Business Combinations

1. In a business combination that is an acquisition, an enterprise recognises assets and liabilities arising from post-employment benefits at the present value of the obligation less the fair value of any plan assets (see FRS 122₂₀₀₄, Business Combinations). The present value of the obligation includes all of the following, even if the acquiree had not yet recognised them at the date of the acquisition:

   1. actuarial gains and losses that arose before the date of the acquisition (whether or not they fell inside the 10% 'corridor');

   2. past service cost that arose from benefit changes, or the introduction of a plan, before the date of the acquisition; and

   3. amounts that, under the transitional provisions of paragraph 160(b), the acquiree had not recognised.

   Curtailments and Settlements

2. An enterprise should recognise gains or losses on the curtailment or settlement of a defined benefit plan when the curtailment or settlement occurs. The gain or loss on a curtailment or settlement should comprise:

   1. any resulting change in the present value of the defined benefit obligation;

   2. any resulting change in the fair value of the plan assets; and

   3. any related actuarial gains and losses and past service cost that, under paragraphs 93 and 97, had not previously been recognised.

3. Before determining the effect of a curtailment or settlement, an enterprise should remeasure the obligation (and the related plan assets, if any) using current actuarial assumptions (including current market interest rates and other current market prices).

4. A curtailment occurs when an enterprise either:

   1. is demonstrably committed to make a material reduction in the number of employees covered by a plan; or

   2. amends the terms of a defined benefit plan such that a material element of future service by current employees will no longer qualify for benefits, or will qualify only for reduced benefits.

   A curtailment may arise from an isolated event, such as the closing of a plant, discontinuance of an operation or termination or suspension of a plan. An event is material enough to qualify as a curtailment if the recognition of a curtailment gain or loss would have a material effect on the financial statements. Curtailments are often linked with a restructuring. Therefore, an enterprise accounts for a curtailment at the same time as for a related restructuring.

5. A settlement occurs when an enterprise enters into a transaction that eliminates all further legal or constructive obligation for part or all of the benefits provided under a defined benefit plan, for example, when a lump-sum cash payment is made to, or on behalf of, plan participants in exchange for their rights to receive specified post-employment benefits.

6. In some cases, an enterprise acquires an insurance policy to fund some or all of the employee benefits relating to employee service in the current and prior periods. The acquisition of such a policy is not a settlement if the enterprise retains a legal or constructive obligation (see paragraph 40) to pay further amounts if the insurer does not pay the employee benefits specified in the insurance policy. Paragraphs 106-109 deal with the recognition and measurement of reimbursement rights under insurance policies that are not plan assets.

7. A settlement occurs together with a curtailment if a plan is terminated such that the obligation is settled and the plan ceases to exist. However, the termination of a plan is not a curtailment or settlement if the plan is replaced by a new plan that offers benefits that are, in substance, identical.

8. Where a curtailment relates to only some of the employees covered by a plan, or where only part of an obligation is settled, the gain or loss includes a proportionate share of the previously unrecognised past service cost and actuarial gains and losses (and of transitional amounts remaining unrecognised under paragraph 160(b)). The proportionate share is determined on the basis of the present value of the obligations before and after the curtailment or settlement, unless another basis is more rational in the circumstances. For example, it may be appropriate to apply any gain arising on a curtailment or settlement of the same plan to first eliminate any unrecognised past service cost relating to the same plan.
   
   

   Example Illustrating Paragraph 120 An enterprise discontinues a business segment and employees of the discontinued segment will earn no further benefits. This is a curtailment without a settlement. Using current actuarial assumptions (including current market interest rates and other current market prices) immediately before the curtailment, the enterprise has a defined benefit obligation with a net present value of RM1,000, plan assets with a fair value of RM820 and net cumulative unrecognised actuarial gains of RM50. The enterprise had first adopted the Standard one year before. This increased the net liability by RM100, which the enterprise chose to recognise over five years (see paragraph 160(b)). The curtailment reduces the net present value of the obligation by RM100 to RM900. Of the previously unrecognised actuarial gains and transitional amounts, 10% (RM100/RM1,000) relates to the part of the obligation that was eliminated through the curtailment. Therefore, the effect of the curtailment is as follows:   Before Curtailment After           curtailment gain curtailment           RM RM RM Net present value of obligation   1,000 (100) 900 Fair value of plan assets   (820) ___________ - ___________ (820) ___________ 180 (100) 80 Unrecognised actuarial gains   50 (5) 45 Unrecognised transitional amount (80) 8 (72) (RM100 X 4/5) ___________ ___________ ___________ Net liability recognised in balance sheet   150 (97) 53 ========= ========= =========

   
   Presentation

   Offset

9. An enterprise should offset an asset relating to one plan against a liability relating to another plan when, and only when, the enterprise:

   1. has a legally enforceable right to use a surplus in one plan to settle obligations under the other plan; and

   2. intends either to settle the obligations on a net basis, or to realise the surplus in one plan and settle its obligation under the other plan simultaneously.

10. The offsetting criteria are similar to those established for financial instruments in FRS 132₂₀₀₄, Financial Instruments: Disclosure and Presentation.

    Current I Non-current Distinction

11. Some enterprises distinguish current assets and liabilities from non-current assets and liabilities. This Standard does not specify whether an enterprise should distinguish current and non-current portions of assets and liabilities arising from post-employment benefits.

    Financial Components of Post-employment Benefit Costs

12. This Standard does not specify whether an enterprise should present current service cost, interest cost and the expected return on plan assets as components of a single item of income or expense on the face of the income statement.

    Disclosure

13. An enterprise should disclose the following information about defined benefit plans:

    1. the enterprise's accounting policy for recognising actuarial gains and losses;

    2. a general description of the type of plan;

    3. a reconciliation of the assets and liabilities recognised in the balance sheet, showing at least:

       1. the present value at the balance sheet date of defined benefit obligations that are wholly unfunded;

       2. the present value (before deducting the fair value of plan assets) at the balance sheet date of defined benefit obligations that are wholly or partly funded;

       3. the fair value of any plan assets at the balance sheet date;

       4. the net actuarial gains or losses not recognised in the balance sheet (see paragraph 93);

       5. the past service cost not yet recognised in the balance sheet (see paragraph 97);

       6. any amount not recognised as an asset, because of the limit in paragraph 59(b);

       7. the fair value at the balance sheet date of any reimbursement right recognised as an asset under paragraph 106 (with a brief description of the link between the reimbursement right and the related obligation); and

       8. the other amounts recognised in the balance sheet;

    4. the amounts included in the fair value of plan assets for:

       1. each category of the reporting enterprise's own financial instruments; and

       2. any property occupied by, or other assets used by, the reporting enterprise;

    5. a reconciliation showing the movements during the period in the net liability (or asset) recognised in the balance sheet;

    6. the total expense recognised in the income statement for each of the following, and the line item(s) of the income statement in which they are included:

       1. current service cost;

       2. interest cost;

       3. expected return on plan assets;

       4. expected return on any reimbursement right recognised as an asset under paragraph 106;

       5. actuarial gains and losses;

       6. past service cost; and

       7. the effect of any curtailment or settlement;

    7. the actual return on plan assets, as well as the actual return on any reimbursement right recognised as an asset under paragraph 106; and

    8. the principal actuarial assumptions used as at the balance sheet date, including, where applicable:

       1. the discount rates;

       2. the expected rates of return on any plan assets for the periods presented in the financial statements;

       3. the expected rates of return for the periods presented in the financial statements on any reimbursement right recognised as an asset under paragraph 106;

       4. the expected rates of salary increases (and of changes in an index or other variable specified in the formal or constructive terms of a plan as the basis for future benefit increases);

       5. medical cost trend rates; and

       6. any other material actuarial assumptions used.

    An enterprise should disclose each actuarial assumption in absolute terms (for example as an absolute percentage) and not just as a margin between different percentages or other variables.

14. Paragraph 125(b) requires a general description of the type of plan. Such a description distinguishes, for example, flat salary pension plans from final salary pension plans and from post-employment medical plans. Further detail is not required.

15. When an enterprise has more than one defined benefit plan, disclosures may be made in total, separately for each plan, or in such groupings as are considered to be the most useful. It may be useful to distinguish groupings by criteria such as the following:

    1. the geographical location of the plans, for example by distinguishing domestic plans from foreign plans; or

    2. whether plans are subject to materially different risks, for example, by distinguishing flat salary pension plans from final salary pension plans and from post-employment medical plans.

    When an enterprise provides disclosures in total for a grouping of plans, such disclosures are provided in the form of weighted averages or of relatively narrow ranges.

16. Paragraph 31 requires additional disclosures about multi-employer defined benefit plans that are treated as if they were defined contribution plans.

17. Where required by FRS 124₂₀₀₄, Related Party Disclosures, an enterprise discloses information about:

    1. related party transactions with post-employment benefit plans; and

    2. post-employment benefits for key management personnel.

18. Where required by FRS 137₂₀₀₄, Provisions, Contingent Liabilities and Contingent Assets, an enterprise discloses information about contingent liabilities arising from post-employment benefit obligations.

    Other Long-Term Employee Benefits

19. Other long-term employee benefits include, for example:

    1. long-term compensated absences such as long-service or sabbatical leave;

    2. jubilee or other long-service benefits;

    3. long-term disability benefits;

    4. profit sharing and bonuses payable twelve months or more after the end of the period in which the employees render the related service; and

    5. deferred compensation paid twelve months or more after the end of the period in which it is earned.

20. The measurement of other long-term employee benefits is not usually subject to the same degree of uncertainty as the measurement of post-employment benefits. Furthermore, the introduction of, or changes to, other long-term employee benefits rarely causes a material amount of past service cost. For these reasons, this Standard requires a simplified method of accounting for other long-term employee benefits. This method differs from the accounting required for post-employment benefits as follows:

    1. actuarial gains and losses are recognised immediately and no 'corridor' is applied; and

    2. all past service cost is recognised immediately.

    Recognition and Measurement

21. The amount recognised as a liability for other long-term employee benefits should be the net total of the following amounts:

    1. the present value of the defined benefit obligation at the balance sheet date (see paragraph 65);

    2. minus the fair value at the balance sheet date of plan assets (if any) out of which the obligations are to be settled directly (see paragraphs 103-105).

    In measuring the liability, an enterprise should apply paragraphs 50-92, excluding paragraphs 55 and 62. An enterprise should apply paragraph 106 in recognising and measuring any reimbursement right.

22. For other long-term employee benefits, an enterprise should recognise the net total of the following amounts as expense or (subject to paragraph 59) income, except to the extent that another Financial Reporting Standard requires or permits their inclusion in the cost of an asset:

    1. current service cost (see paragraphs 64-92);

    2. interest cost (see paragraph 83);

    3. the expected return on any plan assets (see paragraphs 110-112) and on any reimbursement right recognised as an asset (see paragraph 106);

    4. actuarial gains and losses, which should all be recognised immediately;

    5. past service cost, which should all be recognised immediately; and

    6. the effect of any curtailments or settlements (see paragraphs 114 and 115).

23. One form of other long-term employee benefit is long-term disability benefit. If the level of benefit depends on the length of service, an obligation arises when the service is rendered. Measurement of that obligation reflects the probability that payment will be required and the length of time for which payment is expected to be made. If the level of benefit is the same for any disabled employee regardless of years of service, the expected cost of those benefits is recognised when an event occurs that causes a long-term disability.

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