2012 TTAAG IAS 19 Employee Benefits - Defined Benefit Plans

7/22/2019 2012 TTAAG IAS 19 Employee Benefits - Defined Benefit Plans

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TECHNICAL TOPIC AUDIT APPROACH GUIDEIAS 19 Employee Benefits - Defined benefit plans (09/12)

1

Purpose

The purpose of this technical topic audit approach guide (or guide) is to assist teams in developing and documenting an audit approach to defined benefit plans, where the

entity follows International Accounting Standard 19 Employee Benefits (IAS 19 or the Standard) . This guide includes examples of relevant information to document,

audit procedures to perform and guidance.

Engagement teams should note the following when using this guide:

It is intended to be guidance in nature and does not constitute a set of prescriptive requirements, or a comprehensive checklist of matters to be addressed.

In determining the audit approach consideration should be given to the significant risks, evaluation of estimates, control evaluation and RoMM assessment specific to the

entitys circumstances.

It may be appropriate to consider the guidance and/or perform and document the procedures separately to address different defined benefit plans relevant to the entity.

Professional judgement should be exercised when determining which procedures will be performed on a particular engagement. The example procedures need to be

tailored to address the specific circumstances of the entity and to reflect the planned audit approach. This may result in the determination that:

- the procedures in this guide may not be sufficient.

- some of the procedures included in this guide may not be relevant.

- it may be appropriate to perform different procedures to those included in this guide.

The guidance is based on, but not limited to, audits performed in accordance with KAM International 2012 (KAM) and using eAudIT 2012.

Use of examples

This guide provides a range of examples including significant accounts and relevant assertions; estimates; significant risks; inquiries; process activities; what could go

wrongs; controls; and substantive procedures.

Examples indicated with a symbol are available in the relevant eAudIT activity through industry knowledge.

All other examples can be cut and pasted from this guide into the relevant eAudIT activity.

Alternatively, for substantive testing it may be more efficient to attach this guide to the relevant audit program or eAudIT activity 3.4.1 Technical Topics.


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Contents

1. Overview

1.1. Objective of IAS 19

1.2. Scope of this guide

1.3. Definitions used in this guide

1.4. Sources of further guidance

2. General matters to consider in our audit approach

2.1. General matters to consider

2.2. The professional judgement process

3. Developing an audit approach

3.1. Example significant accounts

3.2. Risk assessment: Risk identification, assessment and response

3.2.1.Developing our understanding of the entity

3.2.2.Identification and implications of a significant risk

3.2.3.Involvement of specialists and experts

3.3. Risk assessment: Process activities and control evaluation

3.4. Substantive testing

A. Identification and classification

B. Overview of defined benefit plans

C. Accounting for multi-employer plans

D. Plan financial statements

E. Defined benefit obligations

1. General considerations

2. Source data provided to the actuary

3. Actuarial assumptions

4. Past service cost

5. Develop own estimatesF. Plan assets

G. Actuarial gains and losses

H. Reimbursement rights

I. Curtailments and settlements

J. Minimum funding requirements and refunds or reduction in futurecontributions

K. Presentation and disclosure

Appendices

1. Example process activities, WCGWs and controls2. Developing a scope of work with specialistssubstantive procedures


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1 Overview

1.1 Objective of IAS 19 Employee BenefitsThe objective of IAS 19 is to prescribe the accounting and disclosure for employee benefits. The Standard requires an entity to recognise:

(a) a liability when an employee has provided service in exchange for employee benefits to be paid in the future; and

(b) an expense when the entity consumes the economic benefit arising from service provided by an employee in exchange for emp loyee benefits. [IAS 19]

IAS 19 is applied by an employer in accounting for all employee benefits, except those to which IFRS 2 Share Based Payments applies. [IAS 19.1]

1.2 Scope of this guide

I n scope

This guide is applicable when auditing defined benefit plans that are accounted for using IAS 19 Employee Benefits and, if applicable, IFRIC 14 IAS 19 The Limit on a

Defined Benefit Asset, Minimum Funding Requirements and their Interaction. IFRIC 14 has specific additional accounting considerations for defined benefit plans relating tothe availability of refunds or reductions in contributions and minimum funding requirements. Defined benefit plans may be pension plans or other types of post-employment

defined benefit plans, such as medical cover. The guide is based on the Standards as currently effective, for accounting periods beginning on or before 31 December 2012,

unless otherwise noted.

Example significant accounts are set out in section 3.1 below.

Out of scope

This guide does not apply to the amendments to IAS 19 that are effective for annual periods beginning on or after 1 January 2013 (although earlier application of the amended

IAS 19 is permitted, subject to making disclosure of this fact). See section 1.3 for sources of further guidance on the revised standard.

This guide does not apply to:

Defined contribution plans Other employee benefits that are within the scope of IAS 19

Employee benefits to which IFRS 2 Share Based Payments applies, which are outside the scope of IAS 19

The audit of the financial statements of defined benefit plans. The accounting for defined benefit plans is addressed by IAS 26 Accounting and Reporting by

Retirement Benefit Plans

This guide does not address specific considerations resulting from first time application of IFRS, as set out in IFRS 1.


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1.3 Definitions used in this guide

Term Definition

Actuarial gains and losses Actuarial gains and losses comprise:

(a) experience adjustments (the effects of differences between the previous actuarial assumptions and what has actually occurred); and

(b) the effects of changes in actuarial assumptions. [IAS 19.7]

Asset ceiling The asset ceiling is a limit to the amount of a net defined benefit asset that can be recognised in the statement of financia l position, based

on the present value of available contribution reductions or refunds plus unrecognised actuarial losses and unrecognised past service

costs. [IAS 19.58; Insights 4.4.660.10]

Corridor method Under the corridor method, actuarial gains and losses are recognised when the cumulative (unrecognised) amount thereof at the

beginning of the period exceeds a 'corridor'. The corridor is 10 percent of the greater of the present value of the obligation and the fair

value of the assets. The corridor is calculated separately for each plan. [Insights 4.4.530 .10; IAS 19.92]

Current service cost The increase in the present value of a defined benefit obligation resulting from employee service in the current period. [IAS 19.7]

Curtailment An amendment to a defined benefit plan which reduces or removes benefits for future service by employees, which occurs when anentity either:

(a) is demonstrably committed to make a significant reduction in the number of employees covered by a plan; or

(b) amends the terms of a defined benefit plan so that a significant element of future service by current employees will no longer qualify

for benefits, or will qualify only for reduced benefits. [IAS 19.111, 111A]

Defined benefit obligation The expected future payments, without deducting anyplan assets, required to settle an entitys obligations (under a defined benefit plan

of which the reporting entity is a sponsoring employer) resulting from employee service in the current and prior periods [IAS 19.7]. The

obligation is measured in present value terms.

Defined benefit plans Post-employment benefit plans other than defined contribution plans. [IAS 19.7]

Defined contribution plans Post-employment benefit plans under which an entity pays fixed contributions into a separate entity (a fund) and will have no legal or

constructive obligation to pay further contributions if the fund does not hold sufficient assets to pay all employee benefits relating to

employee service in the current and prior periods. [IAS 19.7]

Employee benefits All forms of consideration given by an entity in exchange for service rendered by employees. [IAS 19.7]

Fair value The amount for which an asset could be exchanged or a liability settled between knowledgeable, willing parties in an arm's length

transaction. [IAS 19.7]


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Term Definition

Group administration plans An aggregation ofsingle employer plans combined to allow participating employers to pool their assets for investment purposes and

reduce investment and administration costs but the claims of different employers are segregated for the sole benefit of their own

employees. [IAS 19.33]Interest cost The increase during a period in the present value of a defined benefit obligation which arises because the benefits are one period closer

to settlement. [IAS 19.7]

Long-term employee benefit

fundAn entity (a fund) that is legally separate from the reporting entity and exists solely to pay or fund employee benefits. [IAS 19.7]

Medical benefits Payments to cover all or part of the costs of health care on behalf of an individual. Also referred to as health benefits or health insurance.

Multi-employer plans Defined benefit plans ordefined contribution plans (other thanstate plans) that:

(a) pool the assets contributed by various entities that are not under common control; and

(b) use those assets to provide benefits to employees of more than one entity, on the basis that contribution and benefit levels are

determined without regard to the identity of the entity that employs the employees concerned. [IAS 19.7]

Net defined benefit liability/

asset

The net total of the following amounts:

a) the present value (PV) of the defined benefit obligation at the end of the reporting period;

b) plus any actuarial gains (less any actuarial losses) not recognised because of the application of the corridor method (or othersystematic partial recognition method permitted under IAS 19.92 -93);

c) minus anypast service costnot yet recognised;

d) minus the fair value at the end of the reporting period ofplan assets (if any) out of which the obligations are to be settleddirectly. [IAS 19.54]

Except that if the net total is negative (i.e. a net asset position) the amount is limited by the asset ceilingtest. [IAS 58.19]

Past service cost The change in the present value of the defined benefit obligation for employee service in prior periods, resulting in the current periodfrom the introduction of, or changes to,post-employment benefits or other long-term employee benefits. Past service cost may be either

positive (when benefits are introduced or changed so that the present value of the defined benefit obligation increases) or negative (when

existing benefits are changed so that the present value of the defined benefit obligation decreases. [IAS 19.7]


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Term Definition

Plan assets Plan assets comprise:(a) assets held by a long-term employee benefit fund [i.e. a post-employment benefit plan]; and

(b) qualifying insurance policies. [IAS 19.7]Plan assets are available to be used only to pay or fund employee benefits, are not available to the reporting entity's own creditors (evenin bankruptcy), and cannot be returned to the reporting entity, unless either:

(i)the remaining assets of the fund are sufficient to meet all the related employee benefit obligations of the plan or the reporting entity; or(ii)the assets are returned to the reporting entity to reimburse it for employee benefits already paid. [IAS 19.7]

Pension Payments to an individual, or surviving dependants, under given conditions following retirement from employment. A pension (alsoreferred to as apost-retirement benefit) is a type ofpost-employment benefitand may be in the form ofdefined benefitordefined

contribution plans.

Post-employment benefits Employee benefits (other than termination benefits) which are payable after the completion of employment [IAS 19.7], before or during

retirement. For examplepost-retirement benefits (such aspensions) and medical and life insurance benefits that are available after

employment. [Insights 4.4.100.10]

Post-employment benefit

plans

Formal or informal arrangements under which an entity providespost-employment benefits for one or more employees [IAS 19.7]. A

post employment benefit plan may be referred to as a plan or scheme.

Post-retirement benefits Post retirement benefits includepension benefits and other non-pension benefits such as medical cover that become payable on

retirement from employment. A retirement age is usually defined by the plan and/or legislation.

Projected Unit Credit

MethodThe Projected Unit Credit Method (sometimes known as the accrued benefit method pro-rated on service or as the benefit/ years of

service method) sees each period of service as giving rise to an additional unit of benefit entitlement and measures each uni t separately

to build up the final obligation [IAS 19.65]. This is the actuarial valuation method that the Standard requires to be used to determine thepresent value ofan entitys defined benefit obligations and the related current service costand where applicable,past service cost. [IAS19.64]

Qualifying insurance policy An insurance policy issued by an insurer that is not a related party (per IAS 24) of the reporting entity, if the proceeds of the policy:

a) can be used only to pay or fund employee benefits under a defined benefit plan; andb) are not available to the reporting entity's own creditors (even in bankruptcy) and cannot be paid to the reporting entity, un less either:

i. the proceeds represent surplus assets that are not needed for the policy to meet all the related employee benefitobligations; orii. the proceeds are returned to the reporting entity to reimburse it for employee benefits already paid. [IAS 19.7]


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Term Definition

Reimbursement rights asset A reimbursement rights asset arises where an entity has a right to reimbursement of some or all of its defined benefit obligations from athird party. They are notplan assets. [IAS 19.104A]

Return on plan assets The interest, dividends and other revenue derived from theplan assets, together with realised and unrealised gains or losses on the plan

assets, less any costs of administering the plan (other than those included in the actuarial assumptions used to measure the defined

benefit obligation) and less any tax payable by the plan itself. [IAS 19.7]

Settlements A settlement occurs when an entity 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 specifiedpost-employment benefits. [IAS 19.112]

Single employer plans Post employment benefit plans that provide benefits to the employees of a single entity (or to a group of entities under common control).

Sponsoring employer A sponsoring employer is an entity who usually funds part or all of the costs of apost-employment benefit plan on behalf ofthe entitys

employees.

State plans Post employment benefit plans that are established by legislation to cover all entities (or all entities in a particular category, for example,a specific industry) and are operated by national or local government or by another body which is not subject to control or influence by

the reporting entity. [IAS 19.37]


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1.4 Sources of further guidance

Sources of further guidance include:

IAS 19Employee Benefits (as currently effective)

IFRIC 14 IAS 19 - The Limited on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction

Insights into IFRS 9th

Edition 2012/13 (Insights): Chapter 4.4 Employee benefits

IS Alert 2011/54: Audit documentation considerations when auditing estimates (with attached Practice Aid)

IS Alert 2009/01: Current market conditions and employee benefit plans

For additional guidance and example procedures relevant to auditing fair value measurements in accordance with IFRSs, refer to the Technical Topic Audit ProgramGuide,IFRSs -Fair Value Measurements.

For guidance on the effect of the revisions to IAS 19 that are effective for annual periods beginning on or after 1 January 2013, refer to:

- IAS 19Employee Benefits (revised June 2011)

- First Impressions: Employee Benefits (July 2011)

KAM International 2012


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2 General matters to consider in our audit approach

2.1 General matters to consider

Defined benefit plan accounting is an area that is based on estimates and in which significant judgement is applied by management, with resulting potential for managementbias. Throughout this guide we refer to procedures such as assess and evaluate, and in many instances the primary source of information about the accounting

estimates will be managements judgement. This means that the application of our professional scepticism, the quality of our documentation and consideration of appropriate

management representations is particularly important.

Topic Summary KAM topic

Professional

scepticism

It is important that we plan our audit approach and procedures to develop an understanding of managements methodology and keyassumptions, such as the demographic and financial actuarial assumptions for defined benefit obligations, and apply appropriate

professional scepticism in evaluating their reasonableness.

We do not just accept managements explanations and information, but corroborate their explanations and evaluate the reliability of

that information based on our understanding of the business, the industry, current market conditions and other audit evidence obtainedduring our audit. We consider our own potential biases and apply the professional judgement process when performing our audit.

26.0000

General

principles and

responsibilities

Management

bias

We examine accounting estimates for biases and also evaluate whether the circumstances producing the bias, if any, represent a fraud

risk. Where the judgements and decisions made by management in making the accounting estimate indicate possible bias, we

document the indicators of management bias and document how the engagement team plans to address the indicators.

20.0000

Estimates

Quality of

documentation

The audit documentation needs to be of sufficient quality and clarity such that an experienced auditor, having no previous co nnectionwith the engagement, reviewing the audit documentation sometime in the future will be able to understand the procedures performed,

including the results, and the audit evidence obtained.

It is particularly important with potentially complex technical areas of accounting such as defined benefit plans to stand back and askwhether the audit documentation reflects the significant judgements and professional scepticism applied.

7.0000

Audit

documentation

Management

representations

Attach to eAudIT

activity 4.7.3

We obtain written representations from management and, where appropriate, those charged with governance regarding whether they

believe significant assumptions used in making accounting estimates are reasonable. [Source: KAM 20.2155]

Consider whether there is also a need to obtain specific written representations with regard to defined benefit plans, such as forjudgements and estimates. Refer to IS Alert 2012/14,Example Management Representation Letter (2012 Update) for furtherguidance. In particular, Attachment 1 (section xxi and xxii) to that letter provides example additional representations to address

specific circumstances of the client relating to post employment benefits, including defined benefit plans.

61.0000

Written

representations
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2.2 The professional judgement process

Audit quality is integral to KPMGs business and is the responsibility of every professional in all KPMG member firms. The professional judgement process is a tool that

supports elements of performing an effective and efficient audit and is a key part of theAudit Quality Framework.

The professional judgement process describes what we should do but often does notdescribe what we actually do when making complex judgements. The reason that we dont

always follow this process is that in environments that include pressure, time constraintsand limited capacity, there are a number ofjudgement traps andjudgementbiases that we

can fall into.

Commonjudgement traps include solving the wrong problem, not being clear on what weare trying to achieve, and considering an inappropriately constrained set of alternatives.

Keyjudgement biases include:

anchoringbasing expected outcomes too much on one piece of information such as aclient estimate.

confirmationseeking and overweighting evidence that confirms the proposed solution.

overconfidencea tendency to be overconfident in our judgement abilities.

Key elements of critical thinking in the professional judgement process

Element Description Examples of applying the professional judgement process to defined benefit plans

1. Clarify Issues and

Objectives

Determine that the appropriate issue and objective have been identified and

understand how the issue relates to the overall audit.

Have all defined benefit plans been appropriately recognised and disclosed in the

financial statements?

2. Consider

Alternatives

When more alternatives are considered, judgements may be better. Has

opposing information been considered for each point of view, where

appropriate?

Is the plan classified appropriately, i.e. as defined benefit or defined contribution?

What would be the impact on the plan of a change in any of the actuarial assumptions?

3. Gather and

Evaluate

Information

What subjective assumptions are embedded in the information obtained? Are

inferences that have been drawn from the available evidence supportable based

on objective facts or other information obtained throughout the audit? Hassufficient, appropriate information been obtained?

Are the actuarial assumptions (demographic, discount rates, future salary increases

etc.) supportable and consistent with our understanding of the plan, comparable plans

and current economic conditions?

4. Reach

Conclusions

Form a conclusion, considering whether it makes sense in the context of the

audit and other audit evidence.

Does the net defined benefit plan asset or liability recognised in the financial

statements fit with our understanding of the plan and current economic conditions?

5. Articulate and

Document Rationale

Document the findings and conclusion over the key areas of judgement in

accordance with firm and professional requirements, ensuring that all relevant

factors considered have been documented.

Findings and conclusions on specific significant accounts and audit procedures are

documented in the relevant audit program. Overall conclusions on significant risks and

other relevant matters are documented in eAudIT activity 4.5.4
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3 Developing an audit approach

3.1 Example significant accounts

This table includes the significant accounts and relevant assertions from the General cross-industry knowledge in scope of this guide. Other industry specific or client specific

significant accounts and disclosures may also be appropriate to include in scope (1).

Financial statement Significant account/ disclosure(2)Relevant assertions Contains an

estimate?C E A V O P

Statement of financial position Pension assets C E A V O P Y

Pension liabilities C E A V O P Y

Statement of comprehensive income Pension expenses C E A P N

Defined benefit plan actuarial gains/ (losses) C E A P N

Notes:

1) Other significant accounts - The General cross-industry knowledge examples include pension assets and liabilities and pension expense as example significant accounts, on the basis thatpensions are a common form of post-employment benefit. Engagement teams may identify other significant accounts in relation to other post -employment benefits that are still within the

scope of IAS 19 and this guide. The guidance and example procedures that follow may apply to all types of defined benefit plans.

2) The industry knowledge examples do not include a separate Pensions disclosure (in eAudIT activity 2.3.2) on the basis that the applicable disclosures are addressed by identifying the Passertion as relevant for the related significant account(s).


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3.2 Risk assessment: Understanding the entity

This section sets out guidance on the risk assessment phase of the audit for defined benefit plans and provides relevant examples. Defined benefit plans is an area that will

often have a significant risk identified.

3.2.1 Developing our understanding of the entity

Guidance eAudIT #

Significant accounts: Identify whether the entity has any accounts in the scope of IAS 19 that relate to defined benefit plans (see section 1.3 of this guide) and

assess whether they are significant accounts. Identify the relevant assertions for each significant account. [Source: KAM 10.1300]

If no defined benefit plan accounts have been recorded in the general ledger, it may still be necessary to identify a significant account for a defined benefit plan

in order to document procedures to address completeness, classification and/or disclosure risks.

Map the significant accounts to the appropriate process(es) and audit program. It may be appropriate to identify a separate Pensions or Defined benefit

plans audit program for documenting the substantive procedures for this topic.

2.3.1

Significant

accounts

2.3.3 and

2.3.4

Identify whether or not a significant account contains an estimate relating to defined benefit plans, such as the estimate of the present value of defined benefit

obligations and estimate of the fair value of plan assets. Significant accounts are identified (in eAudIT activity 2.3.1) as containing an estimate when that

estimate gives rise to a risk of material misstatement as a result of estimation uncertainty at the time we perform our audit procedures. [Source: KAM 20.1015]

Retrospective review of estimates: evaluate the outcome of accounting estimates included in the prior period financial statements, or, where applicable, their

subsequent re-estimation for the purpose of the current period. [Source: KAM 20.1240]

Defined benefit obligations and plan assets are by their nature mainly long term. As such our retrospective review is more likely to focus on the accuracy of the

assumptions used in the prior period estimate, such as how close the current period experience was to the actuarial assumptions in the prior period. Our

intention is to evaluate if the assumptions made by management in their valuation in the prior period, were valid and consistent with events in the followingperiod, with the purpose of assessing managements reliability and accuracy in making estimates.

2.3.1

Significant

accounts

2.6.11.xx

Estimates

Ask the required inquiry below to relevant management personnel and consider the responses in context of defined benefit plan estimates. Additional

inquiries may also be appropriate and can be included within the relevant inquiries agenda. Many different inquiries of management orother risk assessment

procedures may identify information relevant to consideration of defined benefit plans. The examples below may be particularly relevant.

Document

Generator

Attach the

agenda(s)

to 2.5.2

Inquiries


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Guidance eAudIT #

Required inquiry Estimates changes in

circumstances

Have there been changes in circumstances that may give rise to new or the need to revise existing

accounting estimates including the following:

the entity engaged in new types of transactions that may give rise to accounting estimates.

the terms of transactions that give rise to accounting estimates changed.

accounting policies relating to accounting estimates changed as a result of changes to therequirements of the applicable financial reporting framework or otherwise.

regulatory or other changes outside the control of management occurred that may requiremanagement to revise or make new accounting estimates.

new conditions or events occurred that may give rise to the need for new or revised accountingestimates?

Additional inquiry

examples

Post employments benefit

plans

Does the entity have (or contribute to) any post-employment benefit plans for its employees,

including participating in any multi-employer or state plans? Have there been any new plans or

significant changes to existing plans, including changes to the mix of employees participating in theplan?

Estimate changes Have there been any changes to the significant accounting estimates for the entity including increased

subjectivity or judgement involved in the underlying assumptions?

2.5.3

Other risk

assessment

procedures

Key elements of understanding of the entity and its environment are documented (in eAudIT activity 2.6.1 to .7) based on findings from risk assessment

inquiries and other risk assessment procedures [Source: KAM 58.1370]. Various findings from risk assessment could lead to matters relevant to the audit of

defined benefit plans being identified. Example wording for key elements of understanding are available in industry knowledge.

2.6.1-7

Understanding of IT and GITC: Identify whether there are any software systems that support processes and data used in accounting for defined benefit plans,

including the use of system-generated reports, and document this as part of our understanding of IT. Identify whether there are any application controls (i.e.

automated controls or manual controls with an automated component), such as the configuration of reports, that we will seek to rely on in our audit of defined

benefit plans. Where reliance on application controls is planned, identify and test the general IT controls that support the continued operation of those

application controls.

The specific application controls we plan to rely on are documented and tested as part of the relevant process in eAudIT activity 2.11.xx.2 (see section 3.3).

2.6 10

and 2.13, if

applicable


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3.2.2 Identification and implications of a significant risk

Guidance eAudIT #

Consider whether there is a significant risk(significant inherent risk of error and/or risk of fraud) related to the significant account(s) and in particular

whether there is a significant risk related to the estimate.

Defined benefit plans is an area that will often have one or more significant risks identified.See example significant risk below.

Significant

risks are

documented in

the Tracker

If a significant risk has been identified related to defined benefit plans, evaluate the design and implementation of controls over the significant accounts

and assertions related to that risk [Source: KAM 47.1110]2.11.xx.1-3 of

the relevant

process(es)

Substantive testing: For accounting estimates that give rise to a significant risk, in addition to other substantive procedures the engagement team evaluates

how management has considered alternative assumptions or outcomes, and why it has rejected them, or how management has otherwise addressed

estimation uncertainty in making the accounting estimate; whether the significant assumptions used by management are reasonable; and where

relevant...managements intent to carry out specific courses of action and its ability to do so. [Source: KAM 20.1885]

3.2.xx.3 of the

relevant audit

program(s)

Example significant risk Significant account/ disclosure Relevant assertions

Pension assets and liabilities - judgemental accounting estimates

The calculation of the estimate of the present value of defined benefit obligations, the estimate of the fair value of

related plan assets and the preparation of related disclosures involve subjective judgements or uncertainties that can

be difficult to corroborate, which increase the likelihood of misstatements to pension assets and liabilities.

Pension assets

Pension liabilities

V

V

P

P


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3.2.3 Involvement of specialists and experts

Guidance eAudIT #

The engagement partner may consider the involvement ofKPMGactuarial specialists where actuarial information is used in the preparation of the financial

statements. [Source: KAM 34.1235] For example, actuarial information is used in estimating the present value of defined benefit obligations for postemployment benefit plans.

The following factors may assist the engagement partner in deciding whether to involve KPMG valuation specialists:

the materiality, nature and complexity of the estimates, including fair value estimates and the risk of material misstatement at the assertion level

whether the entity has developed the estimates, including fair value estimates or has engaged the services of a management's expert

whether we have sufficient skills to review the estimates, including fair value estimates determined by the entity. [Source: KAM 34.1265]

Select the

specialists

in 1.2.2

Scaling

Agree the scope of the specialists involvement. For example it may be appropriate to involve actuarial specialists, in particular to assess the application of

IAS 19 (and where applicable, IFRIC 14) with regard to:

the calculation of the net defined benefit asset or liability and related income or expense (procedures #5 and #6 from section 3.4 of this guide)

the actuarial method, the attribution of benefits to periods of service and the actuarial assumptions applied (#13 to #19 and #22 to #27)

the recognition of past service cost (#28) the recognition of actuarial gains and losses (#39)

identifying what effect curtailments, settlements, refunds or reductions in future contributions, or minimum funding requirements, if any, had on theentity (#41 to #43)

the appropriateness of defined benefit plan disclosures (#44)

if appropriate, to develop our own estimates of the present value of defined benefit obligations (#29).

It may be appropriate to involve valuation specialists in examining significant assumptions underlying the estimate of the fair value of plan assets (#30, #38).

Appendix 2 provides a table indicating which of the substantive procedures from section 3.4 might typically be performed by specialists, audit team or either.

2.12. xx

Make inquiries of management regarding whether the entity uses managements experts for an actuarial valuation of defined benefit plans. A management's

expert is an individual or organisation possessing skills, knowledge and experience in a field other than accounting or auditing, whose work in that field is used

by the entity to assist in preparing the financial statements. An expert may be a third party engaged by the entity or an employee of the entity. [Source: KAM:

62.6015]

There will usually be a plan actuary for each defined benefit plan, who is engaged or employed by the plan to perform valuations of the defined benefit plan

when required, such as for the plan financial statements. There may also be an actuary engaged or employed by the entity, to perform a valuation as at the end

of the entitys reporting period. It may be the same or a different actuary to the plan actuary.

1.2.2

Scaling


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Guidance eAudIT #

If the engagement team plan to use the work of an expert engaged or employed by the entity, such as an actuary for the defined benefit plan, we document our

evaluation of the competence, capabilities and objectivity of that management's expert. We consider whether to involve a KPMG specialist and/or use an

expert engaged by KPMG in our evaluation of managements expert and their work [Source: KAM 62.1000, 62.1055]

2.9.9.xx

Experts

3.3 Risk assessment: Process activities and control evaluationThis section sets out guidance relating to process activities and control evaluation. We are required to obtain an understanding of the process activities relating to

significant accounts including, where relevant, activities relating to how management makes accounting estimates. Where a significant risk is identified, we are also required

to evaluate the design and implementation of controls relevant to that risk. Appendix 1 has example process activities, WCGWs and controls.

Guidance eAudIT #

Process activities: We make inquiries of management and inspect relevant documentation to obtain an understanding of managements processes for defined

benefit plans, (including information systems used, responsibilities, timeliness, methods, etc). [Source: KAM 42.1010] 2.11.xx.1Process activities related to an estimate: We obtain an understanding of how management makes the accounting estimates, and an understanding of the data

on which they are based. [Source: KAM 20.1085]2.6.11.xx

Planned approach: We determine whether we will evaluate controls for each significant account and relevant assertion. This may be because:

we plan to perform tests of operating effectiveness (this decision is documented in eAudIT activities 2.9.1 and 2.9.2); or

we have identified a significant risk (the relevant control activities in 2.11.xx are automatically generated in eAudIT once a significant risk is linked to asignificant account and assertion).

2.9.1 and

2.9.2

Where we plan to evaluate controls, we identify what could go wrong(WCGW) in the process activities. [Source: KAM 42.6080] 2.11.xx.1


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Guidance eAudIT #

We identify the controls that address the WCGWs in the activity, such as those relating to the extraction of data inputs, the estimate of plan obligations and the

estimate of the fair value of plan assets. This includes, if relevant, IT application controls such as the configuration of reports. The controls over the

judgemental elements of accounting estimates relevant to defined benefit plans are likely to be primarily management review.

Consider whether management has the same or separate control(s) over the accounting for different defined benefit plans and/or different components of the

entity and document accordingly.

2.11.xx.2

or

(as HLC)

2.10.1

If we plan to rely on controls, we evaluate the design and implementation of those controls. Where a significant risk is identified, we are required to evaluate

the design and implementation of controls over the relevant significant accounts and assertions relating to that risk. [Source: KAM 21.1015]

2.11.xx.3

Tests of operating effectiveness are performed where we plan to rely on controls. It may not be efficient to seek to test and rely on the operating effectiveness

of controls relating to estimates for defined benefit plans due to the high level of judgement and the nature of the controls.

3.1.xx.1


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3.4 Substantive testingThis section sets out example substantive procedures and guidance. Substantive procedures are normally documented in an audit program in eAudIT activity 3.2. The

relevant procedures can be cut and pasted from this document to the appropriate audit program(s). Alternatively, this guide can be attached to the relevant audit program or

eAudIT activity 3.4.1, with appropriate cross references to the underlying work.

The procedures address the significant accounts and assertions listed in the short name for each substantive procedure (all accounts means all those listed in 3.1 above).

# Short name Description Preparer Guidance

1 Pension

assets and

liabilities roll-

forward

schedule

(all accounts;

no assertions*)

Obtain a roll-forward schedule for pension assets and liabilities

detailing opening balances reconciled to closing balances atperiod end. The schedule should include increase and decreases

in value of the assets and liabilities, expenses, contributions,payments and other movements during the period. Perform the

following procedures:

Verify the mathematical accuracy of the roll-forwardschedule.

Agree the opening balances/ comparatives to the prior periodroll-forward schedule.

Agree the roll-forward schedule to the general ledger and tothe financial statements.

*Since this procedure is only designed to set up a lead sheet for the

significant accounts, it is not deemed to address any assertions directly.

A Identification and classification of post-employment benefit plans [Refer to Insights 4.4.120]

2 Classificationof post-

employment

benefit plans

(Pension

assets CEAO,Pension

liabilitiesCEAO,

Pensionexpenses

Obtain a list of post-employment benefit plans [that the entity

contributed to during the period and/or for which the entity hascontinuing obligations], which identifies:

- whether they are accounted for as defined benefit plans ordefined contribution plans; and

- the type of plan, i.e.:- single employer (including group administration plans);- multi-employer; or- state plans.

Select items for testing and perform the following procedures:

Post-employment benefit plans are classified as either defined

contribution plans or defined benefit plans depending on theeconomic substance of the plan as derived from its principal terms

and conditions [IAS 19.25]. The classification determines the

accounting treatment.

A plan is classified as a defined contribution plan if the entity paysfixed contributions into a separate entity and will have no further

obligation (legal or constructive) to pay further amounts. All otherplans are defined benefit plans. [Insights 4.4.120.20, IAS 19.25]

The classification of employee benefit plans is based on the


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CEA) Obtain managements analysis of the plan and inspect theterms and conditions of the relevant agreement. Assesswhether the type of plan is appropriately identified and

whether the nature of the plan is that of:

- a defined benefit plan; or

- a defined contribution plan

Compare this analysis to how the plan has been accounted forand assess whether it has been classified appropriately.

employer's obligation to make further contributions, rather than onthe basis of the benefit to which the employees are entitled.[Insights 4.4.120.30, IAS 19.27]

The classification of multi-employer plans and state plans is

assessed in the same way as for other post-employment plans.

Group administration plans are not treated as multi-employer plans.They are classified and accounted for in the same way as single

employer plans. A group administration plan is one which is

grouped together with other plans for purposes of investment

management and/ or administrative savings, while remainingseparate single employer plans. [IAS 19.33]

Each post-employment benefit plan is accounted for separately.

3 Classification

of plansfunded by an

insurance

policy

(Pension

assets AO,Pension

liabilities AO,Pension

expenses A)

Make inquiries of management whether the entity pays premiums

on an insurance policy to fund any post-employment benefitplans.

Inspect underlying documentation of:

- the (requirement for) payments of the premium; and

- the terms on which payment of employee benefits are tobe made.

Examine how the entity has accounted for the plan and assess

whether the accounting treatment adopted is appropriate.

Where the entity funds a post-employment benefit plan through an

insurance policy, the plan is accounted for as a defined contributionplan, unless the entity has a legal or constructive obligation to:

a) pay the employee benefits directly when they fall due; or

b) pay further amounts if the insurer does not pay all futureemployee benefits relating to employee service in the current

and prior periods^. [IAS 19.39],

in which case it is accounted for as a defined benefit plan.

^ especially if there are future salary increase that determine the

amount of pension attributed to past service.

4 Completenessof post

employment

benefit plans

(Pension

assets C,Pension

Compare the list of post-employment benefit plans[in procedure#2] to the prior period and our understanding of the entity.

Inspect relevant documentation, such as human resources policiesand benefits (e.g. via intranet site), minutes of meetings of the

Board of Directors (including Remuneration Committee), minutes

of human resources executive meetings, minutes of pension fundtrustees meetings, communications with pension administrators,

Consider our overall understanding of the entity, including recentacquisitions and restructurings, its industry etc.

Consider inspecting a selection of employee contracts or otherbenefits communications to identify whether all applicable plans

have been identified.

Consider the existence of both legal obligations under the formalterms of a defined benefit plan, and constructive obligations that


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liabilities, CPensionexpenses C)

pension plan trustees, regulators, trades unions and employees.

Assess whether the list of post employment benefit plans is

complete.

may arise from the entitys informal practices. Informal practicesgive rise to a constructive obligation where the entity has norealistic alternative but to pay employee benefits. [IAS 19.52]

B Overview of defined benefit plans

5 Assess

calculation of

defined

benefit plans

net liability

or asset

(Pension

assets A,

Pensionliabilities A)

Obtain a detailed schedule of post-employment defined benefitplans showing the net defined benefit plan liability or asset and

the net expense/ income for the period and:

Verify the mathematical accuracy of the schedule.

Agree to the pension assets and liabilities roll-forwardschedule/ the general ledger.

Select defined benefit plans for testing and perform the following

procedures: Obtain a calculation of the net defined benefit plan liability

or asset and:

- re-perform the calculation.

- vouch the inputs to supporting documentation

- examine whether it has been calculated appropriatelyand in accordance with the requirements of IAS 19.

This procedure is designed to examine the overall calculation of netdefined benefit plan liability or asset. The underlying inputs to the

calculation are tested by procedures #13 to #39.

The amount recognised as a defined benefit liability [or asset,subject to the asset ceiling, below] is the net total o f the following

amounts:

A. the present value (PV) of the defined benefit obligation at theend of the reporting period;

B. plus any actuarial gains (less any actuarial losses) notrecognised because of the application of the corridor method(or other systematic method allowed in the Standard) (see

procedure #36);

C. minus any past service cost not yet recognised;

D. minus the fair value at the end of the reporting period of planassets (if any) out of which the obligations are to be settled

directly. [IAS 19.54]

If the amount calculated by the formula above is positive, the entity

has a net liability, if negative it has a net asset.

Asset ceiling

However, paragraph 58 of the Standard imposes a ceiling on the

amount of a defined benefit asset that can be recognised. A netdefined benefit asset position is measured at the lower of:

a) the result of the above calculation; and

b) the total of*:


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i) any cumulative unrecognised net actuarial losses and pastservice cost; and

ii) the present value of any economic benefits available in theform of refunds from the plan or reductions in future

contributions to the plan. The present value is determined

using a discount rate consistent with that used forestimating the defined benefit obligation (see procedure

#19). [IAS 19.58]

*If a net asset is measured on this basis IAS 19.58A requires that

the following are recognised immediately:

1) net actuarial losses of the current period and past service costof the current period to the extent that they exceed anyreduction in the present value of the economic benefitsspecified in b) (ii) above.

2) net actuarial gains of the current period after the deduction ofpast service cost of the current period to the extent that they

exceed any increase in the present value of the economicbenefits specified in b) (ii) above.

If there is no change or a decrease in the present value of theeconomic benefits, the entire net actuarial gains of the current

period after the deduction of past service cost of the current period

should be recognised immediately.

This calculation may be impacted by the application of IFRIC 14,see procedures #42 and #43 below, which can also lead torecognition of an additional liability.

6 Recognitionin profit or

loss of net

defined

benefit plan

expense

For defined benefit plans [selected in procedure #5] obtain a

detailed analysis of the amount recognised in profit or loss for theperiod and perform the following procedures:

re-perform the calculation

vouch the inputs to supporting documentation

This procedure is designed to examine the overall calculation of

profit or loss on a defined benefit plan for the period. Underlyinginputs to the calculation are tested by procedures #13 to #39.

The amount recognised in profit or loss for the period is the net

total of the following amounts*:

a) current service cost.


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(Pensionexpenses A)

examine whether the amount has been calculated inaccordance with IAS 19.

b) interest cost.

c) the expected return on any plan assets and on anyreimbursement rights.

d) actuarial gains and losses, as required in accordance with theentitys accounting policy.

e) past service cost.

f) the effect of any curtailments or settlements.

g) the effect of the asset ceiling (the limit defined in (b) of theguidance to procedure #5 above, unless it is recognised in othercomprehensive income ( in accordance with IAS 19.93C)).

h) The effect of any additional liability in respect of minimumfunding requirements and any subsequent re-measurement ofthat liability, unless it is recognised in other comprehensive

income (in accordance with IFRIC 14.26(b)).

*except to the extent that another accounting standard requires or

permits their inclusion in the cost of the asset.

[ (a-g): IAS 19.61; (h): IFRIC 14.26]

7 Communica-tions with

plan

actuaries and

other

relevant

parties

(Pension

assets AV,Pension

liabilities AV,

pensions

For defined benefit plans [selected in procedure #5], inspect

communications with the plans actuary (and the actuaryappointed by the entity, if different), trustees, investment

managers, administrators and applicable regulators during thecurrent period or subsequent to the period end and assess whether

there are any matters raised that could have a significant impact

on the net defined benefit plan liability (or asset) and the expensefor the period.

Matters to identify through inspection of communications include

the following:

a) whether there has been a new actuarial valuation of the plan(e.g. to value funding obligations for purposes of the planfinancial statements or other regulatory requirements).

b) documentation of defined benefit plan considerationsassociated with significant or unusual transactions undertakenby the entity.

c) guidance or rulings sought or obtained from trustees orregulators.

d) notifications of deficit funding contributions due or surplus


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expenses A) distributions receivable.

e) notification of outstanding or late payments.

f) audits or special investigations by the regulatory authorities.

g) significant other defined benefit plan developments that haveimpacted the entity during the period.

h) use of expert actuarial and legal advice.

8 Evaluateindependence

of plan from

the entity

(Pension asset

liabilities OP)

For defined benefit plans [selected in procedure #5], makeinquiries of management to understand the legal structure of theplan and inspect relevant documentation. Identify who the

supervisory board/ trustees of the plan are and examine whether

they are, and remained throughout the period, independent of the

entity (i.e. the sponsoring employer.)

Defined benefit plans are typically established as separate legalentities with a supervisory board/ trustees that are independent ofthe sponsoring employer(s). However, if the supervisory board/

trustees (of the defined benefit plan) are not independent of the

entity, there may be a requirement for consolidation of the defined

benefit plan in the group financial statements of the entity.

C Accounting for multi employer plans [Refer to Insights 4.4.150]

9 Appropriateness of

accounting

for multi

employer or

state benefit

plans

(Pensionassets AO,

Pension

liabilities AO,

Pensionexpenses AP)

For multi employer or state defined benefit plans [selected in

procedure #5], make inquiries of management to understandwhether there is sufficient information available to use defined

benefit accounting.

Examine whether the entity has either:

a) accounted for its proportionate share of the defined benefitobligation, plan assets and cost associated with the plan in the

same way as for any other defined benefit plan; or

b) accounted for the plan as if it were a defined contributionplan and made the necessary disclosures.

Vouch the amounts to supporting documentation, such as reportof the multi-employer plan or, for those accounted for as defined

benefit plans, actuarial analysis of the (entitys share of the)plan.

Assess whether managements evaluation of the sufficiency, or

Where a multi employer plan or state plan is classified as a defined

benefit plan, an entity accounts for its proportionate share of thedefined benefit obligation, plan assets and cost associated with the

plan in the same way as for any other defined benefit plan [IAS19.29(a), 36], unless sufficient information is not available to use

defined benefit accounting, in which case it applies the

requirements of IAS 19.30, whereby the entity:

a) accounts for the plan... as if it were a defined contribution plan[IAS 19.30(a)];

b) discloses the fact that the plan is a defined benefit plan and thereasons why sufficient information is not available to enable

the entity to account for the plan as a defined benefit plan;

[IAS 19.30(b)] and

c) to the extent that a surplus or deficit in the plan may affect theamount of future contributions, discloses in addition:


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lack thereof, of information to enable or prevent defined benefitaccounting, and the consequent accounting treatment adopted, isappropriate.

i) any available information about that surplus or deficit;

ii) the basis used to determine that surplus or deficit; and

iii) the implications, if any, for the entity. [IAS 19.30(c)]

Generally, there is insufficient information available about state

plans to apply defined benefit accounting. Therefore defined

contribution accounting normally is applied to state plans. [Insights4.4.190.30]

10 Multi-

employer or

state plans

accounted for

as defined

contribution

contractualagreements

for share of

plan surplus/

deficit

(Pensionassets CA,

Pensionliabilities CA,

Pension

expenses CA)

For multi employer or state post employment plans [selected inprocedure #5] that are defined benefit plans accounted for as

defined contribution plans, perform the following procedures:

Make inquiries of management regarding whether there areany contractual agreements or constructive obligations

between the multi-employer or state plan and its participants

(i.e. the entitys employees) that determine how any surplus/deficit in the plan would be distributed/ funded. Inspect the

agreement to identify how a surplus/ deficit would bedistributed/ funded.

Re-perform managements calculation of the entitys share ofany applicable asset/ liability.

Examine whether the entity has appropriately determined andrecorded any asset or liability, and the resulting income orexpense, that arises from the contractual agreement or

constructive obligation, or made appropriate disclosure of

any contingent liability.

There may be a contractual agreement or constructive obligationsbetween the multi-employer or state plan and its participants that

determines how the surplus in the plan will be distributed to the

participants (or the deficit funded). A participant in a multi-employer plan with such an agreement that accounts for the plan as

a defined contribution plan in accordance with IAS 19.10

recognises the asset or liability that arises from the contractualagreement and the resulting income or expense in profit or loss.

[IAS 19.32A]

In the context of a multi-employer plan, a contingent liability mayarise from, for example:

a) actuarial losses relating to other participating entities becauseeach entity that participates in a multi-employer plan shares in

the actuarial risks of every other participating entity; orb) any responsibility under the terms of a plan to finance any

shortfall in the plan if other entities cease to participate. [IAS

19.32B]

11 Definedbenefit plan

costs shared

among group

entities

(Pension

For defined benefit plans [selected in procedure #5], makeinquiries of management regarding whether there is a contractual

agreement or stated policy for charging the net defined benefit

cost for the plan as a whole to individual group entities.

Inspect the agreement or policy and assess whether each groupentity appropriately recognised the net defined benefit plan

Defined benefit plans that share risks between various entitiesunder common control (e.g. a parent and its subsidiaries, group

entities) are not multi-employer plans [IAS 19.34]. Similarly, theyare not necessarily a group administration plan as there may just be

a single plan.

Any allocation or re-charge of defined benefit plan costs between


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expense AP) expense for the period in accordance with the agreement or policyin its separate financial statements; or

- if there is no such agreement or policy in place, examinewhether - the net defined benefit cost is only recognised in

the separate financial statements of the group entity that is

legally the sponsoring employer for the plan; and

- other group companies have recognised in their separatefinancial statements a cost equal to their contribution payablefor the period.

group entities is only relevant for the separate financial statementsof each entity; at a group level any internal re-charge wouldeliminate on consolidation.

D Plan financial statements

12 Inspect the

plan financial

statements(Pension

assets CEAV)

For defined benefit plans [selected in procedure #5], obtain the

most recent (audited) financial statements for the plan and

perform the following procedures:

Compare the plan assets disclosed in the financial statementsof the plan with the list of plan assets [obtained in procedure27] used for IAS 19 purposes by the entity.

Assess whether the financial statements provide relevant,appropriate evidence for purposes of the valuation of definedbenefit obligations and plan assets of the entity.

If applicable, make inquiries of the plan auditor regarding any

difficulties encountered during their audit of the plan, for examplethe valuation of complex assets.

The plan financial statements

Consider the following in the plan financial statements:

- the measurement basis used for plan assets (which may be fairvalue or a mix of techniques).

- the reasonableness of the fair value estimates in terms of thevaluation method used, the assumptions and inputs

- whether a valuation expert was involved.

- the period end date (and date of approval) of the financialstatements and the timing of the estimates. Is the reporting

period of the plan the same as the entity? If different, how longis the gap and are the estimates appropriate under current

market circumstances?

- any other significant matters disclosed (or required informationomitted from disclosure) about the plan

Consider any additional information that may be required as aresult of the plan having a different reporting period than the entity.All advisors to the plan should be made aware by management, as

early as possible, of the need to obtain or prepare any reports/

information (e.g. statements of investments, bank statements) as at


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the end of the entitys reporting period, if applicable.

For more complex plan assets, consider whether it is necessary to

be more involved in the audit performed by the plan auditor and

whether to involve a KPMG specialist or expert engaged by us.(Note, not all plans may be subject to audit requirements,

depending on nature of the plan and local requirements).

The auditor of the plan

We may seek to rely on the work of another auditor (i.e. the auditorof the defined benefit plan, the plan auditor) because:

- we plan to rely on the audit they have performed on the (mostrecent) plan financial statements and/or

- we request the assistance of the plan auditor in performingspecific procedures.

In this context, the plan auditor would be considered to be aparticipating auditor [KAM 51.1305]. This applies to situations

both where a KPMG member firm or a non-KPMG member firm is

the plan auditor. Refer to KAM 51.0000 Multi-location audits forfurther guidance, including consideration of the appropriatecommunications with, and evaluation of, the plan auditor.

Audit of the underlying plan records

If procedures need to be performed directly on the records of the

plan then the entitys directors will be responsible for seekingpermission from the plan trustees to grant access to the financialrecords of the plan to KPMG as auditors of the entity. This may be

necessary, for example, when the plan fair values are not

sufficiently up to date. The plan trustees may require that only theplan auditors have access to the plan financial records, in whichcase we would need to instruct them as participating auditors with

any additional procedures we require.


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E Defined benefit obligations

E1 General considerations

13 Reconciliationof defined

benefit

obligations

(Pension

liabilities CEA)

For defined benefit plans [selected in procedure #5], obtain a

reconciliation of the present value of the defined benefit obligations(the plan obligations) from the start to the end of the entitys

reporting period, showing the related current service cost, interestcost and, where applicable, past service cost for the period.

Verify the mathematical accuracy of the reconciliation

Agree the opening balance to the prior period file

Vouch the movements in the plan obligations to supportingdocumentation

This is a basic roll-forward procedure for the defined benefit plan

obligation. The following procedures are designed to test the closing

balance and movements during the period. However, in practice, the

calculation of the underlying inputs may all be included in detailed

analysis and reconciliation of the balance; they are listed as separate

procedures here for ease of reference.

14 Definedbenefit

obligations

valuation

method and

timing

(Pension

liabilities AV)

For defined benefit plans [selected in procedure #5], obtain detailsof the underlying calculations used to determine the present value

ofthe plan obligations as at the end of the entitys reportingperiod. Examine whether the entity:

- used the Projected Unit Credit Method to determine presentvalue.

- discounted the whole of a post-employment benefitobligation, even if part of the plan obligations fall duewithin twelve months of the reporting date.

Identify the basis adopted for valuing the plan obligations as at

the end of the entitys reporting period and assess whether:

- it is consistent with the entitys accounting policy.

- the valuation has been performed with sufficient

regularity that the amounts recognised in the financialstatements do not differ materially from the amounts

that would be determined at the reporting date.

An entity uses the Projected Unit Credit Method to determine thepresent value of the defined benefit obligation and the related

current service cost and, where applicable, past service cost [IAS19.64]. The method sees each period of service as giving rise to an

additional unit of benefit entitlement and measures each unitseparately to build up the final obligation.

The whole of a post-employment benefit obligation is discounted,even if part of the obligation falls due within twelve months after

the reporting period. [IAS 19.66]

An entity may perform a full actuarial valuation as at the end of theentitys reporting period or perform an update of a previous full

actuarial valuation conducted for either plan funding purposes or

for IAS19 purposes of its sponsoring employer(s).

An entity determines the present value of defined benefitobligations with sufficient regularity that the amounts recognised inthe financial statements do not differ materially from the amounts

that would be determined at the end of the reporting period. [IAS

19.56, Insights 4.4.330]


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15 Attributingbenefits to

period of

service

(Pensionliabilities AV,Pension

expenses A)

For defined benefit plans [selected in procedure #5], obtain acalculation of the attribution of benefits and perform the

following procedures:

Agree the total to the reconciliation of the defined benefitobligation

Re-perform the calculation

Obtain details of the plans benefit formula and examinewhether the entity attributed benefits to periods of service in

accordance with that formula.

Under some plans, the retirement benefit is calculated by a formulabased on earnings at or towards the end of the period of service.

Other plans consider career average earnings.

In determining the present value of its defined benefit obligations,...

an entity attributesbenefit to periods of service under the plans

benefit formula. [IAS 19.67]

However, if an employees service in later years will lead to a

materially higher level of benefit than in earlier years, an entity

attributes benefit on a straight-line basis from:

a) the date when service by the employee first leads to benefitsunder the plan (whether or not the benefits are conditional on

further service); until

b) the date when further service by the employee will lead to no

material amount of further benefits under the plan, other thanfrom further salary increases. [IAS 19.67]

16 Current

service cost

recalculation

(Pensionexpenses EA)


calculation of current service cost and perform the followingprocedures:



17 Current

service cost

analytical

procedure

(PensionexpensesCEA)

For defined benefit plans [selected in procedure #5], develop an

expectation of the current service cost for the period,

disaggregated to the appropriate level such as by type of definedbenefit plan, component of the entity, etc. Base expectation on

key factors and relationships such as number of employees,

contribution rates, etc.

Evaluate whether the underlying data used to set expectationis complete, relevant and accurate.

The predictability of a defined benefit plans net income/ expense

for the period depends on the nature and complexity of the plan,

market trends and actuarial assumptions. The complexity ofcalculations and potential volatility of defined benefit plan surplus

or deficits means substantive analytical procedures are less likely to

be effective in this area. However, they may be appropriate forgaining audit evidence over specific elements of the calculation,and an example is included here in this guide in respect of current

service cost.


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Calculate the expected amount.

Set the acceptable difference.

Compare the recorded amount with expectation andinvestigate differences that fall outside the range ofacceptable difference through inquiry of management. Obtain

appropriate evidence to corroborate managementsexplanations.

Revise expectation and acceptable difference, if appropriate,and compare revised expectation with recorded amount.

For further guidance on performing substantive analyticalprocedures, refer to KAM 53.0000.

18 Interest cost

(Pension

expenses EA)


calculation of the interest cost and perform the followingprocedures:



Vouch the discount rate used in the calculation to theactuarial report.

Interest cost is calculated by multiplying the discount rate as

determined at the start of the period by the present value of the

defined benefit obligation throughout that period, taking account ofany material changes in the obligation. [IAS 19.82]

For evaluation of the discount rate, see procedure #24.

19 Benefits paid

(Pension

liabilities AV)

For defined benefit plans [selected in procedure #5], obtain detailsof benefits paid during the period and perform the following

procedures:

Vouch benefits paid to the plan financial statements, or otherdocumentation, as applicable.

Assess whether benefits paid are consistent with ourunderstanding of the plan.

In assessing the benefits paid, consider the level of benefits paid inprior periods and the effect of known changes to the plan.

See further guidance regarding placing reliance on the plan

financial statements in procedure #12 above.


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analysis.

Compare the data with that used for the previous valuation for

IAS 19 purposes and obtain explanations for significantvariations. Assess whether variations are consistent with our

knowledge of significant changes to the plan and/or to the entity

and its employees.

participants ages, length of service and gender,

participants earnings history, for deferred and retired memberscurrent levels of benefits accrued or in payment;

information on changes to plan rules

plan assets (invested assets and plan current account balancesand bank deposits), their values, underlying cash transactions,and items of income and expense.

Consider what steps the entitys actuary has undertaken to establish

the relevance and accuracy of the source data.

Where a full valuation has not been performed as at the end of theentitys reporting period*, make inquiries of the entitys actuary

regarding whether they have allowed for changes in the plan suchas membership numbers and accounted for events such as

curtailments since the previous update or previous full valuation.

* In practice, as permitted by IAS 19, an entity may request a

qualified actuary to carry out a detailed valuation of the defined

benefit obligations before the end of the reporting period. Theresults of that valuation need to be updated for any materialtransactions and other material changes in circumstances (including

changes in market prices and interest rates) up to the end of the

reporting period.

Also, an annual or other periodic valuation may have been prepared

to a different date by the plan actuaries, to assess the definedbenefit obligations of the plan as a whole for purposes of the plan

financial statements or other regulatory requirements.


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E3 Actuarial assumptions [Refer to Insights 4.4.280]

22 Actuarial

assumptionsgeneral

(Pension

liabilities V)

For defined benefit plans [selected in procedure #5], inspect the

latest actuarial valuation to obtain details of the demographic andfinancial actuarial assumptions used in estimating the planobligations and perform the following procedures:

Assess whether the actuarial assumptions are unbiased, i.e.,that they are neither imprudent nor excessively conservative,

and are mutually compatible.

Examine whether financial assumptions are appropriately:

- determined in nominal terms.

- based on market expectations, at the end of the

reporting period, for the period over which the

obligations are to be settled.

Actuarial assumptions are an entitys best estimate of the variables

that will determine the ultimate cost of providing post-employmentbenefits [IAS 19.73]. They comprise demographic assumptions(see procedure #23) and fi nancial assumptions, which include:

- the discount rate (see procedure #24)

- future salary and benefit levels (see procedure #25)

- if applicable, future medical costs (see procedure #26)

- the expected rate of return on planassets (see procedure #27).

They are unbiased and mutually compatible. [IAS 19.72]

Financial assumptions are:

- determined in nominal terms, unless estimates in real(inflation-adjusted) terms are more reliable (such as in a

hyper-inflationary economy or where the benefit is index-

linked and there is a deep market in index-linked bonds of thesame currency and term). [IAS 19.76]

- based on market expectations, at the end of the reporting

period, for the period over which the obligations are to be

settled. [IAS 19.77]

23 Actuarial

assumptions

demographic

(Pension

liabilities V)

For defined benefit plans [selected in procedure #5], examine

whether the demographic assumptions are consistent with [current

experience of the plan, with appropriate allowance for future

demographic changes].Vouch the assumptions to supporting documentation.

Compare the assumptions to the prior period and assess whethersignificant changes (or lack thereof) are consistent with our

understanding of the entity and general socio-economic trends.

[Compare plan mortality tables with applicable mortality tables

Demographic actuarial assumptions are about the future

characteristics of current and former employees (and their

dependants) who are eligible for benefits. They deal with matters

such as:i. mortality, both during and after employment;ii. rates of employee turnover, disability and early retirement;

iii. the proportion of plan members with dependants who will beeligible for benefits; and

iv. claim rates under medical plans. [IAS 19.73]

There are a number of difficulties in deriving best estimates for


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for the [country/ demographic] and assess whether appropriatemortality rates have been used.]

demographic assumptions, such as current and future lifeexpectancy. Typically a base mortality table is used by the actuaryreflecting current expected experience and then an appropriate

allowance is made for future improvement

2012 TTAAG IAS 19 Employee Benefits - Defined Benefit Plans

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