Transcript AS-15 EMPLOYEE BENEFITS

Daimler Benz in 1993 under German GAAP
reported a profit of 168 million DM but under
US GAAP for the same period, the company
reported a loss of almost a billion DM, largely
caused by pension blues. It highlighted
problems relating to pension accounting &
funding.
Note: Pension payments are quite insignificant
in comparison to global enterprises but as
Indian companies are going global this
becomes a critical issue.

To
prescribe
the
accounting
and
disclosure for employee benefits.
Entity must recognize:
 A liability when an employee has provided
service in exchange for benefits to be paid in
future.
 An expense when the entity consumes the
service provided by an employee.
Employee
benefits
Short term
benefits
Post
employment
benefits
Defined
contribution
plans
Other long
term benefits
Defined benefit
plans
Termination
benefits
1
2
3
Employee benefits are all forms of consideration
given in exchange for service rendered by
employees.
Short term employee benefits are employee
benefits which fall due wholly within twelve
months after the end of the period in which the
employees render the related service.
Termination benefits are payable as a result of
the entity’s decision to terminate employment
before the normal retirement date or an
employee’s decision to accept voluntary
redundancy.
4
5
6
Post-employment benefits are those which
are payable after the completion of
employment.
Defined contribution plans are post
employment benefit plans under which an
enterprise pays fixed contributions into a
separate entity (a fund) & will have no
obligation to pay further contributions if the
fund does not hold sufficient assets to pay
all employee benefits relating to employee
service in current or prior periods.
Defined benefit plans are the plans other
than defined contribution plans.


When an employee has rendered service to an
entity during an accounting period, the entity
should recognize the undiscounted amount
to be paid in exchange for that service as:
A liability after deducting any amount already
paid. If amount already paid > undiscounted
amount recognize the prepaid expense to the
extent prepayment will lead to refund.
An expense (unless another AS permits the
inclusion of the benefits in the cost of an
asset)
Post employment benefit plans
are either defined contribution
plans or defined benefit plans
based on the terms and
conditions.
Defined
contribution plans
Amount
contributed is
fixed but benefit is
not fixed
Defined benefit
plans
Post employment
benefits are fixed






Fixed amount of contribution to a separate fund.
No constructive or legal obligation to pay further
contribution
Post employment benefit = Contribution made &
Investment returns
Investment risk doesn’t rest with the employer.
Employee takes this risk
Annual cost to the employer is reasonably
predictable
The expense in the period is normally the same
as the amount of the contribution paid.
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The entity is obliged to provide the agreed
benefits to the current & former employees.
Employer has ongoing obligation to make
sufficient contribution to the plan.
Liability is not fixed.
Actuarial
valuation
based
on
various
estimates & assumptions.
Actuarial risks & Investment risk rest with
employer.
Post employment
benefit plan
Advantages
for
employees
Advantages
to employer
Disadvantag
es to
employees
Disadvantag
es to
employer
Defined
contribution
plan
1 Flexibility
2
Independent
of financial
viability of
employer
1 Fixed
contribution
2 Risks with
employees
Bear
Investment
risk
Less
attractive to
employees
as upside is
restricted
Defined
Benefit plan
1 Benefits
are fixed
2 No
investment
risk
Attractive to
employee so
easy to
retain them
Must be
financially
viable for
the employer
Exposed to
Actuarial
risks
(Financial,
increasing
life
expectancy,
etc) &
Investment
risks
1 Use of Actuarial techniques for
 Determination of benefits attributable to
current & prior periods.
 Making
estimates about demographic &
financial variables.
2
Present value of defined benefit obligation &
current service cost
3
Determination of fair value of plan assets
4

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5
6
Determination of
Actuarial gains & losses
Amount of actuarial gains & losses to be
recognized in financial statements.
Determination of past service cost where
plan has been introduced/modified
Determination of resulting gains/losses
where the plan has been curtailed/settled
1 Current service cost is the increase in
actuarial liability resulting from employee
service in the current period.
2 Past service cost is the increase in the
actuarial liability relating to employee service
in the previous period but only arising in
current period.
3 Curtailments and settlements are the gains &
losses arising when major reductions are
made to the no. of employees in the plan.
4
Interest cost is the increase in the liability
arising because the benefits are one year
closer to settlement (unwinding of discount).
5
Actuarial gains & losses are the increases
& decreases in the planned asset or defined
benefit obligation that occur either because
the actuarial assumptions have changed or
because of differences between the previous
actuarial assumptions and the actual
outcome.
Actuarial assumptions are an entity’s best
estimates of the variables that will
determine the ultimate cost of providing
post-employment benefits.
Factors that need to be considered to
make an appropriate estimate:
 Demographic
assumptions relate to,
rates of employee turnover, early
retirement , mortality, claim rates under
medical plans.
 Financial
assumptions relate to, the discount
rate, future salary &benefits level, expected
rate of return on plan assets.
 Actuarial assumptions should be unbiased
and mutually compatible.
 Actuarial assumptions need to reflect the
economic relationships between factors such
as inflation, rates of salary increase, return on
plan assets and discount rates.
 The whole defined benefit obligation need to
be discounted , even if part of obligation falls
due within 12 months of Balance sheet date.
A lump sum benefit is payable of termination of
service and equal to 1% of final salary for each
year of service. The salary in year 1 is 10,000 and
is assumed to increase at 7% (compound) each
year. The discount rate used is 10% per year. The
following table shows how the obligation build
up for an employee who is expected to leave at
the end of the 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 entity at an earlier or
later date.
Year
1
Benefits attributed
to prior years
0
Current years
131
(1% of final salary)
Current & Prior years 131
2
3
4
5
131 262 393 524
131 131 131 131
262 393 524 655
Opening obligation
Interest @ 10
Current
89
89
9
98
196 324 476
20 33
48
108 119 131
service cost
Closing
Obligation
___
89
___ ___ ___ ___
196 324 476 655
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1.
2.
3.
Note:
The opening obligation is the present value
of benefit attributed to prior years.
The current service cost is the present value
of benefit attributed to the current year.
The closing obligation is the present value of
benefit attributed to current and prior years.
Plan assets comprises Assets held by long-term
employer benefits fund.
Assets held by a long-term employee benefit fund
are assets that
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Are held by an entity (a fund) that is legally
separate from the reporting entity and exists
solely to pay of fund employee benefits;
Are available to be used only to pay or fund
employee benefits, are not available to the
reporting entity’s own creditors (even in the
bankruptcy) and can not be returned to the
reporting entity.
Plan assets do not include:
 Unpaid contributions due from reporting
entity to the fund.
 As obvious, plan assets are to be measured at
the fair value.
Actuarial gains and losses may result from
increase or decreases in either:
o The Present value of a defined benefit
obligation;
Or
o The fair value plan assets.
Causes include:
o Unexpectedly high or low rates or employee
turnover, early retirement or mortality;
o Increase in salaries, benefits etc;
o The effect of changes in the discount rate;
and
o Differences between the actual return on plan
assets and expected return on plan assets.
Plan Assets
Particulars
FV at the start of the year
Contribution paid to plan
Benefits paid
Expected return (%)
Actuarial gain/ loss (bal fig.)
FV at the end of the year
Amount
X
X
(X)
X
X
X
Planned Obligation
Particulars
Amount
PV at the start of the year
X
Interest Cost (%)
X
Current service cost (%)
(X)
Benefits paid
X
Actuarial gain/ loss (bal fig.)
X
PV at the end of the year
X
According to AS 15 actuarial
Gains & Losses should be
immediately recognized actuarial
gains and losses in the period in
which it arises.
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Past service costs occurs either due to
an introduction or a change to a postemployment benefits plan.
It is the change in the present value of
the defined benefits obligation for
employee service in prior periods.
May be positive or negative
Yes
Employee
have right
to receive
benefits
immediately
“Vested” recognize
immediately to Profit &
Loss Account
No
Become “vested” at later date,
Spread on a straight-line basis
over the average period
An entity operates a pension plan that
provides a pension of 3% of final salary for
each year of service. The benefits become
vested after five years of service. On 1
January 2005 the entity improves the pension
to 3.5% of final salary for each year of service
starting from 1 January 2001 At the date of
the improvement, the present value of the
additional benefits for service from 1 January
2001 to 1 January 2005 is as follows:
Employee with more than five
200
Years’ service at 1/1/05
Employees with less than five
Years’ service at 1/1/05
150
(average period until vesting: three years)
Total
350
The entity recognizes 200 immediately
because those benefits are already vested.
The entity recognizes 150 on a straight-line
basis over three years from 1 January 2005.
A curtailment occurs when an entity:
 Is demonstrably committed to making a
material reduction in the number of
employees covered by a plan.
 Amend the terms of a plan such that a
material element of future service by current
employees will qualify for no or reduced
benefits.

For Example, an entity closes a plant and
makes those employees redundant.
A settlement occurs when an entity
enters into a transaction to eliminate the
obligation for part or all of the benefits
under a plan.
Gain or Loss arising on curtailment or
settlement should be recognized when
the curtailment or settlement occurs.
An enterprise discontinues a business
segment and employees of the discontinued
segment will earn no further benefits. This is
a curtailment without a settlement. Using
current actuarial assumptions (including
current market interest rates and other
current market prices) immediately before the
curtailment , the enterprise has a defined
benefit obligation with a net present value of
Rs 1,000 and plan assets with a fair value of
Rs 820 and unrecognized past service cost of
Rs 50.
The curtailment reduces the net present value
of the obligation by Rs100 to Rs900.
Of the previously unrecognized past service
cost, 10% (Rs. 100/ Rs 1000) relates to the
part of the obligation that was eliminated
through the curtailment. Therefore, the effect
of the curtailment is as follows:
(Amount in Rs)
Before curtailment
Gain
Present Value of obligation
Fair value of Plan Assets
1,000
(820)
(100)
Nil
Unrecognized past service cost
(50)
5
Net liability recognized in
Balance Sheet
130
(95)
After curtailment
900
(820)
(45)
35
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