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ASSOCHAM IFRS Master Class IFRS Compliance for Employee Benefits Ben Facer, Regional Consulting Leader 18 June 2010

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ASSOCHAM IFRS Master Class IFRS Compliance for Employee Benefits Ben Facer, Regional Consulting Leader 18 June 2010

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    5. Scope: Defined benefit vs defined contribution Your DC fund might be included when: Guaranteed minimum interest rate Interest rate linked to a particular index Guaranteed minimum benefit Interest rate smoothing, with a potential call on the employer

    7. AS-15 vs IAS19 Where are the differences? AS-15 (Revised 2005) was issued as a stepping stone to full IFRS, hence the standards are identical in most respects. Three key differences: Discount rate Recognition of actuarial gains and losses Balance Sheet (Statement of Financial Position) Liability

    8. Discount Rate What do the Standards say?

    9. Recognising actuarial gains and losses Actuarial gains and losses arise from two broad sources: Changes in assumptions used from year to year The experience of the Plan, relative to the assumptions chosen Under AS-15, all actuarial gains and losses must be immediately recognised in the Profit & Loss account IAS19 allows three methods of recognition: Deferred through the P&L – the ‘Corridor’ approach Immediately through the P&L Immediately through the Statement of Comprehensive Income

    11. Ensure that you include all plans within scope Cap on Gratuity to increase from Rs350,000 to Rs1,000,000 Exempt Provident Funds Should they be valued? How? Other employee benefits: Leave encashment Jubilee / Long Service Awards Post Retirement Medical

    12. Ensure that you set assumptions correctly Assumptions include:

    13. Effects of Changes in Actuarial Assumptions

    14. Assumptions: Setting the discount rate Which bonds to reference? Corporate vs Government Bonds IAS19 requires reference to “high quality” corporate bonds, unless no deep market “High quality” typically considered AA rating Spread between AA Corporate and Central Govt 10 year bonds was 130 bps at 31 March 2010 State Government vs Central Government Bonds? Central Govt Bonds hold a sovereign guarantee Sovereign Rating (S&P) BBB- State Govt Bonds are offering higher yields – by around 100 bps At lower security

    15. Assumptions: Setting the Discount Rate The Yield Curve in India - Duration

    16. Ensure that your disclosures are compliant Para 120A sets out in detail specific disclosure items that are required. Let’s look at some simplified examples: Balance Sheet Profit & Loss Treatment of Gains and Losses

    17. Disclosures: Balance Sheet

    18. Assets Must be valued at fair value Exchanged by willing parties in an arm’s length transaction May comprise: Assets in an employee benefits fund An insurance policy To qualify, assets in an employee benefits fund must generally: Be held in an entity which is legally separate from the company Are available only to pay or fund employee benefits Reconciled from year to year with: Contributions Benefit payments Expected return on assets Actuarial gains / losses

    19. Actuarial gain/loss: Assets

    20. Disclosures: Balance Sheet

    21. Disclosures: Benefit Obligation Named the “Defined Benefit Obligation”, or “DBO” The actuarial present value of all benefits attributed to employee service rendered to date Gradual accrual of benefits promised, not benefits vested Projected Unit Credit method – includes expected future salary increases Present value is calculated using discount rate assumption (bond yield) Reconciled from year to year with: Service cost Interest cost Benefit payments Actuarial gains / losses

    22. Actuarial gain/loss: Liability

    23. Disclosures: Profit & Loss

    24. Key components of pension cost Service cost The increase in DBO resulting from one extra year of employee service Interest cost The increase in DBO resulting from the passage of time Expected return on assets The amount of the DBO increase that is expected to be funded from investment returns Credit for the expected risk premium

    25. Disclosures: Reporting gains and losses IAS19 allows three methods to report the unrecognized net actuarial gain and loss. “10% corridor” allows for some annual variability in experience corridor = 10% of max (assets, liabilities) Excess unrecognized gain/(loss) excess is spread over expected average remaining working lifetime and included in pension expense

    27. IASB Exposure Draft Current Requirements in IAS19

    28. IASB Exposure Draft Proposed Requirements in IAS19

    29. Summary IAS19 is not a material change from AS-15 Key change is the allowable methods of gain/loss recognition Consider carefully your assumption setting process Are assumptions your realistic best estimate Avoid unnecessary volatility resulting from poorly chosen assumptions Consider ALL of your employee benefits, and ensure you are appropriately accounting for your expense and liability

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