Employee Benefits

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Employee Benefits

• Gavin Aspden
• Head of Innovation and Technical Development
• 8 September 2009

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Employee benefits
IAS 19
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Employee benefits
IAS 19

• Include
• Wages, salaries and social insurance
• Short-term compensated absences
• Profit sharing/bonuses (payable within 12 months
  of year end)
• Non-monetary benefits
• Accounted for on an accruals basis

Examples Accumulating compensated absences An
employee is owed 5 days holiday at the year end,
but is only allowed to carry forward 3 days
- accrue 3
days holiday at the average daily rate of pay
- only accrue for paid leave where absence has
occurred that is unpaid at the year end
Non-accumulating compensated absences An entity
offers paid maternity leave and military service
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Employee benefits
IAS 19

• Include
• Long-term compensated absences
• Long-service benefits
• Profit sharing/bonuses (payable 12 months or more
  after year end)
• Deferred compensation
• Post-employment healthcare

Accounted for similarly to post-employment
benefits
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Employee benefits
IAS 19
Accrued for when the enterprise is demonstrably
committed to either

• Terminate the employment of an employee or group
  of employees before the normal retirement date
  or
• Provide termination benefits as a result of an
  offer made in order to encourage voluntary
  redundancy.

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Post-employment benefits
IAS 19
IAS 19 covers 2 types of post-employment
(pension) scheme
Defined contribution schemes
Definedbenefit schemes
The entity pays agreed contributions into a plan
and has no further liability
Any other type of scheme. Typically a pension is
guaranteed based on final salary
Accounted for on anaccruals basis
Accounted for using the projected unit credit
method
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Defined benefit schemes
IAS 19
Defined Benefit Schemes
Scheme Assets
Scheme Liabilities
Measure at fair value at reporting date
Measure at present value of future obligations
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Defined benefit schemes
IAS 19
130 bn (double the level of 2007)
May get even worse if there is a significant
recession
Source Deloitte, December 2008
194.5 bn (compared to a surplus of 11.7bn in
2007)
Source Pension Protection Fund, December 2008
See www.pensionprotectionfund.org.uk/index/ppf_780
0_index.htm for the latest position
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Defined benefit schemes
IAS 19
Present value of pension obligation
discount
Current service cost
Dr Current service cost (I/S) Cr PV obligation
Now
Year end
Death
Retirement
Discount/compound using market yields on high
quality corporate bonds
compound
Dr Interest cost (I/S) Cr PV obligation
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Defined benefit schemes
IAS 19
Fair value of plan assets Contributions are paid
in as advised by an actuary
Now
Year end
Death
Retirement
Dr FV plan assets Cr Company cash
Any difference between actual and expected return
is an actuarial gain/loss
growth
Dr FV plan assets Cr Expected return (I/S)
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Defined benefit schemes
IAS 19
Actuarial gains and losses
Present value of defined benefit
obligation m
Actuarial loss (balancing figure) 34
At 1 January 1,990 Interest cost 158 Current
service cost 170 Benefits paid (212)
At 31 December 2,140
Fair value of plan assets m
Actuarial loss (balancing figure)
(423)
At 1 January 1,827 Expected return 180 Contribut
ions 128 Benefits paid (212) At 31
December 1,500
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Defined benefit schemes
IAS 19

• In December 2004, the IASB amended IAS 19 to
  allow the option of recognising actuarial gains
  and losses in full in the period in which they
  occur via the statement of comprehensive income.
• This option is similar to the requirements of the
  UK standard, FRS 17 Retirement Benefits.
• The corridor method also continues to be allowed
  under IAS 19.

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Defined benefit schemes
IAS 19
IAS 19 corridor method m Fair value of plan
assets 1,500 Present value of obligation
(2,140) (640) Net unrecog. losses (34
423) 457 Pension liability (183)
IAS 19 immediate recognition m Fair value of
plan assets 1,500 Present value of obligation
(2,140) Pension liability (640) Reserves PL
reserves (34 423) 457
Assuming no gains/losses brought forward
Allowing these two alternatives will lead to
inconsistencies between what is shown on the
statement of financial position of different
companies
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Defined benefit schemes
IAS 19
IAS 19 corridor method m Income
statement Interest cost 158 Current service cost
170 Expected return on plan assets
(180) Actuarial losses ??
IAS 19 immediate recognition m Income
statement Interest cost 158 Current service cost
170 Expected return on plan assets
(180) Comprehensive income Actuarial losses 457
Under the corridor method unrecognised actuarial
gains losses are deducted from the surplus or
deficit on the statement of financial position
until they exceed what is known as the corridor
limits. If they exceed these levels the excess
is then recognised in the income statement over
the average remaining working life of plan
members.
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Defined benefit schemes
IAS 19
Recognition of actuarial gains and losses
IAS 19 Corridor method m Fair value of plan
assets 1,500 Present value of obligation
(2,140) (640) Net unrecog. losses (34
423) 457 Pension liability (183)
10 Corridor limits (for following
year) Higher of m 10 b/d obligation (10 x
2,140) 214 10 b/d assets (10 x 1,500) 150 ...
Corridor limit 214 Losses outside corridor
(457214) 243
Recognition test Debit to income statement in
following year
243m (say)13 years 18.7m PL expense next year
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Example
IAS 19

• Brutus Co operates a defined benefit pension plan
  for its employees. The company elects to use the
  corridor method under IAS 19.

110
(10 x 110) 11 Dr Income
statement
Present value of defined benefit obligation
m b/d Interest cost Current service
cost Benefits paid Actuarial gain (balancing
figure)   c/d  
Notes (1) The present value of the future benefit
obligations on 1 January 2008 were 110 million.

1. The yield on high quality corporate bonds in the
   year to 31 December 2008 was 10.

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Example
IAS 19
13 Dr Income statement
(10) Cr Plan assets
Present value of defined benefit obligation
m b/d 110 Interest cost (10 x 110) 11 Dr
Income statement Current service cost Benefits
paid Actuarial gain (balancing figure)  
c/d  
Notes (3) The present cost of pensions earned
this year was 13m.
(4) Pensions paid to former employees during the
year amountedto 10m.
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Example
IAS 19
(8)
116

Present value of defined benefit obligation
m b/d 110 Interest cost (10 x 110) 11 Dr
Income statement Current service cost 13 Dr
Income statement Benefits paid (10) Cr Plan
assets Actuarial gain (balancing figure)  
c/d  
Unrecognisedactuarialgains/losses

• Notes
• Extracts from the most recent actuary's report
  show the following
•   31.12.2008
• Present value of pension plan obligation 116m

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Example
IAS 19
(12 x 150) 18 Cr
Income statement
150
7 Cr Company cash (10) Dr PV obligation
(done)
Fair value of plan assets m b/d Expected
return Contributions received Benefits
paid Actuarial loss (balancing figure)  
c/d  
Notes (7) The fair value of plan assets on 1
January 2008 was 150 million.
(8) The expected return on investments is 12.
(9) The pension plan received contributions of
7m and paidpensions to former employees of
10m.
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Example
IAS 19
Fair value of plan assets m b/d 150 Expected
return (12 x 150) 18 Cr Income
statement Contributions received 7 Cr Company
cash Benefits paid (10) Dr PV obligation
(done) Actuarial loss (balancing figure)  
c/d  
140
Actuarial loss (25)
Notes (10) Extracts from the most recent
actuary's report show the following   31.12.2008
Market value of plan assets 140m
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Example
IAS 19
Unrecognised/recognised actuarial gains and
losses m Unrecognised gains b/d Gains b/d
recognised in the income statement Actuarial gain
on obligation during year Actuarial loss on
assets during year   Unrecognised gains
c/d  
63

• Notes
• In the financial statements for the year ended 31
  December 2007, there was an actuarial gain of 63
  million although this had not been recognised.
• The average remaining working life of plan
  members at 1 January 2008 is 7 years.

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Example
IAS 19


(from before) 8
(from
before) (25) 39

(Working) (7) Cr
Income statement
Unrecognised/recognised actuarial gains and
losses m Unrecognised gains b/d 63 Gains b/d
recognised in the income statement Actuarial gain
on obligation during year Actuarial loss on
assets during year   Unrecognised gains
c/d  
Working The 10 Corridor Corridor limits,
greater of m 10 obligation b/d (10 x
110m) 11 10 plan assets b/d (10 x
150m) 15 Therefore, corridor limit 15 Gains b/d
recognised in the income statement (63m
15m)/ 7 years 7
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Example - disclosures
IAS 19
INCOME STATEMENT Income statement
expense m Current service cost 13 Interest
cost 11 Expected return on plan assets (18) Net
actuarial (gains)/losses recognised (7) (1)

IAS 19 is flexible about exactly where in the
income statement each of the above is recognised,
but the line item in which each is recorded must
be disclosed.
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Example - disclosures
IAS 19
STATEMENT OF FINANCIAL POSITION m Fair
value of plan assets 140 Present value of
defined benefit obligation (116) 24 Unrecognise
d actuarial gains (39) Net pension liability
(15)
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Example - disclosures
IAS 19
Opening net liability (110 150
63) 23 Expense recognised in the income
statement (1) Contributions paid (7) Closing net
liability 15
MOVEMENT IN NET PENSION LIABILITY m
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Employee Benefits

• Gavin Aspden
• Head of Innovation and Technical Development
• 8 September 2009