Enquiry:

This inquiry pertains to Gratuity plan of a Company. Section 28.15 (a) requires an entity to measure defined benefit obligations at the present value. Section 28.17 elaborates the procedure for calculating the discounted present value. An entity has the option to either calculate defined benefits under ‘projected unit credit method’ as described in section 28.18 OR under the permitted simplifications as explained in section 28.19.

Our first question is that if an entity opts for section 28.19, will it still be required to work out the discounted present value? Kindly provide the opinion of relevant committee in this regard.

The relevant sections mentioned above are reproduced below:

“28.15 An entity shall measure a defined benefit liability for its obligations under defined benefit plans at the net total of the following amounts:

(a) the present value of its obligations under defined benefit plans (its defined benefit obligation) at the reporting date (paragraphs 28.16-28.22 provide guidance for measuring this obligation), minus
(b) the fair value at the reporting date of plan assets (if any) out of which the obligations are to be settled directly. Paragraphs 11.27-11.32 establish requirements for determining the fair values of those plan assets that are financial assets.”

“28.17 An entity shall measure its defined benefit obligation on a discounted present value basis. The entity shall determine the rate used to discount the future payments by reference to market yields at the reporting date on high quality corporate bonds. In countries with no deep market in such bonds, the entity shall use the market yields (at the reporting date) on government bonds. The currency and term of the corporate bonds or government bonds shall be consistent with the currency and estimated period of the future payments.”

“28.19 If an entity is not able, without undue cost or effort, to use the projected unit credit method to measure its obligation and cost under defined benefit plans, the entity is permitted to make the following simplifications in measuring its defined benefit obligation with respect to current employees:

(a) ignore estimated future salary increases (i.e. assume current salaries continue until current employees are expected to begin receiving post-employment benefits);
(b) ignore future service of current employees (i.e. assume closure of the plan for existing as well as airy new employees); and

(c) ignore possible in-service mortality of current employees between the reporting date and the date employees are expected to begin receiving post-employment benefits (i.e assume all current employees will receive the post employment benefits). However, mortality after service (i.e. life expectancy) will still need to be considered.

An entity that takes advantage of the foregoing measurement simplifications must nonetheless include both vested and unvested benefits in measuring its defined benefit obligation.”

Our second question is with reference to section 15.6 read with section 15.8 of the “Accounting and financial Reporting Standards for Small-Sized Entities” (AFRS for SSEs) where unfunded gratuity provision is made as under:

“However, an entity may opt to calculate the accrued liability by reference to any other rationale method e.g. a method based on the assumption that such benefit are payable to all employees at the end of the accounting year”.

Will discounting be required to work out present value in the above case?

Opinion:

The Committee would like to draw your attention to the following paragraphs of IFRS for SMEs:

Actuarial valuation method

“28.18 If an entity is able, without undue cost or effort, to use the projected unit credit method to measure its defined benefit obligation and the related expense, it shall do so………….”

“28.19 If an entity is not able, without undue cost or effort, to use the projected unit credit method to measure its obligation and cost under defined benefit plans, the entity is permitted to make the following simplifications in measuring its defined benefit obligation with respect to current employees:

(a) ignore estimated future salary increases (i.e. assume current salaries continue until current employees are expected to begin receiving post-employment benefits);

(b) ignore future service of current employees (i.e. assume closure of the plan for existing as well as any new employees); and

(c) ignore possible in-service mortality of current employees between the reporting date and the date employees are expected to begin receiving post-employment benefits (i.e. assume all current employees will receive the post-employment benefits). However, mortality after service (i.e. life expectancy) will still need to be considered.”

Section 28.18 spells out that an entity shall use projected unit credit method to measure provision for gratuity. Section 28.19 of the IFRS for SMEs provides the mechanism to work out provision for gratuity where an entity is not able to use the projected unit credit method. In the simplified version there are no salary increases and services assumed for future (i.e. closure of the plan assumed) this is called “discontinuance approach” in which case no discounting is required.

This concession conveys the same meaning as by section 15.6 of the Accounting & Financial Reporting Standards for SSEs which is reproduced bellow:

“However, an entity may opt to calculate the accrued liability by reference to any other rationale method e.g. a method based on the assumption that such benefit are payable to all employees at the end of the accounting year “.

Hence, the Committee is of the view that the provision for gratuity under section 28.19 of IFRS for SMEs and section 15.6 of AFRS for SSEs will be calculated without discounting for present value, that is, “closure of the plan” and “benefits are payable to all the employees at the end of the accounting year”.

(August 26, 2016)