The revised employee benefits standard is effective from 1 January 2013.
PAS 19 “Employee Benefits” (PAS 19R) has introduced several changes to employee benefits accounting. Here are some key points for consideration upon transition and for disclosure in year-end accounts.
A “net” interest cost is determined based on the net defined benefit asset (liability) and the discount rate at the beginning of the year. This will increase the interest cost formost entities, compared to the previous accounting which required that interest cost on the obligation and the expected return on plan assets were recognised separately.
“Remeasurements” replace “actuarial gains and losses and include the difference between actual investment returns and the return implied by the interest cost and any effect of an asset ceiling. They are recognised in other comprehensive income and not recycled to income. The “corridor” method and the option to recognise immediately in the income statement are no longer available. This will increase balance sheet volatility for many entities.
PAS 19R introduces additional disclosures intended to be more relevant to users of the financial statements. The requirements are extensive and judgment will be needed to determine what information is disclosed.
All past service costs are now recognized immediately in the income statement. This will increase volatility. A reduction in the obligation to employees is a negative past service cost. A curtailment will arise only from a reduction in the number of employees in a plan.
The payment of normal benefits, even if as a single lump sum, is not a settlement. This is consistent with current practice. The accounting is unchanged, although there will be no longer be an impact of unrecognised gains or losses or past service cost.
The accounting for risk-sharing features which limit the employer’s obligation to contribute has been clarified. These features might include, for example, employee contributions and benefits that vary based on the plan experience. The expected cost of benefits should reflect the plan terms and might require specific actuarial assumptions.
The Interpretations Committee (‘IC’) is discussing plans that promise a benefit based on the higher of an actual return or a fixed minimum return. Entities might continue to apply their existing policy for these arrangements until their existing policy for these arrangements until deliberations are completed. The accounting policy should be clearly disclosed.
The IC is considering further guidance on whether employee contributions are a ‘negative short-term benefit recorded in the period due, or whether they should be included in the measurement of the long-term obligation. We believe an entity may continue the accounting previously applied until this guidance is issued. Alternative interpretations might also be acceptable.
The costs of managing plan assets continue to be recognised as a reduction in the return on plan assets.
Taxes are included in either the return on assets or the calculation of the obligation, depending on their nature. Previously they were part of the return on assets.
Other expenses are recognised in the income statement as incurred. This will be a policy change for some that could require retrospective adjustment to the obligation, return on assets and pension expense.
The definitions of short-term and long-term benefits have been further refined. The distinction is based on whether payment is expected to be made within the next 12 months, not whether payment can be demanded within the next 12 months.
Benefits that must be earned by working in a future period are not termination benefits. A liability for a termination benefit is recognised when the entity can no longer withdraw the offer of the termination benefit or any related restructuring costs are recognised. This might delay the recognition of voluntary termination benefits in some cases.
Management should first consider the 2012 accounts; PAS 8 requires disclosure of the potential effect of new accounting standards not yet adopted. We believe the impact of the changes should be quantified. It would be best to consult with your actuaries and auditors.
The amendments are applied retrospectively. This requires restatement of the comparatives, a third balance sheet and additional disclosures. Some limited exceptions apply including no restatement of assets with benefit costs in their carrying amount and no comparative information for sensitivity disclosures.