Gratuity Valuation: IAS 19 Disclosures: Simple Example Continued

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 Pre-requisite to this post: Review of International Accounting Standard (IAS) 19- Employee Benefits [1]

In order to illustrate the IAS Disclosures that will be prepared for the given simple example let us first assume the following:

• Emily is the only employee covered by the plan
• The Fair Value of Plan assets for the year ended 31-December-2009 and 31-12-2010 are as follows:

Year	Fair Value of Plan Assets
2009	8,000
2010	10,000

• There were no benefits paid during the year 2010.
• The contributions made at year end by the employer into the fund for the year 2010 amounted to 1,000
• The net cumulative unrecognized actuarial gain as at year end 31-December-2009 (1-1-2010) is 500
• The actuarial assumptions for year 2010 were unchanged from the assumptions made in the year 2009, i.e.:
  • Discount Rate =13%
  • Salary Growth = 8%
  • Expected Rate of Return on Plan Assets = 13%
• There has been no change in the plan benefit structure since its inception; there exists no unrecognized past service cost and unrecognized transitional liability.
• Based on the actuarial assumptions, the Present Value of Defined Benefit Obligations, i.e. the Actuarial Liability and the Normal Cost determined as part of the last Actuarial Valuation for year ended 31-December-2009 was 8,867.77 and 1,108.47 respectively. In addition according to the application of the corridor limit approach (see next bullet), there was no actuarial gains or losses to be recognized in the year 2010 (see detailed calculation below).
• The accounting policy of the company for recognizing gains and losses is that the amount in excess of the corridor limit, as per section 92, will be spread uniformly over the expected average remaining working lives of the employees participating in the plan.[2]
• The expected remaining working life of Emily as at 31-12-2009 was 30 years and as at 31-12-2010 was 29 years.In the following posts we will look at some of the disclosures that are made as part of the gratuity valuation process:

IAS 19 Disclosures Example: Reconciliation of Present Value of Defined Benefit Obligation and Fair Value of Assets
IAS 19 Disclosures Example: Reconciliation to Assets and Liabilities recognized on the balance sheet
IAS 19 Disclosures Example: Gratuity Cost and disclosure of Actuarial Assumptions

[1] This example is based on the IAS 19 version that includes amendments issued up to 31 December 2006 [2] According to an exposure draft of proposed amendments to IAS 19 published by the IASB in April 2010 there is a proposal that all changes in defined benefit obligations and in the fair value of plan assets should be recognized when those changes occur and therefore the option to leave actuarial gains and losses unrecognized if they are within a ‘corridor’ and to defer recognition of actuarial gains and losses outside the corridor may be removed.