Document ID: chunk:federal_register_of_legislation:F2023C00383:front:0:p19
Version: federal_register_of_legislation:F2023C00383
Segment Type: other
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Character Range: 47788–56472

of those future benefits.

Recognition and measurement: present value of defined benefit obligations and current service cost
66 The ultimate cost of a defined benefit plan may be influenced by many variables, such as final salaries, employee turnover and mortality, employee contributions and medical cost trends. 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 (see paragraphs 67–69);
(b) to attribute benefit to periods of service (see paragraphs 70–74); and
(c) to make actuarial assumptions (see paragraphs 75–98).

Actuarial valuation method
67 An entity 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.
68 The projected unit credit method (sometimes known as the accrued benefit method pro-rated on service or as the benefit/years of service method) sees each period of service as giving rise to an additional unit of benefit entitlement (see paragraphs 70–74) and measures each unit separately to build up the final obligation (see paragraphs 75–98).

Example illustrating paragraph 68

A lump sum benefit is payable on termination of service and equal to 1 per cent of final salary for each year of service. The salary in year 1 is CU10,000 and is assumed to increase at 7 per cent (compound) each year. The discount rate used is 10 per cent per year. The following table shows how the obligation builds up for an employee who is expected to leave at the end of year 5, assuming that there are no changes in actuarial assumptions. For simplicity, this example ignores the additional adjustment needed to reflect the probability that the employee may leave the entity at an earlier or later date.
Year                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               1                                                                                                  2   3    4   5
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   CU                                                                                                 CU  CU   CU  CU
Benefit attributed to:
– prior years                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      0                                                                                                      131      262     393     524
– current year
(1% of final salary)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               131                                                                                                    131      131     131     131
– current and prior years                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          131                                                                                                    262      393     524     655

Opening obligation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 –                                                                                                      89       196     324     476
Interest at 10%                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    –                                                                                                      9        20      33      48
Current service cost                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               89                                                                                                     98       108     119     131
Closing obligation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 89                                                                                                     196      324     476     655

Note: