Amended International Accounting Standards issued for pension and other post- employment benefits

Employers who offer defined benefit, retirement benefits, gratuities, outstanding leave entitlement and other post-employment benefits and are subject to International Financial Reporting Standards (IFRS) should review the amended accounting and disclosure rules of International Accounting Standard 19- Employee Benefits (lAS 19), released last year.

Collectively we will refer to all these benefits as post-employment benefits. And in general we are concerned with benefits that are based on salary at or near the time the employee leaves service or indeed the average of their salaries during some or all of his/her career.

In some cases the benefits may be offered as part of a general terms & conditions on a voluntary basis. However, there are occasions in some jurisdictions in the region where these types of benefits are mandatory.

IAS 19 modifies how a plan's obligations and risks will be reflected on a company's financial statements and requires additional footnote disclosures. The requirements are effective for fiscal years beginning on or after 1st January 2013, but can be adopted earlier.

This article focuses mainly on the issues raised by lAS 19 that are associated with single-employer defined benefit pension and OPEB plans. Sponsors of multiemployer defined benefit pension plans that are required to report under lAS 19 are encouraged to review more thoroughly modified disclosure requirements (examples in the table below) which will differ from disclosure rules expected to be issued by the Financial Accounting Standards Board (FASB).

Background

lAS19, first issued in 1993 and substantially expanded in 1998, has been amended or proposed to be amended in subsequent years. Most recently, the International Accounting Standards Board (IASB) published a 2008 discussion paper, Preliminary Views on Amendments to /AS 19, followed by the 2010 exposure draft for defined benefit plans; the newly announced lAS 19 contains amendments to this exposure draft and becomes the formal accounting standard for pension, gratuities and OPEB plans (and other postretirement benefits not discussed here).

A summary of the IFRS's key "improvements" follows:

Fiscal Year
Pension and
OPEB Cost

Fiscal Year-End
Disclosure

• Calculate the fiscal year net interest charge by multiplying the net defined benefit liability or asset (NDBL) by the fiscal year discount rate. Mathematically, this replaces the expected return on assets assumption with the assumed discount rate.

• Eliminate the option to reflect gains and losses through the income statement or to spread the surplus/deficit or use the “corridor” rules that previously were permitted.

• Require that the entire benefit obligation change in both vested and unvested past service costs resulting from plan amendments, settlements, or curtailments in the current fiscal year be charged/ (credited) concurrently to post-employment benefits cost.

• Require re-measurements of plan changes in assets and liabilities to be displayed in other comprehensive income (OCI) in a revised presentation. Many plan sponsors have already been following this approach. The amended standard now mandates this.

• Require "enhanced" disclosure of information about the plan's characteristics and the employer's associated risks from participation in such plans.

• Require employers participating in multiemployer pension plans to disclose: qualitative information about any agreed deficit or surplus allocation on termination of the plan or the amount that is required to be paid upon withdrawal of the entity from the plan; the expected contribution for the next annual period; and the level of participation.

Retirement benefits, gratuities and OPEB Plans' Cost Calculations

The changes likely to have the most impact on post-employment plan costs when sponsors adopt the amended lAS 19 are:

• The fiscal year post-employment benefits cost will consist of only two components: the service cost and the interest charge (see next bullet). Any prior service cost charge/(credit) incurred as a result of plan amendments, settlements, or curtailments is included in the service cost.

• The interest charge will be calculated as the product of the net defined benefit liability (or asset) and the fiscal year discount rate. The "net" value will be the difference between the defined benefit obligation (DBO) (similar to projected benefit obligation) and the fair value of plan assets. The revised interest charge calculation will likely increase the fiscal year benefit cost for funded plans, as it replaces the prior calculation of the interest on the DBO at the discount rate less the expected return on the plan assets.

• The annual aggregate net gain or loss will be recognized as a change in OCI and will be eliminated as a component of the fiscal year post-employment benefits cost.

There are two components to the net gain or loss. The first is the difference in the DBO for changes during the fiscal year due to employee turnover, retirements, mortality, medical inflation, salary increases, and the discount rate from those assumed, as well as the impact on the DBO of any changes in those assumptions.

The second is the difference in the return on plan assets during the fiscal year, adjusted for the cost of asset management, versus the assumed return based on the fiscal year discount rate.

• The administration expenses were hidden as a deduction from the return on the assets. Now that the return on assets is effectively being taken to be the discount rate, the administration expenses for each year are to be recognized in the profit & loss (typically in the service cost). The exception will be investment related expenses, which will be deducted from the investment return in the OCI.

• This note simplifies matters in one respect and that is for funded plans where there is, or there is expected to be, surplus as a result of local funding rules. In the region generally the provisions of IFRIC 14 do not need to be applied, but advisors should check carefully on this point.

Disclosure Requirements

IAS 19 clarifies the elements to disclose to users of the post-employment benefits financial information, with no significant changes from prior exposure drafts. Thus, the plan sponsor must:

• Explain the plan characteristics and associated risks, such as the benefit formulas, the regulatory environment, responsibilities of the trustees or Board of Directors, and any "significant concentrations of risk" (e.g., a less diversified asset portfolio).

• Identify and explain the charges and credits to the plans, the NDBL, the effect of foreign exchange rates, contributions, asset classes, and the "significant" actuarial assumptions used in the calculations.

• Describe the amount, timing, and "uncertainty" of future cash flows by conducting a sensitivity analysis of significant actuarial assumptions, describing any asset-liability matching techniques (which could include longevity swaps), calculating the weighted average DBO duration, and describing the funding policy.

ACTION

All employers with post-employment benefits (whether provided voluntarily or through a mandatory Labor Law requirement) must determine if compliance with lAS 19 is necessary under corporate financial governance. Different jurisdictions in the region will possibly have their own versions of IAS19 and some firms as subsidiaries of multi-national parents will have head office guidance to follow.

Of immediate concern in the region is the general fall in the yield on bonds in the last few years. The fall in just the last 12 months indicates that in some countries the impact of the change in discount rate could raise the value of liabilities by as much as 50%. In the past that increase could be amortized.

The new standard requires it to be recognized immediately and could have a dramatic impact on the financial disclosures. It would be wise to determine the impact sooner rather than later to avoid a surprise.