1FU491 Employee Benefits

7/31/2019 1FU491 Employee Benefits

1/14

EMPLOYEE

BENEFITS

Jana Roe, CPA

Faculty of Finance and Accounting

University of Economics, Prague

November 3, 2011

1


2/14

EMPLOYEE BENEFITS

IAS 19

FASB ASC 715

Short-term employee benefits

Post-employment benefits (ex. pensions) Other long-term employee benefits

Termination benefits

2


3/14

SHORT-TERM EMPLOYEE BENEFITS

Fall due wholly within twelve months after service

has been rendered Wages, holiday pay, bonuses, etc.

Required disclosures:

o a emp oyee ene s expense or eac accoun ngperiod

Benefits provided to key personnel

3


4/14

POST-EMPLOYMENT BENEFITS

Defined contribution plans

Expense contributions Liability for unpaid expense

Defined benefit plans

Investment Risk

Minimum Funding Requirement

4


5/14

DEFINED BENEFIT CALCULATIONS

Reliable estimates (discounted to PV)

Defined benefit obligation Current service cost

Interest cost

c uar a ga ns an osses FV of plan assets

5


6/14

DEFINED BENEFIT CALCULATIONSPV OF DB OBLIGATION

PV of DB obligation at 1/1/20XX

+ Interest cost

- Benefits paid during the period

+/- Actuarial gains or losses (balancingfigure)

= PV of DB obligation at 12/31/20XX6


7/14

DEFINED BENEFIT CALCULATIONSFAIR VALUE OF PLAN ASSETS

FV of Plan Assets at 1/1/20XX

+ Expected return on plan assets

- Benefits paid during the period

+/- Actuarial gains or losses (balancingfigure)

= FV of Plan Assets at 12/31/20XX7


8/14

DISCLOSURES

Pfizer, Inc.

Caterpillar, Inc. Air-France-KLM

8


9/14

BENEFIT PLANS SUMMARYType of benefit Amount of postretirement

benefit to em ployee

Obligation of sponsoring

company

Sponsoring companys

prefunding of its future

obligationAmount of benefit is not defined.

Actual benefit w ill depend on the

future value of plan assets.

Investment risk is borne by the

employee.

Def ined-contribution pension plan The amount of the companys

contribution is defined. Thecontribution, if any, is made on a

periodic basis w ith no future

obligation.

Not applicable.

Amount of employees benefit is

defined.

Investment risk is borne by

company.

Other postretirement benefits (OPB),

e.g., retirees health care

Amount of benefit depends on plan

specifications and type of benefit.

The eventual benefits are specified.

The amount of the future obligation

must be estimated in the current

period.

Companies typically do not prefund

other postretirement benef it

obligations.

Def ined-benef it pension plan The amount of the future obligation,

based on the plan formula, must beestimated in the current period.

Companies typically prefund the

plans by contributing funds to apension trust.

Pension is based on plan formula

(often a function of length of service

and final years salary).Regulatory requirements to prefund

vary by country.


10/14

IMPACT OF KEY DEFINED BENEFIT PENSION

ASSUMPTIONS ON BALANCE SHEET AND

PERIODIC EXPENSE

Assumption Impact of assumption on

Balance Sheet

Impact of assumption on

periodic expense

Higher discount rate Lower obligation. The interest expense willtypically be lower.

Higher rate of compensation

increase

Higher obligation. Higher service expense.

plan assets

.

Several aspects of the accounting for pensions and other post retirementbenefits can affect comparative financial analysis using ratios based onfinancial statements.

1. Differences in key assumptions can affect comparisons across companies.2. The balance sheet reports a companys net funded position, with the

separate components (i.e. plan assets and plan liabilities) disclosed in thefootnotes.

3. The smoothing mechanisms within the accounting standards can obscure

the underlying economic expense.


11/14

PERSPECTIVES

http://money.usnews.com/money/retirement/articles

/2009/06/01/jobs-that-still-offer-traditional-pensions http://pwc.blogs.com/ifrs/2010/05/the-future-for-

defined-benefit-pension-plans.html

11


12/14

U.S. GAAP VS. IFRSU.S. GAAP IFRS

Defined benefit plans; use of projected unit credit method required to match

expense to periods of service; smoothing is accomplished by deferred

recognition of actuarial gains and losses, amortization of prior service costs,et al.

Methodology very similar to that under US GAAP, with deferred recognition of

actuarial gains or losses. However, past service costs on plan adoption or

amendment are recognized immediately, not deferred.

Past service costs amortized over service period or life expectancy of

workers.

Past service costs expensed immediately.

Actuarial gains and losses cannot be recognized in equity; are to be deferred

and amortized to pension expense over expected term of plan participants to

the extent that defined "corridor" is exceeded.

Actuarial gains and losses optionally can be recognized in equity under

amendment to IAS 19 effective in 2006; if in earnings, either immediate

recognition or amortization similar to US GAAP is permissible.

Reco nition of a minimum liabilit on the balance sheet to at least the No minimum liabilit to be re orted in the statement of financial osition.

unfunded accumulated pension benefit obligation.

No limitation on recognition of pension assets. Limitation on recognition of pension assets.

Curtailment gains recognized only when employees terminate or plan

suspension is adopted, computed differently than under IFRS.

Curtailment gains or losses recognized when announced; computed

differently than US GAAP.

Anticipating changes in the law that would affect variables such as state

medical or social security benefits expressly prohibited.

Anticipate changes in future postemployment benefits based on its

expectations in the law.

Termination benefits expensed when employees accept and amount can be

estimated, recognize contractual benefits when it is probable that employeeswill accept.

Termination benefits expensed when employer is committed to pay these.

12


13/14

IFRS VS. U.S. GAAP

Two major differences:

Recognition of pension gains and losses Recognition of past service cost

June 2011 Amendments to IAS 19

. . + + +

+2011.htm

13


14/14

MIDTERM REVIEW

U.S. GAAP and IFRS Convergence

Property, Plant and Equipment Leases

Intangible Assets

Inventory Pensions

14

Documents

1FU491 Employee Benefits