2012 Ttaag Ias 19 Employee Benefits - Defined Benefit Plans

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

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 entity‟s 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:



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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



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.

symbol are available in the relevant eAudIT activity through industry knowledge.

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

Contents 1.

3.4. Substantive testing

Overview

A. Identification and classification 1.1. Objective of IAS 19 B. Overview of defined benefit plans 1.2. Scope of this guide C. Accounting for multi-employer plans 1.3. Definitions used in this guide D. Plan financial statements 1.4. Sources of further guidance 2.

E. Defined benefit obligations 1. General considerations 2. Source data provided to the actuary 3. Actuarial assumptions 4. Past service cost 5. Develop own estimates

General matters to consider in our audit approach 2.1. General matters to consider 2.2. The professional judgement process

3.

F.

Developing an audit approach

Plan assets

G. Actuarial gains and losses

3.1. Example significant accounts

H. Reimbursement rights

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

I.

Curtailments and settlements

J.

Minimum funding requirements and refunds or reduction in future contributions

K. Presentation and disclosure

3.3. Risk assessment: Process activities and control evaluation

Appendices 1. Example process activities, WCGWs and controls 2. Developing a scope of work with specialists – substantive procedures

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

1 Overview 1.1 Objective of IAS 19 Employee Benefits The 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 employee 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 In 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 to the 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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TECHNICAL TOPIC AUDIT APPROACH GUIDE IAS 19 Employee Benefits - Defined benefit plans (09/12)

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 financial 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 an entity 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 any plan assets, required to settle an entity‟s 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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TECHNICAL TOPIC AUDIT APPROACH GUIDE IAS 19 Employee Benefits - Defined benefit plans (09/12) Term

Definition

Group administration plans

An aggregation of single 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 fund

An 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 or defined contribution plans (other than state 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 other systematic partial recognition method permitted under IAS 19.92-93); c)

minus any past service cost not yet recognised;

d) minus the fair value at the end of the reporting period of plan assets (if any) out of which the obligations are to be settled directly. [IAS 19.54] Except that if the net total is negative (i.e. a net asset position) the amount is limited by the asset ceiling test. [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 period from 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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TECHNICAL TOPIC AUDIT APPROACH GUIDE IAS 19 Employee Benefits - Defined benefit plans (09/12) 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 (even in 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 (also referred to as a post-retirement benefit) is a type of post-employment benefit and may be in the form of defined benefit or defined 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 example post-retirement benefits (such as pensions) 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 provides post-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 include pension 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 Method

The 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 unit 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 the present value of an entity‟s defined benefit obligations and the related current service cost and where applicable, past service cost. [IAS 19.64]

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; and b) are not available to the reporting entity's own creditors (even in bankruptcy) and cannot be paid to the reporting entity, unless either: i. the proceeds represent surplus assets that are not needed for the policy to meet all the related employee benefit obligations; or ii. the proceeds are returned to the reporting entity to reimburse it for employee benefits already paid. [IAS 19.7]

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TECHNICAL TOPIC AUDIT APPROACH GUIDE IAS 19 Employee Benefits - Defined benefit plans (09/12) 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 a third party. They are not plan assets. [IAS 19.104A]

Return on plan assets

The interest, dividends and other revenue derived from the plan 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 specified post-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 a post-employment benefit plan on behalf of the entity‟s 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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TECHNICAL TOPIC AUDIT APPROACH GUIDE IAS 19 Employee Benefits - Defined benefit plans (09/12)

1.4 Sources of further guidance Sources of further guidance include: 

IAS 19 Employee 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 Program Guide, 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:

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IAS 19 Employee Benefits (revised June 2011)

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First Impressions: Employee Benefits (July 2011)

KAM International 2012

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

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 management bias. 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 management’s 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 management‟s methodology and key assumptions, such as the demographic and financial actuarial assumptions for defined benefit obligations, and apply appropriate professional scepticism in evaluating their reasonableness.

26.0000 General principles and responsibilities

We do not just accept management‟s 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 obtained during our audit. We consider our own potential biases and apply the professional judgement process when performing our audit. 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 connection with 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.

7.0000 Audit documentation

It is particularly important with potentially complex technical areas of accounting such as defined benefit plans to stand back and ask whether the audit documentation reflects the significant judgements and professional scepticism applied. 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 for judgements and estimates. Refer to IS Alert 2012/14, Example Management Representation Letter (2012 Update) for further guidance. 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.

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61.0000 Written representations

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

2.2 The professional judgement process Audit quality is integral to KPMG’s 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 the Audit Quality Framework. The professional judgement process describes what we should do but often does not describe what we actually do when making complex judgements. The reason that we don‟t always follow this process is that in environments that include pressure, time constraints and limited capacity, there are a number of judgement traps and judgement biases that we can fall into. Common judgement traps include solving the wrong problem, not being clear on what we are trying to achieve, and considering an inappropriately constrained set of alternatives. Key judgement biases include: anchoring – basing expected outcomes too much on one piece of information such as a client estimate. confirmation – seeking and overweighting evidence that confirms the proposed solution. overconfidence – a 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? Has sufficient, 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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TECHNICAL TOPIC AUDIT APPROACH GUIDE IAS 19 Employee Benefits - Defined benefit plans (09/12)

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 Statement of financial position

Statement of comprehensive income

Relevant assertions

Significant account/ disclosure(2)

Contains an estimate?

C

E

A

V

O

P

Pension assets

C

E

A

V

O

P

Y

Pension liabilities

C

E

A

V

O

P

Y

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 that pensions 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 P assertion as relevant for the related significant account(s).

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

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]

2.3.1 Significant accounts

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. 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 following period, with the purpose of assessing management‟s reliability and accuracy in making 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 or other risk assessment procedures may identify information relevant to consideration of defined benefit plans. The examples below may be particularly relevant.

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2.3.3 and 2.3.4

2.3.1 Significant accounts 2.6.11.xx Estimates

Document Generator Attach the agenda(s) to 2.5.2 Inquiries

TECHNICAL TOPIC AUDIT APPROACH GUIDE IAS 19 Employee Benefits - Defined benefit plans (09/12) Guidance Required inquiry

eAudIT # 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.

2.5.3 Other risk assessment procedures

 the terms of transactions that give rise to accounting estimates changed.  accounting policies relating to accounting estimates changed as a result of changes to the requirements of the applicable financial reporting framework or otherwise.  regulatory or other changes outside the control of management occurred that may require management to revise or make new accounting estimates.  new conditions or events occurred that may give rise to the need for new or revised accounting estimates? 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 the plan?

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?

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.

2.6 10 and 2.13, if applicable

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).

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

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.

Significant risks are documented in the Tracker

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

Relevant assertions

Example significant risk

Significant account/ disclosure

Pension assets and liabilities - judgemental accounting estimates

Pension assets

V

P

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 liabilities

V

P

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

3.2.3 Involvement of specialists and experts Guidance

eAudIT #

The engagement partner may consider the involvement of KPMG actuarial 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 post employment benefit plans.

Select the specialists in 1.2.2 Scaling

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] 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:       

2.12. xx

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 the entity (#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. Make inquiries of management regarding whether the entity uses management‟s 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 entity‟s reporting period. It may be the same or a different actuary to the plan actuary.

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1.2.2 Scaling

TECHNICAL TOPIC AUDIT APPROACH GUIDE IAS 19 Employee Benefits - Defined benefit plans (09/12) 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 management‟s expert and their work [Source: KAM 62.1000, 62.1055]

2.9.9.xx Experts

3.3 Risk assessment: Process activities and control evaluation This 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 management‟s processes for defined benefit plans, (including information systems used, responsibilities, timeliness, methods, etc). [Source: KAM 42.1010]

2.11.xx.1

Process 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:

2.9.1 and 2.9.2



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 a significant account and assertion).

Where we plan to evaluate controls, we identify „what could go wrong’ (“WCGW”) in the process activities. [Source: KAM 42.6080]

16

2.11.xx.1

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

2.11.xx.2

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.

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

17

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

3.4 Substantive testing This 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). Preparer

#

Short name

Description

1

Pension assets and liabilities rollforward schedule

Obtain a roll-forward schedule for pension assets and liabilities detailing opening balances reconciled to closing balances at period 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:

(all accounts; no assertions*)



Verify the mathematical accuracy of the roll-forward schedule.



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



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

A

Identification and classification of post-employment benefit plans

2

Classification of postemployment benefit plans (Pension assets CEAO, Pension liabilities CEAO, Pension expenses

-

*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.

[Refer to Insights 4.4.120]

Obtain a list of post-employment benefit plans [that the entity contributed to during the period and/or for which the entity has continuing obligations], which identifies: -

Guidance

whether they are accounted for as defined benefit plans or defined 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:

18

Post-employment benefit plans are classified as either defined contribution plans or defined benefit plans depending on the economic 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 pays fixed contributions into a separate entity and will have no further obligation (legal or constructive) to pay further amounts. All other plans are defined benefit plans. [Insights 4.4.120.20, IAS 19.25] The classification of employee benefit plans is based on the

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

Short name

Description

CEA)





Preparer

Obtain managements‟ analysis of the plan and inspect the terms and conditions of the relevant agreement. Assess whether 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 for and assess whether it has been classified appropriately.

Guidance employer's obligation to make further contributions, rather than on the 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 remaining separate single employer plans. [IAS 19.33] Each post-employment benefit plan is accounted for separately.

3

Classification of plans funded by an insurance policy (Pension assets AO, Pension liabilities AO, Pension expenses A)

4

Completeness of post employment benefit plans (Pension assets C, Pension

Make inquiries of management whether the entity pays premiums on an insurance policy to fund any post-employment benefit plans.

Where the entity funds a post-employment benefit plan through an insurance policy, the plan is accounted for as a defined contribution plan, unless the entity has a legal or constructive obligation to:

Inspect underlying documentation of:

a)

-

the (requirement for) payments of the premium; and

-

the terms on which payment of employee benefits are to be made.

Examine how the entity has accounted for the plan and assess whether the accounting treatment adopted is appropriate.

pay the employee benefits directly when they fall due; or

b) pay further amounts if the insurer does not pay all future employee 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.

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

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

Inspect relevant documentation, such as human resources policies and 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 fund trustees meetings, communications with pension administrators,

Consider inspecting a selection of employee contracts or other benefits communications to identify whether all applicable plans have been identified.

19

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

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

Preparer

Short name

Description

liabilities, C Pension expenses C)

pension plan trustees, regulators, trades unions and employees. Assess whether the list of post employment benefit plans is complete.

B

Overview of defined benefit plans

5

Assess calculation of defined benefit plans net liability or asset (Pension assets A, Pension liabilities A)

Guidance may arise from the entity‟s informal practices. Informal practices give rise to a constructive obligation where the entity has no realistic alternative but to pay employee benefits. [IAS 19.52]

Obtain a detailed schedule of post-employment defined benefit plans showing the net defined benefit plan liability or asset and the net expense/ income for the period and:

This procedure is designed to examine the overall calculation of net defined benefit plan liability or asset. The underlying inputs to the calculation are tested by procedures #13 to #39.



Verify the mathematical accuracy of the schedule.



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

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

Select defined benefit plans for testing and perform the following procedures:  Obtain a calculation of the net defined benefit plan liability or asset and:

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

-

re-perform the calculation.

B. plus any actuarial gains (less any actuarial losses) not recognised because of the application of the corridor method (or other systematic method allowed in the Standard) (see procedure #36);

-

vouch the inputs to supporting documentation

C. minus any past service cost not yet recognised;

-

examine whether it has been calculated appropriately and in accordance with the requirements of IAS 19.

D. minus the fair value at the end of the reporting period of plan assets (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 net defined benefit asset position is measured at the lower of: a)

the result of the above calculation; and

b) the total of*:

20

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

Short name

Preparer

Description

Guidance i)

any cumulative unrecognised net actuarial losses and past service cost; and

ii) the present value of any economic benefits available in the form 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 for estimating 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 cost of the current period to the extent that they exceed any reduction in the present value of the economic benefits specified in b) (ii) above. 2) net actuarial gains of the current period after the deduction of past service cost of the current period to the extent that they exceed any increase in the present value of the economic benefits specified in b) (ii) above. If there is no change or a decrease in the present value of the economic 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 to recognition of an additional liability. 6

Recognition in 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 the period and perform the following procedures:

This procedure is designed to examine the overall calculation of profit or loss on a defined benefit plan for the period. Underlying inputs to the calculation are tested by procedures #13 to #39.



re-perform the calculation



vouch the inputs to supporting documentation

The amount recognised in profit or loss for the period is the net total of the following amounts*: a)

21

current service cost.

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

Short name

Description

(Pension expenses A)



Preparer

Guidance b) interest cost.

examine whether the amount has been calculated in accordance with IAS 19.

c)

the expected return on any plan assets and on any reimbursement rights.

d) actuarial gains and losses, as required in accordance with the entity‟s 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 the guidance to procedure #5 above, unless it is recognised in other comprehensive income ( in accordance with IAS 19.93C)). h) The effect of any additional liability in respect of minimum funding requirements and any subsequent re-measurement of that 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

Communications 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 plan‟s actuary (and the actuary appointed by the entity, if different), trustees, investment managers, administrators and applicable regulators during the current 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 expense for 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 plan financial statements or other regulatory requirements).

b)

documentation of defined benefit plan considerations associated with significant or unusual transactions undertaken by the entity.

c)

guidance or rulings sought or obtained from trustees or regulators.

d) notifications of deficit funding contributions due or surplus

22

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

Short name

Preparer

Description

Guidance

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 have impacted the entity during the period. h) use of expert actuarial and legal advice. 8

Evaluate independence of plan from the entity (Pension asset liabilities OP)

For defined benefit plans [selected in procedure #5], make inquiries of management to understand the legal structure of the plan 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.)

C

Accounting for multi employer plans

9

Appropriaten ess of accounting for multi employer or state benefit plans (Pension assets AO, Pension liabilities AO, Pension expenses AP)

[Refer to Insights 4.4.150]

For multi employer or state defined benefit plans [selected in procedure #5], make inquiries of management to understand whether there is sufficient information available to use defined benefit accounting. Examine whether the entity has either: a)

Defined benefit plans are typically established as separate legal entities with a supervisory board/ trustees that are independent of the 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.

accounted for its proportionate share of the defined benefit obligation, 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 contribution plan and made the necessary disclosures. Vouch the amounts to supporting documentation, such as report of the multi-employer plan or, for those accounted for as defined benefit plans, actuarial analysis of the (entity‟s share of the) plan. Assess whether management‟s evaluation of the sufficiency, or

23

Where a multi employer plan or state plan is classified as a defined benefit plan, an entity accounts for its proportionate share of the defined benefit obligation, plan assets and cost associated with the plan in the same way as for any other defined benefit plan [IAS 19.29(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 the reasons 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 the amount of future contributions, discloses in addition:

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

Short name

Preparer

Description lack thereof, of information to enable or prevent defined benefit accounting, and the consequent accounting treatment adopted, is appropriate.

Guidance 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. [Insights 4.4.190.30]

10

Multiemployer or state plans accounted for as defined contribution – contractual agreements for share of plan surplus/ deficit (Pension assets CA, Pension liabilities CA, Pension expenses CA)

11

Defined benefit plan costs shared among group entities (Pension

For multi employer or state post employment plans [selected in procedure #5] that are defined benefit plans accounted for as defined contribution plans, perform the following procedures: 

Make inquiries of management regarding whether there are any contractual agreements or constructive obligations between the multi-employer or state plan and its participants (i.e. the entity‟s employees) that determine how any surplus/ deficit in the plan would be distributed/ funded. Inspect the agreement to identify how a surplus/ deficit would be distributed/ funded.



Re-perform management‟s calculation of the entity‟s share of any applicable asset/ liability.



Examine whether the entity has appropriately determined and recorded any asset or liability, and the resulting income or expense, that arises from the contractual agreement or constructive obligation, or made appropriate disclosure of any contingent liability.

For defined benefit plans [selected in procedure #5], make inquiries 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 group entity appropriately recognised the net defined benefit plan

24

There may be a contractual agreement or constructive obligations between 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 multiemployer 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 contractual agreement and the resulting income or expense in profit or loss. [IAS 19.32A] In the context of a multi-employer plan, a contingent liability may arise from, for example: a) actuarial losses relating to other participating entities because each entity that participates in a multi-employer plan shares in the actuarial risks of every other participating entity; or b) any responsibility under the terms of a plan to finance any shortfall in the plan if other entities cease to participate. [IAS 19.32B]

Defined benefit plans that share risks between various entities under common control (e.g. a parent and its subsidiaries, „group entities‟) are not multi-employer plans [IAS 19.34]. Similarly, they are 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

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

Preparer

Short name

Description

expense AP)

expense for the period in accordance with the agreement or policy in its separate financial statements; or -

if there is no such agreement or policy in place, examine whether - 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 separate financial statements a cost equal to their contribution payable for the period.

Guidance group entities is only relevant for the separate financial statements of each entity; at a group level any internal re-charge would eliminate on consolidation.

D

Plan financial statements

12

Inspect the plan financial statements

For defined benefit plans [selected in procedure #5], obtain the most recent (audited) financial statements for the plan and perform the following procedures:

The plan financial statements

(Pension assets CEAV)



-

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

-

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

-

whether a valuation expert was involved.

-

the period end date (and date of approval) of the financial statements and the timing of the estimates. Is the reporting period of the plan the same as the entity? If different, how long is the gap and are the estimates appropriate under current market circumstances?

-

any other significant matters disclosed (or required information omitted from disclosure) about the plan



Compare the plan assets disclosed in the financial statements of the plan with the list of plan assets [obtained in procedure 27] used for IAS 19 purposes by the entity. Assess whether the financial statements provide relevant, appropriate evidence for purposes of the valuation of defined benefit obligations and plan assets of the entity.

Consider the following in the plan financial statements:

If applicable, make inquiries of the plan auditor regarding any difficulties encountered during their audit of the plan, for example the valuation of complex assets.

Consider any additional information that may be required as a result 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

25

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

Short name

Preparer

Description

Guidance the end of the entity‟s 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 auditor of the defined benefit plan, the „plan auditor‟) because: - we plan to rely on the audit they have performed on the (most recent) plan financial statements and/or - we request the assistance of the plan auditor in performing specific procedures. In this context, the plan auditor would be considered to be a participating 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 for further guidance, including consideration of the appropriate communications 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 entity‟s directors will be responsible for seeking permission from the plan trustees to grant access to the financial records 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 the plan auditors have access to the plan financial records, in which case we would need to instruct them as participating auditors with any additional procedures we require.

26

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

Short name

E

Defined benefit obligations

E1

General considerations

13

Reconciliation of defined benefit obligations (Pension liabilities CEA)

14

Defined benefit obligations valuation method and timing (Pension liabilities AV)

Preparer

Description

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 entity‟s reporting period, showing the related current service cost, interest cost 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 supporting documentation

Guidance

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.

For defined benefit plans [selected in procedure #5], obtain details of the underlying calculations used to determine the present value of the plan obligations as at the end of the entity‟s reporting period. Examine whether the entity: - used the Projected Unit Credit Method to determine present value. - discounted the whole of a post-employment benefit obligation, even if part of the plan obligations fall due within twelve months of the reporting date.

An entity uses the Projected Unit Credit Method to determine the present value of the defined benefit obligation and the related current service cost and, where applicable, past service cost [IAS 19.64]. The method sees each period of service as giving rise to an additional unit of benefit entitlement and measures each unit separately to build up the final obligation.

Identify the basis adopted for valuing the plan obligations as at the end of the entity‟s reporting period and assess whether:

An entity may perform a full actuarial valuation as at the end of the entity‟s 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).

-

it is consistent with the entity‟s accounting policy.

-

the valuation has been performed with sufficient regularity that the amounts recognised in the financial statements do not differ materially from the amounts that would be determined at the reporting date.

27

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 determines the present value of defined benefit obligations with sufficient regularity that the amounts recognised in the 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]

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

#

Short name

Description

15

Attributing benefits to period of service

For defined benefit plans [selected in procedure #5], obtain a calculation of the attribution of benefits and perform the following procedures:

Under some plans, the retirement benefit is calculated by a formula based on earnings at or towards the end of the period of service. Other plans consider career average earnings.



Agree the total to the reconciliation of the defined benefit obligation



Re-perform the calculation

In determining the present value of its defined benefit obligations,... an entity attributes benefit to periods of service under the plan‟s benefit formula. [IAS 19.67]



Obtain details of the plan‟s benefit formula and examine whether the entity attributed benefits to periods of service in accordance with that formula.

(Pension liabilities AV, Pension expenses A)

Guidance

However, if an employee‟s 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 benefits under 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 than from further salary increases. [IAS 19.67] 16

17

Current service cost recalculation

For defined benefit plans [selected in procedure #5], obtain a calculation of current service cost and perform the following procedures:

(Pension expenses EA)



Agree the total to the reconciliation of the defined benefit obligation



Re-perform the calculation

Current service cost analytical procedure (Pension expenses CEA)

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 defined benefit 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 expectation is complete, relevant and accurate.

28

The predictability of a defined benefit plan‟s net income/ expense for the period depends on the nature and complexity of the plan, market trends and actuarial assumptions. The complexity of calculations 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 for gaining audit evidence over specific elements of the calculation, and an example is included here in this guide in respect of current service cost.

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

18

Short name

Interest cost (Pension expenses EA)

19

Benefits paid (Pension liabilities AV)

Preparer

Description 

Calculate the expected amount.



Set the acceptable difference.



Compare the recorded amount with expectation and investigate differences that fall outside the range of acceptable difference through inquiry of management. Obtain appropriate evidence to corroborate management‟s explanations.



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

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

For defined benefit plans [selected in procedure #5], obtain a calculation of the interest cost and perform the following procedures: 

Agree the total to the reconciliation of the defined benefit obligation



Re-perform the calculation



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

For defined benefit plans [selected in procedure #5], obtain details of benefits paid during the period and perform the following procedures: 



Guidance

Vouch benefits paid to the plan financial statements, or other documentation, as applicable. Assess whether benefits paid are consistent with our understanding of the plan.

29

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 of any material changes in the obligation. [IAS 19.82] For evaluation of the discount rate, see procedure #24.

In assessing the benefits paid, consider the level of benefits paid in prior 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.

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

Short name

E2

Source data provided to the actuary

20

Data provided by the entity (Pension liabilities AV)

Preparer

Description

Guidance

For defined benefit plans [selected in procedure #5] obtain details of the nature and timing of data provided by the entity to the entity‟s actuary. Select items for testing and vouch (totals) back to the underlying systems and reports from which it was derived.

An actuarial report will usually state that the entity‟s management are responsible for the source data used by the actuary.

Make inquiries of the entity‟s actuary (and/or the entity) regarding the procedures they undertake to ensure the reliability of the data used in their analysis.

 Current salaries for active members of the plan (sourced from payroll records)

Compare the data with that used for the previous valuation for IAS 19 purposes and obtain explanations for variations. Assess whether significant variations are consistent with our knowledge of significant changes to the plan and/or to the entity and its employees.

Source data used by the actuary that is provided by the entity will ordinarily include:

 Employer and employee contributions for the year (sourced from the entity‟s accounting system). Additionally, depending on the nature of the plan, some of the information listed in procedure #21 may also be provided by the entity rather than by the plan administrators. Consider what steps management have undertaken to establish the completeness, relevance and accuracy of the source data. It may be appropriate to evaluate the design and implementation, and test the operating effectiveness, of the specific controls that operate over the source data. This may have already been performed in respect of other audit work on the relevant significant accounts, for example controls test work over the payroll expense may provide additional support over employee data provided to the actuary. In such case, consider the nature and timing of communication of the source data to the actuary, and assess whether additional controls test work/ substantive tests are required over that element of the process.

21

Data provided by the plan administrator (Pension liabilities AV)

For defined benefit plans [selected in procedure #5] obtain details of the nature and timing of data provided by the plan administrator to the entity‟s actuary. Select items for testing and vouch (totals) back to the underlying systems and reports from the plan administrator from which it was derived. Make inquiries of the entity‟s actuary of the procedures they undertake to ensure the reliability of the data used in their

30

Source data used by the actuary that is provided by the plan administrators (i.e. provided by the plan administrators on behalf of the supervisory board/ trustees of the plan) will ordinarily include:  the number and types of participants covered by the defined benefit plan (active, deferred and retired members and beneficiaries),

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

Short name

Preparer

Description

Guidance

analysis.

 participants ages, length of service and gender,

Compare the data with that used for the previous valuation for IAS 19 purposes and obtain explanations for significant variations. Assess whether variations are consistent with our knowledge of significant changes to the plan and/or to the entity and its employees.

 participants earnings history, for deferred and retired members – current levels of benefits accrued or in payment;  information on changes to plan rules  plan assets (invested assets and plan current account balances and bank deposits), their values, underlying cash transactions, and items of income and expense. Consider what steps the entity‟s 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 the entity‟s reporting period*, make inquiries of the entity‟s actuary regarding whether they have allowed for changes in the plan such as 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. The results of that valuation need to be updated for any material transactions 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 defined benefit obligations of the plan as a whole for purposes of the plan financial statements or other regulatory requirements.

31

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

Short name

E3

Actuarial assumptions

22

Actuarial assumptions – general (Pension liabilities V)

Guidance [Refer to Insights 4.4.280]

For defined benefit plans [selected in procedure #5], inspect the latest actuarial valuation to obtain details of the demographic and financial actuarial assumptions used in estimating the plan obligations and perform the following procedures:

Actuarial assumptions are an entity‟s best estimate of the variables that will determine the ultimate cost of providing post-employment benefits [IAS 19.73]. They comprise demographic assumptions (see procedure #23) and financial assumptions, which include:



-



23

Preparer

Description

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.

-

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 plan assets (see procedure #27).

They are unbiased and mutually compatible. [IAS 19.72] Financial assumptions are:

Actuarial assumptions – demographic

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].

(Pension liabilities V)

Vouch the assumptions to supporting documentation.

-

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 indexlinked and there is a deep market in index-linked bonds of the same 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]

Compare the assumptions to the prior period and assess whether significant changes (or lack thereof) are consistent with our understanding of the entity and general socio-economic trends.

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 be eligible for benefits; and iv. claim rates under medical plans. [IAS 19.73]

[Compare plan mortality tables with applicable mortality tables

There are a number of difficulties in deriving best estimates for

32

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

24

Short name

Actuarial assumptions discount rate (Pension liabilities V)

Preparer

Description

Guidance

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

demographic assumptions, such as current and future life expectancy. Typically a base mortality table is used by the actuary reflecting current expected experience and then an appropriate allowance is made for future improvements in longevity. However, many plans are not large enough to rely on their own experience and for such entities; in such cases consider the overall assumptions for the applicable demographics. Life expectancy may vary with factors such as socio-economic group, size of pension and geographical location.

For defined benefit plans [selected in procedure #5], examine whether the discount rate used in the estimate of postemployment benefit obligations is determined appropriately by reference to market bond yields at the end of the reporting period.

One actuarial assumption which has a material effect is the discount rate. The discount rate reflects the time value of money but not the actuarial or investment risk. [IAS 19.79] The rate used to discount post-employment benefit obligations (both funded and unfunded) is determined by reference to market yields (at the end of the reporting period):

Vouch the bond yield to third party source documentation. Assess whether the currency and term of the bonds is consistent with the currency and estimated term of the post-employment benefit obligations.

-

on high quality corporate bonds; or in countries where there is no deep market in such bonds, on government bonds. [IAS 19.78]

The currency and term of the corporate bonds or government bonds is consistent with the currency and estimated term of the postemployment benefit obligations. [IAS 19.78] Where there is no deep market in bonds with a sufficiently long maturity to match the estimated maturity of all the benefit payments, the entity should use current market rates of the appropriate term to discount shorter term payments, and estimate the discount rates for longer maturities by extrapolating current market rates along the yield curve. [IAS 19.81] The present value of the obligation will differ from the liability recognised in the statement of financial position because the liability is recognised after deducting the fair value of any plan assets and because some actuarial gains and losses, and some past service cost, are not recognised immediately. [IAS 19.82]

33

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

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Preparer

Description

Guidance [Refer to Insights 4.4.300 for further guidance]

25

Actuarial assumptions salaries and benefits (Pension liabilities V)

For defined benefit plans [selected in procedure #5], examine whether the post-employment benefit obligations are measured on an appropriate basis that reflects: a)

a)

estimated future salary increases.

b) the benefits set out in the terms of the plan (or resulting from any constructive obligation that goes beyond those terms) at the end of the reporting period. c)

Post-employment benefit obligations are measured on a basis that reflects: [IAS 19.83]

estimated future changes in the level of any state benefits that may affect the benefits payable under a defined benefit plan, if applicable.

estimated future salary increases (taking account of inflation, seniority, promotion, etc) [IAS 19.84]: consider evidence from announced future increases, agreements with employees and trades unions, company policy and past practice.

b) the benefits set out in the terms of the plan (or resulting from any constructive obligation that goes beyond those terms) at the end of the reporting period (e.g. if the formal terms of a plan require an entity to change benefits in future periods, the measurement of the obligation reflects those changes) [IAS 19.85]: consider evidence of underlying details of the plan benefits, communications with employees concerning benefit entitlements, etc. c)

estimated future changes in the level of any state benefits (e.g. state retirement benefits or state medical care) that may affect the benefits payable under a defined benefit plan, if, and only if, either: i.

those changes were enacted before the reporting date; or

ii.

past history, or other reliable evidence, indicates that those state benefits will change in some predictable manner, for example, in line with future changes in general price levels or general salary levels:

consider evidence of announced government policy. [Insights 4.4.290] 26

Actuarial assumptions – medical benefits

For any post employment medical/ health care defined benefit plans [selected in procedure #5], obtain details of the assumptions about medical costs and assess whether they take account of estimated future changes in the cost of medical services, resulting

34

Estimated future changes in the cost of medical services, resulting from both inflation and specific changes in medical costs are taken into account. [IAS 19.88] Estimates of future medical costs should be on the basis of

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

Short name

Description

(Pension liabilities V)

from both inflation and specific changes in medical costs.

Preparer

Make inquiries of management whether the plan requires employees to contribute to the medical costs covered by the plan, and examine whether the estimate of future medical costs takes this into account.

Guidance historical data about the entity‟s own experience, supplemented where necessary by historical data from other companies, insurance companies, medical providers or other sources. The effect of technological advances, changes in health care utilisation or delivery patterns and changes in the health status of plan participants should be considered. [IAS 19.89] The historical data relating to the level and frequency of claims is adjusted to the extent that the demographic mix of the population differs from that of the population used as a basis for the historical data. It should also be adjusted where there is reliable evidence that historical trends will not continue. [IAS 19.90] Where the plan requires employees to contribute to the medical costs covered by the plan, the estimate of future medical costs should take this into account, based on the terms of the plan at the reporting date (or based on any constructive obligation that goes beyond those terms). [IAS 19.91]

27

Actuarial assumptions – expected return on plan assets (Pension liabilities V)

For defined benefit plans [selected in procedure #5], obtain details of the overall calculation of the expected return on plan assets and perform the following procedures:

The expected return on the plan asset (or class of assets) is based on market expectations, at the beginning of the period, for returns over the entire life of the related obligation. [IAS 19.106]



Re-perform the calculation



Vouch components of the overall calculation (different assets/ classes of assets) to underlying calculation of the expected return on those assets.

In determining the expected and actual return on plan assets, an entity deducts expected administration costs, other than those included in the actuarial assumptions used to measure the obligation. [IAS 19.107] [Insights 4.4.480]

Refer to the list of plan assets [obtained in procedure #30]. Select items for testing (which may be individual assets or classes of similar assets, as appropriate) and perform the following procedures: 

Examine whether the expected return on the plan asset is based on market expectations, at the beginning of the period, of returns over the entire life of the related obligation.



Compare the expected return on the plan asset to the actual

35

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

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Description

Guidance

return on the plan asset and assess whether the actuarial gain or loss on the plan asset is appropriately recognised as the difference between the two. 

E4

Past service cost

28

Past service cost (Pension liabilities AV)

Make inquiries of management whether administration costs were appropriately adjusted for in the calculation and inspect the relevant calculation. [Refer to Insights 4.4.600]

For defined benefit plans [selected in procedure #5] obtain a schedule showing the calculation of past service cost, and the amortisation on a straight line basis if applicable, and perform the following procedures: 

Re-perform the calculation of the past service cost for the period.



Make inquiries of management to understand the treatment adopted for the past service cost and assess whether it has been accounted for appropriately.



Agree details of the change in the benefit plan giving rise to the past service cost to supporting documentation.

Past service cost is the change in the present value of the obligation, in respect of prior periods‟ service, due to plan amendments that change benefit entitlements (or due to the introduction of a new plan) [IAS 19.97]. In our view, in order for a change to be a plan amendment, there has to be a change in the agreement between the employer and the employee [Insights 4.4. 600.20]. Examples of changes that may be plan amendments include changes to the retirement age or to benefits payable on early retirement. Past service cost may be positive or negative and is recognised as an expense or as income on a straight line basis over the average period until the benefits become vested [IAS 19.96]. Subsequent changes to that past service cost are recognised only if there is a curtailment or settlement. [IAS 19.99] Negative past service cost arises when an entity changes the benefits attributable to past service so that the present value of the defined benefit obligation decreases. [IAS 19.97; refer to Insights 4.4.620 for further guidance] To the extent that the benefits are already vested immediately following the introduction of, or changes to, a defined benefit plan, an entity recognises past service cost immediately.[IAS 19.96, 100] Past service cost excludes: a) the effect of differences between actual and previously assumed salary increases on the obligation to pay benefits for service in prior years; b) under and over estimates of discretionary pension increases

36

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

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Description

Guidance when the entity has a constructive obligation to grant such increases; c) estimates of benefit improvements that result from actuarial gains that have been recognised in the financial statements if the entity is obliged, by either the formal terms of a plan (or a constructive obligation that goes beyond those terms) or legislation, to use any surplus in the plan for the benefit of plan participants, even if the benefit increase has not yet been formally awarded; d) the increase in vested benefits when, in the absence of new or improved benefits, employees complete vesting requirements; and e) the effect of plan amendments that reduce benefits for future service (a curtailment). [IAS 19.98] Where the entity reduces certain benefits payable under an existing defined benefit plan and, at the same time, increases other benefits payable under the plan for the same employees, the entity treats the change as a single net change. [IAS 19.101]

E5

Develop own estimates

29

PV Plan obligations Develop own estimates (Pension liabilities V)

For defined benefit plans [selected in procedure #5] develop an estimate/ range of estimates of the present value of the defined benefit obligations for comparative purposes. Examine whether the (range of) estimates are consistent with management‟s estimate.

Consider if it is necessary to develop our own estimate or range of estimates for corroborative purposes to evaluate management‟s estimate of the present value of defined benefit obligations. It may be appropriate to involve a KPMG actuarial specialist in developing the estimate. See KAM 20.1575 and 20.1825 for examples and further guidance of when and how it may be appropriate to develop our own point estimate or a range. Significant differences between the result of our model and that of management should be reconciled, and/or may be the basis for additional procedures or a conclusion that the valuation cannot be supported.

37

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

Short name

F

Plan assets

30

Plan assets – overview

Preparer

Description

[Refer to Insights 4.4.350]

Pension assets

For defined benefit plans [selected in procedure #5], obtain a list of plan assets as at the end of the entity‟s reporting period (showing the type of asset, fair value of the asset, date of estimation, valuation method used, etc.)

(no assertions)

-

verify the mathematical accuracy of the list

-

agree to the schedule of actuarial gains and losses for the defined benefit plan

-

agree prior period amounts to the prior period audit file

Identify the basis adopted for valuing the plan assets as at the end of the entity‟s reporting period and assess the impact on the nature, timing and extent of further audit procedures.

31

Confirmation of plan assets

[Refer to the list of plan assets in procedure #30]. Select items for testing and perform the following procedures:

Pension assets (CEAV)

-

Vouch the plan asset to the underlying accounting records of the plan. Obtain direct confirmations for the plan asset from the investment custodian or fund managers, (as appropriate).

Compare the list of plan assets to the confirmation from investment custodian or fund managers and assess whether the list of plan assets is complete.

32

Vouch plan assets to market prices Pension assets

Guidance

[Refer to the list of plan assets in procedure #30]. Identify plan assets whose fair value was based on market prices. Select items for testing and vouch the fair value of the plan asset to market prices.

38

The Standard requires that plan assets are stated at the fair value at the end of the reporting period of the entity. [IAS 19.54(d)] An entity determines...the fair value of any plan assets with sufficient regularity that the amounts recognised in the 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] Consider whether the current period end valuation is representative of known events – e.g. any major changes to the plan composition or funding in the year, cash flow movements in and out of the plan and performance of assets. Perform further procedures over the plan assets based on the nature of the assets, considering procedures #31 to #38 below. Consider whether it is necessary to obtain direct confirmations of plan assets from the investment custodian or fund managers. Refer to KAM topic 23.0000 External confirmations for further guidance. Note that confirming the existence of plan assets in the aggregate ordinarily does not constitute sufficient, appropriate audit evidence. Engagement teams should obtain this information on a disaggregated basis, in accordance with the requirements of IAS 19. Furthermore, confirming the valuation of the plan assets from a third party service provider (e.g. custodian) evidencing fair value of plan assets in the aggregate or on an item by item basis does not, in and of itself, constitute adequate audit evidence with respect to the related valuation assertion. In our view, if plan assets have a quoted market price, they should be measured at the bid price, based on the requirements for measuring the fair value of financial instrument assets. [Insights 4.4.410.10]

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

33

Description

(V)

Scan the list of plan assets and assess whether market prices are available for any other (types of) plan asset.

Assess fair value of plan assets not based on market prices

[Refer to the list of plan assets in procedure #30]. Identify plan assets whose fair value was not based on market prices. Make inquiries of management to understand the valuation methods (and if applicable the model) used to estimate the fair values of plan assets. Select items for testing and perform the following procedures:

Where market prices are not available for a plan asset, fair value is measured by discounting expected future cash flows using a discount rate that reflects both the risk associated with the plan assets and the maturity or expected disposal date of those assets (or, if they have no maturity, the expected period until the settlement of the related obligation). [IAS 19.102]



Consider „fair value‟ as it is defined in IFRS and our knowledge of the entity, industry and market best practices.

Pension assets (V)



34

35

Preparer

Short name

Evaluate the appropriateness of the method selected for valuation, given the nature of the asset in relation to the business and industry, and specific facts and circumstances of the entity Obtain calculations of the estimate and perform the following procedures: - evaluate the assumptions used in the estimate. - assess the completeness, accuracy and relevance of underlying date used in the estimate

Guidance

It may be appropriate to involve a KPMG valuation specialist in assessing the fair value of certain plan assets. Refer to the IFRS Technical Topic Audit Program Guide IFRS Fair Value Measurements for further guidance

Plan assets – cash and deposits

[Refer to the list of plan assets in procedure #30]. Select cash balances for testing and perform the following procedures, as appropriate:

Cash balances include the plan‟s current account(s), money market deposits and any other bank accounts/ other items meeting the definition of cash and cash equivalents.

Pension assets (EAV)



Examine the bank reconciliation at the period end



Obtain direct bank confirmation

The procedures in italics opposite are the short names of procedures available in the general cross-industry knowledge.

Accounting for qualifying insurance policies

Make inquiries of management to identify whether there are any insurance policies relating to the plan, whether held directly by the plan or by the entity as sponsor of the plan.

It is important to assess whether insurance policies are plan assets. Insurance policies may be held by the plan or the sponsor of the plan (i.e. the reporting entity).

[Refer to the list of plan assets in procedure #30]. Examine whether plan assets include insurance policies. Additionally, obtain details of any other insurance policies relevant to the plan that are not accounted for as plan assets. Select insurance policies

Qualifying insurance policies (“QIPs”)... are plan assets [IAS 19.104B]. An insurance policy is a QIP only if held directly by the sponsor of the plan and if:

Pension assets (CEAV)

39



it is not issued by a related party of the entity; and

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

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Preparer

Description



for testing and perform the following procedures: 



Guidance

Inspect the policy document (and any related analysis thereof) and identify who the policy is issued by (and their relationship to the entity, if any) and how the proceeds of the policy may be utilised. Assess whether: -

the insurance policy is a qualifying insurance policy for IAS 19 purposes.

-

the policy has been accounted for appropriately.

-

the amounts receivable under the insurance policy exactly match the amount and timing of some or all of the benefits payable under the plan, and assess whether they have been accounted for appropriately.

the proceeds of the policy: -

can be used only to fund defined benefit obligations;

-

are not available to the employer‟s creditors (even in the case of bankruptcy); and

-

cannot be returned to the entity except as reimbursement for the employee benefits paid or when the proceeds are surplus to requirements. [Insights 4.4.790.10]

In our view, the requirements that should be met for insurance policies held by the sponsor to qualify as plan assets are not applicable to policies held by the plan [Insights 4.4.790.30]. This means for example, that a policy issued by a related party of the entity to the plan is an asset of the plan, although it is not a QIP. Where the (amounts payable to the entity under the) insurance policies exactly match the amount and timing of some or all of the benefits payable under the plan, the fair values of those insurance policies are deemed to be the present value of the related obligations (subject to any reduction required if the amounts receivable under the insurance policies are not recoverable in full). [IAS 19.104] A policy held directly by the reporting entity that is not a QIP is not a plan asset. In such cases, the entity recognises its rights to reimbursement under the insurance policy as a separate asset rather than as a deduction in determining the defined benefit liability; in all other respects, the entity treats that asset in the same way as plan assets [IAS 19.104C]. See section H of this guide on reimbursement rights.

36

Adjustments to the total of plan assets Pension assets (EAV)

[Refer to the list of plan assets in procedure #30] and identify whether: a) unpaid contributions due from the reporting entity to the fund and any non-transferable financial instruments issued by the entity and held by the fund are excluded. b) the total is reduced by any liability of the fund that does

40

Unpaid contributions due from the reporting entity to the fund and any non-transferable financial instruments issued by the entity and held by the fund are excluded from plan assets [IAS 19.103] Plan assets are reduced by any liability of the fund that does not relate to employee benefits, e.g. trade and other payables and

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

Short name

c)

37

Plan assets different reporting period end dates Pension assets (AV)

Preparer

Description not relate to employee benefits. any operating assets of the reporting entity are included.

Fair value of plan assets Develop own estimates Pension assets (V)

liabilities resulting from derivative financial instruments. [IAS 19.103]

Assess whether the plan assets have accounted for these items appropriately.

For plan assets to include operating assets of the reporting entity, the plan has to have ability to use those assets to fund employee benefits, both legally and in substance. [IAS 19.7, 103, BC68]

For defined benefit plans [selected in procedure #5] obtain from management a reconciliation of the valuation of plan assets between the end of the plan reporting period and the end of the entity‟s reporting period, where different.

In practice, as permitted by IAS 19, the entity may request a qualified actuary to carry out a detailed valuation of the obligation and the asset valuation before the end of the reporting period. The results of that valuation are updated for any material transactions and other material changes in circumstances (including changes in market prices and interest rates) up to the end of the reporting period. However, in our view, asset values should be determined at the annual reporting period, even if the valuation of the obligation is done in advance and is adjusted forward, since these values normally are readily determinable. [Insights 4.4.330.30]

Select reconciling items for testing and obtain explanations from management and if applicable, supporting calculations/ documentation. Compare the list of plan assets at the end of the entity‟s reporting period with the list of plan assets at the end of the plan reporting period and the prior period figures. Make inquiries of management to understand any significant changes and assess whether they are reasonable. Assess whether these are representative of known events, e.g. any major changes to the composition of the plan or funding in the period.

38

Guidance

For defined benefit plans [selected in procedure #5] develop an estimate/ range of estimates of the fair value of [a selection of] plan assets for comparative purposes. Examine whether the (range of) estimates are consistent with management‟s estimate.

Consider if it is necessary to develop our own estimate or range of estimates for corroborative purposes to evaluate management‟s estimate of the fair value of all or a selection of the plan assets. It may be appropriate to involve a KPMG valuation specialist in developing the estimate. See KAM 20.1575 and 20.1825 for examples and further guidance of when and how it may be appropriate to develop our own point estimate or a range. Significant differences between the result of our model and that of management should be reconciled, and/or may be the basis for additional procedures or a conclusion that the valuation cannot be supported.

41

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

Short name

G

Actuarial gains and losses

39

Appropriateness of recognition and presentation of actuarial gains or losses (Pension expenses CEAP)

Preparer

Description

[Refer to Insights 4.4.490]

For defined benefit plans [selected in procedure #5] obtain a schedule of the actuarial gains and losses for the period, showing the movements in defined benefit obligations and plan assets and the calculation of the net amount recognised in the financial statements, and perform the following procedures: 

Agree brought forward figures to the prior period



Agree the defined benefit obligation at the end of the reporting period to the actuarial valuation



Agree the plan assets at the end of the reporting period to the fair value estimate.



[Trace the net actuarial gain or loss to the general ledger]



Re-perform the calculation of the net amount recognised in the financial statements.



Assess whether the recognition of any actuarial gain or loss during the period is consistent with the entity‟s accounting policies.



Guidance

Examine whether the appropriate treatment has been adopted in recognising any applicable actuarial gain or loss in profit or loss or in the statement of other comprehensive income.

Actuarial gains or losses arise from the difference between the expected and actual outcomes in the valuation of the [defined benefit plan] obligation and the plan assets. [Insights 4.4.500.10] They 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] An entity chooses an accounting policy of recognising actuarial gains and losses:  in profit and loss: by the corridor method; by any systematic method that results in faster recognition (than the corridor method); in the period they occur; or  in other comprehensive income in the period they occur. The corridor method If the net cumulative unrecognised actuarial gains and losses at the end of the previous reporting period exceeds the greater of: a)

10% of the present value of the defined benefit obligation at that date (before deducting plan assets); and

b) 10% of the fair value of any plan assets at that date (the „corridor‟), the entity should recognise the required portion of those actuarial gains and losses as income or expense. [IAS 19.92] The required portion of actuarial gains and losses to be recognised is calculated as the excess of net cumulative unrecognised amount over the corridor limits, divided by the expected average remaining working lives of the employees participating in that plan. [IAS 19.93]

42

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

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Preparer

Description

Guidance The corridor is calculated and applied separately for each defined benefit plan. [IAS 19.92] Faster recognition An entity may adopt any systematic method that results in faster recognition of actuarial gains and losses, provided that the same basis is applied to both gains and losses and the basis is applied consistently from period to period. This includes the option of recognising actuarial gains and losses in the period in which they occur. The entity may apply such systematic methods to actuarial gains and losses even if they are within the corridor limits specified above. [IAS 19.93] Recognition in other comprehensive income If... an entity adopts a policy of recognising actuarial gains and losses in the period in which they occur, it may recognise them in other comprehensive income... providing it does so for: a)

all of its defined benefit plans. [IAS 19.93A]

b) all of its actuarial gains and losses. [IAS 19.93A] c)

any adjustments arising from the limits specified in paragraph 58(b). [IAS 19.93C]

d) the effect of any additional liability in respect of minimum funding requirements and any subsequent re-measurement of that liability (as specified in procedure #42). [IFRIC 14.26(b)] Actuarial gains and losses that are recognised in other comprehensive income are immediately presented in retained earnings and are not reclassified to profit or loss in a subsequent period. [IAS 19.93D] This also applies to adjustments arising from the limits specified in paragraph 58b and the effect of any liability in respect of minimum funding requirement (see procedure #42). [IAS 19.93D, IFRIC 14.23]

43

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

#

Short name

Description

H

Reimbursement rights

40

Reimbursement rights evaluation

Make inquiries of management regarding whether there are any reimbursement rights relating to defined benefit plans. Obtain a list of the amount of any such rights and:

(Other receivables CEAVP, Pension liabilities E, Pension expense CAP, Contingent assets P)



Guidance [Refer to Insights 4.4.840]

Agree to the general ledger/ other receivables summary schedule

Select items for testing and perform the following procedures:

When, and only when, it is virtually certain that another party will reimburse some or all of the expenditure required to settle a defined benefit obligation, an entity recognises its right to reimbursement as a separate asset [IAS 19.104A]. They are not plan assets, and are presented separately from them, but are measured at fair value and are in all other respects treated in the same way as plan assets. [IAS 19.104A]



Make inquiries of management to understand the nature of the reimbursement right and inspect relevant documentation of the right to reimbursement.

If the reimbursement is in the form of an insurance policy, consider whether it is a qualifying insurance policy (and therefore a plan asset) or not (in which case it may be a reimbursement rights asset).



Assess whether the reimbursement right:

Consider further procedures to audit the fair value of the reimbursement rights asset from Section F Plan Assets and the IFRS Technical Topic Audit Program Guide IFRS Fair Value Measurements, as applicable.

-

is not a qualifying insurance policy

-

meets the virtual certainty test for recognition as an asset

and assess whether the reimbursement right has been accounted for appropriately. 

If the virtual certainty test is not met for all or part of the reimbursement, the entity may still have a contingent asset for the reimbursement to disclose in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets.

Agree the estimate of the fair value of the reimbursement rights asset to supporting documentation.

Presentation



Compare the fair value of the reimbursement rights asset to the underlying defined benefit obligation to which it relates and assess whether it has been measured on a consistent basis with that obligation, where appropriate.

Examine whether reimbursement rights assets, and the movement on the assets during the period, are presented appropriately in the financial statements.

44

Reimbursement rights assets are presented separately from the net defined benefit plan asset or liability in the statement of financial position. [IAS 19.104A] In the statement of comprehensive income, the expense relating to a defined benefit plan may be presented net of the amount recognised for a reimbursement [IAS 19.104A]. Separate or net presentation is an accounting policy choice.

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

Short name

I

Curtailments and settlements

41

Curtailments and settlements (Pension liabilities AV, Pension expense CEA)

Preparer

Description

Guidance [Insights 4.4.880]

Make inquiries of management regarding whether there were any curtailments or settlements of defined benefit plans during the period. Obtain a list of any curtailments or settlements noted, select items for testing and perform the following procedures:

Before determining the effect of a curtailment or settlement, the entity re-measures the obligation (and the related plan assets, if any) using current actuarial assumptions (including current market interest rates and other current market prices). [IAS 19.110]



Examine whether before determining the effect of a curtailment or settlement, the entity re-measured the obligation (and the related plan assets, if any) appropriately.

Gains or losses on the curtailment or settlement of a defined benefit plan are recognised when the curtailment or settlement occurs.



Trace the gain or loss on settlement to the general ledger and identify whether the entity recognised any gain or loss on the curtailment or settlement when it occurred.



Re-perform the calculation of the gain or loss on a curtailment or settlement and assess whether it has been calculated on an appropriate basis

-

Curtailment occurs when an entity is either demonstrably committed to make a significant reduction in the number of employees covered by a plan or amends the terms of the defined benefit plan so that a significant element of future service by current employees will either no longer qualify for benefits or qualify only for reduced benefits.

-

Settlement occurs when the sponsor‟s legal or constructive obligation for part or all of the benefits provided under a defined benefit plan is eliminated.

The gain or loss on a curtailment comprises: a) any resulting change in the present value of the defined benefit obligation; b) any resulting change in the fair value of the plan assets; and c)

any related actuarial gains and losses and past service cost that had not previously been recognised. [IAS 19.109]

Where 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 [is/ includes] a proportionate share of the previously unrecognised past service cost and actuarial gains and losses [IAS 19.115]. 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.

45

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

#

Short name

J

Minimum funding requirements and refunds or reduction in future contributions

42

Minimum funding requirements (Pension liabilities CA, Pension expenses CA)

Description

Make inquiries of management regarding whether the entity has any obligations under a minimum funding requirement to pay contributions to cover an existing shortfall on the minimum funding basis in respect of services already received and obtain a list of such obligations. Select items for testing and perform the following procedures: 



Trace the current period payment to the general ledger and assess whether the minimum funding requirement has been met in the current period.



Make inquiries of management regarding whether any contributions payable in such cases will be available as a refund or a reduction in future contributions after they are paid into the plan.



43

Refund or reduction in future obligations Pension liabilities (EAV)

Inspect the defined benefit plan agreement (or amendments thereto) to understand the nature of the minimum funding requirement.

For minimum funding requirement contributions that are not available after they are paid into the plan, obtain details of the liability recognised when the obligation arose and: -

re-perform the calculation.

-

trace the liability to the general ledger.

Where there is a surplus in the plan or a minimum funding requirement, make inquiries of management regarding whether the entity is entitled to refunds or reductions in future contributions to a defined benefit plan, either in accordance with the terms and conditions of the plan and/or any statutory requirements in the jurisdiction of the plan. Obtain details of how the refund or future reductions in contributions have been taken into account in assessing either the carrying value of a net plan

46

Guidance [Insights 4.4.660] Minimum funding requirements exist in many countries to improve the security of the post-employment benefit promise made to members of an employee benefit plan. Such requirements normally stipulate a minimum amount or level of contributions that must be made to a plan over a given period. Therefore, a minimum funding requirement may limit the ability of the entity to reduce future contributions. [IFRIC 14.2] If an entity has an obligation under a minimum funding requirement to pay contributions to cover an existing shortfall on the minimum funding basis in respect of services already received, and payment of these contributions would generate a surplus in the plan, the entity determines whether the contributions payable will be available as a refund or reduction in future contributions after they are paid into the plan. [IFRIC 14.23] Minimum funding requirements give rise to a liability if a surplus arising from the additional contributions required to be paid to fund an existing shortfall with respect to services already received, is not fully available as a refund or reduction in future contributions. [IFRIC 14.24,25; Insights 4.4.747]

If the statement of financial position amount turns out to be an asset, then the amount recognised is limited to the present value of available contribution reductions or refunds plus unrecognised actuarial losses and unrecognised past service costs. Further requirements ensure that a gain (loss) is not recognised solely as a result of an actuarial loss (gain) or a past service cost in the current period. [Insights 4.4.660.10; IAS 19.58] An economic benefit in the form of a refund and/ or a reduction in

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

Short name

Preparer

Description asset or the need for an additional liability, including the amounts recorded, and perform the following procedures: 



Inspect the terms and conditions of the plan, side agreements and/ or applicable regulations and assess whether there is an economic benefit available to the entity. Trace the amount of the economic benefit relating to the refund or reduction in future contributions to the general ledger.

Guidance future contributions is available if the entity has the right (for a refund, an unconditional right) to realise it at some point during the life of the plan or when the plan liabilities are settled. [IFRIC 14.8, 11,12] A refund is available to an entity only if the entity has an unconditional right to a refund: a)

during the life of the plan; or

b) assuming gradual settlement; or



Re-perform the calculation, if applicable.

c)



Examine whether the economic benefit has been measured and recorded appropriately.

The economic benefit to the entity is measured as the amount of the surplus at the end of the reporting period that the entity has a right to receive as a refund, less any associated costs. [IFRIC 14. 13-15]

assuming full settlement. [IFRIC 14.11]

If there is no minimum funding requirement for contributions relating to future service, the economic benefit that is available as a reduction in future contributions is measured as the lower of: a)

the surplus in the plan; and

b) the present value of the future service cost to the entity, for each year over the shorter of the expected life of the plan and the expected life of the entity. [IFRIC 14.16-17] A minimum funding requirement for contributions relating to any existing shortfall for past service on the minimum funding basis does not affect future contributions for future service [IFRIC 14. 18-19]. It may give rise to a liability (see procedure #42). If there is a minimum funding requirement for contributions relating to future service, the economic benefit available as a reduction in future contributions is the sum of: a)

47

any amount that reduces future minimum funding requirement contributions for future service because the entity made a prepayment (i.e. paid the amount before being required to do so); and

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

Short name

Preparer

Description

Guidance b) the estimated future service cost in each period in accordance with IFRIC 14.16 and 14.17, less the estimated minimum funding requirement contributions that would be required for future service in those periods if there were no prepayment as described in (a). [IFRIC 14. 20] The entity determines the maximum economic benefit that is available from refunds, reductions in future contributions or a combination of both. If a benefit is based on a combination of refunds and reductions in future contributions, it should not be based on assumptions that are mutually exclusive. [IFRIC 14.9]

L

Presentation and disclosure

44

Evaluate the presentation and disclosure of defined benefit plans (Pension assets P, Pension liabilities P, Pension expenses P)

Examine the presentation of any net defined benefit plan assets or liabilities, net defined benefit plan expense for the period and other related amounts in the financial statements and assess whether they have been appropriately presented. Perform the following procedures: 

Agree the amounts presented to the applicable roll-forward schedule or other underlying audit work.



Examine whether the entity presents the assets and liabilities arising from post-employment benefit plans on a consistent basis.



Examine whether the entity has offset any amounts in presentation of plan assets and liabilities and assess whether this is appropriate.



Examine whether the entity has offset any plans in net asset position with those in an net deficit position and assess whether this is appropriate.

Examine the disclosures in the financial statements relating to defined benefit plans and perform the following procedures: 

Make inquiries of management to understand the approach

48

Checklist Use the IFRS disclosure checklist to identify whether the financial statements include all relevant disclosures. The checklist is attached in eAudIT activity 4.6.2. Presentation Offset: Assets that meet the definition of plan assets, including qualifying insurance policies, and the related liabilities are presented on a net basis in the statement of financial position. An entity offsets an asset relating to one plan against a liability relating to another plan when, and only when, the entity: a)

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

b) 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. [IAS 19.116] Current or non-current: The Standard does not specify whether an entity should distinguish between current and non-current portions of assets and liabilities arising from post employment benefits [IAS

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

Short name

Preparer

Description

Guidance

taken to preparing the disclosure and selection of information to include in the disclosure.

19.118].



Agree numerical disclosures to the underlying accounting records, actuarial report or other sources of information, as appropriate (transactional systems, management information etc.).

An entity discloses information that enables users of financial statements to evaluate the nature of its defined benefit plans and the financial effects of changes in those plans during the period. [IAS 19.120]



Vouch the disclosure of actuarial assumptions used to the actuarial report.

Engagement teams are reminded of the importance of appropriate and comprehensive disclosures, in accordance with the requirements of IAS 19.

Evaluate whether the overall narrative disclosures are at an appropriate level of detail and are consistent with our knowledge of the entity, industry, market circumstances and trends, and other relevant factors.

Disclosure [IAS 19.120-125]

Consider the appropriateness of disclosures about any restrictions on the current realisability of the surplus, the basis used to determine the amount of economic benefit available or other sources of estimation uncertainty that have a significant risk of causing a material adjustment to the carrying amount of the net asset or liability recognised in the statement of financial position. [IFRIC 14.10] Consider the appropriateness of disclosures in relation to a related party transaction for entities participating in defined benefit plans that share risks between various entities under common control (e.g. a parent and its subsidiaries). [IAS 19.34B ] Engagement teams are reminded that IAS 1.17(c) states that a fair presentation also requires an entity to provide additional disclosures when compliance with the specific requirements in IFRSs is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity‟s financial position and financial performance.

49

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

Appendix 1 Example process activities, WCGWs and controls The examples in this appendix are associated with the “Human resources” process in industry knowledge. Activities *

WCGW

Control short name

Control description

The [financial controller] analyses each new or amended employee benefit and identifies the appropriate accounting treatment from the entities policies.

Errors in classification

Management review of the accounting for post employment benefit plans

Each [period] the [name] reviews the [reports/ information] regarding the classification of each new or amended post employment benefit plan.

[Name] reviews the available information and prepares the estimates of the present values of defined benefit obligations and the fair value of plan assets [and reimbursement rights assets] [Document the process of determining the estimates. This includes how the following are taken into account:

-

inappropriate classification of employee benefit plans

-

accounting as defined benefit or defined contribution.

- the use of actuarial techniques to make a reliable estimate of the amount that employees have earned in return for their service in the current and prior periods. (This requires an entity to determine how much benefit is attributable to the current and prior periods and to make estimates (actuarial assumptions) about demographic variables (employee turnover, mortality) and financial variables (future increases in salaries, medical

Errors in classification of each new or amended employee benefit plan including:

Errors in PV of defined benefit obligation There are errors in the preparation of the estimate of the present value of defined benefit obligations caused by: -

-

In order to perform the review the reviewer performs the following procedures: [list procedures] over the accounting for post employment benefit plans Once the review is complete and the queries raised/ changes requested have been dealt with to the reviewer‟s satisfaction [document how the reviewer indicates that the review is complete

Management has policies and procedures to help reduce the potential risks over the preparation of the estimate as follows:

Control over the preparation of the estimate of the present value of defined benefit obligations

[document management‟s policies and procedures in place over: - using qualified and experienced personnel including external experts; - review and approval of the relevant factors and the development of assumptions by higher levels of management; - the periodic review of the methods of developing the factors and assumptions; - a comparison of accounting estimates made in prior periods with results in subsequent periods; - consideration by appropriate levels of management of whether the accounting estimates are consistent with the operational plans of the entity; - the completeness, relevance and accuracy of the underlying data used in the preparation of the estimate.]

errors in the underlying data. inappropriate factors or assumptions. not applying the entity‟s accounting policies. inaccurate computation.

50

TECHNICAL TOPIC AUDIT APPROACH GUIDE IAS 19 Employee Benefits - Defined benefit plans (09/12) Activities * costs and other benefits) that will influence the cost of the benefit;

WCGW

Control short name

Control description

Fair value estimate There are errors in the preparation of the estimate of the fair value of plan assets caused by:

Management has policies and procedures to help reduce the potential risks over the preparation of the estimate as follows:

- discounting that benefit using the Projected Unit Credit Method in order to determine the present value of the defined benefit obligation and the current service costs. - determining the total amount of actuarial gains and losses and the amount of those actuarial gains and losses to be recognised - where a plan has been introduced or changed, determining the resulting past service cost. - where a plan has been curtailed or settled, determining the resulting gain or loss. - determining the fair value of any plan assets].

Control over the preparation of the estimate of the fair value of plan assets

The [accountant] prepares the journal entry recording the pension expense for the period. The [accountant] prepares the journal entry recording the pension assets and liabilities actuarial gains and losses for the period and enters it into the general ledger.

-

-

errors in the underlying data. inappropriate factors or assumptions. not applying the entity‟s accounting policies. inaccurate computation.

Errors in accounting for defined benefit plans

Management review of HR costs

There are errors in accounting for defined benefit plans -

not recording relevant amounts or recording them inaccurately

-

[etc.]

[document management‟s policies and procedures in place over: -

using qualified and experienced personnel including external experts;

-

review and approval of the relevant factors and the development of assumptions by higher levels of management;

-

the periodic review of the methods of developing the factors and assumptions;

-

a comparison of accounting estimates made in prior periods with results in subsequent periods;

-

consideration by appropriate levels of management of whether the accounting estimates are consistent with the operational plans of the entity;

-

the completeness, relevance and accuracy of the underlying data used in the preparation of the estimate]

Each [period] [the manager] reviews the following KPI(s): HR costs including salary, pension, bonus etc. In order to perform the review the reviewer performs the following procedures: -

the reviewer considers the overall salary and other expenses. [list other procedures]

Where [the reviewer] has further questions or wishes to understand reasons for the fluctuations in the KPIs these are raised first with the appropriate manager who provides more detailed information where applicable. Once the review is complete and the queries raised/changes requested have been dealt with to the reviewers satisfaction [document how the reviewer indicates that the review is complete.] [Describe any IT component of the control]. Management has designed this control to detect and correct potential misstatements both intentional and unintentional greater than [amount].

51

TECHNICAL TOPIC AUDIT APPROACH GUIDE IAS 19 Employee Benefits - Defined benefit plans (09/12) Activities *

WCGW

[Name] reviews the available information and prepares the employee benefits - defined benefit plan disclosures. [Document the process of determining the employee benefits - defined benefit plan disclosures. ]

Control short name

Control description

Management review of journal entries

When an [item]is entered into the system it is automatically placed into a work queue for [manager] to review. In order to perform the review the [reviewer] carries out the following procedures: -

[list procedures to determine that the journal is appropriately authorised, posted into the correct period and for the correct amount.].

Once the review is complete and the queries raised/ changes requested have been dealt with to the approvers satisfaction [the approver] [document how the approver indicates that the item is approved.] Management has designed this control to prevent potential misstatements both intentional and unintentional greater than [amount]. Errors in preparation of the disclosure There are errors in the preparation of the defined benefit plan disclosures caused by: -

-

Control over the preparation of the defined benefit plan disclosures

errors in the underlying data. inappropriate factors or assumptions. not applying the entity‟s accounting policies. inaccurate computation.

Management has policies and procedures to help reduce the potential risks over the preparation of the disclosure as follows: [document managements policies and procedures in place over: -

using qualified and experienced personnel including external experts;

-

consideration by appropriate levels of management of whether the accounting disclosures are consistent with the operational plans of the entity;

-

the completeness, relevance and accuracy of the underlying data used in the preparation of the disclosure.

Where the disclosure includes subjective elements document managements policies and procedures in place over: -

review and approval of the relevant factors and the development of assumptions by higher levels of management;

-

the periodic review of the methods of developing the factors and assumptions;

-

a comparison of the disclosures made in prior periods with the actual results]

* Activities relating to how management makes the accounting estimate (the text in the grey box above) are documented in estimates activity 2.6.11.xx. All other process activities are documented in the relevant processes in 2.11.xx.1. Example tests of operating effectiveness are available in the relevant eAudIT activity through industry knowledge, for all the types of control examples shown above.

52

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

Appendix 2 Developing a scope of work with specialists – substantive procedures The table below indicates which procedures (referenced by number/ short name from section 3.4 above) might typically be performed by actuarial specialists and/or the audit team. Practice will vary by country as well as depending on the nature and complexity of the engagement. Therefore it is important that the scope of work and nature of procedures to be performed by specialists are discussed and agreed to in advance. The agreed scope of work is attached in eAudIT activity 2.12.xx. #

Procedure short name

Typically performed by Audit team

Actuarial specialist

#

Procedure short name

Typically performed by Audit team

Actuarial specialist

1

Pension assets and liabilities roll-forward schedule

Y

N

23

Actuarial assumptions - demographic

N

Y

2

Classification of post-employment benefit plans

Y

N

24

Actuarial assumptions - discount rate

N

Y

3

Classification of plans funded by insurance policy

Y

N

25

Actuarial assumptions - salaries and benefits

N

Y

4

Completeness of post employment benefit plans

Y

N

26

Actuarial assumptions – medical benefits

N

Y

5

Assess calculation of defined benefit plans net liability or asset

Y

Y

27

Actuarial assumptions – expected return on plan assets

N

Y

6

Recognition in profit or loss of net defined benefit plan expense

Y

Y

28

Past service cost

Y

Y

7

Communications with plan actuaries and other relevant parties

Y

Y

29

PV Plan obligations - Develop own estimates

N

Y

8

Evaluate independence of plan from the entity

Y

N

30

Plan assets – overview

Y

N

9

Appropriateness of accounting for multi employer or state benefit plans

Y

Y

31

Confirmation of plan assets

Y

N

10

Multi-employer or state plans accounted for as defined contribution – contractual agreements

Y

Y

32

Vouch plan assets to market prices

Y

N

53

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

Procedure short name

Typically performed by Audit team

Actuarial specialist

#

Procedure short name

Typically performed by Audit team

Actuarial specialist

11

Defined benefit plans costs shared among a group

Y

N

33

Assess fair value of plan assets not valued based on market prices

Y*

N

12

Inspect the plan financial statements

Y

N

34

Plan assets – cash and deposits

Y

N

13

Reconciliation of defined benefit obligations

Y

Y

35

Accounting for qualifying insurance policies

Y

Y

14

Defined benefit obligations valuation method and timing

N

Y

36

Adjustments to the total of plan assets

Y

N

15

Attributing benefits to period of service

N

Y

37

Plan assets - different reporting period end dates

Y

N

16

Current service cost recalculation

N

Y

38

FV Plan assets - Develop own estimates

Y*

Y

17

Current service cost analytical procedure

N

Y

39

Appropriateness of recognition and presentation of actuarial gains or losses

Y

Y

18

Interest cost

Y

Y

40

Reimbursement rights evaluation

Y

Y

19

Benefits paid

Y

Y

41

Curtailments and settlements

Y

Y

20

Data provided by the entity

Y

N

42

Minimum funding requirements

Y

Y

21

Data provided by the plan trustees/ administrator

Y

N

43

Refund or reduction in future obligations

Y

Y

22

Actuarial assumptions – general

N

Y

44

Evaluate the presentation and disclosure of defined benefit plans

Y

Y

* It may be appropriate to involve a KPMG valuation specialist in these procedures

54