TAS19 - A new era in accounting for long-term employee benefits

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After having remained in draft form for some time, TAS 19 was formally “Gazetted” in the Royal Thai Gazette on 15 December 2010 and therefore became effective for companies’ financial reporting starting on or after 1 January 2011. So what is so special about TAS19 and why does it now mean the role of the actuary is essential to ensure understanding and compliance as we move away from the old ways of accounting for long-term employee benefit costs and enter this new era of accounting for employee benefits in Thailand in line with International practices.

What is covered by TAS19?

The TAS19 standard actually covers all forms of employee benefits:

• Short-term benefits (including cash benefits like salary and bonus)
• Post-employment benefits (including Legal Severance Payment Plan, retirement plans and post retirement medical benefits)
• Other long-term employee benefits (including long service awards and deferred bonus plans)
• Termination benefits

It is the accounting for Post-employment benefits and Other long-term employee benefits that sees the greatest changes through TAS 19 with the introduction of actuarial calculations and accruals accounting for Publically Accountable Entities (PAEs).

The old ways of accounting for long-term employee benefits
 

To date, most companies in Thailand have accounted for the cost of Retirement Benefit schemes in their financial statements on a cash cost basis, showing an expense in the year an actual benefit payout is made and not holding any reserve/liability on their balance sheet. A few Thai companies were following a simplified accrual approach but rarely using actuarial techniques to assess such liabilities. The use of actuarial valuations was usually only applied by companies who were required to report to an overseas parent company.

So what does the TAS19 mean for Thai companies?

Under TAS19, the accounting framework for defined benefit retirement benefit schemes (including Legal Severance Payment Plans) changes significantly. TAS19 introduces the need for all public companies to account for long term employee benefits on an accruals basis and through the recognition of liabilities on their balance sheet calculated using actuarial techniques.

But it’s not just a change in the way expenses and liabilities are measured, the disclosure requirements have been significantly enhanced. This includes reconciliation of the opening and closing balances of the assets (note that most plans in Thailand do not have assets and are therefore unfunded) and liabilities, the elements of P&L Expense as well as details of anything recognized in the Other Comprehensive Income (OCI).

The objective of TAS19 is to allocate costs to accounting periods in which employees' render services – accruals concept. The actuarial assumptions and the methodology for such valuations have also been prescribed in the standard. The enhanced disclosures will improve transparency and enable consistent comparison of financial statements between different companies. The role of the actuary has become vital now, not just to calculate the actuarial valuation of the liability in respect of the employee benefit plans, but more so to ensure appropriate assumptions are used and to fully understand the new disclosures.

The company should take great care over ensuring appropriate assumptions are used in the actuarial calculations – this is where the use of an experienced actuarial consultant can help immensely, by carefully analyzing the past experience of the company for salary increases and employee turnover, by considering past trends for Thai industry, and by considering macro economics – all to determine a best estimate for the future. Appropriate choice of the assumptions will help reduce volatility in the company’s balance sheet liabilities and annual expense.

What is the impact of TAS19 in Thailand?

The introduction of TAS19 will mean public companies will now need to hold reserves on the balance sheet and will have an ongoing P&L expense for all long-term employee benefits. The initial adoption of the accounting standard allows companies to either recognize the initial liability (due to prior service) either in their P&L expense or against their Retained Earnings. In our experience we see most companies opting for the retained earnings approach. For many companies the impact is minimal, however for the largest companies in Thailand with a large workforce with long serving employees, the impact of initial adoption can be significant, adding billions of baht to their balance sheet. This has been seen in 2009 accounts for many of the larger companies who opted to adopt the IAS19 standard ahead of the release of TAS19.

What should companies do?

It is important that all companies consult with their auditor and seek advice of an actuarial consultant to ensure they are aware and prepared for any possible change. As well as the PAEs who must comply with TAS19 this year, the NPAEs may also choose to comply – this may be sensible for NPAEs (Non Publically Accountable Entities) who are a subsidiary of an overseas company or for local Thai companies looking to gain listing in the near future.