Post-employment defined benefit plans – what is changing?

The Board issued an Exposure Draft on Review of GRAP 25 Employee Benefits (ED 184) which proposes changes to employee benefits, and specifically defined benefit plans. The nature, extent and significance of defined benefit plans are likely to vary from entity to entity, with many entities phasing out these plans. For several entities, however, what remains of these plans may still be material.

What are the key changes to the accounting for defined benefit plans?

The key changes to the accounting for defined benefit plans are discussed below. The actuarial valuation method, being the projected unit credit method, remains unchanged. Entities are also encouraged, but not required, to appoint an actuary at every reporting date. Refer to the Secretariat’s FAQ on the matter: Must an entity appoint an actuary at every reporting date to measure its defined benefit obligations?

1. Changes to components

Three new components are introduced that combine elements of the existing components. These are service cost, net interest expense / revenue, and remeasurements. The diagram below illustrates the current and proposed components.

Remeasurements are recognised in surplus or deficit in GRAP 25. This is a departure from IPSAS 39 on Employee Benefits where remeasurements are recognised in net assets / equity.

2. Additional guidance on actuarial assumptions

Guidance is added on actuarial assumptions, including on mortality and the effect of any limit on the employer’s share of the cost of future benefits. Guidance is also added on the impact of employee and third-party contributions on salaries, benefits and medical costs. A diagram in the Exposure Draft illustrates the accounting requirements for contributions from employees or third parties. It is influenced by whether the contributions are:

• set out in the formal terms of the plan or arise from a constructive obligation; and
• linked to service provided to the entity and the number of years that the service had been provided.

3. Guidance on plan amendment, curtailment or settlement

Guidance is added to clarify:

• When the effect of the asset ceiling is considered – Only after the plan amendment, curtailment or settlement.
• The information to be used in determining current service cost and net interest – Information determined at the start of the annual reporting period is generally used. Where a plan amendment, curtailment or settlement occurs, current service cost and net interest are determined for the remainder of the reporting period using the information that became available from the plan amendment, curtailment or settlement.

4. Guidance on past service cost

Guidance is added on:

• A description of past service cost and when to recognise past service cost.
• A description of a plan amendment.
• Clarifying the description of a curtailment.
• Clarifying a gain or loss on settlement, and what is included in settlements.

What information could users expect to see?

A disclosure objective together with guidance on how to meet the disclosure objective, have been introduced in the Exposure Draft. The objective is based on the information needs of users. This allows entities to decide what information, and the level of information, that is needed in their financial statements.

Information presented and disclosed on defined benefit plans will change, primarily based on the changes proposed to the components of defined benefit cost.

Where can the ED be accessed and how can you provide comment?

ED 184 has been published on the ASB’s website and can be accessed here. Comment can be submitted via the website or to the Secretariat of the ASB at info@asb.co.za by 30 November 2020.  

The views expressed in this article are those of Secretariat and not the ASB Board.