2.  Daimler Benz in 1993 under German GAAP reported a profit of 168 million DM but under US GAAP for the same period, the company reported a loss of almost a billion DM, largely caused by pension blues. It highlighted problems relating to pension accounting & funding. Note: Pension payments are quite insignificant in comparison to global enterprises but as Indian companies are going global this becomes a critical issue.

3. To prescribe the accounting and disclosure for employee benefits. Entity must recognize:  A liability when an employee has provided service in exchange for benefits to be paid in future.  An expense when the entity consumes the service provided by an employee.

4. Employee benefits Short term benefits Post employment benefits Defined contribution plans Defined benefit plans Other long term benefits Termination benefits

5. 1 Employee benefits are all forms of consideration given in exchange for service rendered by employees. 2 Short term employee benefits are employee benefits which fall due wholly within twelve months after the end of the period in which the employees render the related service. 3 Termination benefits are payable as a result of the entity’s decision to terminate employment before the normal retirement date or an employee’s decision to accept voluntary redundancy.

6. 4 Post-employment benefits are those which are payable after the completion of employment. 5 Defined contribution plans are post employment benefit plans under which an enterprise pays fixed contributions into a separate entity (a fund) & will have no obligation to pay further contributions if the fund does not hold sufficient assets to pay all employee benefits relating to employee service in current or prior periods. 6 Defined benefit plans are the plans other than defined contribution plans.

7. When an employee has rendered service to an entity during an accounting period, the entity should recognize the undiscounted amount to be paid in exchange for that service as:  A liability after deducting any amount already paid. If amount already paid > undiscounted amount recognize the prepaid expense to the extent prepayment will lead to refund.  An expense (unless another AS permits the inclusion of the benefits in the cost of an asset)

8. Post employment benefit plans are either defined contribution plans or defined benefit plans based on the terms and conditions.

9. Defined contribution plans Amount contributed is fixed but benefit is not fixed Defined benefit plans Post employment benefits are fixed

10.  Fixed amount of contribution to a separate fund.  No constructive or legal obligation to pay further contribution  Post employment benefit = Contribution made & Investment returns  Investment risk doesn’t rest with the employer. Employee takes this risk  Annual cost to the employer is reasonably predictable  The expense in the period is normally the same as the amount of the contribution paid.

11.  The entity is obliged to provide the agreed benefits to the current & former employees.  Employer has ongoing obligation to make sufficient contribution to the plan.  Liability is not fixed.  Actuarial valuation based on various estimates & assumptions.  Actuarial risks & Investment risk rest with employer.

12. Post - employment benefit plan Advantages for employees Advantages to employer Disadvantag es to employees Disadvantag es to employer Defined contribution plan 1 Flexibility 2 Independent of financial viability of employer 1 Fixed contribution 2 Risks with employees Bear Investment risk Less attractive to employees as upside is restricted Defined Benefit plan 1 Benefits are fixed 2 No investment risk Attractive to employee so easy to retain them Must be financially viable for the employer Exposed to Actuarial risks (Financial, increasing life expectancy, etc) & Investment risks

13. 1 Use of Actuarial techniques for  Determination of benefits attributable to current & prior periods.  Making estimates about demographic & financial variables. 2 Present value of defined benefit obligation & current service cost 3 Determination of fair value of plan assets

14. 4 Determination of  Actuarial gains & losses  Amount of actuarial gains & losses to be recognized in financial statements. 5 Determination of past service cost where plan has been introduced/modified 6 Determination of resulting gains/losses where the plan has been curtailed/settled

15. 1 Current service cost is the increase in actuarial liability resulting from employee service in the current period. 2 Past service cost is the increase in the actuarial liability relating to employee service in the previous period but only arising in current period. 3Curtailments and settlements are the gains & losses arising when major reductions are made to the no. of employees in the plan.

16. 4 Interest cost is the increase in the liability arising because the benefits are one year closer to settlement (unwinding of discount). 5 Actuarial gains & losses are the increases & decreases in the planned asset or defined benefit obligation that occur either because the actuarial assumptions have changed or because of differences between the previous actuarial assumptions and the actual outcome.

17. Actuarial assumptions are an entity’s best estimates of the variables that will determine the ultimate cost of providing post-employment benefits. Factors that need to be considered to make an appropriate estimate:  Demographic assumptions relate to, rates of employee turnover, early retirement, mortality, claim rates under medical plans.

18.  Financial assumptions relate to, the discount rate, future salary &benefits level, expected rate of return on plan assets.  Actuarial assumptions should be unbiased and mutually compatible.  Actuarial assumptions need to reflect the economic relationships between factors such as inflation, rates of salary increase, return on plan assets and discount rates.  The whole defined benefit obligation need to be discounted, even if part of obligation falls due within 12 months of Balance sheet date.

19. A lump sum benefit is payable of 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 build up for an employee who is expected to leave at the end of the year 5, assuming that there are no changes in actuarial assumptions. 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.

20. Year1 2 3 4 5 Benefits attributed to prior years 0 131 262 393 524 Current years 131 131 131 131 131 (1% of final salary) Current & Prior years 131 262 393 524 655

21. Opening obligation 89 196 324 476 Interest @ 10 9 20 33 48 Current 89 98 108 119 131 service cost Closing ___ ___ ___ ___ ___ Obligation89196324476655

22. Note: 1. The opening obligation is the present value of benefit attributed to prior years. 2. The current service cost is the present value of benefit attributed to the current year. 3. The closing obligation is the present value of benefit attributed to current and prior years.

23. Plan assets comprises Assets held by long-term employer benefits fund. Assets held by a long-term employee benefit fund are assets that  Are held by an entity (a fund) that is legally separate from the reporting entity and exists solely to pay of fund employee benefits;  Are available to be used only to pay or fund employee benefits, are not available to the reporting entity’s own creditors (even in the bankruptcy) and can not be returned to the reporting entity.

24. Plan assets do not include:  Unpaid contributions due from reporting entity to the fund.  As obvious, plan assets are to be measured at the fair value.

25. Actuarial gains and losses may result from increase or decreases in either: o The Present value of a defined benefit obligation; Or o The fair value plan assets.

26. Causes include: o Unexpectedly high or low rates or employee turnover, early retirement or mortality; o Increase in salaries, benefits etc; o The effect of changes in the discount rate; and o Differences between the actual return on plan assets and expected return on plan assets.

27. Plan Assets Particulars Amount FV at the start of the yearX Contribution paid to planX Benefits paid(X) Expected return (%)X Actuarial gain/ loss (bal fig.)X FV at the end of the yearX

28. Planned Obligation Particulars Amount PV at the start of the yearX Interest Cost (%)X Current service cost (%)(X) Benefits paid X Actuarial gain/ loss (bal fig.)X PV at the end of the yearX

29. According to AS 15 actuarial Gains & Losses should be immediately recognized actuarial gains and losses in the period in which it arises.

30.  Past service costs occurs either due to an introduction or a change to a post- employment benefits plan.  It is the change in the present value of the defined benefits obligation for employee service in prior periods.  May be positive or negative

31. Yes No Employee have right to receive benefits immediately “Vested” recognize immediately to Profit & Loss Account Become “vested” at later date, Spread on a straight-line basis over the average period

32. An entity operates a pension plan that provides a pension of 3% of final salary for each year of service. The benefits become vested after five years of service. On 1 January 2005 the entity improves the pension to 3.5% of final salary for each year of service starting from 1 January 2001 At the date of the improvement, the present value of the additional benefits for service from 1 January 2001 to 1 January 2005 is as follows:

33. Employee with more than five200 Years’ service at 1/1/05 Employees with less than five Years’ service at 1/1/05150 ( average period until vesting: three years) Total 350 The entity recognizes 200 immediately because those benefits are already vested. The entity recognizes 150 on a straight-line basis over three years from 1 January 2005.

34. A curtailment occurs when an entity:  Is demonstrably committed to making a material reduction in the number of employees covered by a plan.  Amend the terms of a plan such that a material element of future service by current employees will qualify for no or reduced benefits.

35.  For Example, an entity closes a plant and makes those employees redundant. A settlement occurs when an entity enters into a transaction to eliminate the obligation for part or all of the benefits under a plan. Gain or Loss arising on curtailment or settlement should be recognized when the curtailment or settlement occurs.

36. An enterprise discontinues a business segment and employees of the discontinued segment will earn no further benefits. This is a curtailment without a settlement. Using current actuarial assumptions (including current market interest rates and other current market prices) immediately before the curtailment, the enterprise has a defined benefit obligation with a net present value of Rs 1,000 and plan assets with a fair value of Rs 820 and unrecognized past service cost of Rs 50.

37. The curtailment reduces the net present value of the obligation by Rs100 to Rs900. Of the previously unrecognized past service cost, 10% (Rs. 100/ Rs 1000) relates to the part of the obligation that was eliminated through the curtailment. Therefore, the effect of the curtailment is as follows:

38. (Amount in Rs) Before curtailment Gain After curtailment Present Value of obligation1,000 (100)900 Fair value of Plan Assets(820) Nil(820) Unrecognized past service cost(50) 5 (45) Net liability recognized in Balance Sheet130 (95)35

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