GRAP 2 5 - National Treasury

ACCOUNTING GUIDELINE

GRAP 25

Employee Benefits

All rights reserved. No part of this publication may be reproduced, stored in retrieval system, or transmitted, in any form or by any means, electronic,

mechanical, photocopying, recording, or otherwise, without the prior permission of the National Treasury of South Africa.

Permission to reproduce limited extracts from the publication will not usually be withheld.

Though National Treasury (NT) believes reasonable efforts have been made to ensure the accuracy of the information contained in the guideline,

it may include inaccuracies or typographical errors and may be changed or updated without notice. NT may amend these guidelines at any time by

posting the amended terms on NT's Web site.

Note that this document is not part of the GRAP standard. The GRAP takes precedence while this guideline is used mainly to provide further

explanations on the concepts already in the GRAP.

GRAP 25 on Employee Benefits

Issued February 2020 of 37

Contents

1. Introduction .................................................................................................................. 4

2. Scope .......................................................................................................................... 5

3. Short-term Employee Benefits ..................................................................................... 6

3.1 Wages, salaries and social security contributions ............................................... 6

3.2 Short-term compensated absences .................................................................... 7

3.3 Bonus, incentive and performance related payments ........................................ 12

3.4 Any non-monetary benefits ............................................................................... 13

4. Post Employee Benefits ............................................................................................. 13

4.1 Defined contribution plan .................................................................................. 14

4.1.1 Recognition and measurement ......................................................................... 14

4.1.2 Disclosure ......................................................................................................... 14

4.2 Defined benefit plan .......................................................................................... 16

4.2.1 Recognition and measurement ......................................................................... 16

4.2.2 Disclosure ......................................................................................................... 19

4.3 Multi-employer and state plans ......................................................................... 32

5. Termination Benefits .................................................................................................. 34

6. Other long-term benefits ............................................................................................ 35

7. Useful links and references ........................................................................................ 37



1. Introduction

This document provides guidance on the accounting treatment and disclosure of employee

benefits.

The contents should be read in conjunction with GRAP 25.

For purposes of this guide, “entities” refer to the following bodies to which the standard of

GRAP relate to, unless specifically stated otherwise:

Public entities

Constitutional institutions

Municipalities and all other entities under their control

Trading entities and government components applying the standards of GRAP

Parliament and the provincial legislatures

TVET and CET colleges

Explanation of images used in manual:

Definition

Take note

Management process and decision making

Example



2. Scope

GRAP 25 is applicable to all employers in accounting for all employee benefits; except for

share based payment transactions (refer to IFRS 2 on Share-based Payments for detail).

This includes any benefits given as consideration for services rendered by key management,

full-time, part-time, permanent, casual and temporary employees.

The Standard as well as this guide also address initial recognition and initial measurement of

assets and liabilities acquired in a transfer of functions between entities under common control

(see the Standard of GRAP on Transfer of Functions Between Entities Under Common

Control) or a merger (see the Standard of GRAP on Mergers).

Employee benefits do not only include benefits paid to employees, but also benefits paid to a

dependant of an employee, for example a spouse, a child or a parent. These benefits may

also be paid on behalf of an employee or his/her dependant, such as payments to insurance

companies.

Employee benefits are all forms of consideration given by an entity in exchange for services rendered by employees.

Employee benefits include:

Short-term benefits, such as salaries, wages, paid annual leave, bonus and paid sick leave;

Post-employment benefits such as pensions and post-employment medical care;

Termination benefits; and

Other long-term benefits such as long-service leave or long-term disability benefits.



3. Short-term Employee Benefits

Short-term employee benefits include items such as:

Wages, salaries and social security contributions;

Short-term compensated absences, such as paid annual leave and paid sick leave;

Bonus, incentive and performance related payments; and

Any non-monetary benefits.

3.1 Wages, salaries and social security contributions

An expense should be recognised when the service is delivered and a liability (or an accrued

expense) should be recognised after deducting the amounts already paid.

One of the most frequently asked questions relating to employee benefits are whether an entity should appoint an actuary at every reporting date to measure its defined benefit obligations

GRAP 25 encourages, but does not require, an entity to involve a qualified actuary in the measurement of all material post-employment benefit obligations.

Entities frequently implement policies that involve the use of external actuaries and internal staff. As an example, an entity may appoint an actuary to carry out valuations periodically, e.g. every 5 years, and then use internal staff to “roll forward” the valuations in the years that an external valuation is not performed.

These types of techniques are acceptable if they comply with the requirements of GRAP which states that an entity determines the present value of the defined benefit obligations and the fair value of any plan assets with sufficient regularity so that the amounts recognised in the financial statements do not differ materially from the amounts that would be determine at the end of the reporting period.

Short-term employee benefits are employee benefits (other than termination benefits – which are dealt with later in the guide) that are due to be settled within twelve months after the end of the period in which the employees rendered the services.

Accounting for short-term benefits is normally straight-forward as a result of two factors:

No actuarial assumptions are required to measure the obligation or cost; and

Short-term employee benefit obligations are not discounted.



Example: Recognise a liability for wages at period end

Employee A is paid R100 per day for services rendered and receives payment at the end of each week. The period end of the entity is Wednesday 30 June 20X9.

Illustrating the disclosure as required in the financial statements for the period ending 30 June 20X9:

Extract from Statement of financial position Note 20X9 20X8

R R

Current liabilities

Trade and other payables 1 300 XX

Extract from Statement of financial performance Note 20X9 20X8

R R

Expenses

Employee cost (300) (XX)

Extract from Notes to the financial statements 20X9 20X8

R R

Trade and other payables

Accrued expenses (R100 x 3 days) 300 XX

3.2 Short-term compensated absences

Short-term absences for which employees are compensated may include vacation, sickness,

maternity and paternity leave. The value of these compensated absences is already factored

into each employee’s salary package.

Short-term leave benefits can be accumulating or non-accumulating. Accumulating absences

are those that can be carried forward and can be used in future periods, while non-

accumulating absences lapse if the current period’s entitlement is not used in full. If short-

term absences accumulate, an entity has to record a liability at the end of the period for any

unused portion of the entitlement. If balances are non-accumulating, no liability is recorded at

the end of the period as the entitlement has lapsed.



When short-term benefits accumulate it does not necessarily mean that an entity must accrue

for all unused entitlements. Accumulating absences can be vesting (which means an

employee is entitled to a cash payment for all unused leave on leaving the entity) or it can be

non-vesting (which means an employee is not entitled to a cash payment for unused leave on

leaving the entity).

In the case of vesting accumulating absences the entity should recognise a liability for all the

unused days. In the case of non-vesting accumulating absences the entity should only

recognise a liability for the unused entitlement it expects the employee to utilise before

retirement or resignation.

The significant differences between accumulating and non-accumulating compensated

absences can be summarised as set out in the table below.

Example: Accumulating absences

An employee has a gross salary of R312,000 and is entitled to 21 days annual leave per year. It is the entity’s policy that a year has 260 working days. The unused leave may be carried forward indefinitely and may be paid out in cash when the employee leaves the employ of the entity. In year 1 the employee has utilised none of his leave entitlement.

At the end of the reporting period the entity has to recognise a liability for the accumulating benefit. The employee’s effective remuneration rate per working day is R1,200 (R312,000 / 260 days). The liability the entity has to recognise is R25,200 (R1,200 x 21 days).

Example: Non-vesting accumulating absences

An employee has a gross salary of R312,000 and is entitled to 21 days annual leave per year. It is the entity’s policy that a year has 260 working days. The unused leave may not be paid out in cash when the employee leaves the service of the entity. In year 1 the employee has utilised none of the leave.

At the end of the reporting period the entity has to recognise a liability for the accumulating benefit. The employee’s effective remuneration rate per working day is R1,200 (R312,000 / 260 days). The entity estimates that 80% of all unused balances will be utilised before employees leave the employment of the entity. The liability the entity has to recognise is R20, 160 (R1,200 x 21 days x 80%).



Accumulating compensated absences Non-accumulating compensated absences

Entitlement is carried forward to future periods if not used in full;

Entitlement is not carried forward: it lapses if the entitlement is not used in full;

Depending on the entity’s policy, an employee may receive a cash payment for unused entitlements on leaving an entity (vesting entitlements) or an employee may not be entitled to cash payments for unused entitlements (non-vesting entitlements);

On leaving the entity, employees will not receive a cash payment for unused entitlements;

The expected cost of the accumulated compensated absence should be recognised as a liability (assuming it is vested)

No liability is recognised.

Example: Annual leave accumulates (assuming it is vested) as an employee is in the service of an entity and when the employee leaves the employ of the entity the unused annual leave is paid out.

Example: An employee is allowed a fixed amount of sick leave days in a period and after the period, any sick leaves days not utilised cannot be carried over to the next period. In addition, any sick leave days not utilised when the employee leaves the employment of the entity will not be paid out.

Example: Vested Annual Leave

Entity X grants its employees 20 days leave a year (assume that the leave cycle and the financial year are the same). At the end of the leave cycle, employees can either elect to have any unused leave paid out or, they can elect to carry the leave days forward to the next leave cycle. If employees resign, they are entitled to a cash payment for any leave due. At the end of the year, a total of 500 leave days have not been used.

In terms of the policy, the entity has an obligation to either pay out unused leave or allow employees to carry over unused leave to future cycles. As a result it has a present obligation for the full 500 unused days at year end.

Example: Non-Vested Annual Leave

Entity A provides its employees 20 leave days a year (assume that the leave cycle and the financial year are the same as example 5). Any unused leave at year end must be used within a 6 month period, otherwise it is forfeited. Based on past history, employees forfeit 10% of their unused leave. At year end, the entity has 300 unused leave days.

At year end, the entity has an obligation of 300 leave days. However, it knows that based on history, 10% is forfeited. Therefore in measuring the obligation, it considers the leave percentage that is not utilised. A liability of 270 days is recognised [300 – (300 x 10%)].



The diagram below summarises the recognition and measurement of short-term compensated

absences:

Refer to the accounting guideline on GRAP 19 for guidance on how to determine whether a

leave liability should be accounted for as an accrual or a provision.

Yes No

Yes No



Example: Short-term compensated absences (accumulating)

Employee B is entitled to 15 days paid leave per year. Assume that it is entity policy that employees must take 10 days leave per year and that employees are entitled to accumulate 5 days from each year’s leave cycle. In addition, employees are only allowed to accumulate a maximum of 20 days leave. During the 20X7/20X8 financial year employee B took 11 days leave. Assume that employee B had 18 days leave accumulated at the beginning of the 20X7/20X8 reporting period. For example purposes, it is assumed the leave obligation for employee B at 30 June 20X8 was R21,600 and employee B’s cost to company per working day for 20X7/20X8 is R1,320.

Extract from leave register

1 July 20X8 – Opening balance 18

Leave entitled 15

Leave days taken (11)

Remaining leave days 22

Leave days lapsed as per policy (2)

30 June 20X8 – Closing balance 20

Extract from Statement of Financial Position

Notes 20X8 20X7

R R

Current liabilities

Trade and other payables from exchange transactions (20 days x R1,320)

1 26,400 21,600

Extract from Statement of Financial Performance

Notes 20X8 20X7

R R

Employee related cost (R26,400 – R21,600) 2 4,800 XX

Extract from Notes to the Financial Statements

20X8 20X7

R R

1. Payables from exchange transactions

Accrued expenses 26,400 21,600

26,400 21,600



2. Employee related cost

Annual leave 4,800 XX

4,800 XXX

3.3 Bonus, incentive and performance related payments

Before an entity recognises the expected costs of bonus, incentive and performance related

payments, it should comply with the following two requirements:

The example above is for illustrative purposes only and the entity’s employment policy would

determine on what basis the bonus or performance bonuses, where applicable, will be

determined, e.g. basic salary, total cost to company, basic salary plus allowances, etc.

Example: Accounting for annual bonus and performance bonus

Assume that an entity’s policy states that a performance bonus is payable in June each year, based on basic salaries. The performance bonus will be based on a rating of each employee’s individual performance for the 12 months ending March each year. It has also been the entity’s practice for the past 7 years to pay a 13th cheque in December, which equals an employee’s basic salary for one month, apportioned where an employee was only employed for part of the year. The year end of the entity is March.

At the end of the reporting period the entity should recognise an expense and obligation for the 13th cheque due to the constructive obligation which was created over the past 7 years. The obligation should be recognised only for the period from January to March.

At the end of the reporting period a provision should be raised for the performance bonuses that would probably be paid in June. If the individual performances have been assessed before the authorisation of the financial statements then the actual amounts can be provided, but if the assessments are not available, then the provision should be based on management’s best estimate.



Refer to the accounting guideline on GRAP 19 for guidance on how to determine whether a

bonus payable should be accounted for as an accrual or a provision.

3.4 Any non-monetary benefits

Non-monetary benefits, by definition, include any benefit given to an employee that is not

cash. This will include for example:

4. Post Employee Benefits

The arrangement whereby an entity provides post-employment benefits are called post-

employment benefits plans. Post-employment benefit plans can be classified as either a:

Defined contribution plan; or

Defined benefit plan.

In determining the assets and liabilities to be recognised related to postemployment benefits

in a transfer of functions between entities under common control, a transfer of functions

between entities not under common control or a merger an entity considers the Standards of

The bonus expense and liability recognised at year-end should only be accrued for the number of periods from when the bonus was last paid to end of the reporting period.

Post-employment benefits are employee benefits (other than termination benefits) which are payable after the completion of employment.



GRAP on Transfer of Functions Between Entities Under Common Control, Transfer of

Functions Between Entities Not Under Common Control or Mergers, as appropriate.

The table below illustrates the significant differences between the two plans:

Defined contribution plan Defined benefit plan

Entity pays fixed contributions into a separate entity Not applicable

Entity’s obligation is limited to its contributions to the fund

The entity’s obligation is to pay agreed benefits to current and former employees

Actuarial and investment risk falls on the employees Actuarial and investment risk falls on the employer (entity)

4.1 Defined contribution plan

4.1.1 Recognition and measurement

Accounting for this plan is straightforward because the reporting entity’s obligation is limited

to the amounts to be contributed for that period. As a result actuarial assumptions are not

required to measure the obligation. Furthermore, the obligation under this plan is measured

on an undiscounted basis, unless the contributions do not fall due within 12 months after the

end of the reporting period.

4.1.2 Disclosure

Below is an example illustrating the disclosures required for defined contribution plans (refer

to the standard for detail):

Extract from Statement of Financial Position and Notes to the Financial Statements

Note 20X1 20X0

R R

Current assets

Receivables from exchange transactions 1 XX XX

Current liabilities

Payables from exchange transactions 2 XX XX

Defined contribution plans are post-employment benefit plans under which an entity pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further contributions if the fund does not hold sufficient assets to pay all employee benefits relating to employee services in the current and prior periods.



Note 20X1 20X0

1. Receivables from exchange transactions

Receivables from the sale of goods and services XX XX

Defined contribution plan - XX

(illustrating situations where a pre-payment was made) XXX XXX

2. Payables from exchange transactions

Payables from the purchase of goods and services XX XX

Deposits XX XX

Defined contribution plan XX -

(illustrating situations where not all payments for the period were made before year end)

XXX XXX

3. Defined contribution plan

Contributions paid to defined contribution plan XX XX

Provide details of the defined contribution plan here. Details can include, but is not limited to number of members, percentage contribution by employer and employees, etc.

Note that the contributions paid should be separately disclosed in the financial statements and that the amount disclosed should consist of both the employer and employee contributions.



4.2 Defined benefit plan

4.2.1 Recognition and measurement

The accounting for defined benefit plans is more complex because actuarial assumptions are

required to measure the obligation and the expenses and there is the possibility of actuarial

gains or losses. To make it even more complex, the obligation is measured on a discounted

basis as it may only be settled years after the employees rendered the related services.

Accounting for a defined benefit plan involves the following steps:

1. Identify a reputable valuator with the necessary qualifications (not required by standard);

2. Provide the valuator with the required information to enable them to perform the valuation;

3. Obtain the valuation report from the valuators;

4. Check that the information used by the valuator agrees to the information provided to the valuator; and

5. Use the valuation report to:

Recognise the obligation (or surplus) and expenses and revenue as required by the standard; and

Disclose all relevant information as set out by the standard.

Defined benefit plans can be funded, unfunded or partially funded.

Defined benefits plans are post-employment plans other than defined contribution plans.

Example: Defined benefit plan

An entity has undertaken to cover 60% of the medical aid contributions of employees after their retirement. The entity contributes on a monthly basis to a fund in order to fund the payments for these costs. If there are insufficient funds available in the fund, the entity will cover the shortfall.

The plan is a defined benefit plan, as the employer carries the actuarial and investment risk by carrying the shortfall if insufficient funds are available.

Funded plans are plans where the future liabilities for pension benefits are provided for in advance by the accumulation of assets held externally to the employing entity's business.

Unfunded plans are plans where pension benefits are paid directly by the employer. No assets are set aside in advance to provide for future liabilities; instead pension liabilities are met out of the employer's own resources.



The amounts to be recognised in the financial statements are listed below:

The net liability (asset) to be recognised in the statement of financial position is determined as follows:

The present value of the obligations at the date of adoption;

Minus the fair value, at the date of adoption, of plan assets (if any) out of which the obligations are to be settled directly;

Plus any liability that may arise as a result of a minimum funding requirement.

The movements in the present value of the defined benefit obligation consist of the following:

Current service cost;

Interest cost;

Actuarial (gain)/losses;

Past service cost;

Effect of curtailments or settlements; and

Benefits paid.

The movements in the fair value of the plan assets consist of the following:

Expected return on plan assets;

Contributions by employer;

Contributions by employees;

Actuarial (gain)/losses;

Benefits paid; and

Effect of settlements.

The following items are recognised in surplus or deficit:


Interest cost;

Actuarial gain/loss;

Funded, partially funded and unfunded plans should be identified and disclosed separately in the financial statements.

GRAP 25 does not prescribe where interest costs should be

presented, an entity can include such costs as part of employee costs or finance

costs



Past service cost;

Effect of curtailments or settlements;

Expected return on plan assets.

Current service cost is the increase in the present value of the defined benefit obligation resulting from employee service in the current period.

Interest cost is the increase during a period in the present value of a defined benefit obligation which arises because the benefits are one period closer to settlement.

Actuarial gain/loss comprises:

Experience adjustments (the effect of difference between the previous actuarial assumptions and what has actually occurred); and

The effects of changes in actuarial assumptions.

Past service cost is the change in the present value of the defined benefit obligation for employee service in prior periods, resulting in the current period from the introduction of, or changes to, post-employment benefits or other long term employee benefit.

Curtailment is the act or process of reducing an entity’s operations; this is often linked to restructuring. The effects of curtailments are the reduction in the obligation due to restructuring.

Settlement occurs when an entity enters into a transaction that eliminates future legal or constructive obligations for part or all the benefits provided under a defined benefit plan.

Expected return on plan assets is based on expectations, at the beginning of the reporting period, of returns over the entire life of the related obligation. The expected return reflects changes in fair value of plan assets held during the period as a result of actual contributions paid into the fund and actual benefits paid out of the fund.

Contributions by the employer or employees are the actual payments made into the fund.



4.2.2 Disclosure

The disclosure required as depicted in the diagram above are shown in the illustrative example

below.

Example: Defined benefit plan (disclosure)

This section provides an extract from an actuarial report and illustrates how this report is used

to obtain the relevant disclosure information for the annual financial statements. The

illustration is in respect of an unfunded post-retirement medical aid benefit.

Extracts from a Report on the Actuarial Valuation of the Employer’s Liability in respect of Unfunded Post-employment Health Care Benefits.

Valuation method and main assumptions:

The actuarial valuation method used to value liabilities is the Projected Unit Credit Method prescribed by the accounting standards. Future benefits valued are projected using specific actuarial assumptions and the liability for in-service members is accrued over expected working lifetime.

Any plan assets are valued at current market value as required by the accounting standards.



In order to undertake the valuation, it is necessary to make a number of assumptions. The most significant assumptions used for the current and previous valuations are outlined below.

Valuation date 31 March 20X7 31 March 20X8

Discount rate 10.75% p.a. 9.50% p.a.

Health care cost inflation 10.00% p.a. 8.00% p.a.

Salary inflation 9.50% p.a. 7.50% p.a.

Expected retirement age* 55 55

Membership discontinued at retirement or death-in-service* 10% 10%

*These assumptions were set in consultation with the entity.

We assume that current in-service members would retire on their current medical scheme option and that there would be no change in options on retirement.

The difference between the discount rate and the inflation assumption is more important than their absolute values.

Actuarial assumptions are generally more suited to the estimation of the future experience of larger groups of individuals. The overall experience of larger groups is less variable and is more likely to tend to the expected value of the underlying statistical distribution. The smaller the group size, the less likely it is that the actual future experience will be close to that expected. Furthermore, please note that even if the assumptions are appropriate for the group overall, they may not be appropriate at an individual level.

There is no allowance for deferred company taxation in our calculations.

The difference between the discount rate and the inflation assumption is more important than their absolute values.

Actuarial assumptions are generally more suited to the estimation of the future experience of larger groups of individuals. The overall experience of larger groups is less variable and is more likely to tend to the expected value of the underlying statistical distribution. The smaller the group size, the less likely it is that the actual future experience will be close to that expected. Furthermore, please note that even if the assumptions are appropriate for the group overall, they may not be appropriate at an individual level.

There is no allowance for deferred company taxation in our calculations.

Key results:

The accrued liability as at 31 March 20X8 is summarised below:

Accrued liability R’000

Continuation members 4,000

In-service members 13,000

Retirement benefits 12,000

Death-in-service benefits 1,000

17,000



The accrued liability split between current and non-current liability as at 31 March 20X8 is shown below:

Accrued liability R’000

Current liability (payable within 12 months) 500

Non-current liability 16,500

17,000

There are no plan assets.

The accrued liability in excess of plan assets as at 31 March 20X8 is summarised below:

R’000

Accrued liability 17,000

Plan assets -

Accrued liability in excess of plan assets 17,000

Potential accounting treatment

The potential accounting treatment as at 31 March 20X8 is set out below, based on the following accounting policy:

Any actuarial gains and losses are recognised immediately in profit or loss (surplus or deficit for GRAP purposes).

For illustrative purposes, we have included the forecast cost for the year following the valuation date and the forecast position at the year-end following the valuation date, ignoring any gains or losses arising over the period.

The values as at 31 March 20X7 are based on a roll-back of the 31 March 20X8 values and the assumptions that would have applied then.

Reconciliation of assets and liabilities 31 March 20X7

31 March 20X8 31 March 20X9

Recognised in the statement of financial position R’000 R’000 R’000

Present value of funded obligations - - -

Less: Fair value of plan assets - - -

- - -

Present value of unfunded obligations 14,500 17,000 17,800

Present value of obligation in excess of plan assets

14,500 17,000 17,800

Net liability 14,500 17,000 17,800

**roll-back due to date of actuarial valuation



Reconciliation of present value of obligation in excess of plan assets

20X7 20X8

R’000 R’000

Opening balance 12,600 14,500

Current service cost 750 950

Interest cost 1,300 1,600

Actuarial (gain)/losses 60 210

Past service cost - -

Effect of curtailment or settlement - -

Benefit paid (210) (260)

Closing balance 14,500 17,000

Trend information 20X4 20X5 20X6 20X7 20X8

R’000 R’000 R’000 R’000 R’000

Present value of obligation 9,500 10,800 12,600 14,500 17,000

Fair value of plan assets - - - - -


9,500 10,800 12,600 14,500 17,000

Experience adjustments (Actuarial gain and losses before change in assumptions):

In respect of present value of obligation - - - - -

In respect of fair value of plan assets - - - - -

The trend information is the amounts for the current annual reporting period and previous four reporting periods of:

The present value of obligation, the fair value of the plan assets and the surplus or deficit of the plan; and

Experience adjustments on the plan liabilities and plan assets.

Sensitivity results:

It is important to treat the results of the valuation with a degree of caution, as they are extremely sensitive to the assumptions used.

The valuation results set out above are based on a number of assumptions. The value of the liability could turn out to be overstated or understated, depending on the extent to which actual experience differs from the assumptions adopted.

Note that the trend information for the previous four periods will not always be in the valuation report. This information can however be obtained from prior years’ financial statements.



We recalculated the liability of the entity to show the effect of:

A one percentage point decrease or increase in the rate of health care cost inflation;

A five or ten percentage point increase in the rate of health care cost inflation for the next five years, thereafter returning to a health care cost inflation of 8.00% p.a.;

A one percentage point decrease or increase in the discount rate; and

A one percentage point decrease or increase in the discount rate.

Health care cost inflation

Central assumption

8%

-1% +1%

Accrued liability at 31 March 20X8 (R’000)

% change

17,000 14,348

-15,6%

20,315

+19.5%

Current service cost + Interest cost (R’000)

% change

2,550 1,796

-17.8%

3,129

+22.7%


Central assumption

8%

+5% for

5 years

+10% for

5 years


% change

17,000 20,825

+22.5%

24,888

+46.4%

Discount rate

Central assumption

9.50%

-1% +1%


% change

17,000 20,451

+20.3%

14,365

-15.5%

Discount rate

Central assumption 55

years

1 year

younger

1 year

older

5 years

older


% change

17,000 17,765

+4.5%

16,269

-4.3%

13,515

-20.5%

The actuarial report will include more information than the extracts above. More detail about the method and assumptions can be obtained from the report, should it be required.



Illustration of presentation and disclosure in the financial statements, for the period ended 31 March 2010, based on the actuarial report provided above

Extract from Statement of Financial Position

Note 20X8 20X7

R ‘000 R ‘000

Non-current assets

Defined benefit obligation 1 17,000 14,500

The standard does not specify whether an entity should distinguish between current and non-current portions of assets and liabilities from post-employment benefits.

Entities can distinguish between current and non-current liabilities and assets should the information be available.

The entity should remember to be consistent from one period to the next. If a distinction is made between current and non-current in one year, then the entity should continue to do so in following years.

This information was obtained from the following section in the actuarial report:

Reconcilation of assets and liabilities 31 March 20X7

31 March 20X8

31 March 20X9

Recognised in the statement of financial position

R’000 R’000 R’000



- - -



14,500 17,000 17,800

Net liability 14,500 17,000 17,800




Note 20X8 20X7

R ‘000 R ‘000

1. Defined benefit obligation

Provide a general description of the type of plan. For the example above, the description will include that it is a post-retirement medical aid benefit for retired employees, the percentage or amount that is contributed by the employer and the employees that are entitled to this benefit.

Extract from Notes to the Financial Statements (continued)

Note 20X8 20X7

R ‘000 R ‘000


Analysis of defined benefit obligation

Present value of funded obligation - -

Present value of unfunded obligation 17,000 14,500

17,000 14,500


Reconcilation of assets and liabilities 31 March 20X7

31 March 20X8

31 March 20X9

Recognised in the statement of financial position

R’000 R’000 R’000



- - -



14,500 17,000 17,800

Net liability 14,500 17,000 17,800




Note 20X8 20X7

R ‘000 R ‘000


Movement in the present value of the defined benefit obligation





Benefits paid by the plan (260) (210)




20X7 20X8

R’000 R’000












Note 20X7 20X8

R ‘000 R ‘000


The amounts for the current and previous four periods were as follows (R’000)

2006 2007 2008 2009 2010

Defined benefit obligation 9,500 10,800 12,600 14,500 17,000


Trend information 20X4 20X5 20X6 20X7 20X8

R’000 R’000 R’000 R’000 R’000

Present value of obligation 9,500 10,800 12,600 14,500 17,000

Fair value of plan assets - - - - -


9,500 10,800 12,600 14,500 17,000

Experience adjustments (Actuarial gain and losses before change in assumptions):

In respect of present value of obligation - - - - -

In respect of fair value of plan assets - - - - -




Note 20X8 20X7

R ‘000 R ‘000


Expenses and income recognised in surplus for the period

Current service costs - Included under employee related cost

x 950 750

Actuarial loss - Included under employee related cost x 210 60

Interest costs - Included under finance cost x 1,600 1,300

Actuarial (gains)/losses

Actuarial losses should be included in the employee related cost/personnel cost line item in the statement of financial performance and actuarial gains should be included in the other income line item in the statement of financial performance.

Actuarial gains and losses should not be netted off in the statement of financial performance.



20X7 20X8

R’000 R’000












Note 20X8 20X7

R ‘000 R ‘000


The following main assumptions were used in performing the valuation at 31 March 2010




Expected retirement age 55 55

Membership discontinued at retirement or death-in-service

10% 10%


Note 20X8 20X7

R ‘000 R ‘000


The effect of an increase of one percentage point and the effect of a decrease of one percentage point in the assumed medical cost trend rates on the following would be (R’000):

31 March 2010 Increase 1% Decrease 1%

Defined benefit obligation 20,315 14,348

Current service cost and interest cost 3,129 1,796

31 March 2009 Increase 1% Decrease 1%

Defined benefit obligation 17,327 12,238

Current service cost and interest cost 2,515 1,443

More assumptions can be disclosed should

they be available


Valuation date 31 March 20X8

31 March 20X7




Expected retirement age* 55 55

Membership discountinued at retirement or death-in-service* 10% 10%



The comparatives can be obtained from the prior period’s financial statements should it not be available from the current year’s valuation report.

This information was obtained from the following sections in the actuarial report:


Central assumption

8%

-1% +1%

Acrrued liability at 31 March 20X8 (R’000)

% change

17,000 14,348

-15,6%

20,315

+19.5%

Current service cost + Interest cost (R’000)

% change

2,550 1,796

-17.8%

3,129

+22.7%


Central assumption

8%

+5% for

5 years

+10% for

5 years


% change

17,000 20,825

+22.5%

24,888

+46.4%

Central assumption

9.50%

Discount rate

-1% +1%


% change

17,000 20,451

+20.3%

14,365

-15.5%

Central assumption

55 years

Discount rate

1 year

younger

1 year

older

5 years

older


% change

17,000 17,765

+4.5%

16,269

-4.3%

13,515

-20.5%



Example: defined benefit plan (disclosure)

Should the defined benefit obligation be wholly or partially funded then additional disclosure is required for the plan assets.


Note 20X8 20X7

R’000 R’000

Reconciliation of present value of obligation and fair value of plan asset

Present value of funded obligations XX XX

Less: Fair value of plan assets (XX) (XX)

XXX XXX

Present value of unfunded obligations XX XX

Present value of obligation in excess of plan assets XXX XXX

Movement in the present value of the plan assets

Opening balance XXX XXX

Expected return XX XX

Contributions by employer XX XX

Contributions by employees XX XX

Actuarial (gain)/losses XX XX

Benefits paid by the plan (XX) (XX)

Effect of settlements XX XX

Closing balance XXX XXX

Provide detail on each of the major categories of plan assets, which shall include, but is not limited to: equity instruments, debt instruments, property and all other assets, the percentage or amount that each major category constitutes of the fair value of plan asset.

The amounts for the current and the previous four periods were as follows (R’000)

2006 2007 2008 2009 2010

Plan assets XX XX XX XX XX

Expenses and income recognised in surplus for the period

Expected return on plan assets – included under other income

(XX) (XX)

Losses/(gains) on curtailments and settlements – included under other income

(XX) (XX)

The following main assumptions were used in performing the valuation at 31 March 2010

Expected return on plan asset x% p.a. x% p.a.



4.3 Multi-employer and state plans

Multi-employer and state plans are accounted for in the same way.

The accounting treatment of these plans depends upon whether or not the entity has a legal

or constructive obligation to pay future benefits. If the entity’s only obligation is to pay

contributions as they fall due and the entity has no obligation to pay future benefits, it accounts

for the multi-employer or state plan as a defined contribution plan.

If the multi-employer or state plan is a defined benefit plan and sufficient information is

available, then the entity accounts for its proportionate share of the defined benefit obligation,

plan assets and post-employment benefit cost associated with the plan in the same way as

for any other defined benefit plan.

There may be cases where the entity may not be able to identify its share of the underlying

financial position and performance of the plan with sufficient reliability for accounting purposes.

In those cases, the entity accounts for the plan as if it were a defined contribution plan. In

these instances additional disclosures are required (refer to the standard for detail).

Multi-employer plans are defined contribution plans (other than state plans and social security programmes) or defined benefits plans (other than state plans) that:

Pool the assets contributed by various entities that are not under common control; and

Use those assets to provide benefits to employees of more than one entity on the basis that contributions and benefit levels are determined without regard to the identity of the entity that employs the employees concerned.

State plans are established by legislation for all entities (or entities in a specific category, for example, a specific industry).

Example: Multi-employer plan

A defined benefit plan is financed on a pay-as-you-go basis such that: contributions of employers and/or employees are set at a level that is expected to be sufficient to pay the benefits falling due; and employee’s benefits are determined by the length of their services.

Such a plan creates actuarial risk for the entity: If the ultimate cost or benefits already earned at reporting date are more than expected, the entity will have to either increase its contributions or persuade employees to accept a reduction in benefits. Therefore such a plan is a defined benefit plan.



Example: Multi-employer defined benefit plan

Along with similar municipalities in the province, a municipality participates in a multi-employer defined benefit plan. Because the plan exposes the participating municipalities to actuarial risks associated with the current and former employees of other municipalities’ participating in the plan, there is no consistent and reliable basis for allocating the obligation, plan assets and cost to individual municipalities participating in the plan.

The following illustrates the disclosure that will be made in the financial statements of the municipality:

Extract from Notes to the financial statements

Note 20X1 20X0

Defined contribution plans XX XX

The entity accounts for its multi-employer defined benefit plan as a defined contribution plan, as there is no consistent and reliable basis for allocating the obligation, plan assets and cost to the individual municipalities participating in the plan and the plan exposes the participating municipalities to actuarial risks associated with the current and former employees of other municipalities participating in the plan.

Example: The Government Employees Pension Fund (GEPF)

The Government Employees Pension Fund (GEPF) is a defined benefit plan that was established by law through the enactment of the Government Employees Pension Law, act 21 of 1996.

All employees of government are required to become members unless they are required by legislation to become a member of another fund or are excluded from membership. Other employers in the public sector may apply to participate.

Although the GEPF is a defined benefit plan, there is no consistent and reliable basis for allocating the obligation, plan assets and cost to individual employers participating in the plan and each participating employer is exposed to actuarial risk associated with current and former employees of other entities and therefore the participating employers will account for the GEPF as a defined contribution plan, with the necessary disclosures included in the financial statements.

The following illustrates the disclosure that will be made in the financial statements of an entity:

Extract from Notes to the financial statements

Note 20X1 20X0

Defined benefit plans – GEPF XX XX

The entity accounts for this defined benefit state plan as a defined contribution plan, as there is no consistent and reliable basis for allocating the obligation, plan assets and cost to the individual employers participating in the plan and the plan exposes the participating employers to actuarial risks associated with the current and former employees of other employers participating in the plan.



5. Termination Benefits

An entity may be committed, by legislation, by contractual or constructive obligation to make

payments to employees when it terminates their employment. These payments are referred

to as termination benefits and are typically lump-sum payments. The payments may also

include:

enhancements of retirement benefits or of other post-employment benefits, either

indirectly through an employee benefit plan or directly; and

salary until the end of a specified notice period, if the employee renders no further services

that provides economic benefits to the entity.

In the case of termination benefits, the past event that results in the present obligation for

the entity is the termination itself. An entity recognises a liability and expense for

termination benefits when the entity can demonstrate their commitment to either:

provide termination benefits as a result of an offer made in order to encourage voluntary

redundancy; or

terminate the employment of an employee or group of employees before the normal

retirement date.

Termination benefits that fall due more than 12 months after reporting date should be

discounted. When an offer is made to employees to encourage voluntary redundancy,

measurement of the liability and expense should be based on the number of employees

expected to accept the offer.

Note that multi-employer plans are distinct from group administration plans.

A group administration plan, is a group of single employer plans which have been combined to allow employers of these separate funds to pool their assets for investment purposes, so as to reduce the investment, management and administrative costs. However, the claims of the different employers are segregated for the sole benefit of their own employees.

An entity can demonstrate commitment to termination when, and only when,:

The entity has a detailed formal plan for the termination; and

The entity is without a realistic possibility of withdrawal from the termination / restructuring plan.

This principle is drawn from the requirements of recognising a provision (or contingent liability) as stipulated in GRAP 19 on Provisions, Contingent Liabilities and Contingent Assets (refer to the accounting guideline on GRAP 19 for more detail).



6. Other long-term benefits

Other long-term benefits include, for example:

Long-term compensated absences such as sabbatical leave;

Long-service awards;

Long-term disability benefits;

Example: Termination benefits - Voluntary

The compulsory retirement age for employees of the entity is 60 years. The entity has offered all employees over 55 years the option of early retirement. A detailed plan is available which sets out the number of employees affected, the termination benefits per job classification and the date the plan will be effective. By the time the financial statements had to be authorised, management could still not make a reliable estimate of the number of employees expected to accept the offer.

Disclosure in the financial statements

Management should disclose a contingent liability as required in GRAP 19 on Provisions, Contingent Liabilities and Contingent Assets.

Example: Termination benefits

The compulsory retirement age for employees of the entity is 60 years. The entity is terminating the employment of all employees over the age of 55 years. A detailed plan is available which sets out the number of employees affected, the termination benefits per job classification and the date the plan will be effective.

Recognition and disclosure in the financial statements

A liability and expense should be recognised immediately for the termination benefits. Should the termination benefits fall due later than 12 months, it should be discounted. Should the expense be material, then the nature and amount of the expense should be disclosed in terms of GRAP 1 on Presentation of Financial Statements.

Other long-term employee benefits are employee benefits (other than post-retirement benefits and termination benefits) that are not due to be settled within twelve months after the end of the period in which the employees render the related service.



Bonus, incentive and performance related payments paid twelve months or more after the

end of the period in which the employees render the related service;

Deferred compensation paid twelve months or more after the end of the reporting period

in which it is earned; and

Compensation payable by the entity until an individual enters new employment.

Other long-term benefits are not usually subject to the same degree of uncertainty as the

measurement of post-employments benefits and are therefore not as complex to measure.

Notwithstanding above, the method used to account for long-term benefits is similar to the

method used to account for defined benefit plans.

The amount to be recognised in the statement of financial position as a liability will be:

The present value of defined benefit obligation;

Minus the fair value of plan assets out of which the obligation are to be settled directly.

The expenses to be recognised in surplus or deficit consist of the following:


Interest cost;

Expected return on plan assets and any reimbursement right recognised as an asset;

Actuarial gains and losses;

Past service cost; and

The effect of any curtailments or settlements.

GRAP 25 includes a rebuttable presumption that long-term disability payments are not usually subject to the same degree of uncertainty as the measurement of post-employment benefits. Where this presumption is disproved, the entity should consider whether some or all long-term disability payments should be accounted for as defined benefit plans (in that case the entity would follow the accounting treatment included under the section on defined benefit plan for the applicable long-term disability payments).

Example: Other long-term benefits

It is the entity’s policy that each employee will receive a R2,000 long-term service award after 10 consecutive years of employment with the entity.

The entity should determine the probability of how many employees will receive the long-service award, i.e. how many employees will remain with the entity for at least 10 years. This probability should then be discounted over the remaining term before the award is paid out and be recognised as a liability in the statement of financial position.



7. Useful links and references

8. Reference Location of reference

Frequently Asked Questions (FAQs)

on the Standards of GRAP

ASB website:

http://www.asb.co.za/frequently-asked-questions/

IGRAP 7 on The Limit on a Defined

Benefit Asset, Minimum Funding

Requirements and their Interaction

ASB website:

http://www.asb.co.za/interpretations-approved-

and-effective/

IGRAP 19 on Liabilities to Pay

Levies

Guideline on The Application of

Materiality to Financial Statements

ASB website:

http://www.asb.co.za/guidelines/

Standard Chart of Accounts for Local

Government (mSCOA)

National Treasury website:

http://mfma.treasury.gov.za

(mSCOA – Municipal Standard Chart of Accounts)

Illustrative Financial Statements for

local government

National Treasury website:

http://mfma.treasury.gov.za

(mSCOA – Municipal Standard Chart of Accounts)

GRAP 2 5 - National Treasury

Documents

Transcript of GRAP 2 5 - National Treasury