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Re-Stating – The 2009-10 Accounts for IFRS – Benefits During Employment (IAS 19)

Re-Stating – The 2009-10 Accounts for IFRS – Benefits During Employment (IAS 19). Roman Haluszczak, Manager, CIPFA Finance Networks E mail: Roman.Haluszczak@cipfa.org.uk. Employee Benefits – Chapter 6 of the CIPFA IFRS Code. 2. Employee Benefits – Chapter 6 of the IFRS Code. 3.

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Re-Stating – The 2009-10 Accounts for IFRS – Benefits During Employment (IAS 19)

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  1. Re-Stating – The 2009-10 Accounts for IFRS – Benefits During Employment (IAS 19) Roman Haluszczak, Manager, CIPFA Finance Networks E mail: Roman.Haluszczak@cipfa.org.uk

  2. Employee Benefits – Chapter 6 of the CIPFA IFRS Code 2

  3. Employee Benefits – Chapter 6 of the IFRS Code 3

  4. Employee Benefits – Chapter 6 of the CIPFA IFRS Code – Transition arrangements up until the 31st of March 2010 4

  5. IAS 19 - Basic Principles Balance Sheet perspective Recognise a liability when an employee has provided service in exchange for employee benefits to be paid in the future Comprehensive Income and Expenditure perspective Recognise an expense when the entity consumes the economic benefit arising from the employee’s services 5

  6. Chapter 6.2 of the CIPFA Code -Benefits Payable during Employment (a) Short-term benefits Include (other than termination benefits) employee benefits payable within twelve months after the year-end e.g. (a) wages, salaries and social security contributions (b) short-term compensated absences (c) bonuses and similar payments (d) non-monetary benefits. 6

  7. Chapter 6.2 of the CIPFA Code Short-term Compensated Absences ‘ Non-Accumulating or Accumulating’ Non-Accumulating short term compensated absences cannot be carried forward to be used in future periods –not included in any potential provision Accumulating are those that can be carried forward and used in future periods potentially without restriction? Recognition when employees render service and increase their entitlement to future benefit Measure at the additional amount the authority expects to pay as a result of unused entitlement 7

  8. Chapter 6.2 of the CIPFA Code - Short term Compensated Absences – Accrual and SI 454 Today’s focus is on the accounting entries for IFRS transition not defining how the accrual has been finalised Please see Appendix A of Chapter 6.2 for a detailed definition of how the accrual can be defined at http://www.cipfa.org.uk/pt/cipfalasaac/transition_guidance.cfm Please also see October 2009 FAN series on the IFRS Transition balance Sheet – www.cipfanetworks.net/fan SI 454 2010 – Short term accumulating absences -- Where, in accordance with proper practices, a local authority includes an amount in respect of a liability for short-term accumulating compensated absences in its balance sheet, the authority must not charge to a revenue account an amount in respect of that liability until the date on which the liability ceases or is discharged.”. 8

  9. Short-term benefits –Transition Principles – Accumulating Short Term Absences – 1st of April 2009 - Transition Balance sheet Entries Authorities should have already addressed this SI 454 mitigates the effects of such a move on the GF- Accounting Entries need to be :DrShort term accumulating compensated absences account (An Unusable Reserve) and CrAccumulated Absences Account (Long Term Provision inthe Balance sheet) with the initial liability Although the regulations / statutory guidance took effect on 1 April 2010, the Local Authority Accounting Panel recommended that the effect of the regulations is reflected in the restated opening 1 April 2009 balance sheet and the restated 2009/10 accounts. 9

  10. Short-term benefits –Transition Principles – Accumulating Short Term Absences – A Simplified Example (1) As at the 31st of March 2009 Accruelle Council estimated that a provision for the following short term accumulating compensated absences account (STACAA) was required: 10

  11. Short-term benefits –Transition Principles – Accumulating Short Term Absences – A Simplified Example (2) The entries required to restate the opening 1 April 2009 balance sheet are as follows: Dr STACAA £22m and Cr Provision for Accumulated Absences £22m Compared to the 31 March 2009 balance sheet prepared under the SORP, the opening 1 April balance sheet under the Code will include an new liability of £22m (the provision), matched by a debit balance on the new STACAA 11

  12. Short-term benefits –Transition Principles – Accumulating Short Term Absences – A Simplified Example (3) At the 31st of March 2010 - Accruelle Council estimated that the equivalent provision for untaken STACAA was as follows – In brackets The difference between the 2 provisions was £0.4m 12

  13. Entries Required to Re-state 2009-10 – (1)- Reversing the provision as at 1st of April 2009 13

  14. Entries Required to Re-state 2009-10 – (2)- With the total provision for untaken leave (annual leave and flex leave) at 31 March 2010 14

  15. 2009-10 Re-statement - Summary The net cost of services will now be £0.4m higher in 2009-10 due to this IFRS re-statement than it would have been if this re-statement had not been actioned. You need to be aware of the movements on service accounts as they may be significant – Compared to the 31 March 2010 balance sheet prepared under the SORP, the 31 March 2010 balance sheet under the Code will include an new liability of £22.4m (the provision), matched by a debit balance on the new Accumulated Absences Account of £22.4m. Detail of the accounting arrangements for posting these accruals are given in http://www.cipfa.org.uk/pt/cipfalasaac/download/transition_6.2_benefits_payable_during_employment.pdf Appendix B 15

  16. Delegate Information only 16

  17. Other Long Term Benefits 17

  18. Chapter 6.2 of the CIPFA Code Benefits Payable during Employment (b) Other Long term benefits (1) Other long-term employee benefits are employee benefits (other than post employment benefits and termination benefits) that do not fall due wholly within twelve months after the end of the period in which the employees render the related services. These include: Long-term compensated absences such as long service or sabbatical leave Jubilee or other long-service benefits Long-term disability benefits Bonuses payable twelve months or more after the end of the period in which the employees render the related service Deferred compensation paid twelve months or more after the period in which it is earned. 18

  19. Chapter 6.2 of the CIPFA Code Benefits Payable during Employment (b) Other Long term benefits (2) – 1st of April 2009 Under The CIPFA IFRS Code ( and IAS 19) long term disability benefits are charges to surplus\deficit on services – However The Code has adopted an IPSAS 25 interpretation that allows long-term disability benefits to be accounted as defined benefit retirement benefits in certain circumstances (see paragraph 6.2.3.5). If IPSAS 25 interpretation adopted – then defined benefit retirement benefits would have been already accounted for as an actuarial gain\loss as follows ( not in the I & E Account) – Cr net scheme assets\liabilities and Dr Pension reserve with an actuarial loss The above entry would be offset by the increase in statutory transfer as follows Cr Pension reserve and Dr General fund Therefore no requirement to re-state the opening IFRS balance sheet at 1st of April 2009 is necessary if this interpretation is followed 19

  20. Chapter 6.2 of the CIPFA Code Benefits Payable during Employment (b) Other Long term benefits (2) – Transactions During 2009\10 (1) During 2009\10 the long-term disability benefit transactions will need to be restated in accordance with the Code and the effected 2009/10 comparative statement of accounts restated. Rebuttable presumption- that the measurement of long term benefits are not subject to the same degree of uncertainty as the measurement of post employment benefits. Where this presumption is rebutted - the benefits should be accounted for in the same way as other benefits payable under the pension schemes, as was the case with the SORP. Where this presumption is not rebutted – benefits accounted for as other long term benefits rather than in the same manner as other benefits payable under a pension scheme. 20

  21. Chapter 6.2 of the CIPFA Code Benefits Payable during Employment (b) Other Long term benefits (2) – Transactions During 2009\10 (2) Appendix C – transition guidance Example In this example, the authority considers that the presumption that the measurement of long term disability benefits is not subject to the same degree of uncertainty as the measurement of post employment benefits is valid. ( not rebutted) It therefore accounts for the benefits as other long term benefits rather than in the same manner as other benefits payable under a pension scheme. In order to restate the opening IFRS balance sheet as at 1 April 2009, no entries are required in England and Wales as the regulation relating to pensions has been extended to cover other long-term benefits. 21

  22. Chapter 6.2 of the CIPFA Code Benefits Payable during Employment (b) Other Long term benefits (2) – Transactions During 2009\10 (3) For 2009\10 the amount charged by Erehwon Council for long term disability benefit under the SORP was £1m which was equal to the amount included within the 2009\10 actuarial assumptions Actual expenditure on long term disability benefit in 2009\10 was £1.2m. In 2009\10 under the SORP - the £0.2m was treated as an actuarial loss – Cr Pension Reserve and Dr STRGL In order to re-state the 2009-10 accounts for IFRS – first of all Dr service revenue accounts £0.2m and Cr Pension Reserve by £0.2m 22

  23. Chapter 6.2 of the CIPFA Code Benefits Payable during Employment (b) Other Long term benefits (2) – Transactions During 2009\10 (4) In England and Wales (and Scotland and Northern Ireland if the regulation / statutory guidance relating to pensions is extended to cover other long-term benefits), The following entries will be required to transfer the increased expenditure to the Pension Reserve Dr Pension Reserve £0.2m Cr GF (MIRS) £0.2m – thus reversing the increased cost charged to service accounts. 23

  24. Termination Benefits 24

  25. Chapter 6.3 of the CIPFA IFRS code – Termination Benefits (1) SORP 2009 did not cover all termination benefits (eg lump sum payments on termination of employment) SORP 2009 only covered termination awarded as an enhancement of pension benefits usually in the form of added years of service. It treated these as a retirement benefit and classified them as one type of ‘past service’ cost. The Code, (IAS 19) covers all forms of termination benefits and does not treat them as a ‘post employment benefit’ but as a separate category of employment benefit. Termination benefits are required to be recognised immediately in Surplus or Deficit on the provision of services under the Code 25

  26. Chapter 6.3 of the CIPFA code – Termination Benefits (2) For Local Authorities main termination benefit has been an award of pensions added years enhancement classified as a past service cost under SORP Past service costs arise from decisions taken in the current year but whose financial effects derive from earlier years service e.g introduction of, or improvement to, retirement benefits which did not previously exist Most Local Government past service costs are likely to be unfunded discretionary benefits ( principally added years) Accounting Entries – Debit Net Cost of Services -Non Distributed Cost – Past Service Cost and Credit Pensions Liability 26

  27. Chapter 6.3 of the CIPFA code – Termination Benefits (3) Added Years – in local government are generally not subject to a vesting period and are awarded on retirement If there was a vesting period – then the costs would need to be allocated over that period on a straight line basis Unless termination benefits awarded as a pension enhancement are subject to a vesting period no transitional adjustment to the opening IFRS balance sheet at 1 April 2009 will be required. Any unrecognised past service costs from previous years shall be accounted for by Debiting the GF and crediting the Defined Benefit obligation. In turn the above entry to the General Fund shall be reversed by increasing the statutory transfer to the Pension Reserve (ie credit General Fund and debit Pension Reserve). 27

  28. Chapter 6.3 of the CIPFA code – Termination Benefits (4) Accounting adjustments at the 1st of April 2009 Transition Balance sheet Any unrecognised past service cost shall be immediately recognised by crediting the defined benefit obligation and debiting the General Fund. In turn the entry to the General Fund shall be reversed by increasing the statutory transfer to the Pension Reserve (ie credit General Fund and debit Pension Reserve). Entries would be: Dr GF and Cr benefit obligation then Dr Pension Reserve and Cr GF 28

  29. Chapter 6.3 of the CIPFA code – Termination Benefits (5) Accounting adjustments during 2009\10 Any past service benefits awarded during 2009/10 in respect of pension enhancements not recognised immediately in the Income and Expenditure Account shall be recognised in Surplus or Deficit on the provision of services and the Defined Benefit Pension Obligation. The increase in the charge to Surplus or Deficit on the provision of services for the year shall in turn require the statutory transfer between the General Fund and the Pension Fund to be increased. Proposed Accounting Entries are given overleaf 29

  30. Chapter 6.3 of the CIPFA code – Termination Benefits (6) Accounting adjustments during 2009\10 Dr Surplus or Deficit on the provision of services Cr Defined Benefit Obligation To recognise the enhancement awarded in the year Dr Pension Reserve Cr General Fund To transfer the charge to the Pension Reserve in accordance with statutory requirements; This transfer would be reported in the Movement in Reserves Statement. 30

  31. Post Employment Benefits 31

  32. Chapter 6.4 of the CIPFA code – Post Employment Benefits (1) No major changes to the SORP and no transition issues except in Northern Ireland Continue to account for schemes as defined benefit schemes (FRS 17) (IAS 19) NO OPTION in the Code to use the ‘corridor’ approach under IAS 19 For authorities, except those in Northern Ireland, there will not normally be transitional issues in respect of post employment benefits and the balance sheet items will usually be transferred to the 1 April 2009 opening IFRS balance sheet at the amounts carried on the 31 March 2009 Balance Sheet. 32

  33. Chapter 6.4 of the CIPFA code – Post Employment Benefits (2) Where exceptionally the defined benefit obligation or plan assets to be included to the opening IFRS (1 April 2009) Balance Sheet under the Code differs from the carrying amounts included in the 31 March 2009 Balance Sheet an authority shall: Ensure that the difference between the two positions is reflected through the mechanism of the pensions reserve. Balanced to the 1st of April 2009 position. Transition adjustments will only be required where a pension plan is accounted for differently under the Code than under the SORP. The post employment benefit transactions during 2009/10 will need to be restated in accordance with the Code and the affected 2009/10 comparative statement of accounts restated. 33

  34. Pension Fund Accounts 34

  35. Chapter 6.5 of the CIPFA code – Pension Fund Accounts (1) The Code (following IFRS 1) requires authorities that administer pension funds to disclose an opening IFRS Net Assets Statement at 1 April 2009. The Net Assets Statement at 31 March 2009 would be used unchanged as the 1 April 2009 opening IFRS Net Assets Statement. Except if: The authority opted to disclose the ‘actuarial present value of promised retirement benefits’, in its net assets statement 35

  36. Chapter 6.5 of the CIPFA code – Pension Fund Accounts (2) Paragraph 6.5.2.9 of the Code permits three options for disclosing the ‘actuarial present value of promised retirement benefits’, as follows: Option A – in the Net Assets Statement, in which case it requires the statement to disclose the resulting surplus or deficit Option B – in the notes to the accounts Option C – by reference to this information in an accompanying actuarial report. 36

  37. Chapter 6.5 of the CIPFA code – Pension Fund Accounts (3) The Code (paragraph 6.5.2.10) only permits option A to be used where the actuarial present value of promised retirement benefits is valued as at the Balance Sheet date. Under options B and C, the most recent valuation can be used, even where this is before the balance sheet date. Where an authority has chosen to disclose the actuarial present value of promised retirement benefits using option B or C, no transition requirements will arise in the statements themselves. The 31 March 2009 Net Assets Statement will form the restated 1 April 2009 Net Assets Statement without any changes being required. 37

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