Page 294 - Group Insurance and Retirement Benefit IC 83 E- Book

Recognition and measurement: present value of defined benefit obligations
and current service cost

66 The ultimate cost of a defined benefit plan may be influenced by many variables, such as final
salaries, employee turnover and mortality, employee contributions and medical cost trends. The
ultimate cost of the plan is uncertain and this uncertainty is likely to persist over a long period of
time. In order to measure the present value of the post-employment benefit obligations and the
related current service cost, it is necessary:

(a) to apply an actuarial valuation method (see paragraphs 67–69);

(b) to attribute benefit to periods of service (see paragraphs 70–74); and

(c) to make actuarial assumptions (see paragraphs 75–98).

Actuarial valuation method

67 An entity shall use the projected unit credit method to determine the present value of its
defined benefit obligations and the related current service cost and, where applicable, past
service cost.

68 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 (see paragraphs 70–74) and measures each unit separately to
build up the final obligation (see paragraphs 75–98).

Example illustrating paragraph 68
A lump sum benefit is payable on termination of service and equal to 1 per cent of final salary for
each year of service. The salary in year 1 is Rs.10,000 and is assumed to increase at 7 per cent
(compound) each year. The discount rate used is 10 per cent per year. The following table shows
how the obligation builds up for an employee who is expected to leave at the end of year 5,
assuming that there are no changes in actuarial assumptions. For simplicity, this example ignores
the additional adjustment needed to reflect the probability that the employee may leave the entity
at an earlier or later date.

Year 1 2 3 4 5

Rs. Rs. Rs. Rs. Rs.

Benefit attributed to:

– prior years 0 131 262 393 524

– current year 131 131 131 131 131
(1% of final salary)

– current 131 262 393 524 655

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