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IFRS extracts from accounts IFRS Pentana Checker IFRS quarterly update Investor view Other tools Pocket guides Practical guides to IFRS A practical guide to accounting for agricultural assets Publication on IFRS 3 (revised): Impact on earnings - the crucial questions and answers for decision-makers A practical guide to IFRS 8 for investment funds Practical guide to investment property 2009 Practical guide to investment property 2010 A practical guide to capitalisation of borrowing costs A practical guide to segment reporting A practical guide to share-based payments - February 2011 US GAAP convergence and IFRS: What you need to know about the FASB and IASBs joint project 01 - Accounting for financial liabilities unchanged except for those at fair value through profit or loss 02 - Revenue recognition: full speed ahead 03 - Insurance contracts: fundamental accounting changes proposed 04 - Financial statement presentation: project update 05 - Practical guide to leasing: overhauling lease accounting 06 - Deferred tax on certain assets at fair value: proposed amendment to IAS 12 07 - A practical guide to new IFRSs for 2010 08 - Practical guide on financial instrument accounting: IFRS 9 09 - Deferred tax on investment properties at fair value amendment to IAS 12 10 - Revenue from contracts with customers: the response are in 11 - Leasing proposals: the results are in 12 - A practical guide to new IFRSs for 2011 13 - Update on recent revenue discussions at the IASB and FASB 14 - Accounting implications of natural disasters 15 - Update on recent revenue discussions at the IASB and FASB 16 - Business combinations - determining what a business is under IFRS 3 (2008) 17 - What do the revenue exposure draft proposals mean to the oil & gas industry? 18 - Joint arrangements 19 - Consolidated financial statements - redefining control 20 - IAS 19 (revised), 'Employee benefits 21 - Fair value measurement 22- Revenue from contracts with customers

23 - Accounting for derivative instruments 24 - Financial reporting considerations arising from current market conditions in Europe 25 - Contingent consideration 26 - New IFRSs for 2012 27 - Responses to re-exposed revenue proposals 28 - Revenue from contracts with customers: Ready, set, redeliberate 29 - IFRS 10 for the insurance industry 30 - IFRSs 10 and 12 - Questions and answers 31 - Classification of joint arrangements 32 - Revenue redeliberations continue 33 - Limited amendments to the IFRS 9 classification and measurement model 34 - Practical guide to IFRS 10 - Investment entities: Exception to consolidation 35 - IAS 19 (revised) significantly affects the reporting of employee benefits Appendix 1 Treatment of asset management and other administration costs 36 - Boards conclude redeliberations on key revenue measurement and recognition issues 37 - New IFRSs for 2013 38 - Boards finalise redeliberations of revenue from contracts with customers 39 - Exposure draft on impairment of financial assets 40 - Combined and carve out financial statements 41 - Revised exposure draft on leases 42 - Revised exposure draft on insurance contracts PwC regulatory briefing Similarities and differences Straight away Webcasts Law and regulations Auditing Help

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35 - IAS 19 (revised) significantly affects the reporting of employee benefits

Tools, practice aids and publications Practical guides to IFRS

35 - IAS 19 (revised) significantly affects the reporting of employee benefits
Publication date: 25 Feb 2013

The IASB amended IAS 19, Employee benefits in June 2011 and the revised guidance is mandatory from 1 January 2013. The amendment changes the accounting for certain types of benefits and raises a number of application issues. This practical guide (pdf, 368kb) provides more detail. February 2013 update: An appendix has been added to the practical guide. The appendix gives more details on how to distinguish 'costs of managing plan assets' and 'other administration costs'. It also explains how 'other administration costs' should be treated in the income statement.

At a glance

The revised standard on accounting for employee benefits is mandatory for years commencing on or after 1 January 2013. The most significant effect of the changes is on defined benefit plans and other post-employment benefits; however, termination benefits and other employee benefits are also affected. The revised standard raises several application questions for plans that include employee contributions. Actuarial gains and losses, the effect of the asset ceiling and the actual return on plan assets (remeasurements) are recognised in the balance sheet immediately, with a charge or credit to other comprehensive income (OCI) in the periods in which they occur. They are not recycled subsequently. Interest expense or income will now be calculated on the net defined benefit liability (asset) by applying the discount rate to the net defined benefit liability (asset). This replaces the interest cost on the defined benefit obligation and the expected return on plan assets and will increase the employee benefit expense for most entities. Past-service cost will be recognised in profit or loss in the period when a plan is amended. A curtailment will only occur when an entity significantly reduces the number of employees covered by a plan.

Curtailment gains and losses will be accounted for as a past-service cost. A liability for a termination benefit will be recognised at the earlier of when the entity can no longer withdraw the offer of the termination benefit and when the entity recognises any related restructuring costs. Any benefit that requires future service is not a termination benefit. Enhanced disclosures are required to explain the characteristics of benefit plans and risks associated with them, and identify and explain the amounts recognised in the financial statements. There are several areas where the application of the revised standard is not clear, including the accounting for: employee contributions; higher of plans; and administration expenses.

Background The IASB has amended IAS 19, Employee benefits and the revised guidance will be mandatory from 1 January 2013. The amendments are part of a longer term objective to improve the accounting in this important area. Accounting for employee benefits was included in the Memorandum of Understanding between the IASB and the FASB. There will still be significant differences, but some of the changes further align IFRS and US GAAP. PwC observation: Both the IASB and the FASB have indicated that further improvements are desirable in the future. However, the IASB's consideration of its post-2011 agenda suggests that further changes to the accounting for employee benefits, including contribution-based promises, will be at least several years away. Practical issues The amendment will change the accounting for certain types of benefits and raise a number of application issues. These are considered below. Net interest cost The revised standard replaces the interest cost on the defined benefit obligation and the expected return on plan assets with a net interest cost based on the net defined benefit asset or liability and the discount rate, measured at the beginning of the year. The net defined benefit asset or liability is adjusted for actual benefit payments and contributions during the year. There is no change in the approach to determining the discount rate; this continues to reflect the yield on high-quality corporate bonds, or on government debt when there is no deep market in high-quality corporate bonds. PwC observation: This is the most significant change in the measurement of employee benefit expense. It will increase the income statement charge for many entities because the discount rate is typically lower than the expected return on assets assumption. However, this change has no effect on total comprehensive income, as the increased charge in profit or loss is offset by a

credit in OCI. There is no impact on the balance sheet. Remeasurements The amendment introduces a new term: remeasurements. This is made up of actuarial gains and losses on the defined benefit obligation, the difference between actual investment returns and the return implied by the net interest cost and the effect of the asset ceiling. Remeasure-ments are recognised immediately in OCI and are not reclassified. An appropriate portion of remeasurements is included in the cost of assets, if other IFRSs require the inclusion of such costs. PwC observation: The corridor and spreading method and the immediate recognition of actuarial gains/losses in profit or loss are no longer permitted. This will reduce diversity in presentation and, subject to the asset ceiling, will ensure that the balance sheet always reflects the extent to which a pension plan is funded. Amounts recognised in OCI are not reclassified through profit or loss, but the standard no longer requires these items to be recognised immediately in retained earnings. This will allow remeasurements to be presented as a separate category within equity. Judgement is required to distinguish the portion included in cost of assets from that recognised in OCI. Past service cost Past service cost arises when an entity amends a benefit plan to provide additional benefits for services in prior periods. The amendment changes the definition of past service cost to clarify the distinction between curtailments and past service costs; it also requires all past-service costs to be recognised immediately in profit or loss, regardless of vesting requirements. A plan amendment that reduces the obligation to employees will be a negative past service cost, so there will be symmetry between the accounting for amendments that increase or reduce the obligation for past service. A curtailment will be the effect of a reduction in the number of employees participating in a plan. PwC observation: IAS 19 currently requires unvested past service costs to be recognised on a straight-line basis over the average future service period until the benefits become vested; vested past-service costs are recognised in profit or loss immediately. The changes require management to recognise all past-service costs in profit or loss in the period of a plan amendment. Unvested past service costs can no longer be spread over a future-service period. The amendment also removes the requirement to determine whether a benefit reduction was a curtailment or a negative past service cost. Changes to benefits that reduce the defined benefit obligation will be past service costs. Example An entity operates a pension plan that provides a pension of 1% of final salary for each year of service, subject to a minimum of five years service. On 1 January 20X1, the entity improves the

pension to 1.25% of final salary for each year of service, including prior years. The present value of the defined benefit obligation is therefore increased by C500,000, as follows:
C

Employees with more than 5 years of service at 1 January 20X1 400,000 Employees with less than 5 years of service at 1 January 20X1 (average of three years of service so two years until vesting) 100,000 Increase in defined benefit obligation Existing IAS 19 A past service cost of C400,000 should be recognised immediately, as those benefits have already vested. The remaining C100,000 is recognised on a straight-line basis over the two-year period from 1 January 20X1. Amendment to IAS 19 A past service cost of C500,000 should be recognised and charged in the income statement immediately. Settlement A settlement arises when an entity makes a payment to the employees covered by a plan or a third party that eliminates all further liability under the plan. The amendment clarified the definition of a settlement but did not make significant changes to the accounting for gains and losses on settlement. Settlement gain or loss is defined as the difference between (a) the present value on the settlement date of the defined benefit obligation being settled, and (b) the settlement price, including any plan assets transferred and any payments made directly by the entity. It is recognised in profit or loss when the settlement occurs. The settlement gain or loss will no longer include unrecognised actuarial gains or losses, as these will have been recognised immediately in OCI. PwC observation: The amendment clarifies that the payment of benefits provided in the terms of a plan and included in the actuarial assumptions for example, an option at retirement for employees to take their benefit in the form of a lump sum rather than a pension or routine pension payments are not settlements. Risk and cost-sharing plans The rising costs of post-employment benefits arising from improving longevity, poor investment returns, legislative changes or increasing medical costs have led to changes in plan design that do not always fit easily into the existing guidance. The amendment clarifies the accounting for features such as employee contributions or benefits that vary depending on the experience of the plan, for example employee contributions to meet deficits, reductions in 500,000

employee contributions from surpluses, contingent benefit increases relating to the investment performance of the plan and limits on the employer's obligation to contribute to a plan. It requires the expected cost of benefits to reflect all these plan terms, which may therefore require specific actuarial assumptions. For example, the cost of a benefit linked to investment returns will require an assumption about investment returns to be included in the expected increase in the benefit. PwC observation: Determining the substance of such arrangements, particularly constructive obligations beyond the contractual plan terms, will require judgement. The substance of the benefit is also important to determine whether changes in benefits are plan amendments or actuarial gains or losses, and whether they affect profit or loss or OCI. Example Pension plan X has a long-established practice of providing cost-of-living increases to pensions in payment in line with the movement in a consumer price index (CPI). However, these are only awarded to the extent that the investment returns on plan assets are above a specific rate. There is no catch-up in future years for subsequent higher returns when an increase has been restricted by the rate of return in a specific period. Assumed future pension increases should reflect both expectations for future changes in the CPI and expected returns on plan assets, together with the variability in those returns. Taxes Taxes payable by a benefit plan are currently included in the actual and expected return on plan assets. The revised standard requires taxes related to defined benefit plans to be included either in the return on plan assets or the calculation of the benefit obligation, depending on the nature of the taxes. Taxes on the return on plan assets will be part of the actual investment return and will be recognised in OCI. Social charges or other taxes levied on benefit payments or contributions to the plan will be included in the measurement of the benefit obligation to the extent that they relate to benefits in respect of service before the balance sheet date. PwC observation: Entities are only affected if their current policy is different from the revised requirements. An entity that has to change its policy for taxes will be required to recalculate the benefit obligation, return on plan assets and the employee benefit cost because the amendment is applied retrospectively. Judgement is required to determine whether taxes should be included in the measurement of the benefit obligation or in the return on plan assets. The revised standard refers specifically to taxes payable by the plan, but we believe taxes relating to benefits and paid by the employer should be recognised in the same way. Example

In territory X, pension plans are subject to income tax on investment income (interest, dividends and realised capital gains) and on contributions to the plans. The tax on investment income should be recognised in the actual return on assets. The tax on contributions should be recognised in the measurement of the benefit obligation based on the expected future contributions payable in respect of past service. Administration costs and other expenses The amendment requires costs associated with the management of plan assets to be deducted from the return on plan assets, which is unchanged from the existing standard. Other expenses such as record-keeping costs or actuarial valuation fees should be recognised in profit or loss when the services are received. This changes the existing standard, under which there is a choice to include expenses in the calculation of the defined benefit obligation or in the actual and expected return on plan assets. The amendment gives a detailed definition of what should be included in the return on plan assets as follows: Interest Dividends Other income Unrealised gains/losses Costs of managing investments Taxes payable on investment returns + + +/+/-

PwC observation: Entities are only affected if their current policy differs from the new requirements. One example of this is where costs other than investment management have been reflected in the expected and actual return on assets. Where a policy has to be changed, it may be necessary to recalculate the benefit obligation, return on assets and employee benefit expense, as the amendment is applied retrospectively. Both the current and revised standards require that costs relating to medical claims handling are included in the measurement of the benefit obligation. The revised standard is silent on other administration costs. The Basis for Conclusions says that such costs should be recognised when the administration services are provided as it would be difficult to allocate them between past and future service. This does suggest some inconsistency regarding the treatment of administration expenses and is likely to be a change from current practice. Appendix 1, Treatment of asset management and other administration costs, provides a more

detailed discussion on how to distinguish these costs and how to treat them in the income statement. Classification of defined benefit and defined contribution plans The amendment added the words in substance to the guidance that explains the distinction between defined contribution and defined benefit plans. The guidance now says that, in a defined contribution plan, the actuarial risk falls in substance on the employee. This makes the description of a defined contribution plan consistent with the description of a defined benefit plan, which refers to the risks falling, in substance, on the employer. PwC observation: Under the current standard, a plan is classified as a defined benefit plan and not a defined contribution plan, if any risk of having to meet a shortfall falls on the employer, even if the risk is remote. In our view nothing is changed as a result of the additional words in the revised standard because there is no change in the definition of defined benefit and defined contribution plans. Termination benefits The amendment makes changes to the definitions and accounting for termination benefits to make IAS 19 broadly consistent with the US GAAP treatment of one-time termination benefits. The changes clarify that any benefit that must be earned by working for a future period is not a termination benefit. A termination benefit is given only in exchange for the termination of employment. A benefit that is in any way dependent on providing services in the future is not a termination benefit. This was confirmed by the IFRS IC in January 2012. The amendment also clarifies the obligating event when an employer offers voluntary termination benefits. A liability is recognised when the entity can no longer withdraw an offer. Termination benefits and past-service costs can be very similar and may often arise as part of a restructuring. The amendment clarifies that:

the gain or loss on a curtailment or plan amendment linked to a restructuring or termination benefit is recognised at the earlier of when the related restructuring costs or termination benefits are recognised and when the curtailment or plan amendment occurs; and termination benefits linked to a restructuring are recognised at the earlier of when the related restructuring costs are recognised and when the entity can no longer withdraw an offer of the termination benefit.

PwC observation: The amendment removes a choice about whether some benefits are termination or postemployment benefits. Management will have to assess whether benefits meet the definition of termination benefits or are earned by working for a future period, in which case they would be

classified as either a short-term, other long-term or post-employment benefit. This change applies to existing benefits and not just arrangements agreed in the future. Management should consider the timing of recognition for benefits that are termination benefits and whether an offer can no longer be withdrawn. Benefits that have been previously classified as termination benefits may be reclassified. This might result in later expense recognition than the existing IAS 19. A benefit that is dependent on providing services in the future is not a termination benefit. However, a benefit related to past, as well as future service, would, in part, be recognised immediately as a past service cost. Example Management is committed to close a factory in 10 months and, at that time, will terminate the employment of all of the remaining employees at the factory. Management needs the expertise of the employees at the factory to complete existing contracts and announces the following plan. Each employee that renders service until the factory closure will receive, on the termination date, a cash payment of C30,000. Employees leaving before the factory closure will receive C10,000. There are 120 employees at the factory. Management expects 20 employees to leave before closure. The total expected cash outflows under the plan are C3,200,000 (20 C10,000 + 100 C30,000). The entity accounts for benefits provided in exchange for termination of employment as termination benefits; it accounts for benefits provided in exchange for services as short-term employee benefits.

Termination benefits The benefit provided in exchange for termination of employment is C10,000, which the entity would have to pay for terminating the employment without any future service. The entity recognises a liability of C1,200,000 (120 C10,000) for the termination benefits at the earlier of when the plan of termination is communicated to the affected employees and when the entity recognises the restructuring costs associated with the factory closure. Benefits provided in exchange for service The incremental benefits that employees will receive if they provide services for the 10month period are given in exchange for services provided over that period. They are accounted for as short-term employee benefits, as the entity expects to settle them within 12 months after the end of the annual reporting period. In this example, discounting is not required, so an expense of C200,000 (C2,000,000 10) is recognised in each month during the service period of 10 months, with a corresponding increase in the carrying amount of the liability. Under current IAS 19, it could be argued that the whole amount of C3,200,000 meets the definition of a termination benefit and should be recognised when the closure and termination arrangements are announced.

Other long-term employee benefits

There is diversity in practice under the existing standard around whether the classification of an obligation as current or non-current under IAS 1 also drives the classification of the benefit as short or long term under IAS 19. The diversity arises because both standards use the term due to be settled, which is not defined. The amendment clarifies the definitions of short- and long-term benefits in IAS 19 by confirming that the distinction is based on whether payment is expected to be within the next 12 months, rather than when payment can be demanded. A long-term benefit under IAS 19 could be a current liability when the entity does not have the unconditional right to defer settlement for more than 12 months. PwC observation: Management should review the classification of short- and long-term benefits, and reclassify and remeasure obligations in accordance with the revised guidance. The accounting for short-term benefits remains unchanged and is generally simple, as no actuarial assumptions are required and any obligations are measured on an undiscounted basis. Long-term benefits are still accounted for in a similar way to defined benefit plans. Example Employees accrue a 20-day vacation entitlement rateably over the year. Unused entitlement can be carried forward indefinitely but is lost if not used before the employee leaves the company. Entitlement is utilised on a first in first out basis. Entity A has past experience that indicates that employees often carry forward their entitlement for a number of years, building up balances greater than 20 days. Entity B has past experience that indicates that employees utilise their entitlement such that they do not build up balances in excess of 10 days and typically use any carried forward entitlement in the next year. Entity A concludes that the vacation accrual is an other long-term benefit, as it does not expect to settle all the benefit within 12 months of the period in which it has been earned. Entity B concludes that the vacation accrual is a short-term benefit, as it expects to settle the benefit within 12 months of the period during which it has been earned. PwC observation: Although the IAS 19 classification in Entity A and Entity B is different, this would only have a significant impact if the effect of discounting in Entity A was material to the liability. Interim reporting The amendment does not make any consequential amendments to IAS 34, Interim financial reporting, to simplify the general requirements of IAS 19 in the context of interim reporting. However, the IASB notes in the Basis for Conclusions that an entity is not always required to remeasure a net defined benefit liability (asset) for interim reporting purposes under IAS 19 and IAS 34.

PwC observation: The removal of the corridor and spreading approach may increase the complexity of interim reporting for some entities. Those using this approach typically only remeasure the net defined benefit obligation between year ends in the event of a plan amendment, curtailment or settlement. Entities choosing to recognise actuarial gains and losses in OCI typically remeasure the defined benefit obligation and plan assets at each interim date to establish a gain or loss recognised in OCI. Service cost, interest cost and expected return on assets would not be recalculated unless there was a plan amendment, curtailment or settlement. The removal of the corridor and spreading options may make it necessary for an entity to value plan assets and the defined benefit obligation at each interim balance sheet date. Back-end loading of benefit formula IAS 19 requires that defined benefits are attributed to periods of service following the plans benefit formula unless an employees service in later years will lead to a materially higher level of benefit (and therefore current service cost) than in earlier years (back-end loading). Where this is the case, the benefits are allocated to periods of service on a straight-line basis. The exposure draft stated that assumed salary increases should be considered in determining whether or not there is back-end loading. The Board concluded that this additional guidance should not be included in the final standard. PwC observation: An argument that salary increases do not result in a plan benefit formula that is back-end loaded leads to inconsistencies in the treatment of plans providing economically identical benefits, depending on how those benefits are described in the plan documentation. Our view is that the current practice of including future salary increases in determining whether a benefit formula allocates a materially higher level of benefit to later years remains appropriate. Disclosure The amendment introduces additional disclosures. The Board focused the disclosure objectives on the matters most relevant to the users of the financial statements. The amendment will require disclosure to:

explain the characteristics of and risks associated with its defined benefit plans; identify and explain the amounts in the entitys financial statements arising from its defined benefit plans; and explain how the defined benefit plans may affect the entitys future cash flows regarding timing, amount and uncertainty.

There are many new disclosure requirements, including:

Risks specific to the entity arising from defined benefit plans A narrative description of the specific or unusual risks arising from a defined benefit plan is required. Judgement will be required to identify those risks that should be explained, which may be challenging if there are many defined benefit plans with different characteristics within a group.

Categories of plan assets based on risks/nature The amendment requires a breakdown of the plans assets into categories that distinguish the risk and liquidity characteristics and whether or not they have a quoted market price in an active market. Actuarial assumptions Entities are required to disclose the significant actuarial assumptions, together with a sensitivity analysis for reasonably possible variations in each of the significant actuarial assumptions. Judgement is required to determine the significant assumptions. Reconciliations A reconciliation between the opening and closing balances for plan assets, the defined benefit obligation, the balance sheet asset or liability and the effect of the asset ceiling will be required. Future cash flows Entities will be required to disclose significant information, in addition to the sensitivity analyses mentioned above, to help users understand the potential impact on cash flows, including: o a narrative description of any asset-liability matching strategies; o a description of the funding arrangements and funding policy; o the amount of the expected contributions in the next year; and o the weighted-average duration of the defined benefit obligation. Extended disclosures for multi-employer plans The accounting for multi-employer plans has not changed. However, more information has to be disclosed for multi-employer plans. For example: o a description of the funding arrangements; o the extent to which the entity might be liable for other entities obligations; o qualitative information regarding any withdrawal liability unless it is probable that the entity will withdraw; o an indication of an entity's level of participation in a plan (for example, proportion of total members); and o the expected contribution in the following year.

PwC observation: The disclosure requirements under current IAS 19 are extensive and sometimes difficult to understand. The amendment replaces a checklist of items with an objective of providing relevant information when plans are material to the entity. However, the new requirements are likely to require more extensive disclosures and more judgement to determine what disclosure is required. Management should also be aware that some of the new disclosures may require additional actuarial calculations and should consider whether the internal reporting has to be updated to collect the new disclosures. An illustrative example of disclosures required by the amended standard is presented in Appendix V of the Illustrative IFRS consolidated financial statements for 2012 year ends. Transition

The amendment is effective for annual periods beginning on or after 1 January 2013; full retrospective application is required in accordance with IAS 8 Accounting policies, changes in accounting estimates and errors, except for (a) changes to the carrying value of assets that include employee benefit costs in the carrying amount and (b) comparative information about the sensitivity analysis of the defined benefit obligation. Early adoption is permitted. IAS 8 also specifies disclosures regarding the effect of adopting the revised standard in the year of adoption (para 28) and where the revised standard has not yet been adopted (para 30). PwC observation: The amendment is applied retrospectively, which will require the disclosure of a third balance sheet in accordance with IAS 1. There is an exception for assets that include employee costs so that assets such as inventory and property, plant and equipment that include employee benefits in cost do not have to be restated. This exception is not applicable for firsttime adopters. The changes will also remove the employee benefits exemption in IFRS 1. Areas under consideration Two aspects of the revised standard are currently being considered by the IFRS Interpretations Committee. Employee contributions The existing version of IAS 19 includes little guidance regarding employee contributions towards the cost of their benefits. These contributions affect both the obligation to employees and the cost of providing benefits, but there is no explicit guidance on how they should be reflected in the measurement of these items. The only implicit guidance comes from the disclosure requirements where employee contributions are included in the reconciliations of the opening and closing defined benefit obligation and the fair value of plan assets. Practice has been in line with US GAAP and UK GAAP. Where a plan specifies an employee contribution rate, employee contributions in the current period are deducted from the present value of benefits earned during the year to calculate the service cost. Where employee contributions are based on a proportion of the plans cost, (often known as risk and cost sharing plans), practice has been more varied. The revised standard includes additional language that might affect the accounting for employee contributions, the impact is not clear. One interpretation is that the effect of employee contributions over the employees working life should be reflected in the cost of the benefits earned by employees in each period and in the obligation to employees at the end of the period. Employee contributions are treated as a negative benefit under this interpretation and attributed to service either in accordance with the benefit plan formula or on a straight line basis. Typically this would increase the annual expense and the liability at the end of the year. There are several ways that this approach could be applied.

In our view these would all be difficult to apply in practice. It is also questionable whether the resulting presentation would provide meaningful information to users. The variety of methods that could be applied under this approach would also reduce comparability between entities. The IFRS Interpretations Committee is considering further guidance on the accounting for employee contributions. PwC observation: It is not clear how the additional guidance should be interpreted and in our view it is currently acceptable to continue with the accounting applied under the existing standard until further guidance is issued by either the IASB or the IFRS Interpretations Committee. Higher of plans The IFRS Interpretations Committee was asked to consider the accounting for plans that promise a benefit based on the higher of the actual return on plan assets and a fixed minimum return. The Committee concluded that the IASB did not intend to change the accounting currently applied to these types of arrangements. PwC observation: In our view, the conclusion of the Interpretations Committee means that entities may continue to apply their existing accounting policy to these arrangements when the revised standard is adopted. The policy and the resulting accounting treatment should be disclosed clearly when the impact is material. The Interpretations Committee has not yet finalised its conclusions on the accounting for these types of arrangements. Next steps Management should determine the effect of the revised standard and, in particular, any changes in benefit classification or presentation. Management should consider the effect of the changes on any existing employee benefit arrangements and whether additional processes are needed to compile the information required to comply with the new disclosure requirements. Management should also consider the choices that still remain within IAS 19, the possible effect of these changes on key performance ratios and how to communicate these effects to analysts and other users of the financial statements. See also More

Tools, practice aids and publications Practical guides to IFRS 20 - IAS 19 (revised), 'Employee benefits Technical updates (2013) 05 March 2013 Additional practical guidance on amendments to IAS 19, 'Employee benefits' Topic summaries Employee benefits (IAS 19)

Appendix 1 Treatment of asset management and other administration costs

Publication date: 25 Feb 2013

Paragraph 130 of IAS 19R requires that costs of managing the plan assets should be recognised as part of the return on assets, but other administration costs should be recognised as period costs when incurred. This requirement results in the costs incurred in managing plan assets being booked directly into other comprehensive income (OCI) rather than expensing them. But the standard does not specify (a) how to distinguish these types of costs from other costs, and (b) where in the income statement other administration costs that do not qualify as costs of managing plan assets should be classified. (a) Distinguishing the costs How does one distinguish costs of managing plan assets from other administration costs? IAS 19R generally requires costs to be expensed when incurred, unless it can be shown that they relate directly to managing plan assets or that they are taxes payable by the plan. Examples of costs relating directly to managing plan assets would include:

fees paid to the bank for asset management services; salaries of the management board who manage the trust; and investment consultant fees.

Conversely, examples of costs that we do not believe qualify as costs of managing plan assets include:

salaries of members of the trusts management board who administer the pension payments; administration costs incurred to administer the pension plan participants database; and actuarial valuation costs.

In some circumstances, other indirect costs that relate to scheme assets might also be treated as costs of managing plan assets (for example, trustees time spent at trustee meetings for discussing investment strategies). This would be acceptable if it is clear that such costs are incurred in managing plan assets. But we expect that, in most circumstances, entities will find that the effort necessary to break down all scheme costs sufficiently to support such an approach will not be cost beneficial.

Does it matter who incurs the costs the entity or the scheme? This question is irrelevant. The above guidance applies whether the cost is paid directly by the sponsoring entity on behalf of the plan or by the plan itself. Does the entity have to consider actual and expected expenses? Expected expense was a term previously used in paragraph 107 of IAS 19, which required that (in determining the expected and actual return on plan assets) an entity should deduct expected administration costs, other than those included in the actuarial assumptions used to measure the obligation. IAS 19R requires administration costs to be recognised as an expense when the services are provided (and the expected return on plan assets is determined by reference to the discount rate on the liability), so the term expected expenses is no longer relevant. Are claims handling costs for medical benefits treated differently? Yes. Costs incurred in processing and resolving medical claims (including legal and adjusters fees) are not expensed when incurred. Paragraph 76(b)(iii) of IAS 19R indicates that medical claims handling costs will form part of the actuarial assumptions, and so they are included in the defined benefit obligation. (b) Treatment of other administration costs in the income statement The following table summarises the acceptability of the potential methods of treating costs that do not qualify as costs of managing plan assets: Method of recognising other costs in the Acceptable Commentary income statement under IAS 19R? Recognise in operating expenses (for Most aligned with the situation example, in staff costs) but leave outside where scheme expenses are paid 1 the pensions note reconciliation directly by the entity. In this case, even though not required, it would be desirable to have some disclosure in the pensions note of the amount and where it has been included. Amounts could also be included within the pensions note reconciliation, but this might be somewhat artificial because expenses are not paid out of scheme assets. Recognise in operating expenses and also show within the pensions note

Most aligned with the situation where scheme expenses are paid

reconciliation as a separate line item

directly by the scheme. In this case, disclosure in the pensions note would be required. Amounts should be included within the pensions note reconciliation because they are paid out of scheme assets. Not acceptable, because expenses are not included within the definition of current service cost. But amounts could be immaterial for amounts recognised in financial statements, even though recognised in operating results; so relegated to essentially a disclosure issue compared to other approaches above. More useful for reader of accounts to see scheme expenses explicitly stated; so a separate line item would be clearer. Not acceptable under IAS 19R, because not within definition of net interest cost. This is a change from IAS 19, which allowed for inclusion within the expected return on assets. The line where expenses should be recognised is not specified, allowing flexibility. Particularly if scheme is closed, it could be argued that scheme expenses are more appropriately presented within financing results. But administration expenses are not a finance item and they are not interest on a liability; they are costs for a service that does not arise from a borrowing. In our view, financing is rather the entitys management of cash and debt in a broader sense.

Recognise in operating expenses but as part of current service costs within the pensions note reconciliation

Recognise in finance costs but as part of net interest costs within the pensions note reconciliation

Recognise in finance costs as a separate line item and within the pensions note reconciliation

Include present value of future expenses in the measurement of the defined benefit pensions obligation

Not acceptable under IAS 19R, because there is a requirement to recognise administration cost at the time when services are provided. IAS 19R is a change from previous IAS 19 para 107, which permitted an allowance for expenses within the pensions obligation.

All references to pensions note reconciliation in the table refer to the requirement in paragraphs 140-141 of IAS 19R.

PricewaterhouseCoopers LLP

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