attributed to periods of service under the plan’s benefit formula (as is the case in Example 31.2
above). If, however, an employee’s service in later years will lead to a materially higher level
of benefit, the benefit should be attributed on a straight-line basis from:
(a) the date when service by the employee first leads to benefits under the plan; until
(b) the date when further service by the employee will lead to no material amount of
further benefits under the plan, other than from further salary increases. [IAS 19.70].
The standard considers that this requirement is necessary because the employee’s service
throughout the entire period will ultimately lead to benefit at that higher level. [IAS 19.73].
The standard explains that employee service gives rise to an obligation under a defined
benefit plan even if the benefits are conditional on future employment (in other words
they are not vested). [IAS 19.70]. Employee service before the vesting date is considered to
give rise to a constructive obligation because, at each successive period end, the amount
of future service that an employee will have to render before becoming entitled to the
benefit is reduced. In measuring its defined benefit obligation, an entity should consider
the probability that some employees may not satisfy any vesting requirements. Similarly,
although certain post-employment benefits, such as post-employment medical benefits,
become payable only if a specified event occurs when an employee is no longer
employed, an obligation is considered to be created when the employee renders service
that will provide entitlement to the benefit if the specified event occurs. The probability
that the specified event will occur affects the measurement of the obligation, but does not
determine whether for accounting purposes the obligation exists. [IAS 19.72].
The obligation is considered to increase until the date when further service by the
employee will lead to no material amount of further benefits, and accordingly all benefit
should be attributed to periods ending on or before that date. [IAS 19.73].
IAS 19 illustrates the attribution of benefits to service periods with a number of worked
examples as follows: [IAS 19.71-74]
Example 31.3: Attributing benefits to years of service
1. A defined benefit plan provides a lump-sum benefit of 100 payable on retirement for each year of service.
A benefit of 100 is attributed to each year. The current service cost is the present value of 100. The
present value of the defined benefit obligation is the present value of 100, multiplied by the number of
years of service up to the end of the reporting period.
If the benefit is payable immediately when the employee leaves the entity, the current service cost and
the present value of the defined benefit obligation reflect the date at which the employee is expected to
leave. Thus, because of the effect of discounting, they are less than the amounts that would be determined
if the employee left at the end of the reporting period.
2. A plan provides a monthly pension of 0.2% of final salary for each year of service. The pension is
payable from the age of 65.
Benefit equal to the present value, at the expected retirement date, of a monthly pension of 0.2% of the
estimated final salary payable from the expected retirement date until the expected date of death is
attributed to each year of service. The current service cost is the present value of that benefit for the
current year of service. The present value of the defined benefit obligation is the present value of monthly
pension payments of 0.2% of final salary, multiplied by the number of years of service up to the end of
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the reporting period. The current service cost and the present value of the defined benefit obligation are
discounted because pension payments begin at the age of 65.
3. A plan pays a benefit of 100 for each year of service. The benefits vest after ten years of service.
A benefit of 100 is attributed to each year. In each of the first ten years, the current service cost and the
present value of the obligation reflect the probability that the employee may not complete ten years of service.
4. A plan pays a benefit of 100 for each year of service, excluding service before the age of 25. The benefits
vest immediately.
No benefit is attributed to service before the age of 25 because service before that date does not lead to
benefits (conditional or unconditional). A benefit of 100 is attributed to each subsequent year.
5. A plan pays a lump-sum benefit of 1,000 that vests after ten years of service. The plan provides no
further benefit for subsequent service.
A benefit of 100 (1,000 divided by ten) is attributed to each of the first ten years. The current service
cost in each of the first ten years reflects the probability that the employee may not complete ten years
of service. No benefit is attributed to subsequent years.
6.
A plan pays a lump-sum retirement benefit of 2,000 to all employees who are still employed at the age of 55
after twenty years of service, or who are still employed at the age of 65, regardless of their length of service.
For employees who join before the age of 35, service first leads to benefits under the plan at the age of
35 (an employee could leave at the age of 30 and return at the age of 33, with no effect on the amount
or timing of benefits). Those benefits are conditional on further service. Also, service beyond the age of
55 will lead to no material amount of further benefits. For these employees, the entity attributes benefit
of 100 (2,000 divided by twenty) to each year from the age of 35 to the age of 55.
For employees who join between the ages of 35 and 45, service beyond twenty years will lead to no
material amount of further benefits. For these employees, the entity attributes benefit of 100 (2,000
divided by twenty) to each of the first twenty years.
For an employee who joins at the age of 55, service beyond ten years will lead to no material amount of
further benefits. For this employee, the entity attributes benefit of 200 (2,000 divided by ten) to each of
the first ten years.
For all employees, the current service cost and the present value of the obligation reflect the probability
that the employee may not complete the necessary period of service.
7. A post-employment medical plan reimburses 40% of an employee’s post-employment medical costs if
the employee leaves after more than ten and less than twenty years of service and 50% of those costs if
the employee leaves after twenty or more years of service.
Under the plan’s benefit formula, the entity attributes 4% of the present value of the expected medical
costs (40% divided by ten) to each of the first ten years and 1% (10% divided by ten) to each of the
second ten years. The current service cost in each year reflects the probability that the employee may
not complete the necessary period of service to earn part or all of the benefits. For employees expected
to leave within ten years, no benefit is attributed.
8. A post-employment medical plan reimburses 10% of an employee’s post-employment medical costs if
the employee leaves after more than ten and less than twenty years of service and 50% of those costs if
the employee leaves after twenty or more years of service.
Service in later years will lead to a materially higher level of b
enefit than in earlier years. Therefore, for
employees expected to leave after twenty or more years, the entity attributes benefit on a straight-line
basis (see 7.3 above). Service beyond twenty years will lead to no material amount of further benefits.
Therefore, the benefit attributed to each of the first twenty years is 2.5% of the present value of the
expected medical costs (50% divided by twenty).
For employees expected to leave between ten and twenty years, the benefit attributed to each of the first
ten years is 1% of the present value of the expected medical costs. For these employees, no benefit is
attributed to service between the end of the tenth year and the estimated date of leaving.
For employees expected to leave within ten years, no benefit is attributed.
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2793
9. Employees are entitled to a benefit of 3% of final salary for each year of service before the age of 55.
Benefit of 3% of estimated final salary is attributed to each year up to the age of 55. This is the date
when further service by the employee will lead to no material amount of further benefits under the plan.
No benefit is attributed to service after that age.
None of the illustrations above are controversial. The following points of note are
brought out in the above:
• the scenarios in 3 and 5 are economically identical, and are attributed to years of
service accordingly. In each case benefits only vest after ten years, however an
obligation is to be built up over that period rather than at the end; and
• example 8 illustrates that accruing a 10% benefit over a period of 20 years of
service which jumps to 50% once 20 years have been completed is an example of
service in later years leading to a materially higher level of benefit. Accordingly,
the obligation is to be built-up on a straight-line basis over 20 years.
As regards example 9, the standard explains that where the amount of a benefit is a
constant proportion of final salary for each year of service, future salary increases will
affect the amount required to settle the obligation that exists for service before the end
of the reporting period, but do not create an additional obligation. Therefore:
(a) for the purpose of allocating benefits to years of service, salary increases are not
considered to lead to further benefits, even though the amount of the benefits is
dependent on final salary; and
(b) the amount of benefit attributed to each period should be a constant proportion of
the salary to which the benefit is linked. [IAS 19.74].
7.5 Actuarial
assumptions
The long timescales and numerous uncertainties involved in estimating obligations for
post-employment benefits require many assumptions to be made when applying the
projected unit credit method. These are termed actuarial assumptions and comprise:
(a) demographic assumptions about the future characteristics of current and former
employees (and their dependants) who are eligible for benefits and deal with
matters such as:
(i) mortality, both during and after employment;
(ii) rates of employee turnover, disability and early retirement;
(iii) the proportion of plan members with dependants who will be eligible for
benefits;
(iv) the proportion of plan members who will select each form of payment option
under the plan terms (see 10.2.2 below for discussion of lump-sum cash
payments); and
(iv) claim rates under medical plans; and
(b) financial assumptions, dealing with items such as:
(i) the
discount
rate;
(ii) future salary and benefit levels, excluding the cost of benefits that will be met
by the employees;
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(iii) in the case of medical benefits, future medical costs, including claim handling
costs, which the standard describes as costs that will be incurred in processing
and resolving claims, including legal and adjuster’s fees; and
(iv) taxes payable by the plan on contributions relating to service before the
reporting date or on benefits resulting from that service. [IAS 19.76].
The requirements of IAS 19 in this regard are set out below, with the exception of the
discount rate which is discussed at 7.6 below.
The standard requires that actuarial assumptions be unbiased (that is, neither imprudent
nor excessively conservative), mutually compatible and represent the employer’s best
estimates of the variables that will determine the ultimate cost of providing post-
employment benefits. [IAS 19.75-77]. Actuarial assumptions are mutually compatible if they
reflect the economic relationships between factors such as inflation, rates of salary
increase and discount rates. For example, all assumptions which depend on a particular
inflation level (such as assumptions about interest rates and salary and benefit increases)
in any given future period should assume the same inflation level in that period.
[IAS 19.78].
The financial assumptions must be based on market expectations at the end of the
reporting period, for the period over which the obligations are to be settled. [IAS 19.80].
The standard requires that a defined benefit obligation be measured on a basis that reflects:
(a) the benefits set out in the terms of the plan (or resulting from any constructive
obligation that goes beyond those terms) at the end of the reporting period;
(b) any estimated future salary increases that affect the benefits payable;
(c) the effect of any limit on the employer’s share of the cost of the future benefits;
and
(d) contributions from employees or third parties that reduce the ultimate cost to the
entity of those benefits. [IAS 19.87].
Regarding mortality, the standard requires assumptions to be a best estimate of the
mortality of plan members both during and after employment. [IAS 19.81]. In particular,
expected changes in mortality should be considered, for example by modifying standard
mortality tables with estimates of mortality improvements. [IAS 19.82].
Assumptions about medical costs should take account of inflation as well as specific
changes in medical costs (including technological advances, changes in health care
utilisation or delivery patterns, and changes in the health status of plan participants).
[IAS 19.96-97]. The standard provides a quite detailed discussion of the factors that should
be taken into account in making actuarial assumptions about medical costs, in particular:
(a) measuring post-employment medical benefits requires assumptions about the level
and frequency of future claims, and the cost of meeting them. An employer should
make such estimates based on its own experience, supplemented where necessary
by historical data from other sources (such as other entities, insurance companies
and medical providers); [IAS 19.97]
(b) the level and frequency of claims is particularly sensitive to the age, health status
and sex of the claimants, and may also be sensitive to their geographical location.
This means that any historical data used for estimating future claims need to be
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2795
adjusted to the extent that the demographic mix of the plan participants differ
s
from that of the population used as the basis for the historical data. Historical data
should also be adjusted if there is reliable evidence that historical trends will not
continue; [IAS 19.98] and
(c) estimates of future medical costs should take account of any contributions that
claimants are required to make based on the terms (whether formal or
constructive) of the plan at the end of the reporting period. The treatment of
contributions by employees and third parties is discussed at 7.2 above.
Clearly, the application of actuarial techniques to compute plan obligations is a complex
task, and it seems likely that few entities would seek to prepare valuations without the
advice of qualified actuaries. However, IAS 19 only encourages, but does not require
that an entity take actuarial advice. [IAS 19.59].
However sophisticated actuarial projections may be, reality will (apart from the most
simple scenarios) always diverge from assumptions. This means that when a surplus or
deficit is estimated, it will almost certainly be different from the predicted value based
on the last valuation. These differences are termed actuarial gains and losses. The
standard observes that actuarial gains and losses result from increases or decreases in
the present value of a defined benefit obligation because of changes in actuarial
assumptions and experience adjustments (see 10.4.1 below). Causes of actuarial gains
and losses could include, for example:
(a) unexpectedly high or low rates of employee turnover, early retirement or mortality
or of increases in salaries, benefits (if the formal or constructive terms of a plan
provide for inflationary benefit increases) or medical costs;
(b) differences between the actual return on plan assets and amounts included as part
of net interest in profit or loss;
(c) the effect of changes to assumptions concerning benefit payment options;
(d) the effect of changes in estimates of future employee turnover, early retirement or
mortality or of increases in salaries, benefits (if the formal or constructive terms of
a plan provide for inflationary benefit increases) or medical costs; and
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 557
