1st Jun 2023, By Susan Turner
For companies wishing to adopt IAS 19 for the first time or considering a transition to a new IAS 19 provider, there are certain measures that can be taken to ensure the valuation process runs efficiently and smoothly; these include:
In the following Section we describe the positive/negative impact of adopting (✔) or not adopting (✘) the measures listed above.
1.1 Appointing a reputable professional provider ✔
By appointing a specialist IAS 19 provider that is well respected in the actuarial industry and by the top audit firms, and has extensive knowledge and experience of conducting IAS 19 valuations, a company can expect to be provided with a professional and expert service.
One way to find more information on the credentials of actuarial providers is to ask the company’s external auditors. They are often willing to offer recommendations as to which actuarial firms should be considered for the role, having regard to reputational knowledge and the auditors’ own experience of working with those actuarial firms in the past.
A company can also carry out its own research on various actuarial firms, e.g. via its own network of external contacts, by accessing the providers’ websites, and so on.
1.2 Appointing a less reputable professional provider ✘
If a company appoints an actuarial provider that is inexperienced in providing IAS 19 services (e.g. it is a relatively new “start-up” or the actuarial team consists of actuarial students rather than fully qualified actuaries) then there is a risk of work-multiplication and of the actuarial results being inaccurate. This could mean that the liability is under or over accrued for, with the worst-case scenario being that the Auditors have to restate the previously issued Financial Statements where the inaccuracies extend to the previous reporting period. Auditor enforced reworks of IAS 19 mean that cheaper providers end up being more expensive and time-consuming.
2.1 Fully defining the scope of work ✔
A company that has a detailed understanding of its financial reporting requirements and what is needed to meet the needs of its external auditors and any regulatory requirements, is well placed to communicate the objectives, expectations and desired outcome of the IAS 19 project to the appointed actuarial provider. This will serve to avoid any misunderstandings and potential delays to the project. Correct and detailed scoping of the project will also ensure that the timelines and fees can be determined with greater accuracy.
A professional IAS 19 provider will help a company to define its requirements by asking pertinent questions concerning such fundamental matters as i) jurisdictions and number of entities, ii) number of employees, iii) type of report (consolidated or entity-wise) and iv) benefit scheme rules.
2.2 Inaccurate scoping of the IAS 19 project ✘
A company that does not have a clear understanding of the IAS 19 project, for example it is unable to answer one or more of the points i) to iv) under point 2.1 above, cannot specify its exact needs to the appointed IAS 19 provider. In such cases it is recommended that the company engages with the key stakeholders to the project, including the Finance Team, HR personnel and the external Auditors. Effective collaboration will ensure that the needs of all interested parties are met.
3.1 Well-structured project team ✔
When appointing an IAS 19 provider, it is prudent to enquire about the project team that will be deployed. In particular, the following questions should be asked:
i) How will the project be managed?
ii) How will the data be interrogated and cleansed?
iii) Who will compute the actuarial results?
iv) What is the process for reviewing the draft valuation report?
v) Who will be responsible for reviewing and signing the finalized valuation report?
vi) Where is the data processed and kept?
If the responses received from the potential IAS 19 provider are a close reflection of the following “model” answers, then a company has some level of reassurance that the project team will be well-structured:
i) A dedicated Project Manager will be appointed to manage the project from end-to-end
ii) Sophisticated software and analytical tools will be used by expert data analysts
iii) The valuation results will be computed by actuarially trained staff under the supervision of a fully qualified Actuary
iv) A 2-stage (preferable 3-stage) robust peer-review system is in place, with the last stage being signed-off by a fully qualified Actuary
v) The appointed Signing Actuary will be an experienced Fellow, possessing actuarial qualifications recognized globally
vi) Data is processed and kept in a country acceptable to the various oversight bodies and, most importantly, as preferred by the company.
3.2 Project team lacks hierarchical structure ✘
Where an IAS 19 project team consists of mostly actuarial students, with only a minimal level of seniority built in, demonstrating a lack of breadth and depth, then there is less certainty that the service provided will be professional, cost effective and well managed. Furthermore, if the actuarial results are not signed-off by a Fellow Actuary, then less reliance can be placed on their accuracy and the company may not have the assurance that is provided by professional standards oversight bodies such as the Institute and Faculty of Actuaries in the UK, or similar.
4.1 There are no data issues ✔
One of the most fundamental aspects of any IAS 19 project is the quality of the data used to base the valuation on. If significant issues are identified as part of the data analysis, validation and reconciliation process, then this could lead to the project being delayed whilst corrective action is taken. Data is considered to be in good order if the following conditions are met:
i) There are no errors, such as incorrect salaries
ii) There are no omissions, such as missing dates of birth
iii) The employee movements can be fully reconciled, i.e. opening payroll + joiners - leavers = closing payroll
iv) The benefits can be fully reconciled against those independently computed by the IAS 19 provider
v) The data appears to be reasonable, for example Date of Joining is between age 16 and Normal Retirement Age.
4.2 Significant problems with the data ✘
The most common issues with the data submitted for IAS 19 valuations include:
i) The End of Service Gratuity Benefits (“EOSGB”) being adjusted to allow for deductions such as loan repayments and additions such as unpaid vacation leave, with no explanation in the data set
ii) Incomplete data associated with employees transferring internally from one entity to another, for example the EOSGB transferred amounts not being provided where applicable
iii) “Scheme Salary” not being accurate, for example it includes unexplained components of pay that should not be used in the computation of an employee’s EOSGB entitlement
iv) Reason for Leaving not being provided or not being correct. This makes the EOSGB reconciliation exercise far more difficult for everyone involved
v) The employee IDs being different to those provided for the last valuation (if conducted by the same IAS 19 provider). This makes the employee movement reconciliation difficult
If any or all of the above issues are identified by the IAS 19 provider, then this may cause delays to the project. In extreme cases, additional Fees may need to be charged to allow for the unanticipated extra work.
As a global actuarial provider, with nearly 15 years’ experience of conducting employee benefits valuations in accordance with IFRS, including IAS 19, Lux is well placed to advise companies on the pitfalls to avoid and the measures to take in order to achieve a successful outcome when embarking on an IAS 19 valuation project.
For more information on Lux’s IAS 19 services, please click on the following link: https://www.luxactuaries.com/solutions/ias-19-employee-benefits-valuation
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