R-1173, AL-NOOR SOCIETY, BLOCK 19, F.B.AREA, KARACHI.

 PIPFA STUDENTS  INTERMEDIATE  FINANCIAL ACCOUNTING  PERFORMANCE MEASUREMENT  COMPLETION OF SYLLABUS IN 1 MONTH  JOIN KHALID AZIZ  0322*  R1173-ALNOOR SOCIETY BLOCK 19 F.B.AREA-KARACHI.

 ICAP STUDENTS  MODULE B FINANCIAL ACCOUNTING  BUSINESS ECONOMICS  MODULE D COST ACCOUNTING  COMPLETION OF SYLLABUS IN 3 MONTHS  JOIN KHALID AZIZ  0322*  R1173, ALNOOR SOCIETY, BLOCK 19. F.B.AREA, KARACHI.

 PREVIOUS  MICRO ECONOMICS & STATISTICS  FINAL  MACRO ECONOMICS

 PART 1 ACCOUNTING, STATISTICS & ECONOMICS.  PART 2 ADVANCED & COST ACCOUNTING, BUSINESS LAW, AUDITING & TAX.

 1 ST YEAR ACCOUNTING, BUSINESS MATHS & ECONOMICS.  2 ND YEAR ACCOUNTING & STATISTICS.

 ACCOUNTING, ECONOMICS, BUSINESS STUDIES, URDU & PAK STUDIES.

 COMMERCE COACH    R-1173, AL-NOOR SOCIETY, BLOCK 19, F.B.AREA, KARACHI.

 Related standards  IAS 19  Current GAAP comparisons  Looking ahead  End-of-chapter practice 12

 IFRS 2 Share-based payment  IAS 24 Related party disclosures 13

 Objective and scope  Short-term employee benefits  Post-employment benefit plans  Post-employment benefits: defined contribution plans  Post-employment benefits: defined benefit plans  Other long-term employee benefits  Termination benefits 14

 Accounting and disclosure requirements for employee benefits: all forms of consideration given by an entity in exchange for employee services rendered ◦ Short-term employee benefits ◦ Post-employment benefits ◦ Other long-term employee benefits ◦ Termination benefits 15

 Short-term employee benefits – benefits other than termination benefits that are due to be settled within 12 months after the end of the period in which the related service is rendered  Example: ◦ Salaries, wages, social security contributions ◦ Short-term compensated absences such as paid annual and sickness leaves ◦ Profit-sharing and bonuses ◦ Non-monetary benefits such as medical care, housing, etc. 16

 Short-term compensated absences: ◦ Recognize a cost and liability = the undiscounted amount of benefits expected to be paid  Some benefits accumulate ◦ Accrue as employee provides services (e.g., paid vacation leave)  Some do not accrue (e.g., parental leave) ◦ Recognize cost and liability when event occurs that obligates the entity to provide the benefit 17

 Profit-sharing and bonus plans: ◦ Recognize cost and liability only when  a legal or constructive obligation exists, and  amount can be reasonably estimated  To reasonably estimate, must have one of the following: ◦ plan has formal terms including a formula ◦ amount is known before F/S are authorized for release ◦ past practice provides clear evidence of amount 18

 Post-employment benefit plans – formal or informal arrangements to provide benefits after employment, such as pension benefits and post- employment medical care  Two types of plan: ◦ defined contribution plan: employer makes specific contributions, employee benefits = whatever has accumulated ◦ defined benefit plan: employer promises to pay a post-employment benefit, if not enough funds have accumulated, employer is responsible for the difference 19

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 - Relatively straightforward  - Liability is recognized only for contributions unpaid at the end of the period  - Expense recognized in same period as services are rendered 21

 - Complex  - Accounting measures depend on actuarial assumptions far into the future  - Obligations are settled many years after service is provided by employees – need to take time value of money into account  - Many plans are funded and rely on investment returns to grow  - Employer underwrites actuarial and investment risks 22

 Accounting building blocks ◦ Present value of a defined benefit obligation – the discounted present value of the expected future payments required to settle an entity’s obligation resulting from employee service accumulated to date ◦ Plan assets – assets held by the long-term employee benefit fund that exists solely to pay employee benefits as they fall due. 23

 Changes in the PV of the defined benefit obligation (DBO) – based on projected salaries: Present value of the obligation, beginning of period + Current period’s service cost + Interest cost on the outstanding obligation for the period +/- Past service costs from plan amendments in the period --Benefits paid under the plan in the period +/- +/-Actuarial gains (-) and losses (+) in the period_______________ = =Present value of the obligation, end of period________________ 24

 PV of the defined benefit obligation depends on: ◦ actuarial assumptions (mortality rates, employee turnover, dependants) ◦ financial assumptions (discount rate, future salary levels, future medical costs)  Discount/interest rate = end-of-period market yield on high-quality corporate bonds with terms that correspond to obligation 25

 Current service cost = PV of benefits earned for service in current period  Past service cost (PSC) = change in PV of DBO from introducing plan that includes benefits for past service or from a change in the benefits payable related to past service under existing plan  Actuarial gains/losses = effects of changes in actuarial assumptions and experience adjustments for difference between previous estimates and what actually occurred. 26

 Changes in the FV of plan assets: Fair value of plan assets, beginning of period +Contributions from employer/employees in the period +/-Actual return on plan assets in the period - Benefits paid under the plan in the period_______ ___ = Fair value of plan assets, end of period____________ 27

 Actual return on plan assets = interest, dividends, other income and realized and unrealized gains and losses on assets held in plan  Expected return on plan assets = return used by actuary in determining funding requirements 28

 Benefit cost to recognize each period Current service cost for the period + Interest cost for the period - Expected return on plan assets for the period +/- Actuarial gain (-) or loss(+) amortized in the period +/- Past service cost recognized in the period = Post-employment benefit cost to profit or loss 29

 Benefit cost variables taken from ◦ PV of PBO, and ◦ Fund assets ◦ Information in working papers for actuarial gain/loss and PSC  Amortization of actuarial gain/loss – use corridor method  PSC  for vested benefits, expense in period  for unvested benefits, amortize to expense on straight- line basis over average period until vested 30

 Actuarial gains/losses: 2 options 1.recognize all actuarial gains/losses in OCI when they occur, and then directly to retained earnings – not through P&L 2.do not recognize/amortize unless accumulated net actuarial gain/loss is significant*; if significant, amortize excess amount to expense over average working lives of employees in plan  *significant: if at the first of the period, it is more than 10% of the larger of the beginning of the period PV of PBO and the fund assets 31

 Entries: Dr. Employee benefit expense$X Cr. Defined benefit liability$X To record expense and recognize liability. Dr. Defined benefit liability$Y Cr. Cash$Y To record contribution to plan assets. 32

 Balance in Defined Benefit Liability on balance sheet can be reconciled to building blocks: Present value of the defined benefit obligation - Fair value of the plan assets =Funded status of the plan +/-Net unrecognized actuarial gains (+) or losses (-) -Unrecognized past service costs =Defined benefit liability 33

 Extensive disclosures required ◦ Description of plans and accounting policies ◦ Reconciliation of changes in PV of PBO and fund assets ◦ Reconciliation of B/S account to funded status ◦ Components of and total expense ◦ Information about plan assets and actuarial assumptions, sensitivity analysis, historical data ◦ Best estimate of expected contribution to plan in year after B/S date 34

 Examples: ◦ long-term disability benefits, long-service or sabbatical leaves, deferred compensation (>12 months) ◦ similar to post-employment benefits, but with less measurement uncertainty ◦ all aspects recognized in expense in year; no defer and amortize 35

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 Termination benefits – benefits payable as a result of: ◦ ending an employee’s employment before normal retirement date, or ◦ employee accepts voluntary termination in exchange for benefits  Recognize liability and expense only when entity is demonstrably committed to plan. Plan sets out: a) location, function and approximate number of employees being terminated; b) termination benefits to be provided for each job classification or function; and c) when the plan will be implemented  Entire cost is expensed when entity is committed to plan 37

 IAS 19 on IASB current agenda  Goal - issue interim standard with significant improvements by 2011  March 2008 Discussion Paper (DP) issued – limited scope  Exposure Draft expected in late 2009  After DP issues resolved, second phase of project will begin 38

 Tentative decisions made by IAS Board ◦ All changes in plan assets and benefit obligation should be recognized when incurred ◦ No need to separately recognize expected return on plan assets ◦ All past service cost should be recognized in expense when plan amended ◦ Variety of presentation approaches for components of defined benefit expense – IASB seeking input ◦ New definitions needed for post-employment benefits and defined benefit plans 39