An entity adopting IFRS for the first time has to conduct the actuarial valuation at the beginning of the financial year in which IFRS will be adopted. The difference between the opening actuarial liability and the liability that is carried in the books of the accounts should be recognised under “Past Service Cost”, so that the opening employee benefits liability in the books of accounts is equal to the opening actuarial liability for the financial year. This Past Service Cost will then be transferred to the Profit & Loss Account.
Hence, it is imperative to conduct the actuarial valuation as at the beginning of the financial year. Some of our clients request us to conduct just the valuation as at the end of the financial year in which they will be adopting IFRS for the first time. But we always recommend to them that a valuation needs to be conducted as at the beginning of the financial year.
Entity ABC Limited is reporting under IFRS for the first time in financial year 2017. The End of Service Benefit liability using the traditional formulaic and non-actuarial approach was SAR 410 million as at 1 January 2017.
ABC Limited appointed Lux to conduct the actuarial valuation for FY 2017.
Lux, accordingly, conducted the actuarial valuation for ABC Limited as at 1 January 2017 and 31 December 2017. The actuarial liability (“DBO”) Lux computed as at 1 January 2017 was SAR 425 million. Hence, the difference between the opening book liability (SAR 410 million) and the actuarial liability (SAR 425 million), i.e. SAR 15 million, is charged to Past Service Cost.
For ease of understanding, the journal entries should be as follows:
1. Journal Entries
1.1 Case of Past Service Cost
Past Service Cost 15
To End of Service Benefit liability 15
This will ensure that the opening book liability in the year of adoption is the same as the actuarial liability.
This Past Service Cost should be transferred to the Profit & Loss A/c for FY 2017.
Profit & Loss A/c 15
To Past Service Cost 15
1.2 Case of Past Service Gain
If the actuarial liability is SAR 400 million instead of SAR 425 million, then the difference of SAR 10 million should be charged to Past Service Gain.
End of Service Benefit liability 10
To Past Service Gain 10
Past Service Gain 10
To Profit & Loss A/c 10
Given that the opening book liability is now the same as the actuarial liability, ABC Limited can use the relevant accounting disclosures for FY 2017, provided in Table 7.1 of our valuation report, to recognise the current service cost, interest cost, and the actuarial gain or loss in their books of accounts.