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Example illustrating paragraph 60
A defined benefit
plan has the following characteristics:
|
Present value
of the obligation |
1.100 |
|
Fair value of
plan assets |
(1.190) |
|
|
(90) |
|
Unrecognised
actuarial losses |
(110) |
|
Unrecognised
past service cost |
(70) |
|
Unrecognised increase in
the liability on initial adoption of the Standard under
paragraph155(b) |
(50) |
|
Negative
amount determined under paragraph 54 |
(320) |
|
Present value
of available future refunds and reductions in future
contributions |
90 |
|
The limit
under paragraph 58(b) is computed as follows: |
|
|
unrecognised
actuarial losses |
110 |
|
unrecognised
past service cost |
70 |
|
present value
of available future refunds and reductions in future
contributions |
90 |
|
Limit |
270 |
270 is less than 320. Therefore,
the enterprise recognises an asset of 270 and discloses that
the limit reduced the carrying amount of the asset by 50 (see
paragraph 120A(f)(iii)).
Profit or loss
61. An entity shall recognise the net total of the
following amounts in profit or loss, except to the extent
that another Standard requires or permits their inclusion in
the cost of an asset:
(a) current service cost (see paragraphs 63 to 91);
(b) interest cost (see paragraph 82);
(c) the expected return on any plan assets (see paragraphs
105 to 107) and on any reimbursement rights (see paragraph
104A);
(d) actuarial gains and losses, as required in accordance
with the entity’s accounting policy (see paragraphs 92 to 93D);
(e) past service cost (see paragraph 96);
(f) the effect of any curtailments or settlements (see
paragraphs 109 and 110); and
(g) the effect of the limit in paragraph 58(b), unless it is
recognised outside profit or loss in accordance with paragraph
93C.
62. Other International
Accounting Standards require the inclusion of certain employee
benefit costs within the cost of assets such as inventories or
property, plant and equipment (see IAS 2, inventories, and IAS
16, property, plant and equipment). Any post-employment
benefit costs included in the cost of such assets include the
appropriate proportion of the components listed in paragraph
61.
Recognition and measurement:
present value of defined benefit obligations and current
service cost
63. The ultimate cost of a
defined benefit plan may be influenced by many variables, such
as final salaries, employee turnover and mortality, medical
cost trends and, for a funded plan, the investment earnings on
the plan assets. The ultimate cost of the plan is uncertain
and this uncertainty is likely to persist over a long period
of time. In order to measure the present value of the
post-employment benefit obligations and the related current
service cost, it is necessary to:
(a) apply an actuarial
valuation method (see paragraphs 64 to 66);
(b) attribute benefit to
periods of service (see paragraphs 67 to 71); and
(c) make actuarial assumptions
(see paragraphs 72 to 91).
Actuarial valuation method
64. An enterprise 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.
65. The projected unit credit
method (sometimes known as the accrued benefit method
pro-rated on service or as the benefit/years of service method)
sees each period of service as giving rise to an additional
unit of benefit entitlement (see paragraphs 67 to 71) and
measures each unit separately to build up the final obligation
(see paragraphs 72 to 91).
66. An enterprise discounts the
whole of a post-employment benefit obligation, even if part of
the obligation falls due within 12 months of the balance sheet
date.
Example illustrating paragraph
65
A lump sum benefit is payable on
termination of service and equal to 1 % of final salary for
each year of service. The salary in year 1 is 10000 and is
assumed to increase at 7 % (compound) each year. The discount
rate used is 10 % per annum. The following table shows how the
obligation builds up for an employee who is expected to leave
at the end of year 5, assuming that there are no changes in
actuarial assumptions. For simplicity, this example ignores
the additional adjustment needed to reflect the probability
that the employee may leave the enterprise at an earlier or
later date.
|
Year |
1 |
2 |
3 |
4 |
5 |
|
Benefit
attributed to: |
|
|
|
|
|
|
—prior
years |
0 |
131 |
262 |
393 |
524 |
|
—current
year
(1 %
of final salary) |
131 |
131 |
131 |
131 |
131 |
|
—current
and prior years |
131 |
262 |
393 |
524 |
655 |
|
Opening
obligation |
- |
89 |
196 |
324 |
476 |
|
Interest
at 10 % |
- |
9 |
20 |
33 |
48 |
|
Current
service cost |
89 |
98 |
108 |
119 |
131 |
|
Closing
obligation |
89 |
169 |
324 |
476 |
655 |
|
Note:
1. The opening
obligation is the present value of benefit attributed to
prior years.
2. The current service cost is the present
value of benefit attributed to the current year.
3. The closing obligation is the present
value of benefit attributed to current and prior years. |
Attributing benefit to periods of
service
67. In determining the present
value of its defined benefit obligations and the related
current service cost and, where applicable, past service cost,
an enterprise should attribute benefit to periods of service
under the plan's benefit formula. However, if an employee's
service in later years will lead to a materially higher level
of benefit than in earlier years, an enterprise should
attribute benefit on a straight-line basis from:
(a) the date when service by
the employee first leads to benefits under the plan (whether
or not the benefits are conditional on further service);
until
(b) the date when further
service by the employee will lead to no material amount of
further benefits under the plan, other than from further
salary increases.
68. The projected unit credit
method requires an enterprise to attribute benefit to the
current period (in order to determine current service cost)
and the current and prior periods (in order to determine the
present value of defined benefit obligations). An enterprise
attributes benefit to periods in which the obligation to
provide post-employment benefits arises. That obligation
arises as employees render services in return for
post-employment benefits which an enterprise expects to pay in
future reporting periods. Actuarial techniques allow an
enterprise to measure that obligation with sufficient
reliability to justify recognition of a liability.
Examples illustrating paragraph
68
1. A defined benefit plan
provides a lump-sum benefit of 100 payable on retirement for
each year of service
A benefit of 100 is attributed
to each year. The current service cost is the present value
of 100. The present value of the defined benefit obligation
is the present value of 100, multiplied by the number of
years of service up to the balance sheet date.
If the benefit is payable
immediately when the employee leaves the enterprise, the
current service cost and the present value of the defined
benefit obligation reflect the date at which the employee is
expected to leave. Thus, because of the effect of
discounting, they are less than the amounts that would be
determined if the employee left at the balance sheet date.
2. A plan provides a monthly
pension of 0,2 % of final salary for each year of service.
The pension is payable from the age of 65.
Benefit equal to the present
value, at the expected retirement date, of a monthly pension
of 0,2 % of the estimated final salary payable from the
expected retirement date until the expected date of death is
attributed to each year of service. The current service cost
is the present value of that benefit. The present value of
the defined benefit obligation is the present value of
monthly pension payments of 0,2 % of final salary,
multiplied by the number of years of service up to the
balance sheet date. The current service cost and the present
value of the defined benefit obligation are discounted
because pension payments begin at the age of 65.
69. Employee service gives rise
to an obligation under a defined benefit plan even if the
benefits are conditional on future employment (in other words
they are not vested). Employee service before the vesting date
gives rise to a constructive obligation because, at each
successive balance sheet date, the amount of future service
that an employee will have to render before becoming entitled
to the benefit is reduced. In measuring its defined benefit
obligation, an enterprise considers the probability that some
employees may not satisfy any vesting requirements. Similarly,
although certain post-employment benefits, for example,
post-employment medical benefits, become payable only if a
specified event occurs when an employee is no longer employed,
an obligation is created when the employee renders service
that will provide entitlement to the benefit if the specified
event occurs. The probability that the specified event will
occur affects the measurement of the obligation, but does not
determine whether the obligation exists.
Examples illustrating paragraph
69
1. A plan pays a benefit of 100
for each year of service. The benefits vest after ten years
of service.
A benefit of 100 is attributed
to each year. In each of the first 10 years, the current
service cost and the present value of the obligation reflect
the probability that the employee may not complete 10 years
of service.
2. A plan pays a benefit of 100
for each year of service, excluding service before the age
of 25. The benefits vest immediately.
No benefit is attributed to
service before the age of 25 because service before that
date does not lead to benefits (conditional or unconditional).
A benefit of 100 is attributed to each subsequent year.
70. The obligation increases
until the date when further service by the employee will lead
to no material amount of further benefits. Therefore, all
benefit is attributed to periods ending on or before that
date. Benefit is attributed to individual accounting periods
under the plan's benefit formula. However, if an employee's
service in later years will lead to a materially higher level
of benefit than in earlier years, an enterprise attributes
benefit on a straight-line basis until the date when further
service by the employee will lead to no material amount of
further benefits. That is because the employee's service
throughout the entire period will ultimately lead to benefit
at that higher level.
Examples illustrating paragraph
70
1. A plan pays a lump-sum
benefit of 1000 that vests after 10 years of service. The
plan provides no further benefit for subsequent service.
A benefit of 100 (1000 divided
by 10) is attributed to each of the first 10 years. The
current service cost in each of the first 10 years reflects
the probability that the employee may not complete 10 years
of service. No benefit is attributed to subsequent years.
2. A plan pays a lump-sum
retirement benefit of 2000 to all employees who are still
employed at the age of 55 after 20 years of service, or who
are still employed at the age of 65, regardless of their
length of service.
For employees who join before
the age of 35, service first leads to benefits under the
plan at the age of 35 (an employee could leave at the age of
30 and return at the age of 33, with no effect on the amount
or timing of benefits). Those benefits are conditional on
further service. Also, service beyond the age of 55 will
lead to no material amount of further benefits. For these
employees, the enterprise attributes benefit of 100 (2000
divided by 20) to each year from the age of 35 to the age of
55.
For employees who join between
the ages of 35 and 45, service beyond 20 years will lead to
no material amount of further benefits. For these employees,
the enterprise attributes benefit of 100 (2000 divided by
20) to each of the first 20 years.
For an employee who joins at
the age of 55, service beyond 10 years will lead to no
material amount of further benefits. For this employee, the
enterprise attributes benefit of 200 (2000 divided by 10) to
each of the first 10 years.
For all employees, the current
service cost and the present value of the obligation reflect
the probability that the employee may not complete the
necessary period of service.
3. A post-employment medical
plan reimburses 40 % of an employee's post-employment
medical costs if the employee leaves after more than 10 and
less than 20 years of service and 50 % of those costs if the
employee leaves after 20 or more years of service.
Under the plan's benefit
formula, the enterprise attributes 4 % of the present value
of the expected medical costs (40 % divided by 10) to each
of the first 10 years and 1 % (10 % divided by 10) to each
of the second 10 years. The current service cost in each
year reflects the probability that the employee may not
complete the necessary period of service to earn part or all
of the benefits. For employees expected to leave within 10
years, no benefit is attributed.
4. A post-employment medical
plan reimburses 10 % of an employee's post-employment
medical costs if the employee leaves after more than 10 and
less than 20 years of service and 50 % of those costs if the
employee leaves after 20 or more years of service.
Service in later years will
lead to a materially higher level of benefit than in earlier
years. Therefore, for employees expected to leave after 20
or more years, the enterprise attributes benefit on a
straight-line basis under paragraph 68. Service beyond 20
years will lead to no material amount of further benefits.
Therefore, the benefit attributed to each of the first 20
years is 2,5 % of the present value of the expected medical
costs (50 % divided by 20).
For employees expected to leave
between 10 and 20 years, the benefit attributed to each of
the first 10 years is 1 % of the present value of the
expected medical costs. For these employees, no benefit is
attributed to service between the end of the 10th year and
the estimated date of leaving.
For employees expected to leave
within 10 years, no benefit is attributed.
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