An entity adopting IFRS has to conduct an 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.

Illustrative Example

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 $410 million as at 1 January 2017.

ABC Limited appointed Lux to conduct the actuarial valuation for FY 2017.

Lux 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 $ 425 million. Hence, the difference between the opening book liability ($ 410 million) and the actuarial liability ($ 425 million), i.e. $ 15 million, is charged to Past Service Cost.

For ease of understanding, the journal entries should be as follows:

Journal Entries

1. If a Past Service Cost

  • DR Past Service Cost 15
  • CR 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.

  • DR Profit & Loss A/c 15
  • CR Past Service Cost 15

2. If a Past Service Gain

If the actuarial liability is $ 400 million instead of $ 425 million, then the difference of $ 10 million should be charged to Past Service Gain.

  • DR End of Service Benefit liability 10
  • CR Past Service Gain 10
  • and
  • DR Past Service Gain 10
  • CR 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 our standard valuation report, to recognise the current service cost, interest cost, and the actuarial gain or loss in their books of accounts.