Survey of Financial Assumptions for Actuarial Valuations of Defined Benefit Schemes in accordance with Hong Kong Accounting Standard 19 Employee

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1 Survey of Financial Assumptions for Actuarial Valuations of Defined Benefit Schemes in accordance with Hong Kong Accounting Standard 19 Employee Benefits 2011/2012

2 Survey of Financial Assumptions for Actuarial Valuations of Defined Benefit Schemes in accordance with Hong Kong Accounting Standard 19 Employee Benefits 2011/2012 Contents Highlights 1 1. Introduction 2 2. Discount Rate 3 3. Salary Increases 5 4. Expected Return on Assets 7 5. Treatment of Actuarial Gains / Losses Impact of HKAS 19 Figures on Company Financial Statements 11 Appendices A. Summary of Survey Statistics 14 B. Background to HKAS C. Major Financial Assumptions of HKAS D. HKAS 19 Terminology 17 E. Recognition of Actuarial Gains / Losses 18 F. Major Amendments to HKAS G. About Towers Watson 21

3 Highlights Median discount rate has decreased but salary growth rate remains stable The median discount rate adopted has decreased from 2.90% p.a. for 2010/2011 to 1.46% p.a. for 2011/2012 resulting in higher liabilities. On the other hand, 2011/2012 s median assumption for long term salary increases has remained unchanged at 4% p.a. Poor investment performance in 2011/2012 led to a decrease in surplus Schemes asset values have decreased due to poor investment performance in 2011 (average return of -3.9%). This led to a decrease in the average Net Asset (i.e. surplus) on surveyed companies balance sheets from 2.2 times of the total monthly scheme salary last year to 1.4 times this year. Annual Expense for 2012/2013 is expected to increase Poor investment performance over the year 2011/2012 resulted in higher expected expense for 2012/2013. It is particularly so for those companies which recognize actuarial gains / losses through their Profit or Loss Accounts because the investment losses will come through as an increase in expense for 2012/2013. towerswatson.com 1

4 1. Introduction Towers Watson has been surveying the financial parameters used by employers in complying with the requirements of Hong Kong Accounting Standard 19 Employee Benefits (HKAS 19) since its introduction on 1 January This report is the ninth in this survey series. This report covers the following areas in the context of HKAS 19: Companies selection of financial assumptions; Market practice for treatment of actuarial gains and losses; and Impact of HKAS 19 to Profit or Loss Account and Balance Sheet. This survey focuses on defined benefit retirement schemes which are established under the Occupational Retirement Schemes Ordinance ( ORSO ), the legislation governing the operation of voluntary retirement schemes in Hong Kong. It covers companies with accounting years ended within the survey period of 1 July 2011 and 30 June Around 100 defined benefit schemes with around 54,000 members are included in the survey with total net asset values of HK$39 billion. The survey covers about 40% of defined benefit schemes in Hong Kong. A summary of the surveyed schemes statistics is set out in Appendix A. Most surveyed companies (about 78%) have financial years ending on 31 December, with the remainder typically having year-ends of either 31 March or 30 June. Given this, the survey results primarily reflect data as of 31 December each year. Measurement of HKAS 19 liabilities Hong Kong retirement schemes typically provide lump sum benefits payable on retirement, death or earlier termination of employment. HKAS 19 requires that the costs of providing such benefits which are payable in the future be recognized before the actual payments are made. The determination of the HKAS 19 cost of benefits is based on the attribution of benefits accruing over the employees service periods and the use of actuarial assumptions to calculate the present value of such benefits to reflect the time value of money and the probability of payment. HKAS 19 requires the actuarial assumptions to be: Best estimates; Unbiased and mutually compatible; and Based on market expectations at the balance sheet date. The assumptions adopted are ultimately the responsibility of the employer. The key financial assumptions are the discount rate, long term salary increase rate and long term investment return. These are reviewed in the following sections. Details on the background, assumption setting methodology and technical terms of HKAS 19 are given in Appendices B, C, D & E. 2 HKAS 19 Accounting Survey Report 2011/2012

5 2. Discount Rate Majority of companies set their discount rates based on the yields of Exchange Fund Notes. Figure 1 shows the discount rates which were adopted by the surveyed companies, compared to the yields of Hong Kong Exchange Fund Notes ( EFN ) as at 31 December Figure 1. Discount Rates Versus EFN Yields The dots represent the discount rates that the surveyed companies have adopted, reflecting also the various durations of the scheme liabilities. The line denotes the actual EFN yield curve as at 31 December The line extending beyond duration of 15 years represents yields extrapolated from the benchmark yields of 10-year EFN and 15-year EFN. The majority of surveyed companies have adopted discount rates within 0.5% of the EFN yields at their respective financial year-end dates. The few isolated dots with discount rates at 4% and 4.5% are outliers, representing companies whose discount rates are not based on the EFN yields. towerswatson.com 3

6 Figure 2 illustrates the distribution of discount rates adopted and the yields of 10-year EFN for the last 5 years. Figure 2. Distribution of Discount Rates The median discount rate used by companies in 2011/2012 was 1.46% p.a. compared to 2.90% p.a. for 2010/2011. This drop is consistent with the reduction in EFN yields. In isolation this change would have increased companies HKAS 19 liabilities and hence resulted in a liability loss 1. 1 See Section 5 4 HKAS 19 Accounting Survey Report 2011/2012

7 3. Salary Increases The median stays at 4% per annum. The distribution of the long-term rates of salary increases adopted by the surveyed companies is illustrated in Figure 3. Figure 3. Distribution of the long-term Rates of Salary Increases The median long term expectation of salary increases has remained unchanged at 4% p.a. in the past few years. However, the upper range of salary increase assumptions has increased gradually over the last 3 years. This is probably due to higher inflation in recent years pushing some companies towards higher salary increase expectations. Spread between rate of salary increases and discount rate Although the individual assumptions are important, for the purposes of determining the liabilities of defined benefit retirement schemes, the spread between the discount rate and the salary increase assumption is more important than the individual rates in isolation. The discount rate and the salary increase rate have an opposing impact on the HKAS 19 liabilities: the higher the discount rate, the lower the liabilities but the higher the salary increase, the higher the liabilities, and vice versa. Given this, the more positive (or less negative) the spread (discount rate less salary increase rate) the lower the liabilities, and conversely a less positive (or more negative) spread would result in higher liabilities. towerswatson.com 5

8 Figure 4 shows the distribution of the spread adopted by the surveyed companies. The spread has widened from -1.10% p.a. in 2010/2011 to -2.50% p.a. in 2011/2012 due to the decrease in EFN yields. As a result, liabilities were generally higher than the previous years, ignoring other factors. Figure 4. Spread between Salary Increases and Discount Rate The significant negative spread resulted in substantially higher liabilities and deficit since the liability growth due to the expected salary increase is not being offset entirely by the discount rate factor. 6 HKAS 19 Accounting Survey Report 2011/2012

9 4. Expected Return on Assets The median stays at 6.5% per annum. For the purposes of this survey, we have grouped the schemes of the surveyed companies into four different categories based on the proportion of equities in their asset mix: Benchmark portfolio with 80% or more of equities Benchmark portfolio with 60% to 79% of equities Benchmark portfolio with 40% to 59% of equities Benchmark portfolio with less than 40% of equities Figure 5 shows the proportion of schemes falling into these four categories. Figure 5. Schemes' Benchmark Asset Allocation to Equities Overall, the median benchmark allocation to equities has remained unchanged at 60%, reflecting the overall stability in the schemes long-term investment strategy. Please note that the results are based on benchmark allocation of assets, which does not necessarily reflect the actual allocation of assets on the valuation date. towerswatson.com 7

10 The distribution of the expected rate of return assumptions adopted by companies are summarized in Figure 6. Figure 6. Distribution of Expected Rate of Return on Assets The median expected return assumption has reduced slightly from 7% p.a. in 2009/2010 to 6.5% p.a. in 2010/2011 and remains at the same level in 2011/2012. This trend is mainly due to lower expected returns from both equities and bonds at the recent valuations. Actual Returns versus Expected Return on Assets Table 7 sets out the average actual return of the scheme assets in each of the past 5 years. Table 7. Average Actual Rate of Return on Assets 2007/ / / / / % -27.3% +19.7% +8.3% -3.9% Investment markets performed poorly in The actual investment returns achieved by schemes in 2011/2012 were poor (and negative), giving rise to an asset loss 2. 2 See Section 5 8 HKAS 19 Accounting Survey Report 2011/2012

11 Figure 8 shows the distribution of the outperformance / underperformance of scheme asset returns over the expected return assumptions adopted by the surveyed companies. Figure 8. Spread between Actual Return and Expected Return on Assets 3 Over the long term, one would expect actual returns to be in line with the expected return. This is true over the last 3 years, but not over the last 5 years, due to a substantial negative return in IAS 19 Amendments One of the key amendments issued by the IASB on 17 June 2011 is that the interest cost and expected return on assets will be replaced with a measure of net interest income / expense on plan surplus or deficit, which will be calculated using the discount rate (not based on the scheme s asset mix). Therefore, the expected rate of return on scheme assets assumption will no longer be relevant. As this change in IAS 19 has been fully adopted by the Hong Kong Institute of Certified Public Accountants (HKICPA), the new approach in most cases is expected to increase the HKAS 19 Annual Expense, since the Profit or Loss will no longer benefit from the expectation of higher returns on riskier investments. For example, an expected return assumption of 6.5% and a discount rate of 1.45% means the gap is 5.05%, which is substantial in the determination of the expected return on assets to offset benefit costs. 3 Using actual returns minus expected returns towerswatson.com 9

12 5. Treatment of Actuarial Gains / Losses Figure 9 shows the range of methods chosen by the surveyed companies for recognizing actuarial gains or losses. The description of various methods is summarized in Appendix E. The 10% corridor method remains the most popular amortization method but a significant proportion of companies have switched to the Other Comprehensive Income ( OCI ) method. Figure 9. Method of Recognizing Actuarial Gains/Losses IAS 19 Amendments One of the key amendments issued by the IASB on 17 June 2011 requires that all actuarial gains and losses must be recognized immediately in the OCI in the year they arise. The change is intended to improve transparency and comparability in the entities financial reporting. For entities that currently delay recognition of actuarial gains and losses (e.g. by using the 10% corridor option), the move to immediate recognition of actuarial gains and losses could lead to substantially higher balance sheet volatility, but more stable Annual Expense. 10 HKAS 19 Accounting Survey Report 2011/2012

13 6. Impact of HKAS 19 Figures on Company Financial Statements Apart from disclosure purposes, HKAS 19 figures provide companies with critical information for budgetary and risk-management purposes. In this section we look at the following HKAS 19 statistics: Annual Expense as a percentage of companies annual scheme salary; Annual Expense compared to the actual contributions paid by companies; and Net Asset / Net Liability as a multiple of monthly scheme salary. Annual Expense as a Percentage of Annual Scheme Salary Figure 10 illustrates the Annual Expense of the surveyed companies as a percentage of their respective employees scheme salaries for the fiscal years 2010/2011 and 2011/2012, and the Preliminary Annual Expense for 2012/2013. Figure 10. Annual Expense as a Percentage of Annual Scheme Salaries The median Annual Expense as a percentage of the covered employees scheme salaries in 2011/2012 (2.4%) is lower than that of the previous period (3.1%). A key reason is the investment gains in 2010/2011. Similarly, the 2012/2013 expense is expected to be higher due to investment losses in 2011/2012. towerswatson.com 11

14 Table 11 illustrates the median Annual Expense of the surveyed companies as a percentage of their respective employees scheme salaries. Table 11. Median of Annual Expense as a Percentage of Annual Scheme Salaries Method of recognizing Percentage of 2012/2013 Change in 2011/2012 actuarial gains/losses Companies (Preliminary) Median Companies adopting OCI 36% 1.6% 2.8% é 1.2% Companies not adopting OCI 64% 2.8% 8.1% é 5.3% All companies combined 100% 2.4% 5.2% é 2.8% From the table above, the increase in Annual Expense as a percentage of scheme salaries is higher for those companies that are not adopting the OCI approach. This is mainly due to the impact of the 2011/2012 investment losses being amortized in the Profit or Loss Account. Annual Expense compared to contributions paid by companies (expressed as a percentage of annual scheme salaries) Figure 12 illustrates the difference between the actual cash contributions paid by the surveyed companies and the corresponding Annual Expense during 2011/2012. Figure 12. Employer Contributions over P&L charges In Hong Kong, companies fund their retirement schemes based on actuarial recommendations following periodic funding valuations carried out under the provisions of ORSO. Given that the investment gains in 2009 and 2010 were amortized and recognized in the Profit or Loss Account in 2010/2011 while cash contributions were more stable based on long term assumptions, many companies are currently contributing at a level higher than the Annual Expense recognized in the Profit or Loss Account. 12 HKAS 19 Accounting Survey Report 2011/2012

15 Net Asset / Net Liability as multiple of monthly scheme salary The HKAS 19 Annual Expense in the company s Profit or Loss Account and the actual company cash funding contributions to the retirement scheme can differ considerably. Any excess of Annual Expense over company cash contributions accumulates to form a Net Liability 4 (i.e. provision) in the Balance Sheet; conversely, any excess of cash contributions over Annual Expense gives rise to a Net Asset 4 (i.e. prepayment). Figure 13 shows the distribution of the ratios of Net Liability (positive figure) or Net Asset (negative figure) disclosed in the companies Balance Sheet expressed as a multiple of covered employees monthly scheme salaries. At 2011/2012 year-end, a majority of companies had prepayments on their balance sheets. The median Net Asset has decreased from a multiple of 2.2 for 2010/2011 to 1.4 for 2011/2012. Figure 13. Distribution of Net Liability (Asset) as a Multiple of Monthly Salaries The key reason for the reduction is the investment losses and lower discount rate used to determine the liabilities. 4 For those companies adopting OCI, the actuarial losses (gains) recognized in OCI are also included when calculating the Net Liability (Asset). towerswatson.com 13

16 Appendix A: Summary of Survey Statistics A summary of the survey statistics is set out in Table 14: Table 14. Survey Statistics Covered Period 2007/ / / / / 2012 Number of Schemes Number of Employers Number of Members 55,000 53,000 69,000 55,000 54,000 Total Monthly Scheme Salaries (HK$ million) Average Monthly Scheme Salary ($HK) Total Scheme Assets (HK$ billion) Average Scheme Assets per Employer (HK$ million) ,343 1,047 1,087 17,800 18,200 19,600 19,000 20, Most companies have a financial accounting year-end of 31 December. The distribution of the measurement dates adopted is illustrated in Figure 15. Figure 15. Measurement Date Distribution 14 HKAS 19 Accounting Survey Report 2011/2012

17 Appendix B: Background to HKAS 19 HKAS 19 (previously known as SSAP 34) was issued by the Hong Kong Institute of Certified Public Accountants in December 2001 and became effective on 1 January HKAS 19 is essentially the same as the IAS 19 accounting standard issued by the International Accounting Standards Board and was adopted as applicable to Hong Kong companies by the Hong Kong Institute of Certified Public Accountants. In essence, HKAS 19 requires companies to account for the costs of providing employee benefits in their Profit or Loss Account and Balance Sheet, and prescribes the methods and assumptions to be used to obtain these costs. HKAS 19 classifies the benefits provided by companies to their employees into various categories, and prescribes the specific treatment to account for the cost of these separate categories of benefits. Like many other accounting standards that deal with employee benefits issued by other accounting bodies worldwide, HKAS 19 is designed to: provide greater consistency in the treatment of liabilities in respect of employee benefits and consequently to enable better comparability of benefit costs; and provide disclosures that improve reporting so that users of financial statements can have a better understanding of the commitment undertaken by the companies regarding employee benefits. Since its inception, some amendments have been made to the HKAS 19. The major changes include: A one-off option was introduced whereby actuarial gains and losses 5 may be recognized immediately and fully on a company s balance sheet through Other Comprehensive Income ( OCI ), previously Statement of Recognized Income and Expenses ( SORIE ), rather than through the Profit or Loss Account. Companies had up to 31 December 2006 to decide whether to adopt the OCI option forrecognizing actuarial gains and losses. For a group defined benefit scheme with a number of associated participating employers, HKAS 19 requires that the aggregate group HKAS 19 cost should be determined on a defined benefit basis and shared amongst the participating employers according to the group s agreed policy of sharing costs. If such policy does not exist, the individual participating employers HKAS 19 cost will be its actual cash contributions with the representative employer absorbing the differences between the group scheme s HKAS 19 cost and the employers aggregate cash contributions. Further amendments were made in 2011 that the actuarial gains and losses 5 need to be recognized in Other Comprehensive Income in the year they arise. In addition, the expected return on scheme assets assumption will be replaced by discount rate. Such amendments will be effective from 1 January Appendix F sets out the details. 5 See Section 5 towerswatson.com 15

18 Appendix C: Major Financial Assumptions of HKAS 19 Discount Rate Discount rates are used to calculate the present value of benefit obligations at each financial year end, and the service cost and interest cost components of the Annual Expense for the following financial year. For example, the discount rate as at 31 December 2011 will be used to assess the present value of the benefit obligation as at that date, and the Annual Expense items for the financial year Currently, HKAS 19 stipulates that the discount rate is determined by reference to market yields of high quality corporate bonds at the balance sheet date, with the currency and term of the bonds similar to the estimated term of the benefit obligations. In countries with no deep market in such bonds, the yields on government bonds should be used. Since Hong Kong only has limited issues of corporate bonds, companies have typically used the yields of Hong Kong Government s Exchange Fund Notes ( EFN ) as the reference benchmark to set the discount rate. In isolation, the discount rate has an inverse relationship with the HKAS 19 costs; the lower the discount rate, the higher the HKAS 19 liabilities and service costs, and vice versa. As the discount rate is set as at the balance sheet date (i.e. a snapshot in time), companies HKAS 19 costs can be subject to high degree of volatility, reflecting the yields on EFN which are in turn driven by fluctuations in the interest rate landscape. Salary Increases The salary increase assumption is used to project current salaries into the future to determine the amount of the salary related benefit payable at a future date. A higher salary increase assumption will lead to a higher expected amount of benefits to be paid, and consequently, a higher Defined Benefit Obligation and Annual Expense. Year-to-year salary growth may be a function of: productivity improvement; inflation; and merit or promotional increases. Expected Return on Assets The expected rate of return on assets is the long-term expectation of the increases in retirement scheme assets due to investment income and capital growth. It serves as a negative component in the calculation of Annual Expense. Hence the higher the expected rate of return, the lower the calculated Annual Expense. The expected return on scheme assets is determined based on market expectation of the returns of the scheme assets over the future lifetime of the related benefit obligations, and is net of expenses. In general, the higher the allocation to equities in the scheme s assets, the higher the overall expected return. 16 HKAS 19 Accounting Survey Report 2011/2012

19 Appendix D: HKAS 19 Terminology Defined Benefit Obligation Present value of expected future payments required to settle the obligation arising in respect of employee service in current and prior periods. It is calculated using the Projected Unit Credit Method and assumptions that are individual best estimates and are mutually compatible. Current Service Cost The increase in the Defined Benefit Obligation resulting in respect of employee service in the current accounting period. Interest Cost The increase during an accounting period in the Defined Benefit Obligation which arises because benefits are closer to settlement. Annual Expense The Annual Expense is the amount that needs to be charged to the company s Profit or Loss Account for the accounting year due to benefit costs. It is calculated as Current Service Cost + Interest Cost Expected Return on assets + amortization due to actuarial gains / losses, past service cost, and gains / losses due to curtailments and settlements. Fair value of assets The amount for which an asset can be exchanged or a liability settled between knowledgeable, willing parties on the basis of an arm s length transaction. Return on scheme assets Interests, dividends and other revenue derived from scheme assets, together with realized and unrealized gains or losses on the scheme assets, less any costs of administering the scheme and less any tax payable by the scheme itself. Actuarial gains and losses Changes to the Fair value of assets or the Defined Benefit Obligation from the beginning of the accounting period to the end of the accounting period, due to the differences between actuarial assumptions at the beginning of the accounting period, and what actually occurred during the accounting period, and the effect of changes in actuarial assumptions. Past Service Cost The increase in the Defined Benefit Obligation in respect of employee service in prior periods, resulting in the current period from the introduction of, or changes to, scheme benefits. Past Service Cost is usually positive but can be negative. Other Comprehensive Income (OCI) Other Comprehensive Income is a statement showing the accumulated actuarial gains and losses on the balance sheet. towerswatson.com 17

20 Appendix E: Recognition of Actuarial Gains / Losses At each financial year-end, actuarial gains and losses will arise due to the following reasons: Asset Actual investment return higher or lower than expected return on assets; Liability Actual liability higher or lower than the expected liability at year end due to actual turnover, salary increase and other scheme experience during the financial year being different from the assumed rates; Changes in assumptions, in particular, the discount rate; and Other events such as curtailments / settlements. For example, if the actual liability at the end of the year is higher than the expected amount, the difference will be counted as a liability loss. Similarly, if the actual value of assets at the end of the accounting year is higher than the expected value then the difference will be regarded as an asset gain. The sum of any asset gains / losses and liability gains / losses is collectively known as the actuarial gains / losses in the context of HKAS 19. Under HKAS 19, companies have the following options to recognize these actuarial gains or losses: Method 1: Recognize fully in current financial year in the Profit or Loss Account The Annual Expense for the current year is adjusted (i.e. increase or decrease) by all of the actuarial gains and losses arising during the year. This method can lead to a high degree of volatility in the Profit or Loss Account. Method 2: Amortize it over average future lifetime of the members The Annual Expense for the next financial year is adjusted by the actuarial gains and losses arising during the year divided by the average future lifetime of the existing members. This method spreads the gains or losses over a longer period, thus resulting in less volatility to the Profit or Loss Account. Method 3: Amortize the amount in excess of the 10% corridor over the average future lifetime of the members In this case, the actuarial gains and losses in excess of the 10% corridor at year end will be amortized and reflected in Annual Expense for the next financial year. The 10% corridor is defined as 10% of the greater of the fair value of assets and the Defined Benefit Obligation at the accounting year end. This method results in the lowest volatility of the Annual Expense from year to year of the three methods of recognizing gains / losses through the Profit or Loss Account, as the 10% corridor is effectively a buffer and dampens the impact of gains and losses. Method 4: Other Comprehensive Income (OCI) Under this method, actuarial gains and losses are taken immediately and fully to the balance sheet through Other Comprehensive Income (OCI), previously Statement of Recognized Income and Expense (SORIE), instead of the Profit or Loss Account. The key impact is that the gains and losses are not reflected in the Profit or Loss Account and therefore reduce the volatility of the expense from year to year. However, this method can potentially lead to a high degree of volatility in the Balance Sheet. Any other approach is possible provided the amortization is at a rate not lower than that of Method 3. The OCI approach allows employers to reflect the impact of gains or losses in the Balance Sheet. By contrast, the other methods result in the gains or losses flowing through the Profit or Loss Account. 18 HKAS 19 Accounting Survey Report 2011/2012

21 Appendix F: Major Amendments to HKAS 19 On 17 June 2011, the International Accounting Standards Board (IASB) amended IAS 19, Employee Benefits. This section summarizes the key contents of this amendment. Key Changes and Towers Watson Observations The key amendments include: All changes in the funded position of retirement plans must be recognized immediately in the year they arise. The changes in funded position include gains and losses arising from experience differing from what was assumed, changes in assumptions, investment gains and losses on plan assets, and the effect of plan changes. Towers Watson observations: The change is intended to improve transparency and comparability in entities financial reporting. For entities that currently delay recognition of gains and losses (e.g., by using the 10% corridor option under HKAS 19), the move to immediate recognition of gains and losses could lead to substantially more balance sheet volatility. For the purpose of deriving the Profit and Loss charges, Interest Cost and the Expected Return on Plan Assets will be replaced with a measure of Net Interest Income/Expense on the Plan Surplus or Deficit. This Interest Income or Expense would be measured based on the plan s discount rate. Therefore, the Expected Return on Plan Assets assumption will no longer be relevant. Towers Watson observations: The new approach reflects the IASB s concern about the significant judgement required by entities in setting their assumptions on the expected rate of returns. In most cases, the net interest approach would reduce net income/increase net expense, since the employer s Profit or Loss would not benefit from the expectation of higher returns on riskier investments. Plan administration costs are not to be deducted from plan asset returns. Such costs should be expensed at the financial year they are incurred, either through a direct charge in the Profit or Loss or by way of an explicit assumption being made in measuring the Defined Benefit Obligation ( DBO ). Towers Watson observations: The new approach requires the explicit disaggregation of plan expenses into the cost of administering the plan and the cost of managing the plan s investments. The effect on net income will depend on the employer s current practice of expensing these administration costs, and the level of such costs. towerswatson.com 19

22 The components of retirement plan costs will be disaggregated into Service Cost, Net Interest Income/Expense and the Remeasurement Component for purposes of reporting the costs in the Comprehensive Income Statement. The Remeasurement Component, which would include gains and losses (including investment returns in excess of or less than the implied investment returns in the Net Interest Income/Expense calculation) and the effect of settlements, would be reported in Other Comprehensive Income ( OCI ), while the Service Cost and Net Interest Income/Expense components would be reported separately in the Profit or Loss as employment cost and financing cost, respectively. Furthermore, Comprehensive Income (i.e. the Profit or Loss plus the OCI) will be reported in a single Statement of Comprehensive Income ( SCI ). Towers Watson observations: The disaggregation should enhance the comparability and usefulness of the line items in the SCI. Including the remeasurement effects in the OCI, while keeping service and financing costs in the Profit or Loss, can reflect the differing predictive values of those amounts when analyzing financial statements. The disclosure requirements will be expanded to provide more insight about the nature of the plans and associated risks, including sensitivity analysis, development of demographic assumptions, fair value measurement of the plans assets and cash flows. Towers Watson observations: The increased amount of disclosure items will add to the effort in preparing disclosure statements. The amendments will be effective on 1 January Restatement of the prior period s financial statements and financial information presented for comparative purposes is required. 20 HKAS 19 Accounting Survey Report 2011/2012

23 Appendix G: About Towers Watson Towers Watson Towers Watson is a leading global professional services company that helps organizations improve performance through effective people, risk and financial management. With 14,000 associates around the world, we offer solutions in the areas of employee benefits, talent management, rewards, and risk and capital management. Our focus is on giving clients the clarity to make the right decisions and take the right actions. And our approach is grounded in perspective the kind that comes from our deep experience working on a wide range of issues. But more important, our perspective begins at eye level with a clear understanding of the clients organization, the way the clients work, their goals and challenges. By connecting the big picture and, your picture, we help to achieve real-world results. Towers Watson in Asia Pacific In the Asia-Pacific Region, Towers Watson operates 23 offices in 13 markets: Australia, China, Taiwan, Hong Kong, Singapore, South Korea, Japan, Malaysia, Philippines, India, Indonesia, Thailand and Vietnam with close to 1,400 associates. Towers Watson in Hong Kong Our Hong Kong office, the first and largest in Asia Pacific, was established 35 years ago. We were also the first major professional services company to open offices in China. Today, Towers Watson Greater China s 450 associates serve our clients from 7 locations: Beijing, Guangzhou, Hong Kong, Shanghai, Shenzhen, Taipei and Wuhan. Benefits in Hong Kong Towers Watson s Benefits business in Hong Kong provides retirement scheme consulting, actuarial services, insured benefits advice, and administration services, and accounts for 80 staff. Towers Watson assists a variety of clients with sizes ranging from less than 10 employees to over 180,000 employees. In Hong Kong, Towers Watson has been established for over 35 years and is by far the largest actuarial consulting practice in the Special Administrative Region. Towers Watson has worked with many of Hong Kong s leading employers, both locally listed and multinational companies, in all aspects of retirement schemes. As a result, we have unparalleled knowledge of current practice in employee benefits and retirement schemes, new trends and the legislative requirements. HKAS 19 Services Our integrated range of services includes: Actuarial accounting valuations to help determine scheme expense and for purposes of meeting disclosure requirements for corporate reporting; Sensitivity assessment of adopting different assumption parameters, including impact to company Profit or Loss and Balance Sheet; Advice in relation to cash versus accounting issues; financial impact of initial or early adoption; changes to HKAS 19, etc; Application to other related benefits such as the Long Service Payment (LSP) benefit; and Training seminars for clients and auditors covering key concepts of HKAS 19, including updates on topical matters. towerswatson.com 21

24 For more information regarding this survey, please contact your Towers Watson consultant or: Iris Ho Consultant Benefits, Hong Kong (852) Elaine Hwang Director Benefits, Hong Kong (852) Copyright 2012 Towers Watson. All rights reserved. towerswatson.com

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