Employee Benefits Gavin Aspden Head of Innovation and Technical Development 8 September 2009

ICAEW Short-term benefits Post- employment benefits Other long-term benefits Termination benefits IAS 19 Employee benefits

ICAEW Short-term benefits Include: Wages, salaries and social insurance Short-term compensated absences Profit sharing/bonuses (payable within 12 months of year end) Non-monetary benefits Accounted for on an accruals basis Examples Accumulating compensated absences An employee is owed 5 days’ holiday at the year end, but is only allowed to carry forward 3 days - accrue 3 days’ holiday at the average daily rate of pay Non-accumulating compensated absences An entity offers paid maternity leave and military service -only accrue for paid leave where absence has occurred that is unpaid at the year end IAS 19 Employee benefits

ICAEW Include: Long-term compensated absences Long-service benefits Profit sharing/bonuses (payable 12 months or more after year end) Deferred compensation Post-employment healthcare Other long-term benefits Accounted for similarly to post- employment benefits IAS 19 Employee benefits

ICAEW Terminate the employment of an employee or group of employees before the normal retirement date; or Provide termination benefits as a result of an offer made in order to encourage voluntary redundancy. Termination benefits Accrued for when the enterprise is demonstrably committed to either: IAS 19 Employee benefits

ICAEW Post-employment benefits IAS 19 covers 2 types of post-employment (pension) scheme Defined contribution schemes Defined benefit schemes The entity pays agreed contributions into a plan and has no further liability Any other type of scheme. Typically a pension is guaranteed based on final salary Accounted for on an accruals basis Accounted for using the projected unit credit method IAS 19

ICAEW Defined benefit schemes Defined Benefit Schemes Scheme AssetsScheme Liabilities Measure at fair value at reporting date Measure at present value of future obligations Pension scheme surplus or deficit on statement of financial position. IAS 19

ICAEW Defined benefit schemes Source: Deloitte, December 2008 £130 bn (double the level of 2007) FTSE 100 IAS 19 May get even worse if there is a significant recession Source: Pension Protection Fund, December 2008 £194.5 bn (compared to a surplus of £11.7bn in 2007) See for the latest position UK as a whole

ICAEW Defined benefit schemes Current service cost Increase in annual pension payments Retirement Death Now Year end Service performed discount Dr Current service cost (I/S) Cr PV obligation compound Dr Interest cost (I/S) Cr PV obligation Present value of pension obligation Discount/compound using market yields on high quality corporate bonds IAS 19

ICAEW Now Increase in annual pension payments Retirement Death Year end Service performed Fair value of plan assets Contributions are paid in as advised by an actuary Dr FV plan assets Cr Company cash growth Dr FV plan assets Cr Expected return (I/S) Any difference between actual and expected return is an actuarial gain/loss IAS 19 Defined benefit schemes

ICAEW Present value of defined benefit obligation £m Present value of defined benefit obligation £m Actuarial loss (balancing figure) 34 At 1 January1,990 Interest cost158 Current service cost170 Benefits paid(212) At 31 December2,140 Defined benefit schemes Actuarial gains and losses Fair value of plan assets £m Fair value of plan assets £m Actuarial loss (balancing figure) (423) At 1 January1,827 Expected return180 Contributions128 Benefits paid(212) At 31 December1,500 IAS 19

ICAEW Defined benefit schemes In December 2004, the IASB amended IAS 19 to allow the option of recognising actuarial gains and losses in full in the period in which they occur via the statement of comprehensive income. This option is similar to the requirements of the UK standard, FRS 17 Retirement Benefits. The corridor method also continues to be allowed under IAS 19. IAS 19

ICAEW Defined benefit schemes IAS 19 corridor method £m Fair value of plan assets 1,500 Present value of obligation (2,140) (640) Net unrecog. losses ( ) 457* Pension liability (183) IAS 19 corridor method £m Fair value of plan assets 1,500 Present value of obligation (2,140) (640) Net unrecog. losses ( ) 457* Pension liability (183) IAS 19 immediate recognition £m Fair value of plan assets 1,500 Present value of obligation (2,140) Pension liability (640) Reserves P&L reserves ( )457* IAS 19 immediate recognition £m Fair value of plan assets 1,500 Present value of obligation (2,140) Pension liability (640) Reserves P&L reserves ( )457* * Assuming no gains/losses brought forward Allowing these two alternatives will lead to inconsistencies between what is shown on the statement of financial position of different companies IAS 19

ICAEW Defined benefit schemes IAS 19 corridor method £m Income statement Interest cost 158 Current service cost 170 Expected return on plan assets (180) Actuarial losses?? IAS 19 corridor method £m Income statement Interest cost 158 Current service cost 170 Expected return on plan assets (180) Actuarial losses?? IAS 19 immediate recognition £m Income statement Interest cost 158 Current service cost 170 Expected return on plan assets (180) Comprehensive income Actuarial losses457 IAS 19 immediate recognition £m Income statement Interest cost 158 Current service cost 170 Expected return on plan assets (180) Comprehensive income Actuarial losses457 Under the corridor method unrecognised actuarial gains & losses are deducted from the surplus or deficit on the statement of financial position until they exceed what is known as the ‘corridor limits’. If they exceed these levels the excess is then recognised in the income statement over the average remaining working life of plan members. IAS 19

ICAEW Defined benefit schemes Recognition of actuarial gains and losses IAS 19 Corridor method £m Fair value of plan assets 1,500 Present value of obligation (2,140) (640) Net unrecog. losses ( ) 457* Pension liability (183) IAS 19 Corridor method £m Fair value of plan assets 1,500 Present value of obligation (2,140) (640) Net unrecog. losses ( ) 457* Pension liability (183) Recognition test: Debit to income statement in following year: Net actuarial gains or losses outside the ‘10% corridor’ Average remaining working lives of participating employees ‘10% Corridor’ limits (for following year): Higher of: £m 10% b/d obligation (10% x 2,140)214 10% b/d assets (10% x 1,500) Corridor limit214 Losses outside corridor (457–214)243 IAS 19 also allows faster recognition (including immediate recognition) 243m ÷ (say)13 years = 18.7m P&L expense next year IAS 19

ICAEW 110 (10% x 110)11Dr Income statement Example Brutus Co operates a defined benefit pension plan for its employees. The company elects to use the corridor method under IAS 19. Notes (1)The present value of the future benefit obligations on 1 January 2008 were £110 million. (2)The yield on high quality corporate bonds in the year to 31 December 2008 was 10%. Present value of defined benefit obligation £’m b/d Interest cost Current service cost Benefits paid Actuarial gain (balancing figure) c/d IAS 19

ICAEW 13Dr Income statement (10)Cr Plan assets Example Notes (3)The present cost of pensions earned this year was £13m. (4)Pensions paid to former employees during the year amounted to £10m. Present value of defined benefit obligation £’m b/d110 Interest cost (10% x 110)11Dr Income statement Current service cost Benefits paid Actuarial gain (balancing figure) c/d IAS 19

ICAEW Present value of defined benefit obligation £’m b/d110 Interest cost (10% x 110)11Dr Income statement Current service cost13Dr Income statement Benefits paid(10)Cr Plan assets Actuarial gain (balancing figure) c/d 116 (8) Example Notes (6)Extracts from the most recent actuary's report show the following: Present value of pension plan obligation£116m Unrecognised actuarial gains/losses IAS 19

ICAEW (12% x 150)18Cr Income statement 150 7Cr Company cash (10)Dr PV obligation (done) Example Notes (7)The fair value of plan assets on 1 January 2008 was £150 million. (8)The expected return on investments is 12%. Fair value of plan assets £’m b/d Expected return Contributions received Benefits paid Actuarial loss (balancing figure) c/d (9)The pension plan received contributions of £7m and paid pensions to former employees of £10m. IAS 19

ICAEW Fair value of plan assets £’m b/d150 Expected return (12% x 150)18Cr Income statement Contributions received7Cr Company cash Benefits paid(10)Dr PV obligation (done) Actuarial loss (balancing figure) c/d 140 Actuarial loss (25) Example Notes (10)Extracts from the most recent actuary's report show the following: Market value of plan assets£140m Unrecognised actuarial gains/losses IAS 19

ICAEW Example Notes (11)In the financial statements for the year ended 31 December 2007, there was an actuarial gain of £63 million although this had not been recognised. (12)The average remaining working life of plan members at 1 January 2008 is 7 years. Unrecognised/recognised actuarial gains and losses £’m Unrecognised gains b/d Gains b/d recognised in the income statement Actuarial gain on obligation during year Actuarial loss on assets during year Unrecognised gains c/d 63 IAS 19

ICAEW (Working)(7)Cr Income statement Unrecognised/recognised actuarial gains and losses £’m Unrecognised gains b/d63 Gains b/d recognised in the income statement Actuarial gain on obligation during year Actuarial loss on assets during year Unrecognised gains c/d (from before)8 (from before)(25) 39 Working – The 10% Corridor Corridor limits, greater of:£’m 10% obligation b/d (10% x £110m)11 10% plan assets b/d (10% x £150m)15 Therefore, corridor limit15 Gains b/d recognised in the income statement: (£63m – £15m)/ 7 years7 IAS 19 also allows faster recognition (including immediate recognition) IAS 19 Example

ICAEW INCOME STATEMENT Income statement expense£’m Current service cost13 Interest cost11 Expected return on plan assets(18) Net actuarial (gains)/losses recognised(7) (1) Example - disclosures IAS 19 is flexible about exactly where in the income statement each of the above is recognised, but the line item in which each is recorded must be disclosed. IAS 19

ICAEW Example - disclosures STATEMENT OF FINANCIAL POSITION £m Fair value of plan assets 140 Present value of defined benefit obligation (116) 24 Unrecognised actuarial gains (39) Net pension liability (15) IAS 19

ICAEW Example - disclosures Opening net liability (110 – )23 Expense recognised in the income statement(1) Contributions paid(7) Closing net liability15 MOVEMENT IN NET PENSION LIABILITY £’m IAS 19

Employee Benefits Gavin Aspden Head of Innovation and Technical Development 8 September 2009