Key Differences Between the Funding Valuation and the PAS 19 Valuation

As many companies request us to do an actuarial valuation for them on a yearly basis, some of the common questions we get from clients include: What’s the difference between the Philippine Accounting Standard No. 19 (PAS 19) Valuation and the Funding Valuation? Do I really need both valuations done every year? How often should we do the valuation?

Understanding the key difference between the PAS 19 and Funding valuations will guide you when a valuation is necessary. Here are 4 key differences:

1. Purpose – The PAS 19 Valuation is for accounting disclosures while the Funding Valuation is for budgeting purposes. It’s not mandatory to set up a Retirement Plan, what is mandated is for the employer to pay a retirement benefit for eligible employees under Republic Act 7641. In any case, whether a company has a retirement plan or not, the PAS 19 Valuation is needed to satisfy the Securities and Exchange Commission’s (SEC) mandate that all corporations should adopt the Philippine Financial Reporting Standards (PRFS). The output of the PAS 19 Valuation is to determine the asset/liability and income/expense of the company’s retirement benefit obligations that your external auditor will disclose in the annual Audited Financial Statements (AFS). 

The Funding Valuation is applicable if a company is considering to set up their Retirement Plan or already has one. The Funding report gives management an idea of the recommended contributions to the retirement fund and for budgeting the future contributions. The Funding Valuation is also a requirement of the Bureau of Internal Revenue (BIR) when applying for tax exemption of the Retirement Plan. This report is also used as a basis for tax deductibility purposes since contributions to the fund is a deductible expense.

2. External Partners – Normally if a financial institution like a bank, insurance company or investment house approaches you to offer their services in managing your retirement fund, then it’s the Funding Valuation that is necessary to know how much will be the recommended and projected contributions to the fund. The company’s contributions to the retirement trust fund will be a tax deductible expense up to the amount reflected in the Funding Valuation.

If it is the external auditor who approaches you and requests for an actuarial valuation, then in most cases, it’s the PAS 19 Valuation that is needed. The external auditor will use the figures reflected from the PAS 19 report in your Audited Financial Statements (AFS) that will be submitted to the SEC. The PAS 19 disclosures has nothing to do with tax deductibility but rather just for accruals and reporting purposes of retirement liabilities and expenses.

3. Assumptions – The methodology of both valuations is the same, which is the projected unit credit method (PUCM). The assumptions such as salary increase rate and attrition rate are the same for both valuations. The only difference is that the PAS 19 Valuation uses a discount rate while the Funding Valuation uses an investment rate of return. 

The discount rate is the basis to calculate the present value of the retirement benefit obligation in the PAS 19 Valuation. The discount rate is based on the government securities BVAL rates that are published in the PDS Group website. On the other hand, the Funding Valuation uses an investment rate of return (IRR), which is used to get the present value of the past service liability. The basis of the IRR is the actual and projected performance of your retirement fund as advised by your fund manager.

If you notice, the basis for the discount rate has nothing to do with the actual performance of the company’s retirement fund. Therefore, the Funding Valuation provides a better economic indicator of the funded level of the retirement fund since the basis for getting the present value is the average performance of the fund based on its portfolio mix.

4. Frequency – The PAS 19 Valuation is reported annually as the audit period starts. The valuation is a requirement so that your auditor can incorporate the results to your financial statements before they are submitted to the SEC. Non-compliance to PAS may result in penalties by the SEC.

The Funding Valuation is normally done when a retirement plan is set up or is amended as this also is a requirement of the BIR. In normal circumstances, the Funding Valuation is performed every 2 – 3 years to ensure that the recommended contributions are up to date given that employee profile, salaries and investments may have had significant adjustments.

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