Friday, April 8, 2011

Changes To Accounting For Employee Benefits Proposed

It cannot be denied that the area where companies spend most on is its employee benefits. Among these benefits is the pension plan. In the Philippines, this particular benefit exposes the company to both actuarial and investment risks. An example of an actuarial risk is when the benefits of an employee are seen to be greater than expected by the time the employee retires. An example of an investment risk is when a company funds a pension plan. And when the fund does not perform well, the company is still obliged to pay the said plan.

Accounting for defined benefit plans such as the pension plans is complex and entails costs for companies. That is why these companies hire the services of an actuary.

Based on rules, actuarial gains or losses or changes to pension obligation can be accounted for in three ways namely: charge the entire change to profit or loss, charge the entire charge to other comprehensive forms, and charge a portion of the change to profit or loss using the “corridor system”.

It was proposed on April 29 last year by the International Accounting Standards Board (IASB) the changes to the accounting of employee benefits. These include removal of the “corridor mechanism” in accounting for long-term employee benefits, new rules to distinguish long-term and short-term benefits, and additional disclosure requirements.

Among these changes, the removal of the “corridor mechanism” is the most significant. Without it, the changes in fund values will be recognized over the average remaining service lives of the employees.

Also, all changes that occur in the value of long-term employee benefit plans will already be recognized as they happen in profit and loss and in comprehensive income.

The difference between long-term and short-term benefits is based on the time the employee is expected to receive the benefit. Therefore, under the current rule, if an employee is able to use a benefit at any time, the obligation is considered a short term benefit for the employee. But under the proposal, this benefit will be considered a long-term liability.

Additional disclosure requirements have also been proposed. These include characteristics of the employee benefit plan and the risks that may arise from the said benefit plan which may include sensitivity analyses and multi –employer plans.

The IASB is expected to publish the final amendments to this proposal by the end of March 2011.

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