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By contrast, any other future changes in the obligation (i.e. where no legal or
constructive obligation previously existed) will be reflected in future current service
costs, future past service costs or both (discussed at 10.1 below). [IAS 19.89].
IAS 19 also deals with the situation where the level of defined benefits payable by a
scheme varies with the level of state benefits. When this is the case a best estimate of
any changes in state benefit should be factored into the actuarial computations only if
they are enacted by the end of the reporting period or are predictable based on past
history or other evidence. [IAS 19.87, 95].
Some defined benefit plans limit the contributions that an entity is required to pay. The
ultimate cost of the benefits takes account of the effect of a limit on contributions. The
effect of a limit on contributions is determined over the shorter of the estimated life of
the entity and the estimated life of the plan. [IAS 19.91].
7.2
Contributions by employees and third parties
The standard notes that some defined benefit plans require employees or third parties
to contribute to the cost of the plan. Contributions by employees reduce the cost of the
benefits to the entity. The standard requires an entity to ‘consider’ whether third-party
contributions reduce the cost of the benefits to the entity, or are a reimbursement right
(discussed at 6.4 above). Contributions by employees or third parties are either set out
in the formal terms of the plan (or arise from a constructive obligation that goes beyond
those terms), or are discretionary. IAS 19 requires discretionary contributions by
employees or third parties to be accounted for as a reduction in service cost when they
are paid to the plan. [IAS 19.92].
The standard draws a distinction between non-discretionary contributions from
employees or third parties set out in the formal terms of the plan which are ‘linked to
service’ and those which are not. Such contributions not dependent upon years of
service reduce remeasurements of the net defined benefit liability (asset). An example
given by the standard is if the contributions are required to reduce a deficit arising from
losses on plan assets or actuarial losses. [IAS 19.93].
For contributions which are linked to service, the standard states that they reduce the
service cost as follows:
• if the amount of the contributions is dependent on the number of years of service
(e.g. contributions that increase with years of service), they should be attributed to
periods of service using the same attribution method required for the gross benefit
(i.e. either using the plan’s contribution formula or on a straight-line basis – see 7.3
below); or
• if the amount of the contributions is independent of the number of years of service
(e.g. contributions that are a fixed percentage of salary), they are permitted to be
recognised as a reduction of the service cost in the period in which the related
service is rendered. Examples of contributions that are independent of the number
of years of service include those that are a fixed percentage of the employee’s
salary, a fixed amount throughout the service period or dependent on the
employee’s age. [IAS 19.93].
Employee
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2787
Application guidance is given in Appendix A to the standard in the form of the following
flow chart.
Contributions from employees or third parties
Set out in the formal terms of the plan (or arise from a
Discretionary
constructive obligation that goes beyond those terms)
Linked to service
Not linked to
service
(for example,
reduce a deficit)
Dependent
Independent
on the number of
of the number of
years of service
years of service
(1)
Reduce service cost
Reduce service cost
by being attributed
in the period in
Affect
Reduce service cost
upon payment to
to periods of
which the related
remeasurements
service
service is rendered
(paragraph 93)
the plan
(paragraph 93(a))
(paragraph 92)
(paragraph 93(b))
(1) This dotted arrow means that an entity is permitted to choose either accounting
Regrettably, the standard does not explain the ‘mechanics’ of an attribution which is
required where contributions are linked to service.
In particular, it is unclear how to treat employee contributions made over the service
period. As shown in Example 31.2 at 7.3 below, the projected unit credit method
requires the net benefit to be expressed as a single net sum as at the date of retirement.
Example 31.2 illustrates post-employment benefit payments being discounted to their
present value as at the retirement date using the IAS 19 discount rate (discussed at 7.6
below). On the same principle, therefore, employee contributions made over the
period of employment would logically need to be inflated to be expressed in the ‘time
value’ as at retirement. However, IAS 19 does not indicate what rate should be used
for this purpose.
We note, in this regard, that when the Interpretations Committee discussed the
matter in November 2012, it considered a Staff Paper which touched on the matter.
The numerical examples appended to the paper expressed the ‘future value’ of in-
service employee contributions as at the date of retirement using the IAS 19 discount
rate.9 The content of the third example in this Staff Paper is reflected in the example
set out below. This example pre-dates the amendments to IAS 19 in respect of
employee contributions and therefore, we assume, that under the current standard
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that the entity has made an accounting policy choice to attribute contributions to
periods of service, even though contributions are independent of the number of years
of service.
Example 31.1: Defined benefit plan with employee contributions, where the
discount rate is higher than the salary growth rate
A lump sum benefit is payable on termination of service and equal to 1 per cent of final salary for each
year of service.
The salary in year 1 is CU10,000 and is assumed to increase at 7 per cent (compound) each year. The
discount rate used is 10 per cent per year.
Employees are required to contribute 0.5% of salary each year, on the last day of the year.
Year
1
2
3
4
5
Total
CU
CU
CU
CU
CU
Salary 10,000
10,700
11,449
12,250
13,108
Benefit attributed to:
– Prior
years
–
131
262
393 524
–
Current year (1% of final salary) (a)
; 131
131
131
131
131
131
262
393
524
655
Gross benefit
Opening obligation
–
90
197
325 476
Interest at 10%
–
9
20
32 48
109
Current service cost 90
98
108
119
131
546
Closing obligation
90
197
325
476
655
Year
1
2
3
4
5
Total
CU
CU
CU
CU
CU
Employee contributions
Actual contributions
(50)
(54)
(57)
(61)
(66)
(288)
Projected total contributions (‘gross’) (b)
(73)
(71)
(69)
(67)
(66)
(346)
Attributed contributions (‘gross’) (c)
(69)
(69)
(69)
(69)
(70)
(346)
Attributed contributions (‘discounted’)
Opening
–
(47)
(104)
(172) (251)
Interest at 10%
–
(5)
(11)
(17) (25) (58)
Negative benefit (d)
(47)
(52)
(57)
(62)
(70)
(288)
Closing
(47)
(104)
(172)
(251)
(346)
Benefit including effect of contributions
Opening obligation
–
93
202
330 480
Interest at 10% (e)
–
9
20
32 48
109
Net current service cost – current service
cost less negative benefit (f)
43
46
51
57
61
258
Actual contributions
50
54
57
61
66
288
Closing
93
202
330
480
655
Net benefit (gross benefit minus projected total contribution) is attributed to each year using the discount rate
Current service cost (f) 43
46
51
57
61
258
Employee
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(a) Straight-lined (see 7.4 below)
(b)
Future-valued contributions (e.g. for Year 1, value of contribution paid at end of year 1 at end of
year 5 using discount rate of 10% will be CU50 × 1.14 = CU73)
(c) Straight-lined to be on the same basis with the attributed benefit
(d)
Present value of attributed contributions
(e)
Includes rounding difference of (1) in Year 4
(f) Present value of gross benefit minus present value of projected total contributions
Journal entries (for Year 1)
To recognise net service cost
Dr Service cost 43
Cr Defined obligation
43
To reflect employee contributions
Dr Plan asset
50
Cr Defined benefit obligation
50
The standard notes that changes in employee or third-party contributions dependent
on number of years of service result in:
(a) current and past service cost if the changes are not set out in the formal terms
of the plan and do not arise from a constructive obligation; or
(b) actuarial gains and losses if the changes in contributions are set out in the
formal terms of the plan or arise from a constructive obligation. [IAS 19.94].
7.3 Actuarial
methodology
IAS 19 notes that the ultimate cost of a defined benefit plan may be influenced by many
variables, such as final salaries, employee turnover and mortality, employee
contributions and medical cost trends. The ultimate cost of the plan is uncertain and
this uncertainty is likely to persist over a long period of time. In order to measure the
present value of the post-employment benefit obligations and the related current
service cost, it is necessary:
• to apply an actuarial valuation method;
• to attribute benefit to periods of service; and
• to make actuarial assumptions. [IAS 19.66].
These steps are discussed in the following sections.
Plan obligations are to be measured using the projected unit credit method, [IAS 19.67],
(sometimes known as the accrued benefit method pro-rated on service or as the
benefit/years of service method). This method sees each period of service as giving rise
to an additional unit of benefit entitlement and measures each unit separately to build
up the final obligation. [IAS 19.68]. This actuarial method also determines the current
service cost and any past service cost. [IAS 19.67]. IAS 19 provides a simple example of
what this entails as follows: [IAS 19.68]
Example 31.2: The projected unit credit method
A lump sum benefit is payable on termination of service and equal to 1% of final salary for each year of
service. The salary in year 1 is 10,000 and is assumed to increase at 7% (compound) each year. The
discount rate used is 10% per year. The following table shows how the obligation builds up for an employee
who is expected to leave at the end of year 5, assuming that there are no changes in actuarial assumptions.
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For simplicity, this example ignores the additional adjustment needed to reflect the probability that the
employee may leave the entity at an earlier or later date.
Year
1
2
3
4
5
Benefit attributed to:
– prior years
–
131
262
393 524
– current year (1% of final salary)
131
131
131
131
131
– current and prior years
131
262
393
524
655
Opening obligation
–
89
196
324 476
Interest at 10%
–
9
20
33 48
Current service cost 89
98
108
119
131
Closing obligation
89
196
324
476
655
Note:
– The opening obligation is the present value of benefit attributed to prior years.
– T
he current service cost is the present value of benefit attributed to the current year.
– The closing obligation is the present value of benefit attributed to current and prior years.
As can be seen in this simple example, the projected unit credit method produces a
figure for current service cost and interest cost (and, although not illustrated here, would
where appropriate produce a figure for past service cost). These cost components are
discussed at 10 below.
This example from the standard contains no underlying workings or proofs. The most
useful would be as follows:
Final salary at year 5 (10,000 compounded at 7%)
10,000 × (1 + 0.07)4 = 13,100
1% of final salary attributed to each year
131
Expected final benefit
5 years × 1% × 131,000 = 655
Current service cost, being present value of 131 discounted at 10%: e.g.
Year 1
131 × (1 + 0.1)–4 = 89
Year 2
131 × (1 + 0.1)–3 = 98
Closing obligation, being years served multiplied by present value of 131: e.g.
Year 3
3 years × 131 × (1 + 0.1)–2 = 324
7.4
Attributing benefit to years of service
The projected unit credit method requires benefits to be attributed to the current
period (in order to determine current service cost) and the current and prior periods
(in order to determine the present value of defined benefit obligations). IAS 19
requires benefits to be attributed to the periods in which the obligation to provide
post-employment benefits arises. That is taken to be when employees render services
in return for post-employment benefits which an entity expects to pay in future
reporting periods. The standard takes the view that actuarial techniques allow an
Employee
benefits
2791
entity to measure that obligation with sufficient reliability to justify recognition of a
liability. [IAS 19.71].
In applying the projected unit credit method, IAS 19 normally requires benefits to be
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 556
