Philippines Technical Research

Accounting & Auditing News Impact of PAS 19R Employee Benefits

Introduction
Upon adoption of the International Financial Reporting Standards (IFRS) in the Philippines in 2005, one of the standards that greatly affected most of the companies is PAS 19 Employee Benefits. After significant amendments made in 2006 to this standard, other significant amendments were issued on June 16, 2011 by the International Accounting Standards Board (IASB) and adopted by the Philippine Financial Reporting Standards Council (FRSC) to be effective for annual periods beginning on or after January 1, 2013. The objective of the amendments to PAS 19 was to enhance the financial reporting of employee benefits by: (a) reporting changes in defined benefit obligations in the fair value of plan assets in a more understandable way; (b) improving comparability by eliminating some presentation options currently allowed under PAS 19; (c) clarifying requirements that have resulted in diverse practices; and (d) improving disclosure requirements for defined benefit plans. This publication covers discussions of the key changes that the amendment to PAS 19 introduces and the impact of these changes. These includes: (a) changes in the accounting treatment of the actuarial gains and losses and past service cost; (b) changes in presentation approach; (c) new disclosure requirements; and (d) new definition of short-term employee benefits and additional guidance for termination benefits classification and recognition.

Changes in accounting treatment

The most significant amendment will require an entity to recognize changes in defined benefit obligations and plan assets when they occur; thus, eliminating the corridor approach permitted under the previous version of PAS 19. In addition, the option to defer the recognition of past service cost when unvested was eliminated as well. As a result of the amendment, entity currently using the corridor approach and / or deferred the recognition of past servic e cost may have to recognize a larger liability, or a smaller asset in the statement of financial position which could affect its compliance with debt covenants and impair its ability to pay a dividend. Also, Other Comprehensive Income and profit or loss will become more volatile due to immediate recognition of actuarial gains and losses and past service cost when compared to current provision of PAS 19. Actuarial gains or losses Under PAS 19R, all actuarial gains and losses are to be recognized immediately in Other Comprehensive Income (OCI). The option to recognize actuarial gains and losses in profit or loss has also been removed. Past service cost Past service cost arise in case of change of the employee benefit plan. Under the current provision of PAS 19, past service cost should be deferred when unvested. This results in an unrecognized amount which is amortized in profit or loss over the vesting period. Under PAS 19R, all past service cost are recognized in profit or loss as they occur.

Changes in presentation approach

The main issues in the current provision of PAS 19 were caused by a range of options. As a result, it was difficult to compare companies with similar obligations. By removing the options under PAS 19R and requiring entities to recognize changes immediately, the amendments will improve the comparability and understandability of changes arising from defined benefit plans. The amendments also introduced a new approach for presenting changes in defined benefit obligations and plan assets. The new presentation includes service cost, net interest, and remeasurement components. The concept of the expected return on plan assets has been eliminated.

New disclosure requirements

The following new disclosure requirements were introduced by the amendment to PAS 19: Characteristics of defined benefit plans and risk associated with them a. Disclosure of the characteristics of the plan, including: (i) the nature of the benefits, (ii) a description of the regulatory framework, and (iii) governance responsibilities. b. c. Description of the risk to which the plan exposes the entity. Description of plan amendments, curtailments and settlements.

Explanation of the amounts in the financial statements a. Minor modifications on the reconciliation from opening balance to the closing balance. PAS 19R requires that the reconciliation should show the plan assets, present value of the defined benefit obligation, the effect of the asset ceiling, and the reimbursement rights. b. Disaggregation of plan assets into different asset classes distinguished on the nature and risks of the plan assets. This includes subdividing those assets that do and do not have a quoted market price.

Amount, timing and uncertainty of future cash flows

a. b. c. Sensitivity analysis for each significant actuarial assumption; Description of any asset-liability matching strategies; and Effect of defined benefit plan on future cash flows.

New definition of short-term employee benefits and additional guidance for termination benefits classification and recognition

Under the current standard, short-term benefits is defined as employee benefits that are due to be settled within 12 months after the end of the period in which employees render the related service while under the revised standard, short-term benefits is defined as employee benefits that are expected to be settled wholly before 12 months after the end of the annual reporting period. The new definition will result in more plans being classified as long-term employee benefit plans that will then need to be measured using actuarial assumptions. PAS 19R provides clarifying guidance to help companies distinguish between benefits payable in exchange for service and benefits payable in exchange for termination of employment by providing indicators when an employee benefit is not a termination benefit. It also requires an entity to recognize a liability and expense at the earlier between (a) the date of offer if the benefits can no longer be withdrawn, and (b) the date when the entity recognizes costs for a restructuring that is within the scope of IAS 37; and involves the payment of termination benefits.

Action point
The above amendments will be effective for annual period beginning on or after January 1, 2013 with retrospective application. This means that the comparative information to be presented in the 2013 Financial Statements should be based on the provisions of PAS 19R. In preparation for this amendment, the impact of the amendments should already be known and such impact can already be determined by having an additional valuation to be performed in addition to the requirements of the current provisions of PAS 19. This will anticipate the potential impact of the amendments and to avoid the duplication of effort by the actuary when preparing the 2013 Financial Statements. For further details of the amendments, please click the link: http://www.deloitte.com/assets/Dcom-Netherlands/Local%20Assets/Documents/NL/Diensten/Accountancy/nl_nl_accountancy_brochure_IAS19_pensioen.pdf

Please contact the Technical Research Group at +63 2 581 9000 local 9088 / 9069 / 9078 or e-mail phtr@deloitte.com for questions regarding this publication.

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