With the implementation of PFRS for SMEs to those qualified entities, questions were raised as to whether the simplifications in the measurement of the defined benefit obligation also imply that discounting is no longer necessary. Different sectors have different interpretations on the provision of the standards. The standards provides for the following (Section 28.19 of PFRS for SMEs):
If an entity is not able, without undue cost or effort, to use the projected unit credit method to measure its obligation and cost under defined benefit plans, the entity is permitted to make the following simplifications in measuring its defined benefit obligation with respect to current employees:
(a) ignore estimated future salary increases (ie assume current salaries continue until current employees are expected to begin receiving post-employment benefits);
(b) ignore future service of current employees (ie assume closure of the plan for existing as well as any new employees); and
(c) ignore possible in-service mortality of current employees between the reporting date and the date employees are expected to begin receiving post-employment benefits (ie assume all current employees will receive the post-employment benefits).
However, mortality after service (ie life expectancy) will still need to be considered. An entity that takes advantage of the foregoing measurement simplifications must nonetheless include both vested and unvested benefits in measuring its defined benefit obligation.
As written, there were no mention about the discounting of the obligation. However, it is to be noted that speaks only of the “simplification” of the method, by which it pertain to the “actuarial valuation method“. Meaning, when the Company applies simplification in accounting of defined benefit obligation, it will still employ the actuarial valuation method, only, it is simplified (ignoring a to c above).
Arguments were raised that the PFRS for SMEs mentioned that we “assume closure of the plan for existing as well as any new employees”, which, base on their interpretation, the assumption should be there will no longer be future service costs and therefore the benefits are assumed to be payable immediately. But it seems that this is not the intention of the standard.
In fact, there was an educational/training material issued by the IFRS Foundation, under IASB that illustrates how the defined benefit obligation be simplified. Under these illustrative computations, the simplification still considers the time value of money as the benefits are still expected to be received by the employees at a future period.
Download a copy of this educational and training material for employee benefits issued by the IFRS Foundation here. The discussion regarding the topic can be found in page 22 to 25 of this material.
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