May 2015

Basis of Discount Rate under AASB119/IAS19

Summary

Previously, government bond rates were used to derive the Discount Rate (the “Discount Rate”) used in estimating post-employment benefits and other long-term employee benefits for all entities except public not-for-profit sector entities.  From June 2015, the first set of Corporate Bond Yields (the “Corporate Bond Yields”) will be provided by Milliman Australia (Milliman) and it was determined that a deep market of corporate bonds exist in Australia. On this basis, it is appropriate under AASB119/IAS19 to use the set Corporate Bond Yields to derive the Discount Rate.

Accounting Standards

Under the AASB119/IAS19 standards, it is specified that the Discount Rate used should be based on:

“…high quality corporate bonds. In countries where there is no deep market in such bonds, the market yields (at the end of the reporting period) on government bonds shall be used..”

Background

Previously, it was determined there was no deep market of high quality corporate bonds in Australia, hence government bonds were used instead.

Recently, the Group of 100 (which represents senior finance executives from major private and public sector organisations) and the Actuaries Institute commissioned Milliman to undertake research in relation to the corporate bond market in Australia. Based on this research, it was determined that a deep market of corporate bonds does now exist in Australia and an approach was established to set the level of Corporate Bond Yields.  These rates will be issued on a quarterly basis (or possibly more frequently) with the first set of rates available in June 2015 based on data available as at 31 May 2015.

Impacts on Disclosed Figures

Corporate Bond Yields are higher than corresponding government bond yields. This is expected to have the following effects:

1. Balance Sheet:

  • lower the value of the liability calculated for AASB119/IAS19 purposes and so either increase the net asset or reduce the net liability reported in the employer’s accounts in relation to its employee benefit liabilities;
  • it is expected that an actuarial gain will arise in the first year that the Corporate Bond Yields are used since the actual value of employee benefit liabilities will be less than expected.  This is expected to result in an increased asset under the “Other Comprehensive Income” item recorded in the employer’s accounts in relation to its defined benefit superannuation liabilities.  This will not be the case for other employee benefit liabilities (as discussed below);

2. Statement of Profit and Loss:

  • It will not have any impact on the cost of the DB plan for the next valuation (31 December 2015) since the Service Cost will be calculated on the basis of the previous year’s discount rate.  However, it will impact on the Service Cost in subsequent years.
  • It will impact the cost of the LSL arrangement in the next valuation (31 December 2015) since the actuarial gain expected to arise in respect of the year will be included in the employee benefit expense related to long service leave entitlements. 

It is recommended each employer discusses the matter with their auditors.

Links related to this matter are provided below:

September 2011

IAS19 Amendments for Employee Benefits

IAS19 Key Changes

The International Accounting Standards Board (the “IASB”) issued an amended version of IAS19 Employee Benefits on 16 June 2011 (the “Amended Standard”).  The key changes from the current IAS19 standard (the “Current Standard”) and the potential impact on plan sponsors’ accounting disclosures are summarised below.

Immediate Recognition of Actuarial Gains and Losses

The Amended Standard requires all actuarial gains and losses to be recognised immediately through the Other Comprehensive Income (“OCI”) item when they occur – i.e. what is effectively the present “retained earnings” method.  This effectively abolishes the “corridor” and “mark-to-market” recognition methods allowed in the Current Standard.

The change is expected to result in a more volatile superannuation asset/liability in the statement of financial position and a relatively stable profit & loss (“P&L”) expense amount.

Interest Cost and the Expected Return on Plan Assets

In accordance with the Amended Standard, the net interest on the defined benefit asset/liability is to be calculated using the discount rate that is used to measure the Defined Benefit Obligation (the “DBO”).  On this basis, the amendment is expected to have a negative impact – i.e. reduce net income – for the majority of plan sponsors in respect of their P&L expense.

The change from the Current Standard effectively assumes an expected rate of return on plan assets equal to the discount rate and plan sponsors’ P&L will no longer be “rewarded” for holding growth assets.  Consequently, it is expected that plan sponsors may consider moving to more conservative investment strategies. 

Presentation of Post-employment Costs

The post-employment cost is disaggregated into three (3) components – i.e. service cost, interest cost/return on plan assets and remeasurement.  Under the Amended Standard only service cost and net interest cost will be presented in the plan sponsors’ P&L.  The remeasurement component, which includes actuarial gains/lossesand changes in the asset ceiling, will be reported in OCI.

Measurement of Plans’ Administration Costs

The Amended Standard specifies that the return on plan assets is to be net of plan asset management costs.  The treatment of other administration cost remains ambiguous under the Amended Standard but the standard does clarify that other administration costs are not to be deducted from the return on plan assets.

Measurement of Plans’ Taxes Payable

The Amended Standard further clarifies the treatment of taxed payable by the plan. Under the Amended Standard tax payable on future employer contributions is included in the DBO calculation while all other taxes payable by the plan are to be included when calculating the return on plan assets.

Expanded Disclosures Focused on Assessing Risk

The Amended Standard requires plan sponsors to disclose relevant information in relation to their employee benefit plans with the aim of meeting the following objectives:

  • explain the characteristics of the defined benefit plans and the risks to the plan sponsors – e.g. a description of benefit design provided to employees;
  • identify and explain the amounts recognised in the financial statements – e.g. reconciliation of changes in DBO and the plan assets; and
  • describe the plans’ effect on the plan sponsors’ future cash flows – e.g. sensitivity testing on the underlying actuarial assumptions.

Miscellaneous Changes

Full documentation of the above and other comments from the IASB can be found on the IASB website:

www.ifrs.org

Effective Date and Transition

The Amended Standard will be effective for fiscal years starting on or after 1 January 2013.  Early adoption is permitted, providing all amendments are adopted early and disclosure is made in relation to this fact.

The amendments have been formally adopted by the Australian Accounting Standard Board (the “AASB”) with no further amendment.  The Amended AASB119 Employee Benefits issued in September 2011 can be found on the AASB website:

http://www.aasb.gov.au/admin/file/content105/c9/AASB119_09-11.pdf

What Plan Sponsors Should Do Now

The Amended Standard may be expected to have some impact on plan sponsors’ financial statements depending on their current practices.  Accordingly, you may wish to consult your auditors and/or parent companies (as appropriate) on the possibilities of early adoption and the likely effect of these changes on key performance ratios prior to the compulsory adoption date.  Further, when possible we suggest it would be prudent to communicate the possible effects of these changes to relevant stakeholders and financial statement users.

Should you wish to find out more about the above, or to discuss how they might affect you, please feel free to contact us.

May 2011

Budget 2011

The Federal Budget was released on 10 May 2011.  Most changes to superannuation were minor.

General

  • Co-contribution salary thresholds remain frozen at $31,920 and $61,920 for the financial year ending 30 June 2013.
  • Minimum draw-downs for account-based pensions have been reduced to 50% since 1 July 2008.  The reduction will be 25% for the financial year ending 30 June 2012 and eliminated thereafter.
  • Superannuation funds can use Tax File Numbers to assist members to locate member accounts and to consolidate their accounts from 1 July 2011.
  • Members making concessional contributions from 1 July 2011 that exceed the threshold can repay the excess, which will then be taxed at their marginal rate.  This change only applies the first time a member breaches the limit and only for breaches up to $10,000.
  • There will be a higher cap for concessional contributions from 1 July 2012.  This applies to members who have attained age 50 and whose superannuation balance is less than $500,000.  Full details on how it would work are yet to be released.
  • Superannuation funds cannot treat shares as trading stock but must treat gains and losses as capital for tax purposes.

Administration

  • From 1 July 2012, employers must show superannuation contributions actually paid on pay slips.  Further, superannuation funds must advise employers and employees quarterly if regular contributions cease.

SMSFs

  • The SMSF levy will rise by $30 for the 2010-11 financial year to fund in part the stronger super measures for the SMSF segment.

Age pension

  • Age pensioners will benefit from an improved work bonus. Those who work will be able to earn up to $250 per fortnight above the income threshold before their age pension is affected. They can carry forward unused amounts, capped at $6,500.

The full documentation and other material relevant to the Federal Budget can be found at:

 Should you wish to find out more about the above or to discuss how they might affect you, please feel free to contact us.

 

December 2010

Stronger Super

The government released a formal response to the Cooper Review (the “Review”) in a document “Stronger Super” on 16 December 2010. 

The document sets out the government’s support for:

  • MySuper as a low cost and simple superannuation product that will replace existing default funds;
  • SuperStream to enhance the efficiency of the administration superannuation system;
  • Reform of the Self Managed Superannuation Funds sector; and
  • Recommendations relating to the governance, integrity and other regulatory settings of the superannuation system.

Most of the measures are not expected to be put in place until at least 1 July 2011, with many requiring further consultation from industry participants and stakeholders.

The Review recommendations supported by the government that may be of particular interest to you, as a sponsor of a defined benefit fund, are as follows:

  • APRA to be given general standards-making power in relation to superannuation (including prudential matters) in order to address the recommendations in the Review and to drive efficiencies in the industry.
  • APRA to issue a prudential standard that focuses on funding to protect vested benefits and the time period within which a defined benefit fund that is in an unsatisfactory financial position must be restored to a satisfactory financial position.
  • The SIS Act to be amended so that a technically insolvent defined benefit fund should not be allowed to accept SG Act contributions unless the fund actuary and the trustee form the view that it is reasonable to believe that the fund will be restored to solvency within the period prescribed under the SIS Act.
  • Defined benefit funds to automatically qualify as ‘default’ funds for SG Act purposes in respect of the defined benefit provided to members so long as the fund meets the requirements of the SG Act to receive contributions.
  • If the defined benefit fund is a hybrid fund, then the MySuper criteria must be met for accumulation members in order for the fund to be accepted as a default fund under the SG Act in respect of those members.
  • Trustees of defined benefit funds (or sub-plans) that are presently allowed to self-insure death and TPD benefits should continue to be allowed to do so.

The full documentation and other material relevant to the government’s release can be found at:

Should you wish to find out more about the above, please feel free to contact us.