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What are the reasons for the increase in the retirement liability?

This is the usual question we receive from our clients as we enter another season of finalizing the company’s audited financial statements as required by the Securities and Exchange Commission (SEC).

The adoption of the Philippine Accounting Standards (PAS) means that companies need to report Retirement Liabilities in accordance with PAS 19. Retirement Liabilities have a direct impact to a company’s balance sheet hence, it would be good to understand what drives the liability up or down.

The 5 major factors that impact the retirement liability:

 

Discount Rate

This is based on the published Philippine Dealing System Treasury Reference Rates (PDST-R2). The higher the discount rate, the lower the liability, and vice versa.

Salary Projection Rate

The higher the increase in the salary projection rate vs previous year, the higher the liability becomes, and vice versa.

Current Service Cost

This pertains to the additional year of service of the employees. Since the cut-off date of the valuation is a year after (i.e. 12/31/16 to 12/31/17) then the liability would have increased equivalent to 1 year of service.

Movement for the Year

This pertains to the actual “experience” for the year in terms of the actual salary increase, resignations and new hires.

Retirement Fund

If a retirement fund is in place, any additional contributions to the fund will reduce the liability. If a retirement plan is tax-qualified, the contributions are treated as a business tax-deductible expense for the year.

 

I hope this gives you a better understanding and appreciation of the PAS 19 Valuation report for guidance in the financial decisions for the year ahead.