The Hindu Business Line : Measuring post-employment benefit obligation under AS-15

A settlement occurs when an enterprise enters into a transaction that eliminates all further obligations for part or all of the benefits provided under a defined benefit plan

According to Accounting Standard 15, on employee benefits, to measure the present value of the post-employment benefit obligations and the related current service cost, it is necessary to (a) apply an actuarial valuation method; (b) attribute benefit to periods of service, and (c) make actuarial assumptions.

In determining the present value of its defined benefit obligations and the related current service cost and, where applicable, past service cost, an enterprise should attribute benefit to periods of service under the plan's benefit formula.

However, if an employee's service in later years leads to a materially higher level of benefit than in earlier years, an enterprise should attribute benefit on a straight-line basis, from: (a) the date when service by the employee first leads to benefits under the plan (whether or not the benefits are conditional on further service); 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.

It may be appreciated that actuarial assumptions comprising demographic and financial assumptions have to be unbiased and mutually compatible. Financial assumptions should be based on market expectations, at the balance-sheet date, for the period over which the obligations are to be settled.

For discount rate, the rate used to discount post-employment benefit obligations (both funded and un-funded) should be determined by reference to market yields at the balance-sheet date on government bonds. The currency and term of the government bonds should be consistent with the currency and estimated term of the post-employment benefit obligations. Post-employment benefit obligations should be measured on a basis that reflects: (a) estimated future salary increases; (b) the benefits set out in the terms of the plan (or resulting from any obligation that goes beyond those terms) at the balance sheet date; and (c) estimated future changes in the level of any state benefits that affect the benefits payable under a defined benefit plan, if, and only if, either:

those changes were enacted before the balance-sheet date; or

past history, or other reliable evidence, indicates that those state benefits will change in some predictable manner, for example, in line with future changes in general price levels or general salary levels.

Assumptions about medical costs should take account of estimated future changes in the cost of medical services, resulting from both inflation and specific changes in medical costs.

Actuarial gains and losses should be recognised immediately in the statement of profit and loss as income or expense.

For measuring its defined benefit liability under AS-15, the enterprise should recognise past service cost as an expense on a straight-line basis over the average period until the benefits become vested. To the extent that the benefits are already vested immediately following the introduction of, or changes to, a defined benefit plan, an enterprise should recognise past service cost immediately.

Right to reimbursement of some part of expense may be treated as an asset. When, and only when, it is virtually certain that another party will reimburse some or all of the expenditure required to settle a defined benefit obligation, an enterprise should recognise its right to reimbursement as a separate asset. The enterprise should measure the asset at fair value. In all other respects, an enterprise should treat that asset in the same way as plan assets. In the P&L statement, the expense relating to a defined benefit plan may be presented net of the amount recognised for a reimbursement.

There may be profit or loss on curtailments and settlements. A curtailment occurs when an enterprise either:

(a) has a present obligation, arising from the requirement of a statute/regulator or otherwise, to make a material reduction in the number of employees covered by a plan; or (b) amends the terms of a defined benefit plan such that a material element of future service by current employees will no longer qualify for benefits, or will qualify only for reduced benefits.

A settlement occurs when an enterprise enters into a transaction that eliminates all further obligations for part or all of the benefits provided under a defined benefit plan, for example, when a lumpsum cash payment is made to, or on behalf of, plan participants in exchange for their rights to receive specified post-employment benefits.

An enterprise should recognise gains or losses on the curtailment or settlement of a defined benefit plan when the curtailment or settlement occurs. The gain or loss on a curtailment or settlement should comprise: (a) any resulting change in the present value of the defined benefit obligation; (b) any resulting change in the fair value of the plan assets; (c) any related past service cost that had not previously been recognised.

Before determining the effect of a curtailment or settlement, an enterprise should re-measure the obligation (and the related plan assets, if any) using current actuarial assumptions (including current market interest rates and other current market prices).

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