European Union Accounting Rule 12 (2017) PDF

Ref. Ares(2017)6265676 - 20/12/2017 EUROPEAN COMMISSION Budget Budget execution (general budget and EDF) Accounting EUROPEAN UNION ACCOUNTING RULE 12 (as revised in 2017) Employee Benefits  EUROPEAN COMMISSION...

Ref. Ares(2017)6265676 - 20/12/2017 EUROPEAN COMMISSION Budget Budget execution (general budget and EDF) Accounting EUROPEAN UNION ACCOUNTING RULE 12 (as revised in 2017) Employee Benefits  EUROPEAN COMMISSION Budget Budget execution (general budget and EDF) Accounting Version: 1 EU ACCOUNTING RULE 12 (2017): EMPLOYEE BENEFITS Date: November 2017 Page 2 of 24 Table of Contents Introduction.................................................................................................................................. 3 Objective....................................................................................................................................... 3 Scope............................................................................................................................................. 3 Definitions..................................................................................................................................... 4 Short-Term Employee Benefits..................................................................................................... 6 Post-employment Benefits―Distinction between Defined Contribution Plans and Defined Benefit Plans................................................................................................................................. 8 Post-employment Benefits―Defined Contribution Plans............................................................ 9 Post-employment Benefits―Defined Benefit Plans................................................................... 10 Other Long-Term Employee Benefits.......................................................................................... 21 Termination Benefits................................................................................................................... 22 Transitional Provisions................................................................................................................ 24 Effective Date.............................................................................................................................. 24 Reference to other accounting rules.......................................................................................... 24  EUROPEAN COMMISSION Budget Budget execution (general budget and EDF) Accounting Version: 1 EU ACCOUNTING RULE 12 (2017): EMPLOYEE BENEFITS Date: November 2017 Page 3 of 24 Introduction 1. The European Union ("EU") provide for various employee benefits (retirement pensions, invalidity pensions, survivor's pensions, medical insurance) for staff in service, invalided staff and retired staff. 2. Each year of service performed by EU employees entitles them to various benefits (sickness, retirement, etc.). These benefits, which they will receive after a period of activity, constitute a commitment on the part of the EU which must be entered in the accounts. The arrival of new staff, the retirement of serving staff, and changes in interest rates or in mortality tables are all factors or assumptions that have a direct influence on the valuation of those commitments. The commitments are constantly changing and must be valued at the close of each reporting period. The Commission makes an estimate at each year-end. 3. Determining the value of post-employment defined benefit-type commitments is a very technical task that requires recourse to actuarial expertise in order to: (a) define the arrangements for applying the actuarial valuation method; (b) guide the choice of assumptions; and (c) determine the commitments to be entered in the accounts and the actuarial gains or losses. Objective 4. The objective of this European Union Accounting Rule ("EAR") is to prescribe the accounting and disclosure for employee benefits. The EAR requires the EU to recognise: (a) A liability when an employee has provided service in exchange for employee benefits to be paid in the future; and (b) An expense when the EU consumes the economic benefits or service potential arising from service provided by an employee in exchange for employee benefits. 5. The principle underlying all of the detailed requirements of this rule is that the cost of providing employee benefits should be recognised in the period in which the benefit is earned by the employee, rather than when it is paid or payable. 6. The principal objectives of post-employment accounting are to measure the cost associated with employees’ benefits and to recognise that cost over the employees’ respective service periods. The periodic costs of post-employment plans have to be assigned properly to the periods in which the related economic benefits are received by the employers incurring these costs. 7. This accounting rule does not propose to set out in detail the actuarial calculations to be performed. Scope 8. This EAR shall be applied by the EU - acting as an employer - in accounting for all employee benefits.  EUROPEAN COMMISSION Budget Budget execution (general budget and EDF) Accounting Version: 1 EU ACCOUNTING RULE 12 (2017): EMPLOYEE BENEFITS Date: November 2017 Page 4 of 24 9. Employee Benefits include: (a) Short-term employee benefits, such as the following, if expected to be settled wholly before twelve months after the end of the reporting period in which the employees render the related services: (i) Wages, salaries and social security contributions; (ii) Paid annual leave and paid sick leave; and (iii) Non-monetary benefits (such as medical care, housing, cars and free or subsidised goods or services) for current employees; (b) Post-employment benefits, such as the following: (i) Retirement benefits (e.g., pensions and lump sum payments on retirement); and (ii) Other post-employment benefits, such as post-employment life insurance and post-employment medical care; (c) Other long-term employee benefits, such as the following: (i) Long-term paid absences such as long-service leave or sabbatical leave; (ii) Jubilee or other long-service benefits; and (iii) Long-term disability benefits; and (d) Termination benefits. 10. Employee benefits include benefits provided either to employees or to their dependants, and may be settled by payments (or the provision of goods or services) made either directly to the employees, to their spouses, children, or other dependants. Definitions 11. The following terms are used in this EAR with the meanings specified: Definitions of employee benefits Employee benefits are all forms of consideration given by the EU in exchange for service rendered by employees or for the termination of employment. Short-term employee benefits are employee benefits (other than termination benefits) that are due to be settled wholly before twelve months after the end of the reporting period in which the employees render the related service. Post-employment benefits are employee benefits (other than termination benefits and short-term employee benefits) that are payable after the completion of employment. Other long-term employee benefits are all employee benefits other than short-term employee benefits and post-employment benefits and termination benefits. Termination benefits are employee benefits provided in exchange for the termination of an employee’s employment as a result of either: (a) An entity’s decision to terminate an employee’s employment before the normal retirement date; or  EUROPEAN COMMISSION Budget Budget execution (general budget and EDF) Accounting Version: 1 EU ACCOUNTING RULE 12 (2017): EMPLOYEE BENEFITS Date: November 2017 Page 5 of 24 (b) An employee’s decision to accept an offer of benefits in exchange for the termination of employment. Definitions relating to classification of plans Post-employment benefit plans are formal or informal arrangements under which the EU provides post-employment benefits for one or more employees. Defined contribution plans are post-employment benefit plans under which the EU pays fixed contributions into a separate entity (a fund) and will have no legal or constructive obligation to pay further contributions if the fund does not hold sufficient assets to pay all employee benefits relating to employee service in the current and prior periods. Defined benefit plans are post-employment benefit plans other than defined contribution plans. Definitions relating to the net defined benefit liability (asset) The net defined benefit liability (asset) is the deficit or surplus, adjusted for any effect of limiting a net defined benefit asset to the asset ceiling. The deficit or surplus is: (a) The present value of the defined benefit obligation less (b) The fair value of plan assets (if any). The asset ceiling is the present value of any economic benefits available in the form of refunds from the plan or reductions in future contributions to the plan. The present value of a defined benefit obligation is the present value, without deducting any plan assets, of expected future payments required to settle the obligation resulting from employee service in the current and prior periods. Plan assets are assets held by a long-term employee benefit fund. Assets held by a long-term employee benefit fund are assets (other than non- transferable financial instruments issued by the reporting entity) that: (a) Are held by an entity (a fund) that is legally separate from the reporting entity and exists solely to pay or fund employee benefits; and (b) Are available to be used only to pay or fund employee benefits, are not available to the reporting entity’s own creditors (even in bankruptcy), and cannot be returned to the reporting entity, unless either: (i) The remaining assets of the fund are sufficient to meet all the related employee benefit obligations of the plan or the reporting entity; or (ii) The assets are returned to the reporting entity to reimburse it for employee benefits already paid.  EUROPEAN COMMISSION Budget Budget execution (general budget and EDF) Accounting Version: 1 EU ACCOUNTING RULE 12 (2017): EMPLOYEE BENEFITS Date: November 2017 Page 6 of 24 Definitions relating to defined benefit cost Service cost comprises: (a) Current service cost, which is the increase in the present value of the defined benefit obligation resulting from employee service in the current period; (b) Past service cost, which is the change in the present value of the defined benefit obligation for employee service in prior periods, resulting from a plan amendment (the introduction or withdrawal of, or changes to, a defined benefit plan) or a curtailment (a significant reduction by the EU in the number of employees covered by a plan); and (c) Any gain or loss on settlement. Net interest on the net defined benefit liability (asset) is the change during the period in the net defined benefit liability (asset) that arises from the passage of time. Remeasurements of the net defined benefit liability (asset) comprise: (a) Actuarial gains and losses; (b) The return on plan assets, excluding amounts included in net interest on the net defined benefit liability (asset); and (c) Any change in the effect of the asset ceiling, excluding amounts included in net interest on the net defined benefit liability (asset). Actuarial gains and losses are changes in the present value of the defined benefit obligation resulting from: (a) Experience adjustments (the effects of differences between the previous actuarial assumptions and what has actually occurred); and (b) The effects of changes in actuarial assumptions. The return on plan assets is interest, dividends or similar distributions and other revenue derived from the plan assets, together with realised and unrealised gains or losses on the plan assets, less: (a) Any costs of managing the plan assets; and (b) Any tax payable by the plan itself, other than tax included in the actuarial assumptions used to measure the present value of the defined benefit obligation. A settlement is a transaction that eliminates all further legal or constructive obligations for part or all of the benefits provided under a defined benefit plan, other than a payment of benefits to, or on behalf of, employees that is set out in the terms of the plan and included in the actuarial assumptions. Short-Term Employee Benefits 12. Short-term employee benefits include items such as the following, if expected to be settled wholly before twelve months after the end of the reporting period in  EUROPEAN COMMISSION Budget Budget execution (general budget and EDF) Accounting Version: 1 EU ACCOUNTING RULE 12 (2017): EMPLOYEE BENEFITS Date: November 2017 Page 7 of 24 which the employees render the related services. In the EU context, short-term employee benefits include salaries (and related contributions), short-term compensated absences (paid leave) and non-monetary benefits (such as medical care) for current employees. Recognition and measurement All Short-Term Employee Benefits 13. For the services rendered by an employee during an accounting period, the EU shall recognise the undiscounted amount of short-term employee benefits expected to be paid in exchange for that service: (a) As a liability (accrued expense), after deducting any amount already paid. If the amount already paid exceeds the undiscounted amount of the benefits, the EU shall recognise that excess as an asset (prepaid expense) to the extent that the prepayment will lead to, for example, a reduction in future payments or a cash refund. (b) As an expense, unless another EAR requires or permits the inclusion of the benefits in the cost of an asset. Short-Term Paid Absences 14. The EU compensates employees for absence for various reasons, including holidays, sickness and short-term disability, and maternity or paternity. Entitlement to paid absences falls into two categories: (a) Accumulating; and (b) Non-accumulating. 15. The EU shall recognise the expected cost of short-term employee benefits in the form of paid absences under paragraph 13 as follows: (a) In the case of accumulating paid absences, when the employees render service that increases their entitlement to future paid absences; and (b) In the case of non-accumulating paid absences, when the absences occur. 16. Accumulating paid absences are those that are carried forward and can be used in future periods if the current period’s entitlement is not used in full. 17. Non-accumulating paid absences do not carry forward; they lapse if the current period’s entitlement is not used in full and do not entitle employees to a cash payment for unused entitlement on leaving the EU. This is commonly the case for sick pay (to the extent that unused past entitlement does not increase future entitlement), maternity or paternity leave. The EU recognises no liability or expense until the time of the absence, because employee service does not increase the amount of the benefit. Observation: For example, the EU recognises a liability for untaken holidays (accumulating compensated absences) at year-end, in the statement of financial position, under the current liabilities heading  EUROPEAN COMMISSION Budget Budget execution (general budget and EDF) Accounting Version: 1 EU ACCOUNTING RULE 12 (2017): EMPLOYEE BENEFITS Date: November 2017 Page 8 of 24 (accrued charges). The amount should be calculated as the additional amount that the EU expects to pay as a result of the unused entitlement that an employee has accumulated at the reporting date (net of taxes and pension contributions that return to the EU). Disclosure 18. This EAR does not require specific disclosures about short-term employee benefits. Although, currently, the aggregate remuneration of key management personnel (EAR 15 Related Party Disclosures) and information about employee benefits expense (EAR 1 Financial Statements) have to be disclosed. Post-employment Benefits―Distinction between Defined Contribution Plans and Defined Benefit Plans 19. Post-employment benefits include items such as the following: (a) Retirement benefits (e.g. pensions and lump sum payments on retirement); and (b) Other post-employment benefits, such as post-employment life insurance, and post-employment medical care. Arrangements whereby the EU provides post-employment benefits are post- employment benefit plans. EU applies this EAR to all such arrangements, whether or not they involve the establishment of a separate entity, such as a pension scheme, superannuation scheme, or retirement benefit scheme, to receive contributions and to pay benefits. Observation: The post-employment benefits provided by the EU include, in addition to pensions, survivors' pensions, orphans' pensions, severance grants, invalidity pensions, family allowances and medical insurance benefits, among others. 20. Post-employment benefit plans are classified as either defined contribution plans or defined benefit plans, depending on the economic substance of the plan, as derived from its principal terms and conditions. 21. Under defined contribution plans the EU’s legal or constructive obligation is limited to the amount that it agrees to contribute to the fund. Thus, the amount of the post-employment benefits received by the employee is determined by the amount of contributions paid by the EU (and perhaps also the employee) to a post- employment benefit plan, together with investment returns arising from the contributions.  EUROPEAN COMMISSION Budget Budget execution (general budget and EDF) Accounting Version: 1 EU ACCOUNTING RULE 12 (2017): EMPLOYEE BENEFITS Date: November 2017 Page 9 of 24 22. Under defined benefit plans: (a) The EU’s obligation is to provide the agreed benefits to current and former employees; and (b) Actuarial risk (that benefits will cost more than expected) and investment risk fall, in substance, on the EU. If actuarial or investment experience are worse than expected, the EU’s obligation may be increased. Defined Benefit Plans that Share Risks between Entities under Common Control 23. Defined benefit plans that share risks between various entities under common control, for example, controlling and controlled entities, are not multi-employer plans. 24. An entity participating in such a plan obtains information about the plan as a whole, measured in accordance with this EAR on the basis of assumptions that apply to the plan as a whole. If there is a contractual agreement, binding arrangement, or stated policy for charging the net defined benefit cost for the plan as a whole measured in accordance with this Standard to individual entities within the economic entity, the entity shall, in its separate or individual financial statements, recognise the net defined benefit cost so charged. If there is no such agreement, arrangement, or policy, the net defined benefit cost shall be recognised in the separate or individual financial statements of the entity that is legally the sponsoring employer for the plan. The other entities shall, in their separate or individual financial statements, recognise a cost equal to their contribution payable for the period. 25. There are cases in the public sector where a controlling entity and one or more controlled entities participate in a defined benefit plan. Unless there is a contractual agreement, binding arrangement, or stated policy, as specified in paragraph 24, the controlled entity accounts on a defined contribution basis and the controlling entity accounts on a defined benefit basis in its consolidated financial statements. The controlled entity also discloses that it accounts on a defined contribution basis in its separate financial statements. A controlled entity that accounts on a defined contribution basis also provides details of the controlling entity, and states that, in the controlling entity’s consolidated financial statements, accounting is on a defined benefit basis. The controlled entity also makes the disclosures required in paragraph 86. 26. Participation in such a plan is a related party transaction for each individual entity. An entity shall therefore, in its separate or individual financial statements, disclose the information required by paragraph 86. Post-employment Benefits―Defined Contribution Plans 27. Accounting for defined contribution plans is straightforward because the reporting entity’s obligation for each period is determined by the amounts to be contributed for that period. Consequently, no actuarial assumptions are required to measure  EUROPEAN COMMISSION Budget Budget execution (general budget and EDF) Accounting Version: 1 EU ACCOUNTING RULE 12 (2017): EMPLOYEE BENEFITS Date: November 2017 Page 10 of 24 the obligation or the expense, and there is no possibility of any actuarial gain or loss. Moreover, the obligations are measured on an undiscounted basis, except where they are not expected to be settled wholly before twelve months after the end of the reporting period in which the employees render the related service. Recognition and Measurement 28. When an employee has rendered service to the EU during a period, the EU shall recognise the contribution payable to a defined contribution plan in exchange for that service: (a) As a liability (accrued expense), after deducting any contribution already paid. If the contribution already paid exceeds the contribution due for service before the end of the reporting period, the EU shall recognise that excess as an asset (prepaid expense) to the extent that the prepayment will lead to, for example, a reduction in future payments or a cash refund; and (b) As an expense, unless another EAR requires or permits the inclusion of the contribution in the cost of an asset. 29. When contributions to a defined contribution plan are not expected to be settled wholly before twelve months after the end of the reporting period in which the employees render the related service, they shall be discounted using the discount rate specified in paragraph 45. Disclosure 30. The EU shall disclose the amount recognised as an expense for defined contribution plans. In addition, where required by EAR 15, shall also disclose information about contributions to defined contribution plans for key management personnel. Post-employment Benefits―Defined Benefit Plans 31. Accounting for defined benefit plans is complex, because actuarial assumptions are required to measure the obligation and the expense, and there is a possibility of actuarial gains and losses. Moreover, the obligations are measured on a discounted basis, because they may be settled many years after the employees render the related service. Recognition and Measurement 32. Defined benefit plans may be unfunded, or they may be wholly or partly funded by EU contributions, and sometimes its employees, into an entity, or fund, that is legally separate from the reporting entity and from which the employee benefits are paid. 33. Accounting for defined benefit plans involves the following steps: (a) Determining the deficit or surplus, using an actuarial technique, the projected unit credit method, to make a reliable estimate of the ultimate cost to the EU of the benefit that employees have earned in return for their service in the  EUROPEAN COMMISSION Budget Budget execution (general budget and EDF) Accounting Version: 1 EU ACCOUNTING RULE 12 (2017): EMPLOYEE BENEFITS Date: November 2017 Page 11 of 24 current and prior periods. This requires to make estimates (actuarial assumptions) about demographic variables (such as employee turnover and mortality) and financial variables (such as future increases in salaries and medical costs) that will affect the cost of the benefit; (b) Discounting the benefit in order to determine the present value of the defined benefit obligation and the current service cost; (c) Deducting the fair value of any plan assets from the present value of the defined benefit obligation; (d) Determining the amount of the net defined benefit liability (asset) as the amount of the deficit or surplus determined in (a), adjusted for any effect of limiting a net defined benefit asset to the asset ceiling. (e) Determining amounts to be recognised in surplus or deficit: (i) Current service cost; (ii) Any past service cost and gain or loss on settlement; and (iii) Net interest on the net defined benefit liability (asset). (f) Determining the remeasurements of the net defined benefit liability (asset), to be recognised in net assets/equity, comprising: (i) Actuarial gains and losses; (ii) Return on plan assets, excluding amounts included in net interest on the net defined benefit liability (asset); and (iii) Any change in the effect of the asset ceiling, excluding amounts included in net interest on the net defined benefit liability (asset). Where an entity has more than one defined benefit plan, the entity applies these procedures for each material plan separately. 34. The EU shall determine the net defined benefit liability (asset) with sufficient regularity that the amounts recognised in the financial statements do not differ materially from the amounts that would be determined at the end of the reporting period. Statement of Financial Position 35. An entity shall recognise the net defined benefit liability (asset) in the statement of financial position. 36. A net defined benefit asset may arise where a defined benefit plan has been overfunded or where actuarial gains have arisen. An entity recognises a net defined benefit asset in such cases because: (a) The entity controls a resource, which is the ability to use the surplus to generate future benefits; (b) That control is a result of past events (contributions paid by the entity and service rendered by the employee); and (c) Future economic benefits are available to the entity in the form of a reduction in future contributions or a cash refund, either directly to the entity or indirectly to another plan in deficit.  EUROPEAN COMMISSION Budget Budget execution (general budget and EDF) Accounting Version: 1 EU ACCOUNTING RULE 12 (2017): EMPLOYEE BENEFITS Date: November 2017 Page 12 of 24 Recognition and Measurement―Present Value of Defined Benefit Obligations and Current Service Cost 37. The ultimate cost of the plan is uncertain and this uncertainty is likely to persist over a long period of time. In order to measure the present value of the post- employment benefit obligations and the related current service cost, it is necessary: (a) To apply an actuarial valuation method; (b) To attribute benefit to periods of service; and (c) To make actuarial assumptions. Actuarial Valuation Method 38. The EU shall use the projected unit credit method to determine the present value of its defined benefit obligations and the related current service cost and, where applicable, past service cost. Attributing Benefit to Periods of Service 39. In determining the present value of its defined benefit obligations and the related current service cost and, where applicable, past service cost, EU shall attribute benefit to periods of service under the plan’s benefit formula. However, if an employee’s service in later years will lead to a materially higher level of benefit than in earlier years, the EU shall attribute benefit on a straight-line basis from: (a) The date when service by the employee first leads to benefits under the plan (whether or not the benefits are conditional on further service) until (b) The date when further service by the employee will lead to no material amount of further benefits under the plan, other than from further salary increases. 40. The projected unit credit method requires the EU to attribute benefit to the current period (in order to determine current service cost) and the current and prior periods (in order to determine the present value of defined benefit obligations). Actuarial Assumptions 41. Actuarial assumptions shall be unbiased and mutually compatible. 42. Actuarial assumptions are EU’s best estimates of the variables that will determine the ultimate cost of providing post-employment benefits. Actuarial assumptions comprise: (a) Demographic assumptions about the future characteristics of current and former employees (and their dependants) who are eligible for benefits. Demographic assumptions deal with matters such as: (i) Mortality; (ii) Rates of employee turnover, disability, and early retirement; (iii) The proportion of plan members with dependants who will be eligible for benefits; (iv) The proportion of plan members who will select each form of payment option available under the plan terms; and  EUROPEAN COMMISSION Budget Budget execution (general budget and EDF) Accounting Version: 1 EU ACCOUNTING RULE 12 (2017): EMPLOYEE BENEFITS Date: November 2017 Page 13 of 24 (v) Claim rates under medical plans. (b) Financial assumptions, dealing with items such as: (i) The discount rate; (ii) Benefit levels, excluding any cost of the benefits to be met by employees, and future salary; (iii) In the case of medical benefits, future medical costs, including claim handling costs (i.e., the costs that will be incurred in processing and resolving claims, including legal and adjuster’s fees); and 43. The EU determines the discount rate and other financial assumptions in nominal (stated) terms, unless estimates in real (inflation-adjusted) terms are more reliable. Actuarial Assumptions: Mortality 44. The EU shall determine its mortality assumptions by reference to its best estimate of the mortality of plan members both during and after employment. Actuarial Assumptions―Discount Rate 45. The rate used to discount post-employment benefit obligations (both funded and unfunded) shall reflect the time value of money. The discount rate reflects the estimated timing of benefit payments. Observation: In the EC context, the discount rate shall be determined by reference to market yields on government bonds at the reporting date. The currency and period of the government bonds should be the same as the defined benefit obligation. Actuarial Assumptions―Salaries, Benefits and Medical Costs 46. The EU shall measure its defined benefit obligations on a basis that reflects: (a) The benefits set out in the terms of the plan at the end of the reporting period; (b) Any estimated future salary increases that affect the benefits payable; (c) The effect of any limit on the employer’s share of the cost of the future benefits; (d) Contributions from employees or third parties that reduce the ultimate cost to the EU of those benefits; and (e) Estimated future changes in the level of any state benefits that affect the benefits payable under a defined benefit plan, if, and only if, either: (i) Those changes were enacted before the end of the reporting period; or (ii) Historical data, or other reliable evidence, indicate that those state benefits will change in some predictable manner, for example, in line with future changes in general price levels or general salary levels.  EUROPEAN COMMISSION Budget Budget execution (general budget and EDF) Accounting Version: 1 EU ACCOUNTING RULE 12 (2017): EMPLOYEE BENEFITS Date: November 2017 Page 14 of 24 47. Actuarial assumptions reflect future benefit changes that are set out in the formal terms of a plan at the end of the reporting period (such as, increasing benefits due to effects of inflation) and do not reflect any future benefit changes that are not set out in the formal terms of the plan at the end of the reporting period. 48. Estimates of future salary increases take account of inflation, seniority, promotion, and other relevant factors, such as supply and demand in the employment market. 49. Some defined benefit plans require employees or third parties to contribute to the cost of the plan. Contributions by employees reduce the cost of the benefits to the EU. 50. Assumptions about medical costs shall take account of estimated future changes in the cost of medical services, resulting from both inflation and specific changes in medical costs. 51. Measurement of post-employment medical benefits requires assumptions about the level and frequency of future claims and the cost of meeting those claims. The EU estimates future medical costs on the basis of historical data about the EU’s own experience, supplemented where necessary by historical data from other entities, insurance companies, medical providers, or other sources. Estimates of future medical costs consider the effect of technological advances, changes in health care utilisation or delivery patterns, and changes in the health status of plan participants. 52. The level and frequency of claims is particularly sensitive to the age, health status, and gender of employees (and their dependants), and may be sensitive to other factors such as geographical location. Therefore, historical data are adjusted to the extent that the demographic mix of the population differs from that of the population used as a basis for the data. It is also adjusted where there is reliable evidence that historical trends will not continue. Past service cost and gains and losses on settlement 53. Before determining past service cost, or a gain or loss on settlement, the EU shall remeasure the net defined benefit liability (asset) using the current fair value of plan assets and current actuarial assumptions (including current market interest rates and other current market prices) reflecting the benefits offered under the plan before the plan amendment, curtailment or settlement. Past Service Cost 54. Past service cost is the change in the present value of the defined benefit obligation resulting from a plan amendment or curtailment. 55. The EU shall recognise past service cost as an expense at the earlier of the following dates: (a) When the plan amendment or curtailment occurs; and (b) When the EU recognises related restructuring costs (see EAR 10) or termination benefits (see paragraph 102).  EUROPEAN COMMISSION Budget Budget execution (general budget and EDF) Accounting Version: 1 EU ACCOUNTING RULE 12 (2017): EMPLOYEE BENEFITS Date: November 2017 Page 15 of 24 56. A plan amendment occurs when the EU introduces, or withdraws, a defined benefit plan or changes the benefits payable under an existing defined benefit plan. 57. A curtailment occurs when the EU significantly reduces the number of employees covered by a plan. A curtailment may arise from an isolated event, such as the closing of a plant, discontinuance of an operation or termination or suspension of a plan. 58. Past service cost may be either positive (when benefits are introduced or changed so that the present value of the defined benefit obligation increases) or negative (when benefits are withdrawn or changed so that the present value of the defined benefit obligation decreases). 59. Where the EU reduces benefits payable under an existing defined benefit plan and, at the same time, increases other benefits payable under the plan for the same employees, the EU treats the change as a single net change. Gains and losses on settlement 60. The gain or loss on a settlement is the difference between: (a) The present value of the defined benefit obligation being settled, as determined on the date of settlement; and (b) The settlement price, including any plan assets transferred and any payments made directly by the EU in connection with the settlement. 61. The EU shall recognise a gain or loss on the settlement of a defined benefit plan when the settlement occurs. 62. A settlement occurs when the EU enters into a transaction that eliminates all further legal or constructive obligation for part or all of the benefits provided under a defined benefit plan (other than a payment of benefits to, or on behalf of, employees in accordance with the terms of the plan and included in the actuarial assumptions. Recognition and Measurement―Plan Assets Fair Value of Plan Assets 63. The fair value of any plan assets is deducted from the present value of the defined benefit obligation in determining the deficit or surplus. Reimbursements 64. When, and only when, it is virtually certain that another party will reimburse some or all of the expenditure required to settle a defined benefit obligation, the EU shall: (a) Recognise its right to reimbursement as a separate asset. The EU shall measure the asset at fair value. (b) Disaggregate and recognise changes in the fair value of its right to reimbursement in the same way as for changes in the fair value of plan assets.  EUROPEAN COMMISSION Budget Budget execution (general budget and EDF) Accounting Version: 1 EU ACCOUNTING RULE 12 (2017): EMPLOYEE BENEFITS Date: November 2017 Page 16 of 24 Observation: In accordance with Article 83 of the Staff Regulations, the Member States guarantee the payment of staff pension benefits collectively according to the scale fixed for the financing of this expenditure. Pensions are paid from the EU budget, which is financed from own resources arising in the year of payment. Components of defined benefit cost 65. The EU shall recognise the components of defined benefit cost, except to the extent that another EAR requires or permits their inclusion in the cost of an asset, as follows: (a) Service cost in surplus or deficit; (b) Net interest on the net defined benefit liability (asset) in surplus or deficit; and (c) Remeasurements of the net defined benefit liability (asset) in net assets/equity. Net interest on the net defined benefit liability (asset) 66. Net interest on the net defined benefit liability (asset) shall be determined by multiplying the net defined benefit liability (asset) by the discount rate specified in paragraph 45, both as determined at the start of the reporting period, taking account of any changes in the net defined benefit liability (asset) during the period as a result of contribution and benefit payments. 67. Net interest on the net defined benefit liability (asset) can be viewed as comprising interest revenue on plan assets, interest cost on the defined benefit. 68. Interest revenue on plan assets is a component of the return on plan assets, and is determined by multiplying the fair value of the plan assets by the discount rate specified in paragraph 45, both as determined at the start of the reporting period, taking account of any changes in the plan assets held during the period as a result of contributions and benefit payments. The difference between the interest revenue on plan assets and the return on plan assets is included in the remeasurement of the net defined benefit liability (asset). Remeasurements of the net defined benefit liability (asset) 69. Remeasurements of the net defined benefit liability (asset) comprise: (a) Actuarial gains and losses; and (b) The return on plan assets, excluding amounts included in net interest on the net defined benefit liability (asset). 70. Actuarial gains and losses result from increases or decreases in the present value of the defined benefit obligation because of changes in actuarial assumptions and experience adjustments. 71. Actuarial gains and losses do not include changes in the present value of the defined benefit obligation because of the introduction, amendment, curtailment or  EUROPEAN COMMISSION Budget Budget execution (general budget and EDF) Accounting Version: 1 EU ACCOUNTING RULE 12 (2017): EMPLOYEE BENEFITS Date: November 2017 Page 17 of 24 settlement of the defined benefit plan, or changes to the benefits payable under the defined benefit plan. Such changes result in past service cost or gains or losses on settlement. Presentation Offset 72. An entity shall offset an asset relating to one plan against a liability relating to another plan when, and only when, the entity: (a) Has a legally enforceable right to use a surplus in one plan to settle obligations under the other plan; and (b) Intends either to settle the obligations on a net basis, or to realize the surplus in one plan and settle its obligation under the other plan simultaneously. Current/Non-Current Distinction 73. Some entities distinguish current assets and liabilities from non-current assets and liabilities. This Standard does not specify whether an entity should distinguish current and non-current portions of assets and liabilities arising from post-employment benefits. Disclosure 74. The EU shall disclose information that: (a) Explains the characteristics of its defined benefit plans and risks associated with them; (b) Identifies and explains the amounts in its financial statements arising from its defined benefit plans; and (c) Describes how its defined benefit plans may affect the amount, timing and uncertainty of the EU’s future cash flows. 75. To meet the objectives in paragraph 74, the EU shall consider all the following: (a) The level of detail necessary to satisfy the disclosure requirements; (b) How much emphasis to place on each of the various requirements; (c) How much aggregation or disaggregation to undertake; and (d) Whether users of financial statements need additional information to evaluate the quantitative information disclosed. 76. If the disclosures provided in accordance with the requirements in this EAR and other EARs are insufficient to meet the objectives in paragraph 74, the EU shall disclose additional information necessary to meet those objectives. For example, the EU may present an analysis of the present value of the defined benefit obligation that distinguishes the nature, characteristics and risks of the obligation. Such a disclosure could distinguish: (a) Between amounts owing to active members, deferred members, and pensioners.  EUROPEAN COMMISSION Budget Budget execution (general budget and EDF) Accounting Version: 1 EU ACCOUNTING RULE 12 (2017): EMPLOYEE BENEFITS Date: November 2017 Page 18 of 24 (b) Between conditional benefits, amounts attributable to future salary increases and other benefits. 77. The EU shall assess whether all or some disclosures should be disaggregated to distinguish plans or groups of plans with materially different risks. Characteristics of defined benefit plans and risks associated with them 78. The EU shall disclose: (a) Information about the characteristics of its defined benefit plans, including: (i) The nature of the benefits provided by the plan (e.g. final salary defined benefit plan or contribution-based plan with guarantee). (ii) A description of the regulatory framework in which the plan operates, for example the level of any minimum funding requirements, and any effect of the regulatory framework on the plan. (iii) A description of any other EU’s responsibilities for the governance of the plan, for example responsibilities of trustees or of management of the plan. (b) A description of the risks to which the plan exposes the EU, focused on any unusual, EU-specific or plan-specific risks, and of any significant concentrations of risk. For example, if plan assets are invested primarily in one class of investments, e.g. property, the plan may expose the EU to a concentration of property market risk. (c) A description of any plan amendments, curtailments and settlements. (d) The basis on which the discount rate has been determined. Explanation of amounts in the financial statements 79. The EU shall provide a reconciliation from the opening balance to the closing balance for each of the following, if applicable: (a) The net defined benefit liability (asset), showing separate reconciliations for: (i) Plan assets. (ii) The present value of the defined benefit obligation. (b) Any reimbursement rights. The EU shall also describe the relationship between any reimbursement right and the related obligation. 80. Each reconciliation listed in paragraph 79 shall show each of the following, if applicable: (a) Current service cost. (b) Interest revenue or expense. (c) Remeasurements of the net defined benefit liability (asset), showing separately: (i) The return on plan assets, excluding amounts included in interest in (b). (ii) Actuarial gains and losses arising from changes in demographic assumptions. (iii) Actuarial gains and losses arising from changes in financial assumptions.  EUROPEAN COMMISSION Budget Budget execution (general budget and EDF) Accounting Version: 1 EU ACCOUNTING RULE 12 (2017): EMPLOYEE BENEFITS Date: November 2017 Page 19 of 24 The EU shall also disclose how it determined the maximum economic benefit available, i.e. whether those benefits would be in the form of refunds, reductions in future contributions or a combination of both. (d) Past service cost and gains and losses arising from settlements. (e) Contributions to the plan, showing separately those by the employer and by plan participants. (f) Payments from the plan, showing separately the amount paid in respect of any settlements. 81. The EU shall disaggregate the fair value of the plan assets into classes that distinguish the nature and risks of those assets, subdividing each class of plan asset into those that have a quoted market price in an active market and those that do not. For example, and considering the level of disclosure discussed in paragraph 75, an entity could distinguish between: (a) Cash and cash equivalents; (b) Equity instruments (segregated by industry type, company size, geography etc.); (c) Debt instruments (segregated by type of issuer, credit quality, geography etc.); (d) Real estate (segregated by geography etc.); (e) Derivatives (segregated by type of underlying risk in the contract, for example, interest rate contracts, foreign exchange contracts, equity contracts, credit contracts, longevity swaps etc.); (f) Investment funds (segregated by type of fund); (g) Asset-backed securities; and (h) Structured debt. 82. The EU shall disclose the fair value of the EU’s own transferable financial instruments held as plan assets, and the fair value of plan assets that are property occupied by, or other assets used by, the EU. 83. The EU shall disclose the significant actuarial assumptions used to determine the present value of the defined benefit obligation. Such disclosure shall be in absolute terms (e.g. as an absolute percentage, and not just as a margin between different percentages and other variables). When the EU provides disclosures in total for a grouping of plans, it shall provide such disclosures in the form of weighted averages or relatively narrow ranges. Amount, timing and uncertainty of future cash flows 84. The EU shall disclose: (a) A sensitivity analysis for each significant actuarial assumption as of the end of the reporting period, showing how the defined benefit obligation would have been affected by changes in the relevant actuarial assumption that were reasonably possible at that date. (b) The methods and assumptions used in preparing the sensitivity analyses required by (a) and the limitations of those methods.  EUROPEAN COMMISSION Budget Budget execution (general budget and EDF) Accounting Version: 1 EU ACCOUNTING RULE 12 (2017): EMPLOYEE BENEFITS Date: November 2017 Page 20 of 24 (c) Changes from the previous period in the methods and assumptions used in preparing the sensitivity analyses, and the reasons for such changes. 85. To provide an indication of the effect of the defined benefit plan on the EU’s future cash flows, the EU shall disclose: (a) A description of any funding arrangements and funding policy that affect future contributions. (b) The expected contributions to the plan for the next reporting period. (c) Information about the maturity profile of the defined benefit obligation. This will include the weighted average duration of the defined benefit obligation and may include other information about the distribution of the timing of benefit payments, such as a maturity analysis of the benefit payments. Defined benefit plans that share risks between entities under common control 86. If an entity participates in a defined benefit plan that shares risks between entities under common control, it shall disclose: (a) The contractual agreement or stated policy for charging the net defined benefit cost or the fact that there is no such policy. (b) The policy for determining the contribution to be paid by the entity. (c) If the entity accounts for an allocation of the net defined benefit cost as noted in paragraph 24, all the information about the plan as a whole required by paragraphs 74–85. (d) If the entity accounts for the contribution payable for the period as noted in paragraph 24, the information about the plan as a whole required by paragraphs 74–76, 78, 81–83 and 85(a) and 85(b). 87. The information required by paragraph 86(c) and 86(d) can be disclosed by cross- reference to disclosures in another group entity’s financial statements if: (a) That group entity’s financial statements separately identify and disclose the information required about the plan; and (b) That group entity’s financial statements are available to users of the financial statements on the same terms as the financial statements of the entity and at the same time as, or earlier than, the financial statements of the entity. Disclosure requirements in other EARs 88. Where required by EAR 15, the EU discloses information about: (a) Related party transactions with post-employment benefit plans; and (b) Post-employment benefits for key management personnel. 89. Where required by EAR 10 Provisions, Contingent Liabilities and Contingent Assets, the EU discloses information about contingent liabilities arising from post- employment benefit obligations.  EUROPEAN COMMISSION Budget Budget execution (general budget and EDF) Accounting Version: 1 EU ACCOUNTING RULE 12 (2017): EMPLOYEE BENEFITS Date: November 2017 Page 21 of 24 Other Long-Term Employee Benefits 90. Other long-term employee benefits include items such as the following, if not expected to be settled wholly before twelve months after the end of the reporting period in which the employees render the related service: (a) Long-term paid absences such as long service or sabbatical leave; (b) Jubilee or other long service benefits; (c) Long-term disability benefits; (d) Deferred remuneration; and (e) Compensation payable by the EU until an individual enters new employment. 91. The measurement of other long-term employee benefits is not usually subject to the same degree of uncertainty as the measurement of post-employment benefits. For this reason, this EAR requires a simplified method of accounting for other long- term employee benefits. Recognition and Measurement 92. In recognising and measuring the surplus or deficit in another long-term employee benefit plan, the EU shall apply the same requirements as for defined benefit plan (paragraphs 32–52 and 63). The EU shall apply paragraphs 64 in recognising and measuring any reimbursement right. 93. The EU shall recognise the net total of the following amounts in surplus or deficit, except to the extent that another EAR requires or permits their inclusion in the cost of an asset: (a) Service cost (see paragraphs 37–62); (b) Net interest on the net defined benefit liability (asset) (see paragraphs 66-68); and (c) Remeasurements of the net defined benefit liability (asset) (see paragraphs 69–71). 94. One form of other long-term employee benefit is long-term disability benefit. If the level of benefit depends on the length of service, an obligation arises when the service is rendered. Measurement of that obligation reflects the probability that payment will be required, and the length of time for which payment is expected to be made. If the level of benefit is the same for any disabled employee regardless of years of service, the expected cost of those benefits is recognised when an event occurs that causes a long-term disability. Disclosure 95. Although this EAR does not require specific disclosures about other long-term employee benefits, other EARs may require disclosures. For example, EAR 15 requires disclosures about employee benefits for key management personnel. EAR 1 requires disclosure of employee benefits expense.  EUROPEAN COMMISSION Budget Budget execution (general budget and EDF) Accounting Version: 1 EU ACCOUNTING RULE 12 (2017): EMPLOYEE BENEFITS Date: November 2017 Page 22 of 24 Termination Benefits 96. This EAR deals with termination benefits separately from other employee benefits, because the event that gives rise to an obligation is the termination of employment rather than employee service. Termination benefits result from either the EU’s decision to terminate the employment or an employee’s decision to accept an entity’s offer of benefits in exchange for termination of employment. 97. Termination benefits do not include employee benefits resulting from termination of employment at the request of the employee without an entity’s offer, or as a result of mandatory retirement requirements, because those benefits are post- employment benefits. Some entities provide a lower level of benefit for termination of employment at the request of the employee (in substance, a post-employment benefit) than for termination of employment at the request of the entity. The difference between the benefit provided for termination of employment at the request of the employee and a higher benefit provided at the request of the entity is a termination benefit. 98. The form of the employee benefit does not determine whether it is in exchange provided for service or in exchange for termination of the employee’s employment. Termination benefits are typically lump sum payments, but sometimes also include: (a) Enhancement of post-employment benefits, either indirectly through an employee benefit plan or directly. (b) Salary until the end of a specified notice period if the employee renders no further service that provides economic benefits to the entity. 99. Indicators that an employee benefit is provided in exchange for services include the following: (a) The benefit is conditional on future service being provided (including benefits that increase if further service is provided). (b) The benefit is provided in accordance with the terms of an employee benefit plan. 100. Some termination benefits are provided in accordance with the terms of an existing employee benefit plan. For example, they may be specified by statute, employment contract or union agreement, or may be implied as a result of the employer’s past practice of providing similar benefits. As another example, if the EU makes an offer of benefits available for more than a short period, or there is more than a short period between the offer and the expected date of actual termination, the EU considers whether it has established a new employee benefit plan and hence whether the benefits offered under that plan are termination benefits or post- employment benefits. Employee benefits provided in accordance with the terms of an employee benefit plan are termination benefits if they both result from the EU’s decision to terminate an employee’s employment and are not conditional on future service being provided. 101. Some employee benefits are provided regardless of the reason for the employee’s departure. The payment of such benefits is certain (subject to any vesting or minimum service requirements) but the timing of their payment is uncertain. Although such benefits are described in some jurisdictions as termination  EUROPEAN COMMISSION Budget Budget execution (general budget and EDF) Accounting Version: 1 EU ACCOUNTING RULE 12 (2017): EMPLOYEE BENEFITS Date: November 2017 Page 23 of 24 indemnities or termination gratuities, they are post-employment benefits rather than termination benefits, and an entity accounts for them as post-employment benefits. Recognition 102. The EU shall recognise a liability and expense for termination benefits at the earlier of the following dates: (a) When the EU can no longer withdraw the offer of those benefits; and (b) When the EU recognises costs for a restructuring that is within the scope of EAR 10 and involves the payment of termination benefits. 103. For termination benefits payable as a result of an employee’s decision to accept an offer of benefits in exchange for the termination of employment, the time when an entity can no longer withdraw the offer of termination benefits is the earlier of: (a) When the employee accepts the offer; and (b) When a restriction (e.g. a legal, regulatory or contractual requirement or other restriction) on the EU’s ability to withdraw the offer takes effect. This would be when the offer is made, if the restriction existed at the time of the offer. 104. For termination benefits payable as a result of an EU’s decision to terminate an employee’s employment, the EU can no longer withdraw the offer when the EU has communicated to the affected employees a plan of termination meeting all of the following criteria: (a) Actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made. (b) The plan identifies the number of employees whose employment is to be terminated, their job classifications or functions and their locations (but the plan need not identify each individual employee) and the expected completion date. (c) The plan establishes the termination benefits that employees will receive in sufficient detail that employees can determine the type and amount of benefits they will receive when their employment is terminated. 105. When the EU recognises termination benefits, the entity may also have to account for a plan amendment or a curtailment of other employee benefits (see paragraph 55). Measurement 106. The EU shall measure termination benefits on initial recognition, and shall measure and recognise subsequent changes, in accordance with the nature of the employee benefit, provided that if the termination benefits are an enhancement to post- employment benefits, the EU shall apply the requirements for post-employment benefits. Otherwise: (a) If the termination benefits are expected to be settled wholly before twelve months after the end of the reporting period in which the termination benefit is  EUROPEAN COMMISSION Budget Budget execution (general budget and EDF) Accounting Version: 1 EU ACCOUNTING RULE 12 (2017): EMPLOYEE BENEFITS Date: November 2017 Page 24 of 24 recognised, the entity shall apply the requirements for short-term employee benefits. (b) If the termination benefits are not expected to be settled wholly before twelve months after the end of the reporting period, the entity shall apply the requirements for other long-term employee benefits. 107. Because termination benefits are not provided in exchange for service, paragraphs 39–40 relating to the attribution of the benefit to periods of service are not relevant. Disclosure 108. Although this EAR does not require specific disclosures about termination benefits, other EARs may require disclosures. For example, EAR 15 requires disclosures about employee benefits for key management personnel. EAR 1 requires disclosure of employee benefits expense. Transitional Provisions 109. The EU shall apply this EAR retrospectively, in accordance with EAR 14 Accounting Policies, Changes in Accounting Estimates and Errors, except that: (a) The EU need not adjust the carrying amount of assets outside the scope of this EAR for changes in employee benefit costs that were included in the carrying amount before the date of initial application. The date of initial application is the beginning of the earliest prior period presented in the first financial statements in which the EU adopts this EAR. (b) In financial statements for periods beginning before January 1, 2018, the EU need not present comparative information for the disclosures required by paragraph 84 about the sensitivity of the defined benefit obligation. Effective Date 110. An entity shall apply this EAR for annual financial statements covering periods beginning on or after January 1, 2018. Reference to other accounting rules 111. This EAR is based on IPSAS 39 Employee Benefits.