefit obligation are reflected in other receivables, subject to the
asset limitation specified in IAS 19 (Employee Benefits).
Benefits expected to be payable after retirement are spread over each employees entire
period of employment, allowing for future changes in remuneration.
Notes to the Consolidated Financial Statements of the Bayer Group 2006
6.2 Discount rate
The discount rate should be determined by reference to market yields on highquality corporate bonds at the end of the reporting period (i.e. AAA-rated).
Commentary
In countries where there is no deep market in such bonds, the market yieldson government bonds should be used.
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6.3 Regularity
Valuations should be carried out with sufficient regularity that the amountsrecognised in the financial statements do not differ materially from theamounts that would be determined at the end of the reporting period .
An entity is encouraged to use a qualified actuary in the measurement of allmaterial post-employment benefit obligations.
6.4 Past service cost
Past service cost should be recognised as an expense on a straight-line basisover the average period until the benefits become vested.
If the benefits are already vested immediately following the introduction of, or changesto, a defined benefit plan, the past service cost must be recognised immediately.
Illustration 5
An entity operates a pension plan that provides a pension of 2% of final salary for eachyear of service. The benefits become vested after five years of service. On 1 January2008 the entity improves the pension to 2.5% of final salary for each year of servicestarting from 1 January 2006. At the date of the improvement, the present value of theadditional benefits for service from 1 January 2006 to 1 January 2008 is as follows:
$000Employees with more than five years service at 1 January 2008 150Employees with less than five years serviceat 1 January 2008 (average period until vesting: three years) 120
_____
270_____
The entity recognises $150,000 immediately because those benefits are already vested.The entity recognises $120,000 on a straight-line basis over three years from 1 January2008.
6.5 Asset ceiling
The calculation of the amount to be included in the statement of financial position mayresult in an asset being recognised.
IAS 19 sets an asset ceiling on how much of that asset can be recognised asthe lowerof the sum of:
present value of theobligation; plus
any unrecognised actuarialgains, less any unrecognisedactuarial losses;
less any unrecognised pastservice cost;
less the fair value of the planassets.
vs any cumulative unrecognised netactuarial losses and past servicecost; and
the present value of any economicbenefits available in the form ofrefunds from the plan or reductionsin future contributions into the
plan.
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Commentary
The standard is in effect applying a degree of prudence by setting a limit onthe amount of the asset that can be recognised.
The asset may arise in circumstances where a plan has been overfunded orwhere actuarial gains are recognised. The entity recognises an asset because:
the entity controls a resource, which is the ability to use the surplusto generate future economic benefits;
the control is as the result of a past event; and
future economic benefits are available in the form of a reduction infuture contributions or as a cash refund.
6.6 Settlements and curtailments
The settlement of a plan occurs when an entity eliminates all furtherobligations that were provided under a defined benefit plan. This couldhappen when the entity makes a one-off payment to members of the plan inreturn for the cancellation of any future obligations.
A curtailment occurs if the entity is committed to make a material reductionin the number of employees covered by the plan or amends the terms of the
plan so that future service will no longer qualify for benefits (or, if stillqualifying, benefits will be much reduced from the original plan).
An entity must recognise a gain or loss when it settles or curtails a plan. The
gain or loss will comprise:
the net resulting change in the present value of the obligation andthe fair value of the assets; and
the related actuarial gains and losses and past service cost that hadpreviously not been recognised.
7 Presentation and disclosure
7.1 Presentation
An asset relating to one plan should be offset against a liability relating toanother when, and only when, the entity:
has a legal right of offset (i.e. to use a surplus in one plan to settleobligations in another); and
intends to settle the obligations on a net basis or realise the surplusand settle the obligation simultaneously.
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7.2 Disclosure defined benefit plans
The entitys accounting policy for recognising actuarial gains and losses.
A general description of the type of plan.
A reconciliation of the assets and liabilities recognised, showing at least:
the present value at the end of the reporting period of definedbenefit obligations that are wholly unfunded, wholly funded andpartly funded;
the fair value of any plan assets at the end of the reporting period ;
the net actuarial gains or losses not recognised in the statement offinancial position ;
the past service cost not yet recognised in the statement of financial
position ;
any amount not recognised as an asset, because of the asset ceilinglimit; and
the amounts recognised in the statement of financial position .
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Illustration 6
25. Provisions for pensions and other post-employment benefits (extract)
The status of unfunded and funded defined benefit obligations, computed using the
appropriate parameters, is as follows:Germany Pension
obligationsOther post-
employmentbenefit obligations
million 2005 2006 2005 2006
Defined benefit obligation as of January 1 8,866 10,256 184 158
Acquisitions 14 1,703 6
Divestitures/changes in the scope of consolidation (10) 0
Current service cost 138 195 17 19
Interest cost 432 466 5 4
Employee contributions 26 26
Plan changes 56 (8) Net actuarial (gain) loss 1,160 (487)
Benefit paid (436) (489) (48) (46)
Plan curtailments (2)
Reclassifications to current assets/liabilities (293) (2)
Defined benefit obligation as of December 31 10,256 11,357 158 139
Fair value of plan assets as of January 1 4,373 4,599
Acquisitions 1,497
Divestitures/changes in the scope of consolidation (5)
Actual return on plan assets 330 116
Employer contributions 306 325 48 46
Employee contributions 26 26
Benefits paid (436) (489) (48) (46)
Reclassifications to current assets/liabilities (16)
Fair value plan assets as of December 31 4,599 6,053
Net recognized liability as of December 31 (5,657) (5,304) (158) (139)
Notes to the Consolidated Financial Statements of the Bayer Group 2006
A reconciliation showing the movements during the period in the net liability(or asset) recognised in the statement of financial position .
The total expense recognised in profit or loss for each of the following, and theline item(s) in which they are included:
current service cost; interest cost; expected return on plan assets; actuarial gains and losses;
past service cost; and the effect of any curtailment or settlement.
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Illustration 7
25. Provisions for pensions and other post-employment benefits (extract
The costs for defined-benefit pension plans for the continuing and discontinued operations
are comprised as follows:
Germany
million 2005 2006
Current service cost 138 195
Past service cost 56 (8)
Interest cost 432 466
Expected return on plan assets (237) (270)
Plan curtailments (2)
Plan settlements
389 381
Notes to the Consolidated Financial Statements of the Bayer Group 2006
The actual return on plan assets.
The principal actuarial assumptions used as at the end of the reporting period,including, where applicable:
the discount rates; the expected rates of return on any plan assets for the periods presented;
the expected rates of salary increases; medical cost trend rates; and any other material actuarial assumptions used.
Illustration 8
25. Provisions for pensions and other post-employment benefits (extract)
All defined benefit plans necessitate actuarial computations and valuations. These
are based not only on life expectancy and staff fluctuation, but also on the following
parameters, which vary from country to country according to economic conditions.
The weighted parameters used to value pension obligations as of December 31 of the
respective year were as follows:
Germany
% 2005 2006
Pension obligation
Discount rate 4.25 4.60
Projected future renumeration increases 2.50 2.60
Projected future benefit increases 1.25 1.50
Other post-employment benefit obligations
Discount rate 3.25 4.30
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8 EXAMINATION TECHNIQUE
Commentary
The basic information that is required, in order to arrive at the asset or liabilityto be included in the statement of financial position and the make up of theitems to be included in the statement of comprehensive income, is set out below.
8.1 Statement of Financial Position
An entitys asset or liability can be found using the following equation:
PV of the obligation; plus Unrecognised actuarial gains, or minus unrecognised actuarial losses; less Past service cost not yet recognised; less
FV of the plan assets.
If the result is positive then a liability will be recognised in the entitysstatement of financial position, and if the result is negative then an asset will
be recognised.
8.2 Statement of Comprehensive Income
The following items will be included within profit or loss in the statement ofcomprehensive income:
Interest on opening plan liability
Return on opening plan assets Current service cost Past service cost recognised in period Actuarial gain or loss to be recognised in the period, based upon the
opening position, if the corridor approach is being followed.
If a question requires recognition of all actuarial gains or losses immediately,then this can be recognised either within profit or loss or within othercomprehensive income if the 2004 amendment is being followed.
Focus
You should now be able to:
describe the nature of defined contribution, multi-employers and definedbenefits plans (IAS 19);
explain the recognition and measurement of defined benefit plans undercurrent proposals;
account for defined benefit plans including the amounts shown in the statement of financialposition , statement of comprehensive income and notes to the account;
identify perceived problems with current proposals on accounting for post-employment benefit costs.
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Activity solution
Solution 1
(a) Actuarial loss/(gain)2007
Liabilities Assets$ $
Present value/Fair value at 1 January 1,000 1,000Interest cost (9%) 90Expected return (12%) 120Current service cost 125Benefits paid (130) (130)Contributions 80
Expected value
2 1,085 1,070
Actuarial loss/gain a balancing figure 130 77 53 Net loss
Present value/Fair value at 31 December 1,215 1,147
2008Liabilities Assets
$ $Present value/Fair value at 1 January 1,215 1,147Interest cost (8%) 97Expected return (11%) 126Current service cost 140Benefits paid (150) (150)Contributions 90
Expected value 1,302 1,213Actuarial loss/gain 111 (76) 187 Net loss
Present value/Fair value at 31 December 1,413 1,137
2009
Liabilities Assets$ $
Present value/Fair value at 1 January 1,413 1,137
Interest cost (8%) 113Expected return (11%) 125Current service cost 155Benefits paid (170) (170)Contributions 100
Expected value 1,511 1,192Actuarial loss/gain 89 8 81 Net loss
Present value/Fair value at 31 December 1,600 1,200
2 If all estimates made at the start of the period had been 100% accurate.
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(b) Amount of actuarial difference recognised
2007 2008 2009 2010
$ $ $ $
b/f 53 240 311
Loss/(gain) in the year(see (a) above) 53 187 81 x
Recognised in the period (W) (10) (15)
Net cumulative unrecognised at the end of the period 53 240 311 x
Net cumulative unrecognised loss/(gain) at the end of theprevious reporting period
53 240 311
WORKING
2007 2008 2009 2010
Corridor limits: $ $ $ $
10% of plan obligations at end of previous period 100 122 141 160
10% of plan assets at end of previous period 100 115 113 120
Limit is the greater of the above 100 122 141 160
Net cumulative unrecognised loss/(gain) at the end of theprevious period
_ 53 240 311
Amount which falls outside the corridor 99 151
Amount to be recognised ( 10) 10 15
(c) Statement of financial position at 31 December
2007 2008 2009
$ $ $
Present value of the obligation 1,215 1,413 1,600
Fair value of the plan assets 1,147 1,137 1,200
68 276 400
Unrecognised actuarial (loss) (53) (240) (311)
Recognised in the statement of financial position 15 36 89
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(d) Journal
2007$
2008$
2009$
Dr Profit or loss (balancing figure) 95 111 153
Cr Liability (W) 15 21 53
Cr Cash (contributions paid) 80 90 100
WORKING2007 2008 2009
Movements on the liability: $ $ $
Opening liability 15 36
Net movement 15 21 53
Closing liability 15 36 89
(e) Profit or loss
2007 2008 2009
$ $ $
Current service costs 125 140 155
Interest cost 90 97 113
Expected return on plan assets (120) (126) (125)
Net actuarial gain or loss recognised in the year 10
Expense 95 111 153
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