Employee Benefits Gavin Aspden Head of Innovation and Technical Development 8 September 2009.

Employee Benefits

Gavin AspdenHead of Innovation and Technical Development

8 September 2009

ICAEW

Short-term benefits

Post-employment

benefits

Otherlong-term benefits

Terminationbenefits

IAS 19

Employee benefits

ICAEW

Short-term benefits

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 basisExamplesAccumulating compensated absencesAn 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

Non-accumulating compensated absencesAn entity offers paid maternity leave and military service- only accrue for paid leave where absence has occurred that is

unpaid at the year end

IAS 19

Employee benefits

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Include:• Long-term compensated absences• Long-service benefits• Profit sharing/bonuses (payable 12

months or more after year end)• Deferred compensation• Post-employment healthcare

Otherlong-term benefits

Accounted for similarly to post-employment benefits

IAS 19

Employee benefits

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• 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.

Terminationbenefits

Accrued for when the enterprise is demonstrably committed to either:

IAS 19

Employee benefits

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Post-employment benefits

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

IAS 19

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Defined benefit schemes

Defined Benefit Schemes

Scheme Assets Scheme Liabilities

Measure at fair value at reporting date

Measure at present value of future obligations

Pension scheme surplus or deficit on statement of financial position.

IAS 19

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Source: Deloitte, December 2008

£130 bn (double the level of 2007)

FTSE 100

IAS 19

May get even worse if there is a significant recession

Source: Pension Protection Fund, December 2008

£194.5 bn (compared to a surplus of £11.7bn in 2007)

See www.pensionprotectionfund.org.uk/index/ppf_7800_index.htm for the latest positionUK as a whole

http://www.pensionprotectionfund.org.uk/index/ppf_7800_index.htm

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Current service

costIncrease in

annual pension payments

Retirement DeathNow Year end

Service performed

discount

Dr Current service cost (I/S)Cr PV obligation

compound

Dr Interest cost (I/S)Cr PV obligation

Present value of pension obligation

Discount/compound using market yields

on high quality corporate bonds

Discount/compound using market yields

on high quality corporate bonds

IAS 19

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Now

Increase in annual pension

payments

Retirement DeathYear end

Service performed

Fair value of plan assets

Contributions are paid in as advised by an actuary

Dr FV plan assetsCr Company cash

growth

Dr FV plan assetsCr Expected return (I/S)

Any difference between actual and

expected return is an actuarial gain/loss

Any difference between actual and

expected return is an actuarial gain/loss

IAS 19


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Present value of defined benefit obligation£m

Present value of defined benefit obligation£m

Actuarial loss (balancing figure) 34

At 1 January 1,990Interest cost 158Current service cost 170Benefits paid (212)

At 31 December 2,140

Defined benefit schemesActuarial gains and losses

Fair value of plan assets£m

Fair value of plan assets£m

Actuarial loss (balancing figure) (423)

At 1 January 1,827Expected return 180Contributions 128Benefits paid (212)

At 31 December 1,500

IAS 19

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• 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.

IAS 19

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IAS 19 corridor method£m

Fair value of plan assets 1,500Present value of obligation (2,140)

(640)Net unrecog. losses (34 + 423) 457*Pension liability (183)

IAS 19 corridor method£m



IAS 19 immediate recognition£m

Fair value of plan assets 1,500Present value of obligation (2,140)Pension liability (640)

ReservesP&L reserves (34 + 423) 457*


Fair value of plan assets 1,500Present value of obligation (2,140)Pension liability (640)

ReservesP&L 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

IAS 19

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IAS 19 corridor method £m

Income statementInterest cost 158Current service cost 170Expected return on plan assets (180)

Actuarial losses ??

IAS 19 corridor method £m


Actuarial losses ??



Comprehensive income Actuarial losses 457



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.

IAS 19

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Defined benefit schemesRecognition of actuarial gains and losses

IAS 19 Corridor method£m



IAS 19 Corridor method£m



Recognition test:

Debit to income statement in following year:

Net actuarial gains or losses outside the ‘10% corridor’

Average remaining working lives of participating employees

‘10% Corridor’ limits (for following year):Higher of: £m10% b/d obligation (10% x 2,140) 21410% b/d assets (10% x 1,500) 150... Corridor limit 214Losses outside corridor (457–214) 243

IAS 19 also allows faster recognition

(including immediate recognition)

243m ÷ (say)13 years = 18.7m P&L expense next year

IAS 19

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110

(10% x 110) 11 Dr Income statement

Example

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

Notes(1) The present value of the future benefit obligations on 1 January 2008

were £110 million.

(2) The yield on high quality corporate bonds in the year to 31 December 2008 was 10%.

Present value of defined benefit obligation

£’m

b/d

Interest cost

Current service cost

Benefits paid

Actuarial gain (balancing figure)

c/d

IAS 19

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13 Dr Income statement

(10) Cr Plan assets

Example

Notes(3) The present cost of pensions earned this year was £13m.

(4) Pensions paid to former employees during the year amountedto £10m.


£’m

b/d 110

Interest cost (10% x 110) 11 Dr Income statement

Current service cost

Benefits paid


c/d

IAS 19

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£’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


c/d 116

(8)

Example

Notes(6) Extracts from the most recent actuary's report show the following:

31.12.2008Present value of pension plan obligation £116m

Unrecognisedactuarialgains/losses

IAS 19

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(12% x 150) 18 Cr Income statement

150

7 Cr Company cash

(10) Dr PV obligation (done)

Example

Notes(7) The fair value of plan assets on 1 January 2008 was £150 million.

(8) The expected return on investments is 12%.


£’m

b/d

Expected return

Contributions received

Benefits paid

Actuarial loss (balancing figure)

c/d

(9) The pension plan received contributions of £7m and paidpensions to former employees of £10m.

IAS 19

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£’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)

Example

Notes(10) Extracts from the most recent actuary's report show the following:

31.12.2008Market value of plan assets £140m

Unrecognisedactuarialgains/losses

IAS 19

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Example

Notes(11) 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.

(12) The average remaining working life of plan members at 1 January 2008 is 7 years.

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

IAS 19

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(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

(from before) 8

(from before) (25)

39

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) 15Therefore, corridor limit 15

Gains b/d recognised in the income statement: (£63m – £15m)/ 7 years 7

IAS 19 also allows faster recognition

(including immediate recognition)

IAS 19

Example

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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)

Example - disclosures

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.

IAS 19

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STATEMENT OF FINANCIAL POSITION

£m

Fair value of plan assets 140

Present value of defined benefit obligation (116)

24

Unrecognised actuarial gains (39)

Net pension liability (15)

IAS 19

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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

IAS 19

Employee Benefits

Gavin AspdenHead of Innovation and Technical Development

8 September 2009

Employee Benefits Gavin Aspden Head of Innovation and Technical Development 8 September 2009.

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