1FU491 Employee Benefits

EMPLOYEE BENEFITS
Jana Roe, CPA Faculty of Finance and Accounting University of Economics, Prague November 3, 2011
EMPLOYEE BENEFITS
IAS 19 FASB ASC 715 Short-term employee benefits Post-employment benefits (ex. pensions) Other long-term employee benefits Termination benefits
SHORT-TERM EMPLOYEE BENEFITS

Fall due wholly within twelve months after service has been rendered Wages, holiday pay, bonuses, etc. Required disclosures:
Total employee benefits expense for each accounting period Benefits provided to key personnel
POST-EMPLOYMENT BENEFITS
Defined contribution plans
Expense contributions Liability for unpaid expense
Defined benefit plans

Actuarial Risk Investment Risk Minimum Funding Requirement
DEFINED BENEFIT CALCULATIONS

Reliable estimates (discounted to PV)
Defined benefit obligation Current service cost
Interest cost Actuarial gains and losses FV of plan assets
DEFINED BENEFIT CALCULATIONS PV OF DB OBLIGATION

PV of DB obligation at 1/1/20XX + Interest cost + PV of current service cost - Benefits paid during the period +/- Actuarial gains or losses (balancing figure) = PV of DB obligation at 12/31/20XX
DEFINED BENEFIT CALCULATIONS FAIR VALUE OF PLAN ASSETS

FV of Plan Assets at 1/1/20XX + Expected return on plan assets + Contributions from employer/employees - Benefits paid during the period +/- Actuarial gains or losses (balancing figure) = FV of Plan Assets at 12/31/20XX
DISCLOSURES
Pfizer, Inc. Caterpillar, Inc. Air-France-KLM
BENEFIT PLANS SUMMARY

Type of benefit Am ount of postretirem ent benefit to em ployee Amount of benefit is not defined. Obligation of sponsoring com pany The amount of the companys contribution is defined. The contribution, if any, is made on a periodic basis w ith no future obligation. Defined-contribution pension plan Sponsoring com panys prefunding of its future obligation Not applicable.
Actual benefit w ill depend on the future value of plan assets. Investment risk is borne by the employee. Defined-benefit pension plan Amount of employees benefit is defined. Pension is based on plan formula (often a function of length of service and final years salary).
The amount of the future obligation, based on the plan formula, must be estimated in the current period.
Companies typically prefund the plans by contributing funds to a pension trust.
Regulatory requirements to prefund vary by country. Investment risk is borne by company. Other postretirement benefits (OPB), Amount of benefit depends on plan e.g., retirees health care specifications and type of benefit. The eventual benefits are specified. Companies typically do not prefund The amount of the future obligation other postretirement benefit obligations. must be estimated in the current period.
IMPACT OF KEY DEFINED BENEFIT PENSION ASSUMPTIONS ON BALANCE SHEET AND PERIODIC EXPENSE
Impact of assumption on Impact of assumption on Balance Sheet periodic expense Higher discount rate Lower obligation. The interest expense will typically be lower. Higher rate of compensation Higher obligation. Higher service expense. increase Higher expected return on Lower expense. plan assets Assumption
Several aspects of the accounting for pensions and other post retirement benefits can affect comparative financial analysis using ratios based on financial 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 the footnotes. 3. The smoothing mechanisms within the accounting standards can obscure the underlying economic expense.
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-fordefined-benefit-pension-plans.html
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U.S. GAAP VS. IFRS

U.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. Past service costs amortized over service period or life expectancy of workers. 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. Recognition of a minimum liability on the balance sheet to at least the unfunded accumulated pension benefit obligation. No limitation on recognition of pension assets. 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 expensed immediately.
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. No minimum liability to be reported in the statement of financial position.
Limitation on recognition of pension assets.
Curtailment gains recognized only when employees terminate or plan suspension is adopted, computed differently than under IFRS. Anticipating changes in the law that would affect variables such as state medical or social security benefits expressly prohibited. Termination benefits expensed when employees accept and amount can be estimated, recognize contractual benefits when it is probable that employees will accept.
Curtailment gains or losses recognized when announced; computed differently than US GAAP. Anticipate changes in future postemployment benefits based on its expectations in the law. Termination benefits expensed when employer is committed to pay these.
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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

http://www.ifrs.org/News/Press+Releases/IAS+19+June +2011.htm
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MIDTERM REVIEW
U.S. GAAP and IFRS Convergence Property, Plant and Equipment Leases Intangible Assets Inventory Pensions
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EMPLOYEE BENEFITS

SHORT-TERM EMPLOYEE BENEFITS

Defined benefit plans

DEFINED BENEFIT CALCULATIONS

Interest cost Actuarial gains and losses FV of plan assets

DEFINED BENEFIT CALCULATIONS PV OF DB OBLIGATION

DEFINED BENEFIT CALCULATIONS FAIR VALUE OF PLAN ASSETS

BENEFIT PLANS SUMMARY

Companies typically prefund the plans by contributing funds to a pension trust.

U.S. GAAP VS. IFRS

Limitation on recognition of pension assets.

IFRS VS. U.S. GAAP

June 2011 Amendments to IAS 19

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