IAS 36 How Impairment test

IAS 36 How Impairment test is all about this – When looking at the step-by-step IAS 36 impairment approach it comes down to the following broadly organised steps: IAS 36 How Impairment test

  • What?? – Determining the scope and structure of the impairment review, explained here,
  • If and when? – Determining if and when a quantitative impairment test is necessary, explained here,
  • IAS 36 How Impairment test or understanding the mechanics of the impairment test and how to recognise or reverse any impairment loss, if necessary. Which is explained in this section…

The objective of IAS 36 Impairment of assets is to outline the procedures that an entity applies to ensure that its assets’ carrying values are not … Read more

Key assumptions in a Pension plan

Key assumptions in a Pension plan – There are two types of pension assumptions that a sponsor makes with input from their actuaries:

  • Economic assumptions describe how market forces affect the amount of expected future benefits to be paid to plan recipients.
  • Demographic assumptions describe the impact of plan-participant behaviours on the timing and probabilities of benefits being paid to them.

In (consolidated) financial statements the following key actuarial assumptions that the company/ sponsor used to estimate its portion of benefit obligation and pension expense under the pension plan.

The economic assumptions relate to:

  • discount rate;
  • expected rate of return on plan assets; Key assumptions in a Pension plan
  • salary escalation rate; and Key assumptions in a Pension plan
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Impact of the Discount Rate on Pension obligations

Impact of the Discount Rate on Pension obligations – In order to understand how the discount rate impacts the company’s pension obligations, it is useful to first understand the finance concepts of time value of money and present value. Note that the discount rate is the most important (and most difficult to assess) assumption in calculating pension obligations.

Time Value of Money Impact of the Discount Rate on Pension obligations

The concept of time value of money is best explained in a simple way: a dollar today is worth more than a dollar in the future.

Imagine receiving $1,000 today and putting it in a simple bank savings account. That Impact of the Discount Rate on Pension obligations $1,000 will eventually grow over the years because the bank … Read more

Components of a company’s pension liability

Components of a company’s pension liability – A company’s defined-benefit pension plans have three basic components:

    • accrued-benefit obligations, or the future liabilities created by employees’ service;
    • plan assets, used to pay pension benefits; and
    • unamortized actuarial gains and losses.

Setting aside unamortized actuarial gains and losses, when plan assets are less than the accrued benefit obligation, a net pension liability is recorded on the statement of financial position. A net pension liability is the estimate of the amount needed to pay for pension benefits that have been earned by current and past employees, less the pool of assets set aside in a separate legal entity to eventually pay for the benefits.

A net pension asset arises when plan assets … Read more

What is a correct discount rate in pension calculations?

What is a correct discount rate in pension calculations – Some background information on the discussion on pension plans and discount rates. Choosing the correct discount rate in calculation pension liabilities is not an easy task and a task that brings public responsibility.

Interest rates in the European area are close to zero because the ECB holds its benchmark refinancing rate at zero since March 2016, see table below:

What is a correct discount rate in pension calculations

Low-interest rates play a critical role in calculating pension plan obligations. Specifically, the interest rates on high-quality corporate bonds are used to determine the plan’s expected risk-free return in the future – a metric known as the “discount rate”. If the discount rate decreases, a pension plan needs more assets today Read more

Obligation

Obligations may be legally enforceable as a consequence of a binding contract or statutory requirement. This is normally the case, for example, with amounts payable for goods and services received. However, obligations do not have to be legally binding.

If, for example, an entity decides as a matter of policy to rectify faults in its products even when these become apparent after the warranty period has expired, the costs that are expected to be incurred in respect of goods already sold are liabilities.

Obligations do not include future commitments.

Some liabilities can be measured only by using a substantial degree of estimation. Some entities describe these liabilities as provisions. In some countries, such provisions are not regarded as liabilities because … Read more