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IAS 19 Employee benefits

2011 http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng

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IFRS WORKBOOKS(1 million downloaded)

Welcome to IFRS Workbooks! These are the latest versions of the legendary workbooks in Russian and English produced by 3 TACIS projects, sponsored by the European Union (2003-2009) and led by PricewaterhouseCoopers. They have also appeared on the website of the Ministry of Finance of the Russian Federation.

The workbooks cover various concepts of IFRS based accounting. They are intended to be practical self-instruction aids that professional accountants can use to upgrade their knowledge, understanding and skills.

Each workbook is a self-standing short course designed for approximately of three hours of study. Although the workbooks are part of a series, each one is independent of the others. Each workbook is a combination of Information, Examples, Self-Test Questions and Answers. A basic knowledge of accounting is assumed, but if any additional knowledge is required this is mentioned at the beginning of the section.

Having written the first three editions, we want to update them and provide them to you to download. Please tell your friends and colleagues. Relating to the first three editions and updated texts, the copyright of the material contained in each workbook belongs to the European Union and according to its policy may be used free of charge for any non-commercial purpose. The copyright and responsibility of later books and the updates are ours. Our copyright policy is the same as that of the European Union.

We wish to especially thank Elizabeth Appraxine (European Union) who administered these TACIS projects, Richard J. Gregson (Partner, PricewaterhouseCoopers) who led the projects and all friends at Bankir.Ru for hosting the books.

TACIS project partners included Rosexpertiza (Russia), ACCA (UK), Agriconsulting (Italy), FBK (Russia), and European Savings Bank Group (Brussels). The help of Philip W. Smith (editor of the third edition) and Allan Gamborg, project managers and Ekaterina Nekrasova, Director of PricewaterhouseCoopers, who managed the production of the Russian version (2008-9) is gratefully acknowledged. Glyn R. Phillips, manager of the first two projects conceived the idea, designed the workbooks and edited the first two versions. We are proud to realise his vision. Robin Joyce Professor of the Chair of International Banking and Finance Financial University under the Government of the Russian Federation

Visiting Professor of the Siberian Academy of Finance and Banking Moscow, Russia 2011 Updated

http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng 2


CONTENTS1. STAFF BENEFITS – INTRODUCTION 3

2. DEFINITIONS 5

3. RECOGNITION AND MEASUREMENT 6

4. ADOPTION OF IAS 19 33

5. MULTIPLE CHOICE QUESTIONS 40

6. ANSWERS TO MULTIPLE CHOICE QUESTIONS 47

1. Staff Benefits – Introduction

OVERVIEW

AimThe aim of this workbook is to facilitate understanding of IAS 19, Staff Benefits. Much of IAS 19 is devoted to payments for retirement plans (pensions).

IAS 26 Accounting and Reporting by Retirement Benefit Plans provides guidance for the accounting of the retirement plans and complements IAS 19.

Introduction

IAS 19 identifies four categories of staff benefits:

i short-term staff benefits, such as salaries and social security contributions, paid annual leave and paid sick leave, profit-sharing and bonuses expected to be paid within twelve

months and non-cash benefits such as medical care, housing, cars and free or subsidised goods or services for current staff.

ii post-employment benefits such as pensions, other retirement benefits, post-employment life insurance and post-employment medical care.

iii other long-term staff benefits, including long-service or sabbatical leave, jubilee or other long-service benefits, long-term disability benefits and, if they are payable twelve months or more after the end of the period, profit-sharing, bonuses and deferred compensation.

iv termination benefits. See below

Termination benefits.An obligation arises from the termination rather than staff service, so termination benefits are recognised, only when it is a commitment to either:

terminate employment before the normal retirement date accept voluntary redundancy in exchange for benefits

An undertaking is committed to a termination only when it has a

detailed formal plan for the termination and the plan is without

realistic possibility of withdrawal.

Where termination benefits fall due more than 12 months after the balance sheet date, they should be discounted.




In the following examples, I/B refers to Income Statement and Balance Sheet (SFP).

EXAMPLE - Termination benefits fall due more than 12 monthsDue to catastrophic trading, your firm must make half of the workforce redundant. Redundancy pay will be in 4 instalments, the first now and the last in 18 months time. All payments will be discounted if the last payment is more than 12 moths after the balance sheet date. The total cost will be $56m. The present value of the payments is $53m, and this figure will be used for the provision.

I/B DR CRStaff costs- redundancy I $53mRedundancy provision B $53mProvision for redundancy, using a discounted figure.

ObjectiveThe objective of IAS 19 is to prescribe the treatment disclosure of staff benefits. IAS 19 requires an undertaking to record:

1. a liability when staff has provided service for benefits to be paid in the future;

2. an expense when the service is provided.

EXAMPLE –staff benefits bookkeepingAt each year-end, your firm pays a loyalty bonus based on service during the year. The bonus should be accrued each month.

I/B DR CRStaff costs-loyalty bonus I $1mLoyalty bonus provision B $1mMonthly provision for loyalty bonus

ScopeIAS 19 applies to all staff benefits (except those to which IFRS 2 Share-based Payments applies), including those provided:

1. under formal plans and agreements2. under legislative requirements, or industry arrangements3. by informal practices that give rise to a constructive

obligation

EXAMPLE- constructive obligationA constructive obligation is where a change in the undertaking's informal practices would cause unacceptable damage to its relationship with staff.If it has been the practice to pay for illness, or disability, for a specific period of time, despite no written commitment, staff would assume that this practice would continue.

Staff benefits include benefits provided to either staff, or their dependants, and may be settled by payments made either directly or to others, such as insurance companies.

EXAMPLE- benefits provided to dependantsYour pension will be paid to you during your lifetime and afterwards to your surviving spouse.

Staff may provide services on a full-time, part-time, permanent, casual or temporary basis. Staff includes directors and other management personnel.

EXAMPLE- exceptions to the definition of staffYou outsource your computer support services to a specialist firm. The firm takes responsibility for your computer staff, although they remain on your premises. After the transfer of staff to the new firm,




they are no longer members of your staff. Their costs are service-supplier costs rather than staff costs.

2. Definitions

Staff benefits are all forms of payment given for service rendered by staff.

Short-term staff benefits are benefits other than termination benefits and equity compensation benefits that are expected be paid in full within twelve months after the end of the period in which the staff render the related service.

Other long-term staff benefits are benefits other than post-employment benefits, termination benefits and equity compensation benefits that will not be paid in full within twelve months, after the end of the period in which the staff render the related service.

Post-employment benefits are pensions, other retirement benefits, post-employment life insurance and post-employment medical care.

Termination benefits are staff benefits payable as a result of either:

(i) an undertaking's decision to terminate employment before the normal retirement date

(ii) a decision to accept voluntary redundancy, in exchange for those benefits.

Equity compensation benefits are staff benefits where:(i) staff are entitled to receive shares of the undertaking or its

parent

(ii) the amount of the undertaking's obligation to staff depends on the future price of shares issued by the undertaking.

(These are covered in IFRS 2 Share-based Payments)

Equity compensation plans are formal or informal arrangements under which an undertaking provides equity compensation benefits for staff.

Fair value The price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. (IFRS 13)

Short-term staff benefitsShort-term staff benefits include items such as:

(i) salaries and social security contributions.(ii) short-term paid absences, such as paid annual leave and

paid sick leave, where the absences are expected to occur within twelve months after the end of the period in which the staff render the related staff service

(iii) profit-sharing and bonuses payable within twelve months after the end of the period in which the staff render the related service. and

(iv) non-cash benefits such as medical care, housing, cars and free or subsidised goods or services for current staff.

No actuarial assumptions are required to measure the obligation or the cost and there is no possibility of any actuarial gain or loss. Short-term staff benefit obligations are measured on an undiscounted basis.




Vested staff benefits are staff benefits that are not conditional on future employment.

3. Recognition and Measurement

All Short-term Staff BenefitsWhen staff has rendered service during an accounting period, the

undertaking should recognise the undiscounted amount of short-

term staff benefits expected to be paid in exchange for that service:

(i) as a liability, an accrued expense net of any amount already paid.

If the amount already paid exceeds the benefits, the excess is recognised as an asset up to a maximum of the reduction in future payments, or a cash refund.

(ii) as an expense, unless another Standard permits the capitalisation into the cost of an asset. For example, IAS 2 Inventories and IAS 16 Property, Plant and Equipment.

EXAMPLE –staff benefits capitalisation into the cost of inventoryDirect labour costs are booked to inventory - see IAS 2

I/B DR CRStaff costs-salaries I $10.0mStaff costs-social security I $1.0mStaff costs-pensions I $2.0m

Cash B $12.0mPayment of salariesInventory B $3,5mStaff costs-salaries direct labour only

I $3.0m

Staff costs-social security direct labour only

I $0,2m

Staff costs-pensions direct labour only

I $0,3m

Allocation of direct labour costs to inventory

Short-term Paid AbsencesAn undertaking should recognise the expected cost of paid absences as follows:

(i) accumulating paid absences: when the staff render service that increases their entitlement to future paid absences

(ii) non-accumulating paid absences: when the absences occur.

An undertaking may pay staff for absence for various reasons including vacation, sickness and short-term disability, maternity or paternity, jury service and military service.

EXAMPLE- Accumulating paid absencesStaff is entitled to be paid for 6 days’ sick leave each year. If they take less than 6 they can receive the money in cash at the end of the year. Each month, the company will accrue half a day’s salary for each employee who has not been sick during the previous month.




I/B DR CRStaff costs-sickness bonus I $0,1mSickness bonus provision B $0,1mMonthly provision for sickness bonus

Entitlement to paid absences is either accumulating or non-accumulating.Accumulating paid absences are those that are carried forward and can be used in future periods, if the current period's entitlement is not used in full.

Accumulating paid absences may be either:

(i) vesting: staff are entitled to a cash payment for unused entitlement on leaving the undertaking or

(ii) non-vesting, when staff are not entitled to a cash payment for unused entitlement on leaving.

EXAMPLE- Accumulating paid absences - non-vestingYour staff is entitled to 6 days’ paid sick leave for each year of service.If the sick leave is not taken in full in one year the balance may be carried forward.No cash is paid, when employment ceases, for any sick leave that remains so this is classified as a non vesting scheme.

An obligation arises when staff render services that increases their entitlement to future paid absences. This applies even if it is non-vesting (where staff may leave before they use an accumulated non-vesting entitlement without payment).

An undertaking should measure the expected cost of accumulating paid absences as a result of the unused entitlement at the balance sheet date.

An undertaking may not need to make detailed computations if there is no material obligation for unused paid absences.

For example, a sick leave obligation is likely to be material only if unused paid sick leave may be taken as paid vacation.

Example-Sick leave, accumulating LIFO basis An undertaking has 300 staff, each entitled to seven days of paid sick leave for each year. Unused sick leave may be carried forward for one year.

Sick leave is taken first out of the current year's entitlement and then from any balance brought forward from the previous year.

At 31 December 2XX5, the average unused entitlement is three days for each staff member. The undertaking expects that 292 staff members will take no more than seven days of paid sick leave in 2XX6 and that remaining eight staff will take an average of nine and half days each.Year A. Entitled B. Taken Estimated A-B Liability2XX5 300x7=210

0300x4=1200 900 (carried

forward)2XX6

300x7=2100

292x7=2044 +8x9.5=76

=2120 -20

The undertaking expects that it will pay an additional 20 days from the unused entitlement for 2XX5 (2.5x8=20).




Therefore, the undertaking recognises a liability equal to 20 days of sick pay.

Non-accumulating paid absences do not carry forward: they lapse if the current period's entitlement is not used in full and do not entitle staff to a cash payment for unused entitlement.

This is commonly the case for sick pay to the extent that unused past entitlement does not increase future entitlement. Other examples of non-accumulating paid absences include maternity or paternity leave, jury service or military service.

For non-accumulating paid absences, an undertaking recognises no liability nor expense until the time of the absence, because staff service does not increase the amount of the benefit.

Profit-sharing and Bonus PlansAn undertaking should recognise the expected cost of profit-sharing and bonus payments only when:

(i) the undertaking has a legal or constructive obligation to make such payments as a result of past events

(ii) a reliable estimate of the obligation can be made.

Under some profit-sharing plans, staff receive a share of the profit only if they remain with the undertaking for a specified period. Such plans create a constructive obligation as service rendered increases the amount to be paid if they remain in service until the end of the specified period.

Measurement reflects the possibility that some staff may leave without receiving profit-sharing payments.

EXAMPLE-Profit sharing plan calculationsA profit-sharing plan requires an undertaking to pay a specified

proportion of its net profit for the year to staff who serve

throughout the year. If no staff leave during the year, the total

profit-sharing payments for the year will be 7% of net profit. The

undertaking estimates that staff turnover will reduce the

payments to 5,5% of net profit of 10 million.

The undertaking recognises a liability and an expense of 5,5% of net profit.

I/B DR CRStaff costs-profit-sharing plan I $0,55mProfit-sharing plan provision B $0,55mProvision for profit-sharing plan

An undertaking may have no legal obligation to pay a bonus but has a practice of paying bonuses. This creates a constructive obligation.

An undertaking can make a reliable estimate of its legal or constructive obligation under a profit-sharing or bonus plan only when:

(i) the plan contains a formula for determining the amount of the benefit.

(ii) the undertaking determines the amounts to be paid before the financial statements are authorised for issue

(iii) past practice gives evidence of the amount of the obligation.




An obligation under profit-sharing and bonus plans results from staff

service so an undertaking recognises the cost not as a distribution of net

profit but as an expense.

EXAMPLE-Profit sharing plan – expense, not a distributionA profit-sharing plan requires an undertaking to pay a 10% of post-tax profit to staff. This is an expense, not a distribution of net profit. Staff Income Tax is 24% and the bonus is treated as an expense for corporation tax. Corporation tax rate is 30%.The profits are $1m.

I/B DR CRStaff costs-profit-sharing plan I $100.000Profit-sharing plan provision B $76.000Income Tax payable B $24.000Corporation Tax payable B $30.000Corporation tax for year I $30.000Provision for profit-sharing plan and the reduction of tax

If profit sharing and bonus payments are not due wholly within twelve months after the end of the period in which the staff render the related service, those payments are ‘other long-term staff benefits’.

DisclosureAlthough IAS 19 does not require specific disclosures about short-term staff benefits, other Standards require disclosures:

(i) IAS 24 Related Parties an undertaking discloses information about benefits for key personnel.

(ii) IAS 1 Presentation of Financial Statements requires the disclosure of staff costs.

Other Long-term Staff BenefitsOther long-term staff benefits include, for example:

(i) long-term paid absences such as long-service, or sabbatical, leave.

(ii) long-service benefits.(iii) long-term disability benefits. (iv) profit-sharing and bonuses payable twelve months or

more after the end of the period in which the staff render the related service.

(v) deferred compensation paid twelve months or more after the end of the period in which it is earned.

The measurement of other long-term staff benefits is not usually subject to the same degree of uncertainty as the measurement of post-employment benefits.

IAS 19 requires a simplified method of accounting for other long-term staff benefits which differs from the accounting required for post-employment benefits as follows:

(i) actuarial gains and losses are recognised immediately and no 'corridor' (see ‘pensions’ below) is applied.

(ii) all past service cost is recognised immediately.

Recognition and MeasurementThe amount recognised as a liability for other long-term staff benefits should be the net total of the following amounts:

(i) the present value of the obligation at the balance sheet date,




(ii) minus: the fair value at the balance sheet date of plan assets that will be used to directly settle obligations.

EXAMPLE- Liability for other long-term staff benefitsYou have a paid sickness and disability scheme that has just

started before year-end.

At the year-end, the present value of the obligation is $3,5m. You have paid $0,2m for an insurance policy plan asset that will cover $1m of claims.The liability will be $2,5m.

I/B DR CRStaff costs- Liability for other long-term staff benefits insurance premium

I $200.000

Cash B $200.000Staff costs- long-term staff benefits I $2,5mLong term staff benefits insured element

B $1.0m

Provision- Liability for other long-term staff benefits

B $3,5m

Provision for liability of staff sickness and disability scheme

For other long-term staff benefits, an undertaking should recognise the net total of the following amounts as expense or income or in the cost of an asset, see IAS 2 and IAS 16:

(i) current service cost.(ii) interest cost.(iii) the expected return on any plan assets and on any

reimbursement right such as insurance recognised as an asset.

(iv) actuarial gains and losses, which should all be recognised immediately.

(v) past service cost, which should all be recognised immediately.

(vi) the effect of any curtailments or settlements.

Long-term disabilityIf benefits depend on service, accruals are made based on the probability of payments within the undertaking / industry.

If the level of benefit is the same for any disabled staff regardless of years of service, the expected cost of those benefits is recognised when an event occurs that causes a long-term disability.

EXAMPLE- long-term disability, regardless of years of serviceLong-term disability is rare in your business. Your scheme provides a benefit that is the same for any disabled staff. You do not make a provision for anticipated costs until a qualifying disability occurs. When a qualifying disability occurs, a provision is made.

I/B DR CRStaff costs- long-term disability I $50.000Cash B $50.000Recording provision for long-term disability when a qualifying disability occurs.

DisclosureAlthough IAS 19 does not require specific disclosures about other long-term staff benefits, other Standards require disclosures, for example, where the expense may explain a corresponding change in performance for the period (see IAS 1).




EXAMPLE-IAS 1 reportingYou have introduced long-term benefit schemes to retain staff. The expense has increased staff costs by 10% in the period. This explanation should be included in the financial statements per IAS 1.

Where required by IAS 24 Related Parties, an undertaking must

disclose information about other long-term staff benefits for key

personnel.

Termination Benefits

IAS 19 deals with termination benefits separately from other staff benefits as the event which gives rise to an obligation is the termination rather than staff service.

RecognitionAn undertaking should record termination benefits as a liability and an expense only when the undertaking is demonstrably committed to:

(i) terminate employment before the normal retirement date.(ii) provide termination benefits as a result of an offer made

to encourage voluntary redundancy.

EXAMPLE-Termination benefitsYou close a division and offer $3.000 to those who take voluntary redundancy. 50 workers accept the offer but you find that 10 more staff will have to be made redundant at a cost of $2.000 each. The money paid to all 60 redundant staff is classified as termination benefits.

I/B DR CRStaff costs- termination benefits I $170.000Cash B $170.000Recording payment of termination benefits

An undertaking is demonstrably committed to a termination only when the undertaking has a detailed formal plan for the termination and is without realistic possibility of withdrawal.

The detailed plan should include as a minimum:(i) the location, function and approximate number of staff

whose services are to be terminated.(ii) the termination benefits for each job classification or

function.(iii) the timing the implementation.

Implementation should begin as soon as possible and the period of

time to complete implementation should be such that material

changes to the plan are not likely.




EXAMPLE- No commitment to terminationYour board decides that a factory will either be sold within 6 months or staff numbers will be cut to sustain profitability. Your firm is not yet ‘demonstrably committed to a termination’ as no detailed plan is available and the staff cuts will not be made if the factory is sold.

No provision should be made for termination costs until the detailed plan is in place and is unlikely to be changed.

Termination benefits are often lump-sum payments but sometimes also include:

(i) improvement of retirement benefits or of other post-employment benefits, either via a pension plan or directly.

(ii) salary until the end of a specified notice period if the member of staff renders no further service that provides benefits to the undertaking.

EXAMPLE-Termination benefits other than lump sum.You relocate your office to another region. All the staff, but one,

move to the new office. The remaining worker is made redundant.

He will be paid his salary of $1.000 for 3 more months and $2.000 will be contributed to his pension. These payments are termination benefits.

I/B DR CRStaff costs- termination benefits I $5.000Salary accrual B $3.000Pension fund accrual B $2.000Recording accruals of termination benefits

Some staff benefits are payable regardless of the reason for the staff's departure. The payment of such benefits is certain subject to any vesting or minimum service requirements but the timing of their payment is uncertain.

EXAMPLE- Benefits payable regardless of the reason for departureOn leaving employment, all staff in your company are entitled to 10 company shares for each month of service. These shares are accounted for under IFRS 2. They are post-employment benefits, not termination benefits.Although such benefits are described in some countries as termination indemnities or termination gratuities, they are post-employment benefits, rather than termination benefits and an undertaking accounts for them as post-employment benefits.

Some undertakings provide a lower level of benefit for voluntary termination at the request of the staff in substance, a post-employment benefit than for involuntary termination at the request of the undertaking. The additional benefit payable on involuntary termination is a termination benefit.

EXAMPLE- Voluntary termination at the request of the staffStaff who request early retirement receive $2.000 as a payment to their pension fund. This is a post-employment benefit.Those whom are made redundant by the firm receive $3.000. The first $2.000 is a post-employment benefit. The remaining $1.000 is a termination benefit.

I/B DR CRStaff costs- post-employment benefits

I $2.000

Pension fund accrual B $2.000




Recording a voluntary early retirementStaff costs- termination benefits I $1.000Staff costs- post-employment benefits

I $2.000

Cash B $3.000Recording a compulsory redundancy

Termination benefits do not provide future benefits and are recognised as an expense immediately.

Where an undertaking recognises termination benefits it may also have to account for a curtailment of retirement benefits or other staff benefits.

EXAMPLE-termination benefits- curtailment of retirement benefitsIn return for a termination bonus of $10.000, an employee agrees to a reduction in his pension entitlement. The credit to the pension costs is $3.000.

I/B DR CRStaff costs- termination benefits I $10.000Cash B $10.000Staff costs- post-employment benefits

I $3.000

Pension fund accrual B $3.000Recording termination benefits and a reduction in retirement benefits

Measurement

Where termination benefits fall due more than 12 months after the balance sheet date, they should be discounted using an appropriate discount rate.

For voluntary redundancy, the measurement of termination benefits should be based on the number of staff expected to accept the offer.

EXAMPLE -Voluntary redundancy number of staffYour firm wishes to make 500 staff redundant. You offer $10.000 to each member of staff that accepts voluntary redundancy. You believe that only 200 staff will accept voluntary redundancy. The termination benefit provision is $2m (200 * $10.000). Further provisions may be made if compulsory redundancies follow.

I/B DR CRStaff costs-voluntary redundancy I $2mRedundancy provision B $2mProvision for voluntary redundancy

DisclosureWhere there is uncertainty about the number of staff who will accept an offer of termination benefits, a contingent liability exists. As required by IAS 37, an undertaking discloses information about the contingent liability, unless the possibility of an outflow in settlement is remote.

As required by IAS 1, an undertaking discloses the nature and amount of a termination benefit, if it is of such size or nature that its disclosure is relevant to explain the performance for the period.

Where required by IAS 24 Related Parties, an undertaking discloses information about termination benefits for key personnel.




Equity Compensation BenefitsEquity compensation benefits include benefits in such forms as:

(i) shares, share options and other equity instruments, issued to staff at less than fair value.

(ii) cash payments, based on the future market price of the undertaking's shares.

Recognition and MeasurementIFRS 2 specifies recognition and measurement requirements for equity compensation benefits, and they have therefore been excluded from IAS 19.

Pensions and other post-employment benefits

Post-employment benefits include, for example:(i) pensions.(ii) other post-employment benefits, such as life insurance

and medical care.

Post-employment benefit plans are classified as either: defined contribution plans defined benefit plans

IAS 19 also gives guidance on the classification of multi-employer plans, state plans and plans with insured benefits.

The 2011 update of IAS 19 is effective from 2013:

In relation to defined benefit schemes:

All changes in the net defined benefit liability (asset) will be recognised when they occur:

(i) service cost and net interest in profit or loss; and

(ii) remeasurements (actuarial gains and losses) in other comprehensive income.

This will end the “corridor” system of spreading changes over a number of years (see below).

The net Interest Cost will use the discount rate by reference to market yields at the end of the reporting period on high quality corporate bonds (or, in countries where there is no deep market in such bonds, government bonds) of a currency and term consistent with the currency and term of the post-employment benefit obligations. The Current Service Cost will include any Curtailments and Settlement gains and losses.

The current rules are listed below for those using the pre-2013 standard:




Overview of the main types of Pension Plan

Defined contributio

n plan

State plan Insured benefits

fund

Multi-employer

plan

Defined benefit

planMake agreed payments to fund.

No further liability.May be either defined contribution plan or defined benefit plan

Promise specific benefits. Pay as directed by the actuary.

Pensioners receive the returns on the funds invested

Pensioners receive the pension determined by the State

Pensioners receive amounts determined by the fund.

Pensionersreceive amounts determined by the fund.

Risk: Pensioners

Risk:State

Risk:Insurance company

Risk:Company

Actuaries:no

State Actuaries: yes

Insurance Company Actuaries: yes

CompanyActuaries: yes

All funds may provide medical and disability aid to pensioners.

Definitions- PensionsPost-employment benefits are benefits other than termination benefits and equity compensation benefits payable after the completion of employment.

Post-employment benefit plans are formal or informal arrangements under which an undertaking provides post-employment benefits for staff.

Defined contribution plans are post-employment benefit plans under which an undertaking pays fixed contributions into a fund and will have no legal nor constructive obligation to pay further contributions. Defined benefit plans are post-employment benefit plans other than defined contribution plans.

Multi-employer plans are plans other than state plans that: (i) pool the assets contributed by various undertakings.(ii) use those assets to provide benefits to staff of

undertakings.

Contribution and benefit levels are determined without regard to the

identity of the undertaking that employs the staff concerned.

Current service cost is the increase in the present value of the defined benefit obligation resulting from staff service in the current period.

A qualifying insurance policy is a policy issued by an insurer that is not a related party as defined in IAS 24, if the proceeds of the policy:

(i) can be used only to finance staff benefits under a defined benefit plan

(ii) are not available to the undertaking's own creditors even in bankruptcy and cannot be paid to the undertaking, unless either:




(1) the proceeds represent surplus assets that are not needed for benefit obligations.

(2) the proceeds are returned to the undertaking to reimburse it for benefits already paid.

Past service cost is the increase in the present value of the obligation for staff service in prior periods. This cost results from changes to pensions or other long-term staff benefits in the current period.

Past service cost may be either positive where benefits are introduced or improved, or negative where benefits are reduced.

Vested staff benefits are benefits that are not conditional on future employment.

The present value of a defined benefit obligation is the present value of expected future payments required to settle the obligation without deducting any plan assets. This results from staff service in the current and prior periods.

Interest cost is the increase during a period in the present value of an obligation that arises because the benefits are one period closer to settlement.

Plan assets comprise:(i) assets held by a long-term fund(ii) qualifying insurance policies

Assets held by a long-term fund are assets that:(i) are held by a fund that exists solely to finance staff

benefits.

(ii) are available to be used only to pay or fund staff benefits, are not available to the undertaking's own creditors even in bankruptcy and cannot be returned to the reporting undertaking unless:

(1) the remaining assets of the fund are sufficient to meet the obligations of the plan or the undertaking

(2) the assets are returned to the undertaking to reimburse it for benefits already paid.

The return on plan assets is interest, dividends and other revenue earned by the plan assets, together with realised and unrealised gains or losses on the plan assets, less any costs of administering the plan and less any tax payable by the plan itself.

Actuarial gains and losses comprise:(i) experience adjustments which are the differences

between actuarial assumptions and what has actually occurred.

(ii) changes in actuarial assumptions.

Defined Benefit PlansExamples of defined benefit plans:

(i) a plan benefit formula that is not linked solely to the amount of contributions.

(ii) a guarantee of a specified return on contributions.(iii) informal practices that give rise to a constructive

obligation.

EXAMPLE- A constructive obligation based on company practice

A constructive obligation may arise where an undertaking has a history of increasing benefits for former staff to keep pace with inflation, even where there is no legal obligation to do so.




Under defined benefit plans:

(i) the undertaking's obligation is to provide the agreed benefits to current and former staff.

(ii) actuarial risk and investment risk fall on the undertaking. If actuarial or investment returns are worse than expected, the undertaking's obligation will be increased.

Defined Contribution Plans

Under defined contribution plans, an undertaking pays fixed

contributions into a separate fund and will have no obligation to

pay further contributions.

The fund will be invested and pensions will be paid from the fund. If the

fund is unable to pay pensions in full, the staff will suffer the loss and the

undertaking will not have to provide further funds to eliminate the loss.

EXAMPLE-Defined contribution planYou contribute 7% of the total salary amount to a company pension plan.The company has no further obligation Staff contribute 4% of their salary.

I/B DR CRStaff costs- salaries I $100.000Staff costs- pensions I $7.000Pension fund accrual B $11.000

Cash payments to staff net of pension

B $96.000

Recording salary and pension contributions

An undertaking recognises contributions to a defined contribution plan when staff have rendered service in exchange for those contributions.

All other post-employment benefit plans are defined benefit plans. Defined benefit plans may be unfunded, partly or wholly funded.

Accounting for defined contribution plans is straightforward because the obligation for each period is determined by the amounts to be contributed for that period.

No actuarial assumptions are required to measure the obligation, nor the expense and there is no possibility of any actuarial gain or loss.

The obligations are measured on an undiscounted basis, except where they do not fall due wholly within twelve months after the end of the period in which the staff render the related service.

Recognition and MeasurementWhen staff has rendered service during a period, the undertaking should record the contribution payable to a defined contribution plan in exchange for that service:

(i) as an accrued expense, after deducting any contribution already paid.




If the contribution already paid exceeds the contribution due for service before the balance sheet date, an undertaking should recognise that excess as a prepaid expense to the extent that the prepayment will lead to a reduction in future payments or a cash refund

EXAMPLE-pensions-prepaid expenseYou decide to pay pensions for 3 months in advance to secure a tax deduction. You show it as a prepayment.

I/B DR CRPensions-prepaid expense

B $45.000

Cash B $45.000Recording pension prepayments

(ii) as an expense, unless another Standard requires or permits the inclusion of the contribution in the cost of an asset see IAS 2 Inventories and IAS 16 Property, Plant and Equipment.

Where contributions to a defined contribution plan do not fall due wholly within twelve months after the end of the period in which the staff render the related service, they should be discounted. DisclosureAn undertaking should disclose the amount recognised as an expense for defined contribution plans. Contributions for key personnel must be disclosed separately (see IAS 24 Related Parties).

Defined Benefit Plans

Defined benefit plans provide pensioners with a specific pension (the defined benefit) normally based on the years of service and their final salary.

For example, a defined benefit plan may offer a pension 1/60 of final salary for each year of service. A member of staff who serves the undertaking for 40 years will receive a pension of 2/3 of final salary.

Having set up a defined benefit plan, all the risks are with the undertaking.

The promise to pay a future pension creates a liability.

The undertaking (normally helped by actuaries) will calculate its obligation to pensioners.

Factors to be taken into account include:-current age of each member of staff who qualifies-the impact of staff who will leave before reaching pensionable age-retirement age -expected years of service at retirement age-expectancy of the number of years of life after retirement- the impact of paying pensions to pensioners’ partners after the death of the pensioner.

Having estimated the obligation, the company must decide how to fund the scheme. Members of staff may also be required to contribute to benefit from the plan.




Unfunded Scheme. The undertaling may decide to finance the liability from current cash flows when the pensions need to be paid. This would be an unfunded scheme. Such a scheme tends to be less popular with staff as the undertaking may not have the cash to pay future pensions, or may even cease to exist.

EXAMPLE-Defined benefit plan-unfundedYour firm undertakes to pay pensions to former staff. Pensions

are a guaranteed a portion of their final salary.

You have no pension fund. You are paying pensioners directly from the company funds.

Each month you pay money to current pensioners and accrue liabilities for current staff.

I/B DR CRStaff costs - pensions for current staff

I $68.000

Pension fund accrual B $68.000Pension fund accrual for pensioners B $37.000Cash payments to pensioners B $37.000Recording pension accrual and payments

Funded Scheme. The undertaking may set up a scheme that fully funds the obligation. This is called the pension fund, or plan. The undertaking pays money every year into the pension fund. The fund invests in various stocks and bonds. The fund will pay the pension liabilities from the return it makes from its assets and from its capital.

The undertaking has estimated the obligation. It now calculates the cash that it must pay each year into the fund to match these obligations. It estimates the different returns on the fund assets to know how much capital to invest.

Most funds have a range of assets (a portfolio) which have different risks and returns in order to spread the risk. The cash flows to meet the obligation will be spread over a number of years as each pension payment becomes due.The fund will be looking to liquidate assets to match these payments.

Partially-funded Scheme. The undertaking has a third option to partially fund the obligation. (The fund is therefore partially-unfunded.) This is often a step towards full funding at a future date when current cash flows do not permit it to be achieved in the current period.

Where the obligation is partially funded, the undertaking has to make up the deficit as pension payments fall due.

Past Service Cost

Past service cost arises when an undertaking introduces a defined benefit plan or changes the benefits payable under an existing defined benefit plan.

Past service cost relates to service given by staff and former staff in earlier periods and is measured as the change in the liability resulting from the change.




An undertaking should recognise past service cost as an expense on a straight-line basis over the average period until the benefits become vested.

EXAMPLE- Past service cost-unvestedYour pension plan has no pensioners yet, only current staff.Improvements to your pension plan incur a past service cost of $45m.The average remaining working life of staff is 15 years. The past service cost should be charged at $3m per year.

I/B DR CRStaff costs- pensions past service cost

I $3m

Pension provision B $3mRecording annual past service cost each year for the next 15 years

To the extent that the benefits are already vested immediately

following the introduction of or changes to, a defined benefit plan

and undertaking should record past service cost immediately.

EXAMPLE- Past service cost-vested immediatelyYou improve your pension payments. Current pensioners will receive an additional $1m (the discounted cash flow amount) in additional benefits. As pensioners, they have completed the service, so the benefits become vested immediately. The costs should be recorded immediately, even though the payments will be paid over a period of years.

I/B DR CRStaff costs- pensions past service cost

I $1m

Pension provision B $1mRecording past service cost for vested benefits

An undertaking establishes the amortisation schedule for past service cost when the benefits are introduced or changed. An undertaking updates the amortisation schedule only if there is a curtailment or settlement.Where an undertaking reduces benefits payable under a defined benefit plan, the resulting reduction in the liability is recorded as negative past service cost. It is calculated over the average period until the reduced portion of the benefits becomes vested.

Past service cost excludes:

i. the impact of differences between actual and previously-forecast salary increases on the obligation to pay benefits for service in prior years (there is no past service cost because actuarial assumptions allow for projected salaries);

ii. under and over estimates of discretionary pension increases where an undertaking has a constructive obligation to grant such increases (there is no past service cost because actuarial assumptions allow for such increases);

iii. estimates of benefit improvements that result from actuarial gains that have already been recognised in the financial statements if the undertaking is obliged to use any surplus in the plan for the benefit of plan participants, even if the benefit increase has not yet been formally awarded (the resulting increase in the obligation is an actuarial loss and not past service cost);




iv. increases in vested benefits when, in the absence of new or improved benefits, employees complete vesting requirements (there is no past service cost because the estimated cost of benefits was recognised as current service cost as the service was rendered); and

v. the effect of plan changes that reduce benefits for future service (a curtailment).

Where an undertaking reduces benefits payable under an existing defined benefit plan, the resulting reduction in the defined benefit liability is recognised as (negative) past service cost over the average period until the reduced portion of the benefits becomes vested.

Where an undertaking reduces benefits payable under an existing defined benefit plan and, at the same time, increases other benefits payable under the plan for the same employees, the undertaking treats the change as a single net change.

Matching the obligation and the plan’s investment performance

The large number of estimates to be made for both the obligation and the investment performance of the plan requires extensive actuarial knowledge and application. The result of these calculations is the undertaking’s monthly payment required to meet the obligation.

Surpluses and deficits that arise in the pension fund are called actuarial gains and losses.

The estimates require updating at least annually, and whenever there are any changes to the pensions.

(To further complicate the calculations, some defined benefit plans include medical insurance and/or life assurance.)

Accounting for defined benefit plans requires actuarial assumptions to measure the obligation and the expense and there is a possibility of actuarial gains and losses. Also, the obligations are measured on a discounted basis, as they may be settled many years after the staff render the related service.

The major risk of defined benefit plans is that the return on the assets is below that originally estimated and the undertaking has to finance the shortfall.

Under IAS 19, these shortfalls (liabilities to pension funds) appear on the balance sheet (see below). Most countries did not have this requirement prior to adoption of IAS 19 and any shortfall did not appear in the undertaking’s financial statements, unless it wished to provide the information voluntarily.

The recognition of these liabilities has been the most dramatic impact of IAS 19. Many defined benefit plans of large organisations have been closed to new members, some benefits reduced and some schemes have been redesigned as defined contribution schemes to limit liabilities. Recognition and MeasurementThe payment of benefits depends on:

the financial position of the fund, the investment performance of the fund,




an undertaking's ability and willingness to provide additional money for any shortfall in the fund's assets.

The undertaking is underwriting the actuarial and investment risks of the plan. Thus, the expense recognised for a defined benefit plan is not necessarily the amount of the contribution due for the period.

EXAMPLE- Expense recognised may differ from the period contributionThe contribution for pensions is $6m in the period. However, the plan assets have provided lower investment returns and there is an actuarial loss of $1m for the period. The expense recognised for the period will be $7m.

I/B DR CRStaff costs- pensions I $7mCash B $6mPension provision B $1mRecording pension payments and actuarial loss

An undertaking must determine how much benefit is attributable to

the current and prior periods and to make actuarial assumptions

about demographic and financial variables such as future increases

in salaries and medical costs that will influence the cost of the

benefit. Professional actuaries are normally involved in this

process.

Where a plan has been introduced or changed, the undertaking must determine the resulting past service cost.

EXAMPLE-Change to a plan: resulting past service costYou decide to increase payments to pensioners by 10%. This applies to both current and future pensioners. This will increase the charge for the current year’s service by $2m and previous years’ contributions will need to be increased by $17m.

I/B DR CRStaff costs- pensions current service cost increase

I $2m

Pension provision B $2mStaff costs- pensions past service cost

I $17m

Pension provision B $17mRecording pension increases for current year and past service cost

Where a plan has been curtailed or settled, the resulting gain or loss should be determined.

EXAMPLE-Curtailment of a planYour group decides to rationalise the number of pension plans and transfer all current staff to a group plan. Your current staff move from your plan to the group plan but your pensioners do not move. Your actuary calculates that your plan needs another $3m to finance benefits to your pensioners.

I/B DR CRStaff costs- pensions closure of company plan

I $3m

Pension provision B $3mRecording pension increases for current year and past service cost




Where an undertaking has more than one defined benefit plan, the undertaking applies these procedures for each material plan separately.

Accounting for the Constructive ObligationInformal practices give rise to a constructive obligation where the undertaking has no realistic alternative but to pay staff benefits. It is assumed that an undertaking which is currently promising specific benefits will continue to do so over the remaining working lives of staff and that those benefits will be provided in their retirement.

Defined Benefit Plans -Procedures

IAS 19 requires an undertaking to: i. use actuarial techniques to make a reliable estimate of the

amount of benefit that staff have earned in return for their service in the current and prior periods and to make actuarial assumptions about demographic variables (such as staff turnover and mortality) and financial variables (such as future increases in salaries and medical costs) that will influence the cost of the benefit;

ii. discount that benefit using the Projected Unit Credit Method (see below) in order to determine the present value of the defined benefit obligation and the current service cost;

iii. determine the fair value of any plan assets;

iv. determine the total actuarial gains and losses and the amount of those actuarial gains and losses to be recognised (see below);

v. . where a plan has been introduced or changed, determine the resulting past service cost; and

vi. where a plan has been curtailed or settled, determine the resulting gain or loss.

Where an undertaking has more than one defined benefit plan, the undertaking applies these procedures for each material plan separately.Actuarial gains and losses

Actuarial gains and losses may result from changes in either the present value of a defined benefit obligation, or the fair value of any related plan assets.

Causes of actuarial gains and losses include, for example:

i. unexpectedly high or low rates of staff turnover, early retirement or mortality or of increases in salaries, benefits or medical costs;

ii. changes in estimates of future employee turnover, early retirement or mortality or of increases in salaries, benefits or medical costs;

iii. changes in the discount rate; and

iv. differences between the actual return and the expected return on plan assets.

Over time, actuarial gains and losses may offset one another. Thus, estimates of post-employment benefit obligations may be viewed as a range (or ‘corridor') around the best estimate. An undertaking is




permitted, but not required, to recognise actuarial gains and losses that fall within that range.

IAS 19 requires an undertaking to recognise, as a minimum, a specified portion of the actuarial gains and losses that fall outside a ‘corridor' of plus or minus 10%.

The Standard also permits systematic methods of faster recognition. Such permitted methods include, for example, immediate recognition of all actuarial gains and losses, both within and outside the ‘corridor'.

An undertaking must record the net cumulative actuarial gains and losses that exceed the greater of:

1. 10% of the present value of the defined benefit obligation before deducting plan assets.

2. 10% of the fair value of any plan assets.This is the ‘10% corridor’.

The actuarial gains and losses to be recorded for each defined benefit plan

is the excess that is outside the 10% 'corridor' at the previous reporting

date, divided by the expected average remaining working lives of the staff

participating in that plan.

EXAMPLE-Actuarial gains and losses, using the 10% corridorPresent value of the defined benefit obligation before deducting plan assets: previous reporting date

$150m

Fair value of plan assets: previous reporting date

$200m

Net cumulative actuarial gain excess $50mThe plan assets are greater than the obligation

10% of the value of the plan assets the ‘10% corridor’ $20mExcess that fell outside the 10% corridor $50m-$20m $30mExpected average remaining working lives of the staff 10

yearsActuarial gain for the period $30m / 10 years $3m

An undertaking may adopt any systematic method that results in faster recognition of actuarial gains and losses, provided that the same basis is applied to both gains and losses and applied consistently from period to period.

If an undertaking adopts a policy of recognising actuarial gains and losses in the period in which they occur, it may recognise them outside the income statement, in, providing it does so for:

i. all of its defined benefit plans; andii. all of its actuarial gains and losses.

Actuarial gains and losses recognised outside the income statement shall be presented in a statement of changes in equity titled ‘statement of recognised income and expense' .

On first adopting IAS 19, an undertaking may recognise any resulting increase in its liability for post-employment benefits over not more than five years. If the adoption of IAS 19 results in decreases, the decreased liability must be recorded immediately.Balance SheetThe amount recognised as a defined benefit liability should be the net total of the following amounts:




(i) the present value of the obligation at the balance sheet date.

(ii) plus any actuarial gains less any actuarial losses not recognised.

(iii) minus any past service cost not yet recognised.(iv) minus the fair value at the balance sheet date of plan

assets if any out of which the obligations are to be settled directly.

The present value of the obligation is the gross obligation, before

deducting the fair value of any plan assets.

EXAMPLE- amount recognised as a defined benefit liability Present value of the defined benefit obligation -$200mActuarial gains less any actuarial losses not recognised +

+$10m

Past service cost not yet recognised -

-$8m

Fair value of plan assets out of which the obligations are to be settled directly. -

-$15m

Amount recognised as defined benefit liability -$213m

An undertaking may request a qualified actuary to carry out a valuation of the obligation as at the balance sheet date.

A surplus is an excess of the fair value of the plan assets over the present value of the defined benefit obligation.

An asset may arise where a plan has been over funded or in certain cases where actuarial gains are recorded. An undertaking recognises an asset in such cases as:

(i) the undertaking controls a surplus that can be used to generate future benefits.

(ii) control is a result of past events - contributions paid by the undertaking and service rendered by the staff.

(iii) future benefits are available to the undertaking in the form of a reduction in future contributions or a cash refund, either directly to the undertaking or indirectly to another plan.

EXAMPLE – Over-funded planYou have halved your workforce. Your actuary identifies a surplus

in the pension plan as a result. You can:

1. reduce further payments to the pension plan.2. have a cash refund.3. transfer the surplus to another fund.

Income StatementAn undertaking should recognise the net total of the following amounts as expense or income:

(i) current service cost.(ii) interest cost.(iii) the expected return on any plan assets and on any

reimbursement rights.(iv) actuarial gains and losses.(v) past service cost.(vi) the effect of any curtailments, or settlements.




Other Standards require the inclusion of certain staff costs within the cost of assets (see IAS 2 Inventories and IAS 16 Property, Plant and Equipment workbooks).

Recognition and measurement: present value of defined benefit obligations and current service cost

The cost of a defined benefit plan may be influenced by many variables, such as final salaries, staff turnover and mortality, medical cost trends and, for a funded plan, the investment earnings on the plan assets.

The total cost of the plan is uncertain and this uncertainty is likely to continue over a long period of time. To measure the present value of the post-employment benefit obligations and the related current service cost, it is necessary to:

i. apply an actuarial valuation method; ii. attribute benefit to periods of service; and iii. make actuarial assumptions.

Actuarial Valuation MethodAn undertaking should use the Projected Unit Credit Method to determine the present value of its defined benefit obligations and the related current service cost and, where applicable, past service cost. Actuaries are likely to be needed to compute this.

The calculations involved in the Projected Unit Credit Method are beyond the scope of this workbook.

Actuarial Assumptions: Discount RateThe rate used to discount post-employment benefit obligations should be determined by reference to market yields at the balance

sheet date on high quality corporate bonds or if none, on government bonds. The currency and term of the corporate bonds or government bonds should be consistent with the currency and estimated term of the post-employment benefit obligations.

The discount rate reflects the time value of money, but not:

1. the actuarial or investment risk 2. the undertaking-specific credit risk borne by the undertaking's

creditors3. the risk that future experience may differ from actuarial

assumptions.

The discount rate reflects the estimated timing of benefit payments. In practice, an undertaking often achieves this by applying a single weighted-average discount rate that reflects the estimated timing and amount of benefit payments and the currency in which the benefits are to be paid.

EXAMPLE –Discount rate that reflects the estimated timing You have a young workforce that will require pension payments in 20-40 years time. You consider using a 30-year bond as your benchmark, and take its yield as your discount rate.

Interest cost is computed by multiplying the discount rate at the start of the period by the present value of the obligation throughout that period, taking account of any material changes in the obligation. EXAMPLES –Interest costAt January 1st, the present value of your pension obligation is $60m. The system is a closed scheme. On December 31st, the present




value of the same obligation is $62m, as the payments have come closer, and the amount of discount is less. The interest cost is $2m.

At January 1st, the present value of your pension obligation is $80m. A number of people leave the scheme during the year. On December 31st, the present value of the obligation is $81m. This represents $4m of increased present value less $3m due to leavers no longer requiring payment.The interest cost is $1m.The present value of the obligation will differ from the liability recorded in the balance sheet, as the liability is recorded after deducting the fair value of any plan assets and because some actuarial gains and losses and some past service cost, are not recorded immediately.

Recognition and Measurement: Plan AssetsFair Value of Plan AssetsThe fair value of any plan assets is deducted in determining the amount recognised in the balance sheet.

When no market price is available, the fair value of plan assets is estimated, for example, by discounting expected future cash flows using a discount rate that reflects both the risk associated with the plan assets and the expected disposal date of those assets or, if they have no maturity, the expected period until the settlement of the related obligation.

Plan assets exclude unpaid contributions due to the fund, as well as any non-transferable financial instruments issued by the undertaking and held by the fund.

EXAMPLE- Plan assets exclusion

Your firm has issued bonds to the pension fund to reduce cash payments. There is no market for the bonds and the fund would have difficulty finding a buyer. The bonds will be excluded from plan assets.

Plan assets are reduced by any liabilities of the fund that do not relate to staff benefits, for example, trade and other payables and liabilities resulting from derivative financial instruments.

Where plan assets include qualifying insurance policies (see Definitions-Pensions above) that exactly match the amount and timing of some or all of the benefits payable under the plan, the fair value of those insurance policies is deemed to be the present value of the related obligations.

ReimbursementsOnly when it is virtually certain that another party will reimburse some or all of the expenditure, the undertaking should recognise this as a separate asset measured at fair value.

In all other respects, an undertaking should treat that asset in the same way as plan assets. In the income statement, the expense relating to a plan may be presented net of the amount recognised for a reimbursement. EXAMPLE-ReimbursementYou have purchased a company. The vendors undertake to pay 50% of pension costs for the next 3 years for the staff that have been transferred. At the end of the first year, you calculate the reimbursement to be $6m. When you are sure that you will receive the reimbursement, it will be credited to pension costs.

I/B DR CRStaff costs- pensions I $6m




Accounts receivable B $6mRecording reimbursement of pension costSometimes, an undertaking is able to rely on another party, such as an insurer, to pay part or all of the expenditure required to settle a defined benefit obligation. Qualifying insurance policies (see Definitions-Pensions above) are plan assets.

When an insurance policy is not a qualifying insurance policy, that insurance policy is not a plan asset. The undertaking recognises the insurance policy as a separate asset, rather than as a deduction in determining the defined benefit liability; in all other respects, the undertaking treats that asset in the same way as plan assets.

If the right to reimbursement arises under an insurance policy that exactly matches the amount and timing of some or all of the benefits payable under a defined benefit plan, the fair value of the reimbursement right is deemed to be the present value of the related obligation.

Return on Plan AssetsThe expected return on plan assets is one component of the expense recorded in the income statement.

The difference between the expected return and the actual return on plan assets is an actuarial gain or loss. It is included with the actuarial gains and losses in determining the net amount that is compared with the limits of the 10% 'corridor'.

EXAMPLE-Actuarial gain or lossThe expected return on your pension plan assets for the year is $4m. This has been calculated by the actuary and is used to determine

the amount of money that you and your staff need to contribute to the fund in the period to finance the promised benefits.

The actual return from the plan’s investments is $5m. The additional $1m $5m-$4m is the actuarial gain for the period.The expected return on plan assets is based on market expectations, at the beginning of the period, for returns over the entire life of the related obligation. The expected return reflects changes in the fair value of plan assets held during the period, as a result of actual contributions paid into the fund and actual benefits paid out of the fund.

In determining the expected and actual return on plan assets, an undertaking deducts expected administration costs, other than those included in the actuarial assumptions used to measure the obligation.

Business CombinationsIn an acquisition, an undertaking recognises assets and liabilities arising from pensions at the present value of the obligation, less the fair value of any plan assets.

The present value of the obligation includes all of the following, even if the acquiree had not yet recognised them at the date of the acquisition:

(i) actuarial gains and losses that arose before the date of the acquisition whether or not they fell inside the 10% 'corridor'.

(ii) past service cost that arose from benefit changes or the introduction of a plan, before the date of the acquisition.

(iii) amounts of assets or liabilities that the acquiree had not recognised.




Curtailments and SettlementsAn undertaking should recognise gains or losses on the curtailment or settlement of a plan when they occur. The gain or loss on a curtailment or settlement should comprise:

(i) any resulting change in the present value of the obligation.

(ii) any resulting change in the fair value of the plan assets.(iii) any related actuarial gains and losses and past service

cost that had not previously been recognised.

Before determining the effect of a curtailment or settlement, an undertaking should remeasure the obligation and the related plan assets using current actuarial assumptions including current market interest rates and prices.

A curtailment occurs when an undertaking either:(i) is demonstrably committed to make a material reduction

in the number of staff covered by a plan. or(ii) changes the terms of a plan so that a material element of

future service by current staff will no longer qualify for benefits, or will qualify only for reduced benefits.

A curtailment may arise from an isolated event, such as the closing of a plant, discontinuance of an operation, or termination or suspension of a plan. An event is material enough to qualify as a curtailment if the curtailment gain or loss would have a material effect on the financial statements.

EXAMPLE- Curtailment-closing of a plantThe closing of a key manufacturing plant has a dramatic impact on your pension plan. Staff numbers are reduced by 37%. Pensioners have been increased by 4% by early retirement. The company needs to pay an additional $5m to the pension plan to fund the resulting actuarial losses.

I/B DR CRStaff costs- pensions curtailment of company plan

I $5m

Pension provision B $5mRecording pension payment increase for plan curtailment

Curtailments are often linked with a restructuring. So, an undertaking accounts for a curtailment at the same time as for a related restructuring.

A settlement occurs when an undertaking enters into a transaction that eliminates all further obligations for part or all of the benefits provided under a plan, for example, when a lump-sum cash payment is made to plan participants in exchange for their rights to receive specified post-employment benefits.

In some cases, an undertaking acquires an insurance policy to fund some

or all of the staff benefits relating to staff service in the current and prior

periods.




EXAMPLE-SettlementYour pension plan is a defined benefit scheme. You decide that the company must limit its risk in providing the guaranteed benefits. An insurance company agrees to run the scheme, with no further recourse to the company, for a payment of $1m, plus the transfer of the plan’s assets.

I/B DR CRStaff costs- pensions settlement of company plan

I $1m

Cash B $1mRecording payment to insurance company to settle a pension plan

The acquisition of such a policy is not a settlement if the undertaking retains an obligation to pay further amounts, if the insurer does not pay the staff benefits specified.

The termination of a plan is not a curtailment or settlement if the plan is replaced by a new plan that offers benefits that are, in substance, identical.

EXAMPLE-Replacement plan not a settlement nor a curtailmentYour parent company’s pension plan takes over all the obligations

of the pension plans of its subsidiaries.

The transfers of their obligations and the closure of the individual plans are not classified as settlements not curtailments.

Where a curtailment relates to only some of the staff covered by a

plan or where only part of an obligation is settled, the gain or loss includes a proportionate share of the previously unrecognised past service cost and actuarial gains and losses. It may be appropriate to apply any gain arising on a curtailment or settlement of the same plan to first eliminate any unrecognised past service cost relating to the same plan.

Presentation

OffsetAn undertaking should only offset an asset relating to one plan against a liability relating to another plan when the undertaking:

(i) has a right to use a surplus in one plan to settle obligations under the other plan

(ii) intends either to settle the obligations on a net basis, or to realise the surplus in one plan, and settle its obligation under the other plan simultaneously.

Current / Non-current DistinctionIAS 19 does not specify whether an undertaking should distinguish current and non-current portions of assets and liabilities arising from post-employment benefits.

Financial Components of Post-employment Benefit CostsIAS 19 does not specify whether an undertaking should present

current service cost, interest cost and the expected return on plan

assets as components of a single item of income or expense on the

face of the income statement.




DisclosureAn undertaking should disclose the following information about defined benefit plans:a. the undertaking's accounting policy for recognising actuarial

gains and losses.b. a general description of the type of plan.c. a reconciliation of opening and closing balances of the

present value of the defined benefit obligation showing separately, if applicable, the effects during the period attributable to each of the following:

i. current service cost,ii. interest cost,iii. contributions by plan participants,iv. actuarial gains and losses,v. foreign currency exchange rate changes on plans measured

in a currency different from the undertaking's presentation currency,

vi. benefits paid,vii. past service cost,viii. business combinations,ix. curtailments andx. settlements.d. an analysis of the defined benefit obligation into amounts

arising from plans that are wholly unfunded and amounts arising from plans that are wholly or partly funded.

e. a reconciliation of the opening and closing balances of the fair value of plan assets and of the opening and closing balances of any reimbursement showing separately, if applicable, the effects during the period attributable to each of the following:

i. expected return on plan assets,ii. actuarial gains and losses,

iii. foreign currency exchange rate changes on plans measured in a currency different from the undertaking's presentation currency,

iv. contributions by the employer,v. contributions by plan participants,vi. benefits paid,vii. business combinations andviii. settlements.f. a reconciliation of the present value of the defined benefit

obligation in (c) and the fair value of the plan assets in (e) to the assets and liabilities recognised in the balance sheet, showing at least:

i. the net actuarial gains or losses not recognised in the balance sheet);

ii. the past service cost not recognised in the balance sheet; iii. any amount not recognised as an asset, because of the

limits; iv. the fair value at the balance sheet date of any

reimbursement right recognised as an asset in accordance with paragraph 104A (with a brief description of the link between the reimbursement right and the related obligation); and

v. the other amounts recognised in the balance sheet.g. the total expense recognised in profit or loss for each of the

following, and the line item(s) in which they are included:i. current service cost;ii. interest cost;iii. expected return on plan assets;iv. expected return on any reimbursement; v. actuarial gains and losses;vi. past service cost;vii. the effect of any curtailment or settlement; andviii. the effect of the limit.




h. the total amount recognised in the statement of recognised income and expense for each of the following:

i. actuarial gains and losses; andii. the effect of the limit.i. for undertakings that recognise actuarial gains and losses in

the statement of recognised income and expense, the cumulative amount of actuarial gains and losses recognised in the statement of recognised income and expense.

j. for each major category of plan assets, which shall include, but is not limited to, equity instruments, debt instruments, property, and all other assets, the percentage or amount that each major category constitutes of the fair value of the total plan assets.

k. the amounts included in the fair value of plan assets for:i. each category of the undertaking's own financial instruments;

andii. any property occupied by, or other assets used by, the

undertaking.l. a narrative description of the basis used to determine the

overall expected rate of return on assets, including the effect of the major categories of plan assets.

m. the actual return on plan assets, as well as the actual return on any reimbursement right recognised as an asset.

n. the principal actuarial assumptions used as at the balance sheet date, including, when applicable:

i. the discount rates;ii. the expected rates of return on any plan assets for the

periods presented in the financial statements;iii. the expected rates of return for the periods presented in the

financial statements on any reimbursement right recognised as an asset in accordance with paragraph 104A;

iv. the expected rates of salary increases (and of changes in an index or other variable specified in the formal or constructive terms of a plan as the basis for future benefit increases);

v. medical cost trend rates; andvi. any other material actuarial assumptions used.vii. An undertaking shall disclose each actuarial assumption in

absolute terms (for example, as an absolute percentage) and not just as a margin between different percentages or other variables.

o. the effect of an increase of one percentage point and the effect of a decrease of one percentage point in the assumed medical cost trend rates on:

i. the aggregate of the current service cost and interest cost components of net periodic post-employment medical costs; and

ii. the accumulated post-employment benefit obligation for medical costs.For the purposes of this disclosure, all other assumptions shall be held constant. For plans operating in a high inflation environment, the disclosure shall be the effect of a percentage increase or decrease in the assumed medical cost trend rate of a significance similar to one percentage point in a low inflation environment.

p. the amounts for the current annual period and previous four annual periods of:

i. the present value of the defined benefit obligation, the fair value of the plan assets and the surplus or deficit in the plan; and

ii. the experience adjustments arising on:a. the plan liabilities expressed either as (1) an amount or (2) a

percentage of the plan liabilities at the balance sheet date and




b. the plan assets expressed either as (1) an amount or (2) a percentage of the plan assets at the balance sheet date.

q. the employer's best estimate, as soon as it can reasonably be determined, of contributions expected to be paid to the plan during the annual period beginning after the balance sheet date.

An undertaking should disclose each actuarial assumption in absolute terms for example, as an absolute percentage and not just as a margin between different percentages or other variables.

A general description of the type of plan is required. Such a description distinguishes, for example, flat salary pension plans from final salary pension plans and from post-employment medical plans. Further detail is not required.

When an undertaking has more than one defined benefit plan, disclosures may be made in total, separately for each plan or in such groupings as are considered to be the most useful.

It may be useful to distinguish groupings by criteria such as the following:

i. the geographical location of the plans, for example, by distinguishing domestic plans from foreign plans; or

ii. whether plans are subject to materially different risks, for example, by distinguishing flat salary pension plans from final salary pension plans and from post-employment medical plans.

When an undertaking provides disclosures in total for a grouping of plans, such disclosures are provided in the form of weighted-

averages or of relatively narrow ranges.

IAS 19 requires additional disclosures about multi-employer defined benefit plans that are treated as if they were defined contribution plans.

Where required by IAS 24, an undertaking discloses information about:

(i) related party transactions with post-employment benefit plans. and

(ii) post-employment benefits for key personnel.

Where required by IAS 37, an undertaking discloses contingent

liabilities arising from post-employment benefit obligations.

On the initial adoption of IAS 19, the effect of the change in accounting policy includes all actuarial gains and losses that arose in earlier periods, even if they fall inside the 10% 'corridor'.

Multi-employer Plans

Multi-employer plans are plans other than state plans that pool the assets contributed by various undertakings and use those assets to provide benefits to staff of undertakings.

Multi-employer plans are created by a group of employers pooling their pension schemes into one scheme to benefit from the economies of scale and to share the administration costs. The scheme may be run by one of the undertakings, an independent pension organisation, or a trades union (if all the beneficiaries are members of that trade union).




EXAMPLE-Multi-employer planYou set up a pension and disability plan together with other

employers in the same trade. It covers all staff from the firms

involved. Employers pay for their own staff, but share the running

costs of the scheme.

If the multi-employer plan is a defined contribution scheme, the main challenge is to run the scheme efficiently to provide optimal benefits for the beneficiaries at an acceptable cost to the employers. However, having made the agreed contributions, there is no further obligation for the employers.

If the multi-employer plan is a defined benefit scheme, it will have all the challenges and costs of a single-employer plan (see defined benefit schemes above). In addition, if there is a deficit, participating undertakings are jointly liable to meet the deficit, so there is a risk that each undertaking will have to pay more than their share if one of the employers fails to pay for its portion.

An undertaking should classify a multi-employer plan either as a defined contribution plan or a defined benefit plan, according to the terms of the plan, including any constructive obligation. This differentiation is necessary to determine the accounting treatment.

Where a multi-employer plan is a defined benefit plan, an

undertaking should account for its proportionate share of the

obligation, plan assets and costs as for any other defined benefit

plan.

When sufficient information is not available to use defined benefit accounting for a multi-employer plan that is a defined benefit plan, an undertaking should:

(i) account for the plan as if it were a defined contribution plan

(ii) disclose:1. the fact that the plan is a defined benefit plan2. why sufficient information is not available to allow the

undertaking to account for the plan as a defined benefit plan

(iii) if a surplus or deficit may affect the amount of future contributions, disclose in addition:(1) any available information about that surplus or

deficit.(2) the basis used to determine that surplus or deficit.

and(3) the implications, if any, for the undertaking.

EXAMPLE- Defined benefit multi-employer plan (i)The plan is financed on a pay-as-you-go basis such that:1. Contributions are set at a level that is expected to be sufficient to pay benefits falling due in the same period.2. Future benefits earned during the current period will be paid out of future contributions.3. Staff benefits are determined by the length of their service.




4. The participating undertakings have no means of withdrawing from the plan without paying a contribution for the benefits earned by staff up to the date of withdrawal.

Such a plan creates actuarial risk for the undertaking. If the cost of benefits earned at the balance sheet date is more than expected, the undertaking will have to either increase its contributions, or persuade staff to accept a reduction in benefits. Therefore, such a plan is a defined benefit plan.

Where sufficient information is available about a multi-employer plan, an undertaking accounts for its share of the defined benefit obligation, plan assets and post-employment benefit cost, in the same way as for other defined benefit plans.

There may be a contractual agreement between the multi-employer plan and its contributing undertakings that determines how the surplus in the plan will be distributed to the contributing undertakings (or the deficit funded).

A contributing undertaking in a multi-employer plan with such an agreement that accounts for the plan as a defined contribution plan shall recognise the asset or liability that arises from the contractual agreement and the resulting income or expense in profit or loss.

EXAMPLE – Defined benefit multi-employer plan (ii) An undertaking participates in a multi-employer defined benefit plan that does not prepare plan valuations on an IAS 19 basis. It therefore accounts for the plan as if it were a defined contribution plan.

A valuation shows a deficit of $150 million in the plan. The plan has agreed under contract a schedule of contributions with the participating employers in the plan that will eliminate the deficit over the next five years. The undertaking's total contributions under the contract are $20 million.

The undertaking recognises a liability for the contributions adjusted for the time value of money and an equal expense in profit or loss.

If not, an undertaking accounts for the plan as if it were a defined contribution plan.

IAS 37 Provisions requires an undertaking to disclose contingent liabilities.

EXAMPLES- multi-employer plan: contingent liabilitiesContingent liabilities may be:i actuarial losses relating to other participating undertakings

because each undertaking that participates in a multi-employer plan shares in the actuarial risks of every other participating undertaking.

ii any responsibility under the terms of a plan to finance any shortfall in the plan, if other undertakings cease to participate.

State Plans (including all plans run by or for national and local governments)An undertaking should account for a state plan in the same way as for a multi-employer plan.




Many state plans are funded on a pay-as-you-go basis: contributions are set to be sufficient to pay the benefits falling due in the same period. Future benefits earned during the current period will be paid out of future contributions.

In most state plans, the undertaking has no obligation to pay those future benefits: its only obligation is to pay the contributions as they fall due. If the undertaking ceases to employ staff who are members of the state plan, it will have no further obligation to pay their benefits.

For this reason, state plans are normally defined contribution plans.

Insured BenefitsAn undertaking may pay insurance premiums to fund a post-employment benefit plan. The undertaking should treat such a plan as a defined contribution plan unless the undertaking will have directly or indirectly, an obligation to either:

(i) pay the staff benefits directly when they fall due.

(ii) pay further amounts, if the insurer does not pay all future staff. benefits relating to staff service in the current and prior periods.

If either of the above exceptions as (either a legal or constructive liability) applies, the undertaking will account for the plan as a defined benefit plan.

The payment of fixed premiums under such contracts is the settlement of the staff benefit obligation, rather than an investment to meet the obligation.

Consequently, the undertaking no longer has an asset or a liability. Therefore, an undertaking treats such payments as contributions to a defined contribution plan.EXAMPLE-Plan run by an insurance firmYour firm has asked an insurance firm to run a pension fund for your staff.You will pay 8% of salaries and your staff will pay 4%, neither you nor the staff having any further obligation. The insurance firm will provide regular reports on the results of the fund and provide pensions according to the returns of the plan’s investments.Where an undertaking funds a pension obligation by contributing to an insurance policy under which the undertaking retains a legal or constructive obligation, the undertaking:

i. accounts for a qualifying insurance policy as a plan asset; and

ii. recognises other such insurance policies as reimbursement rights.

Where an insurance policy is in the name of a specified plan participant or a group of plan participants and the undertaking does not have any obligation to cover any loss on the policy, the undertaking has no obligation to pay benefits to the staff and the insurer has sole responsibility for paying the benefits.

The payment of fixed premiums under such contracts is the settlement of the staff benefit obligation, rather than an investment to meet the obligation. Thus, the undertaking no longer has an asset or a liability, so treats such payments as contributions to a defined contribution plan.

Group Plans – Undertakings under Common Control.




Plans involving companies in the same group should be accounted for as individual company plans, rather than multi-employer plans.

EXAMPLE-Group plan, not a multi-employer planTo save costs, your parent company runs a pension plan for staff of

the parent and its subsidiaries. This should be treated as an

individual company plan.

Defined benefit plans that share risks between various undertakings under common control, for example, a parent and its subsidiaries, are not multi-employer plans.

An undertaking participating in such a plan shall obtain information about the plan as a whole on the basis of assumptions that apply to the plan as a whole. If there is a contractual agreement or stated policy for charging the net defined benefit cost for the plan as a whole to individual group undertakings, the undertaking shall, in its separate or individual financial statements, recognise the net defined benefit cost so charged.

If there is no such agreement or policy, the net defined benefit cost shall be recognised in the separate or individual financial statements of the undertaking that is legally the sponsoring employer for the plan. The other group undertakings shall, in their separate or individual financial statements, recognise a cost equal to their contribution payable for the period.

Participation in such a plan is a related party transaction (see IAS24) for each individual group undertaking. An undertaking shall

therefore, in its separate or individual financial statements, make the following disclosures:

i. the contractual agreement or stated policy for charging the net defined benefit cost or the fact that there is no such policy.

ii. the policy for determining the contribution to be paid by the undertaking.

iii. if the undertaking accounts for an allocation of the net defined benefit cost in, all the information about the plan as a whole as a defined benefit plan.

4. Adoption of IAS 19On first adopting IAS 19, an undertaking should determine its transitional liability for defined benefit plans at that date as:

(i) the present value of the obligation at the date of adoption.

(ii) minus the fair value, at the date of adoption, of plan assets (if any) out of which the obligations are to be settled directly,

(iii) minus any past service cost that should be recognised in later periods.

If the transitional liability is more than the liability that would have been recognised at the same date under the previous accounting policy, the undertaking should make an irrevocable choice to recognise that increase as part of its defined benefit liability:

(i) immediately, under IAS 8. or




(ii) as an expense on a straight-line basis over up to five years from the date of adoption. If an undertaking chooses this option, the undertaking should:1. apply the limit in measuring any asset recognised in

the balance sheet.2. disclose at each balance sheet date: (i) the amount of

the increase that remains unrecognised. and (ii) the amount recognised in the current period.

3. not recognise future actuarial gains until the transitional liability has been fully funded.

4. include the related part of the unrecognised transitional liability in determining any subsequent gain or loss on settlement or curtailment.

If the transitional liability is less than the liability that would have been recognised at the same date under the previous accounting policy, the undertaking should recognise that decrease immediately under IAS 8.

On the initial adoption of IAS 19, the effect of the change in accounting policy includes all actuarial gains and losses that arose in earlier periods even if they fall inside the 10% ‘corridor'.

Sample note: Express Dairies plc Report and Accounts 2003 (extract) 23. Pension commitments and other post retirement benefits

The group operates a defined benefit scheme (‘the Express Scheme’) providing members with benefits based on pay and

service. This scheme was closed to new entrants at the end of January 2002.

The assets of the Express Scheme are held in trustee administered funds, separate from the finances of the company. The group also operates a defined contributions (‘stakeholder’) scheme for all members who joined after January 2002.

The most recent valuation of the Express Scheme was carried out as at 31 March 2002 when the market value of the Express Scheme’s assets was £310.0m. These assets represented 83% of the value of accrued benefits allowing for future increases in earnings.

Employer contributions to the Express Scheme for the 10 months to 31 January 2003 were 12% of pensionable earnings for existing members at 1 April 2000 and 14.33% of pensionable earnings for new members joining the Express Scheme after that date.

With effect from 1 February 2003, the benefits payable under the Express Scheme were changed and from that date employer contributions for all members have been paid at 9.5% of pensionable pay. Additional payments of£6.3m were also made by the group in the year to 31 March 2003.

The charge to the income statement in the current year in respect of the Express Scheme was £12.6m (2002: £10.1m). The charge in respect of the stakeholder scheme was £0.1m (2002: £nil).

The pension cost relating to the Express Scheme was assessed in accordance with the advice of an independent qualified actuary using the projected unit method. The most significant assumptions adopted as at 1 April 2002 were as follows:




%Discount rate

6.25Rate of increase in pensionable earnings

3.75Price inflation

2.5

Assets were valued at their market value.

The additional disclosures are set out below:The information required for disclosure is based on the most recent actuarial valuation as at 31 March 2002 and uses the projected unit method. The following financial assumptions have been used to calculate liabilities.

2003 2002% %

Discount rate 5.5 6.0Salary increases 3.25 3.75Price inflation 2.0 2.5Pension increases in payment 2.0 2.5Pension increases in deferment 3.0 3.0

The assets in the Express Scheme and the expected rate of return were:

Long termrate of return

expectedValue Value

2003 2002 2003 2002% % £m £m

Equities 7.75 7.75 181.5 246.6Gilts and bonds 4.70 5.36 29.2 34.0Property 6.30 6.45 23.7 21.8Cash 3.50 4.50 9.4 6.8Other 7.32 7.32 - 4.4Total market value of assets

243.8 313.6

Present value of scheme liabilities

(399.6) (356.1)

Deficit in the scheme (155.8) (42.5)Related deferred tax asset 46.7 12.8Net pension liability (109.1) (29.7)An analysis of the defined benefit cost of the Express Scheme for the year ended 31 March 2003 is as follows:

£mCurrent service cost (7.8)Past service cost -Total operating charge (7.8)Expected return on assets 22.8Interest on pension liabilities (20.9)Total financing credit 1.9Net income statement charge (5.9)

As the Express Scheme is closed to new members, the current service cost under the projected unit method can be expected to increase as members age and approach retirement.

alysis of amount recognised in the Statement of Total Recognised

Gains and Losses (STRGL) is as follows:




£mActual return less expected return on assets (38.6% of scheme assets)

(94.2)

Experience gains and losses (4.3% of scheme liabilities)

(17.3)

Change in assumptions (10.8)Actuarial loss recognised in STRGL (30.6% of scheme liabilities)

(122.3)

Analysis of movement in deficit during the year is as follows:

£mDeficit at the start of the year (42.5)Movement in the year:Current service cost (7.8)Contributions 14.9Financing credit 1.9Actuarial loss (122.3)Deficit at the end of the year (155.8)Reconciliation to the balance sheet:Fair value of assets 243.8Actuarial value of liabilities (399.6)Liability recognised in the balance sheet (before deferred tax credit)

(155.8)

The group also provides medical benefits for staff who retired before 31 March 1999. The present value of these liabilities is not materially different to the provision shown in note 20. (end of note)

5. Multiple choice questions

1. Termination benefits relate to :(i) a commitment to terminate employment before the

normal retirement date(ii) a commitment to accept voluntary redundancy in

exchange for benefits(iii) pensions(iv) post-retirement medical benefits

1. (i)2. (i)-(ii)3. (i)-(iii)4. (i)-(iv)

2. An undertaking is committed to a termination:1. When the directors have made a decision.2. When there has been a public announcement.3. When it has a detailed formal plan for the termination and

the plan is without realistic possibility of withdrawal.

3. Where termination benefits fall due more than 12 months after the balance sheet date:

1. They should be discounted to present value. 2. They should be ignored.3. They should be excluded form staff costs.

4. Equity compensation benefits are staff benefits include transactions where:

(i) Staff are entitled to receive shares of the undertaking or its parent.




(ii) The obligation depends on the future price of shares of the undertaking.

(iii) Shareholders are awarded bonus shares.1 (i)2 (i)-(ii)3 (i)-(iii)

5. IAS 19 requires an undertaking to record:(i) A liability when staff has provided service for benefits to be paid in the future.(ii) An expense when the service is provided.(iii) The names of the staff involved.

1. (i)2. (i)-(ii)3. (i)-(iii)

6. Staff includes:1. Those who provide services on a full-time, part-time,

permanent, casual or temporary basis. 2. Directors and other management personnel.3. Workers of outsourced services.

1. (i)2. (i)-(ii)3. (i)-(iii)

7. Short-term staff benefits include items such as:(i) Salaries and social security contributions.(ii) Short-term paid absences such as paid annual leave

and paid sick leave where the absences are expected to occur within twelve months after the end of the period in which the staff render the related staff service

(iii) Profit-sharing and bonuses payable within twelve months after the end of the period in which the staff render the related service. and

(iv) Non-cash benefits such as medical care, housing, cars and free or subsidised goods or services for current staff.

(v) Pensions.1. (i)2. (i)-(ii)3. (i)-(iii)4. (i)-(iv)5. (i)-(v)

8. An undertaking should recognise the expected cost of profit-sharing and bonus payments when the following apply:

(i)The undertaking has a present legal or constructive obligation to make such payments as a result of past events.(ii)_A reliable estimate of the obligation can be made.(iii) A reliable estimate of the obligation cannot be made.

1. (i)2. (i)-(ii)3. (i)-(iii)




9. Other long-term staff benefits include, for example:

(i) Long-term paid absences such as long-service or sabbatical leave.

(ii) Long-service benefits.(iii) Long-term disability benefits. (iv) Profit-sharing and bonuses payable twelve months or

more after the end of the period in which the staff render the related service.

(v) Deferred compensation paid twelve months or more after the end of the period in which it is earned.

(vi) Pensions.1. (i)2. (i)-(ii)3. (i)-(iii)4. (i)-(iv)5. (i)-(v)6. (i)-(vi)

10. IAS 19 requires a simplified method of accounting for other long-term staff benefits which differs from the accounting required for post-employment benefits as follows:

(i) Actuarial gains and losses are recognised immediately and no 'corridor' is applied.

(ii) All past service cost is recognised immediately.(iii) No discounting to present value is used.(iv) Liabilities are shown as short-term.

1. (i)2. (i)-(ii)3. (i)-(iii)4. (i)-(iv)

11. For other long-term staff benefits, an undertaking should recognise the net total of the following amounts as expense or income or in the cost of an asset:

(i) Current service cost.(ii) Interest cost.(iii) The expected return on any plan assets and on any

reimbursement right such as insurance recognised as an asset.

(iv) Actuarial gains and losses, which should all be recognised immediately.

(v) Past service cost, which should all be recognised immediately.

(vi) The effect of any curtailments or settlements.1. (i)2. (i)-(ii)3. (i)-(iii)4. (i)-(iv)5. (i)-(v)6. (i)-(vi)

12. A detailed plan for termination benefits should include as a minimum:

(i) The location, function and approximate number of staff whose services are to be terminated.

(ii) The termination benefits for each job classification or function.




(iii) The timing the implementation.(iv) Staff names.

1. (i)2. (i)-(ii)3. (i)-(iii)4. (i)-(iv)

13. Termination benefits:

1. Are recognised as an expense immediately. 2. Should be included in pension figures.3. Should be included in short-term benefits.

14. Multi-employer pension schemes are:1. Defined contribution schemes.2. Defined benefit schemes.3. Either.

15. Most state pension schemes are:1. Defined contribution schemes.2. Defined benefit schemes.3. Either.

16. Actuaries are needed for:1. Defined benefit schemes.2. State schemes.3. Insured benefits funds.4. Defined contribution schemes.

1. (i)2. (i)-(ii)3. (i)-(iii)4. (i)-(iv)

17. A qualifying insurance policy is a policy:(i) Where the proceeds of the policy can be used only to

finance staff benefits under a defined benefit plan(ii) Where the proceeds of the policy are not available to the

undertaking's own creditors even in bankruptcy and cannot be paid to the undertaking, unless either:a. the proceeds represent surplus assets that are not

needed for benefit obligations.b. the proceeds are returned to the undertaking to

reimburse it for benefits already paid.

(iii) Provided by a related party.1. (i)2. (i)-(ii)3. (i)-(iii)

18. Past service cost:1. Is the increase in the present value of the obligation for

employee service in prior periods.2. Is the employment cost for previous years.3. Can only be positive.




19. Vested staff benefits:1. Are benefits that are conditional on future employment.2. Are benefits that are not conditional on future

employment.3. Either 1 or 2.

20. Assets held by a long-term fund are assets that:(i) are held by a fund that exists solely to finance staff

benefits.(ii) are available to be used only to pay or fund staff benefits,

are not available to the undertaking's own creditors even in bankruptcy and cannot be returned to the reporting undertaking unless:a. the remaining assets of the fund are sufficient to meet

the obligations of the plan or the undertakingb. the assets are returned to the undertaking to

reimburse it for benefits already paid.(iii) Any other assets.

1. (i)2. (i)-(ii)3. (i)-(iii)

21. Defined benefit plans may be:(i) Unfunded.(ii) Partly funded.(iii) Wholly funded.1. (i)2. (i)-(ii)3. (i)-(iii)

22. Interest cost is:

1. The increase during a period in the present value of an obligation that arises because the benefits are one period closer to settlement.

2. Finance charges incurred by the pension fund.3. Finance charges paid by the company for late

payment.

23. Actuarial gains and losses comprise:(i) Experience adjustments which are the differences

between actuarial assumptions and what has actually occurred.

(ii) Changes in actuarial assumptions.(iii) Gains and losses made by the investments of the

actuary. 1. (i)2. (i)-(ii)3. (i)-(iii)

24. Under defined benefit plans:

(i) The undertaking's obligation is to provide the agreed benefits to current and former staff.

(ii) Actuarial risk and investment risk fall on the undertaking. If actuarial or investment returns are worse than expected, the undertaking's obligation will be increased.

(iii) The undertaking has to provide long-term medical benefits.1. (i)2. (i)-(ii)3. (i)-(iii)




25. The ‘10% corridor’ is the net cumulative actuarial gains and losses that exceed the ?????? of:

(i) 10% of the present value of the defined benefit obligation before deducting plan assets.

(ii) 10% of the fair value of any plan assets.The missing word is:

1. greater2. lesser3. average

26. On first adopting IAS 19, an undertaking may recognise any resulting increase in its liability for post-employment benefits over not more than:

1. Three years.2. Five years.3. Ten years.

27. Your parent company runs a pension plan for staff of the

parent and subsidiaries. This should be treated as:

1. An individual company plan.2. A multi-employer plan.3. A state plan.

28. An undertaking may pay insurance premiums to fund a post-employment benefit plan. The undertaking should normally treat such a plan as a:

1. Defined contribution plan.2. Defined benefit plan.3. Multi-employer plan.4. State plan.

29. The payment of benefits of a defined benefit plan depends on:

(i) The financial position of the fund.(ii) The investment performance of the fund.(iii) An undertaking's ability and willingness to

provide additional money for any shortfall in the fund's assets.

1. (i)2. (i)-(ii)3. (i)-(iii)

30. For a defined benefit plan, the undertaking must:

(i) Determine the fair value of any plan assets.(ii) Determine the total amount of actuarial gains and

losses and the amount of those actuarial gains and losses that should be recognised.

(iii) Where a plan has been introduced or changed, determine the resulting past service cost.

(iv) Where a plan has been curtailed or settled, determine the resulting gain or loss.

(v) Write the actuarial report.1. (i)2. (i)-(ii)3. (i)-(iii)4. (i)-(iv)5. (i)-(v)




31. The amount recognised as a defined benefit liability, should be the net total of the following amounts:

(i) the present value of the obligation at the balance sheet date.

(ii) plus any actuarial gains less any actuarial losses not recognised.

(iii) minus any past service cost not yet recognised.(iv) minus the fair value at the balance sheet date of plan

assets if any out of which the obligations are to be settled directly.1. (i)2. (i)-(ii)3. (i)-(iii)4. (i)-(iv)

32. For a defined benefit plan, an undertaking should recognise the net total of the following amounts as expense or income:

(i) Current service cost.(ii) Interest cost.(iii) The expected return on any plan assets and on any

reimbursement rights.(iv) Actuarial gains and losses.(v) Past service cost.(vi) The effect of any curtailments or settlements.(vii) Contributions refunded to the company.

1. (i)2. (i)-(ii)3. (i)-(iii)4. (i)-(iv)5. (i)-(v)6. (i)-(vi)

7. (i)-(vii)

33. The discount rate reflects the time value of money but not:

(i) The actuarial or investment risk.(ii) The undertaking-specific credit risk borne by

the undertaking's creditors.(iii) The risk that future experience may differ from

actuarial assumptions. 1. (i)2. (i)-(ii)3. (i)-(iii)

34. An undertaking should recognise past service cost as an expense:

1. Immediately.2. On a straight-line basis over the average period until the

benefits become vested. 3. Deferred until pensions are paid.

35. Where plan assets include qualifying insurance policies that exactly match the amount and timing of some or all of the benefits payable under the plan, the fair value of those insurance policies is deemed to be:

1. Nil.2. The present value of the related obligations.3. Half of the present value of the related obligations.

36. The difference between the expected return and the actual return on plan assets is:

1. An actuarial gain or loss.




2. Ignored.3. Repaid to the company.

37. Business combinations. The present value of the obligation includes all of the following, even if the acquiree had not yet recognised them at the date of the acquisition:

(i) Actuarial gains and losses that arose before the date of the acquisition whether or not they fell inside the 10% 'corridor'.

(ii) Past service cost that arose from benefit changes or the introduction of a plan, before the date of the acquisition.

(iii) Amounts of assets or liabilities that the acquiree had not recognised.

(iv) Goodwill.1. (i)2. (i)-(ii)3. (i)-(iii)4. (i)-(iv)

38. The gain or loss on a curtailment or settlement should comprise:

(i) Any resulting change in the present value of the obligation.

(ii) Any resulting change in the fair value of the plan assets.

(iii) Any related actuarial gains and losses and past service cost that had not previously been recognised.

(iv) Any administration cost.1. (i)2. (i)-(ii)3. (i)-(iii)4. (i)-(iv)

39. A curtailment may arise from an isolated event, such as:(i) The closing of a plant.(ii) Discontinuance of an operation.(iii) Termination of a plan.(iv) Suspension of a plan.(v) Replacement of the plan with a new, similar

plan.1. (i)2. (i)-(ii)3. (i)-(iii)4. (i)-(iv)5. (i)-(v)

40. On first adopting IAS 19, an undertaking should determine its transitional liability for defined benefit plans at that date as:

(i) the present value of the obligation at the date of adoption.

(ii) minus the fair value, at the date of adoption, of plan assets if any out of which the obligations are to be settled directly.

(iii) minus any past service cost that should be recognised in later periods.1. (i)2. (i)-(ii)3. (i)-(iii)

41. If the transitional liability is more than the liability that would have been recognised at the same date under the previous accounting policy, the undertaking should make an




irrevocable choice to recognise that increase as part of its defined benefit liability:

(i) Immediately, under IAS 8. (ii) As an expense on a straight-line basis over up to five

years from the date of adoption. If an undertaking chooses this option, the undertaking should:

1. apply the limit in measuring any asset recognised in the balance sheet.

2. disclose at each balance sheet date: 1 the amount of the increase that remains unrecognised. and 2 the amount recognised in the current period.

(iii) Defer the expense until the scheme is curtailed or settled.

1. (i)2. (i)-(ii)3. (i)-(iii)

6. Answers to multiple choice questions

Question Answer1. 22. 33. 14. 25. 26. 27. 48. 2

9. 510. 211. 612. 313. 114. 315. 116. 317. 218. 119. 220. 221. 322. 123. 224. 225. 126. 227. 128. 129. 330. 431. 432. 533. 334. 235. 236. 137 338 339 440 3




41 2

Note: Material from the following PricewaterhouseCoopers publications has been used in this workbook:

-Applying IFRS -IFRS News-Accounting Solutions



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