Defined benefit plans are classified as post-employment plans where the obligation of the entity is to provide the agreed benefits to current and former employees, usually based on some benefit formulas. Under benefit plans actuarial risk and investment risk fall, in substance, on the entity. If actuarial and investment experience is worse than expected, the entity’s obligation may be increased.

Accounting for defined benefit plans is complex because actuarial assumptions are required to measure the liability and the expense and there is a possibility of actuarial gains and losses. Moreover, the benefit obligations are measured on a discounted basis because they may be settled many years after the employees render the related service.

Actuarial valuation for defined benefit plans involves the following steps:

1. Determine how much benefit is attributable to the current and prior periods.
2. Make actuarial assumptions about demographic variables, such as mortality, turnover, ill health and early retirement and financial variables, such as discount rate, future salary and benefit levels that will affect the cost of the benefits.
3. Use the Projected Unit Credit Method to calculate the present value of the defined benefit obligation for the benefit attributable to prior periods, and the current service cost for the benefit attributable to the current period.
4. Determine the total amount of actuarial gains and losses and the amount of those actuarial gains and losses to be recognized.
5. Where a plan has been introduced or changed, determine the resulting past service cost and the amount to be recognized.
6. Where a plan has been curtailed or settled, determine the resulting gain or loss.

The amount recognized as a defined benefit liability in the balance sheet shall be the net total of the following amounts:

1. the present value of the defined benefit obligation at the balance sheet date;
2. plus any actuarial gains (less any actuarial losses) not yet recognized;
3. minus any past service cost not yet recognized;
   (d)minus the fair value of plan assets, if any, at the balance sheet date.

If the amount determined is negative (an asset), then there are guidelines to limit the extent of its recognition in the balance sheet.

An entity shall recognize in the income statement the net total of the following amounts as expenses:

1. current service cost;
2. interest cost;
3. expected return on any plan assets;
4. actuarial gains and losses, to the extent they are recognized;
5. past service cost, to the extent it is required to be recognized; and
6. resulting gain or loss from any plan curtailment or settlement.

IFRS 19 requires an entity to disclose the following information about its defined benefit plan in the financial statements:

1. the entity’s accounting policy for recognizing actuarial gains and losses;
2. a general description of the type of plan;
3. a reconciliation of the assets and liabilities in the balance sheet, with breakdown;
4. the amounts included in the fair value of plan assets, if any;
5. a reconciliation showing the movements in the net liability or asset recognized in the balance sheet;
6. the total expense recognized in the income statement with breakdown;
7. the actual return on plan assets, if any;
8. the principal actuarial assumptions used in the valuation.

The Standard encourages, but does not require, an entity to involve a qualified actuary in the determination of the benefit obligations. For practical reasons, an entity usually requests the service of a qualified actuary to carry out a detailed valuation of the obligation. Should you require any assistance, in actuarial valuation, or related advisory service, please do not hesitate to contact us.