TFRS for NPAEs - Provision for Severance Payments

Under the Thai Labor Protection Act of 1998, companies are required to pay legal severance payments (‘LSP’) to employees who leave employment at their retirement age, or are terminated by the companies without cause.

Keywords: Thailand, Accounting, TAS, TFRS for NPAEs, Employee Benefits, Best Estimate, Legal Severance Payments, Federation of Accounting Professions, FAP

Severance payments range from one month to ten months of the employee’s salary, based on service levels. Funding of this plan is not required. Payments are made when the employee is entitled to receive payment.

Years of service Amount of LSP
120 days – 1 year 1 month of salary
1 year – 3 years 3 months of salary
3 years -6 years 6 months of salary
6 years -10 years 8 months of salary
10 years and above 10 months of salary

The new Thai Financial Reporting Standards for Non-Publicly Accountable Entities (‘NPAE’) require the companies to recognise an employee benefit liability for the above obligation using the ‘best estimate’ method.

There has been some confusion as to for whom the liability should be recognised and how to calculate it, using a ‘best estimate’. There is clearly significant judgement required when recognising the liability.

The Federation of Accounting Professions (‘FAP’) has issued the following guideline to provide NPAEs with examples of when they should recognise this liability and answers to ‘frequently asked questions’ that the FAP has received. There is still an emphasis on keeping the computation of the liability simple. Notably, there is no requirement to appoint an actuary to calculate the liability.

  • Provision for severance payment not recognised by a company before the announcement of TFRS for NPAE (accounting periods on or after 1 January 2011) should be recognised using one of the following four alternatives:

 –  Recognise full amount in expense in the current year;

 –  Amortise the obligation using a straight line method;

 –  Adjust through the retained earnings on 1 January 2011; or

 –  Retroactive adjustment.

  • A company that has already recognised a provision for severance payment is required to assess whether there is any under or overstatement and adjust in the current year’s profit and loss.
  • The guideline suggests using a simple computation which doesn’t use factors such as salary increases, new employees hired as a replacement or the possibility of death. The liability is recognised for those employees whose service period indicates that the employee has a ‘high possibility of remaining with the company until retirement’, not necessarily all employees in the company. For example, companies may decide to calculate the provision only for employees:

   –  With 10 or more years of service; and

   –  The remaining number of years to retirement is less than or equal to five.

The below example issued by the FAP is provided for guidance only and should not be regarded as a complete computation method applicable to all companies. It is important for every company to determine its ‘best estimate’ based on assumptions that must be documented and computation methods that must be carried out consistently. Alternatively, the company can choose to use a computation using actuarial assumptions or/and comply with the full requirements of Thai Accounting Standard 19 that is mandatory for Publicly Accountable Entities.

Example

1) Mr. A started working with Company A on 1 January 1995.

2) Mr. A has been working with the company for 15 years (till end of 2010).

3) Mr. A will retire in the next 5 years.

4) The company has a policy for employees to retire at the age of 60.

5) Such retirement policy is regarded as a kind of termination of employment.

6) At the termination of employment, Company A has to pay retirement benefit to Mr. A at the rate prescribed in the Labor Protection Act (i.e. 10 months of salary).

7) Post retirement benefit provision may be computed as follows:

Current salary x Staff estimated turnover rate *

x Number of years of work at year-end / Total number of years of work at retirement age)

* The Company maintains a historical staff turnover measuring turnover by year left until retirement.

Year Monthly salary (Baht) Staff turnover rate Post retirement benefit provision (Baht)
2009 10,000 30% 100,000 x 70% x 14/20 = 49,000
2010 12,000 20% 120,000 x 80% x 15/20 = 72,000
2011 15,000 10% 150,000 x 90% x 16/20 = 108,000
2012 20,000 10% 200,000 x 90% x 17/20 = 153,000

The following expense shall be recognised in profit or loss:

Year Expense in profit or loss (Baht)
2010 See details below
2011 108,000 – 72,000 = 36,000
2012 153,000 – 108,000 = 45,000

Accounting entries

Past service costs not recognised by an entity before the announcement of TFRS for NPAEs (accounting periods on or after 1 January 2011)

Option 1: Recognise past service costs before the announcement of TFRS for NPAES as an expense in 2011 for the full amount of 72,000.

Dr. Past service cost of employee severance

      and retirement benefits                                        72,000

   Cr. Post retirement benefit provision                                          72,000

Option 2: Amortise past service costs before the announcement of TFRS for NPAES of 72,000 Baht in the P&L using straight line method over a period of 5 years (72,000 / 5 years = 14,400 per year).

Dr. Past service cost of employee severance

    and retirement benefits                                        14,400

  Cr. Post retirement benefit provision                                          14,400

Option 3: Adjust past service costs before the announcement of TFRS for NPAES of 72,000 Baht through the retained earnings on 1 January 2011.

Dr. Retained earnings – brought forward (2011)  72,000

    Cr. Post retirement benefit provision                                          72,000

Option 4: Adjust past service costs before the announcement of TFRS for NPAES of 72,000 Baht by retroactive adjustment.

Dr. Retained earnings – brought forward (2010)  49,000

Dr. Retained earnings – brought forward (2011)  23,000

     Cr. Post retirement benefit provision                                          72,000

For this option, the company has to restate its statement of income and statement of financial position for 2010 as if the company had recognised the employee retirement benefits since the beginning.

Current year cost of employee severance and retirement benefits

Regardless of the option chosen to treat the past service costs, the entries to account for the current year cost of employee severance and retirement benefits are as follows:

2011

Dr. Cost of employee severance and

    retirement benefits – current year                      36,000

  Cr. Post retirement benefit provision                                          36,000

2012 

Dr. Cost of employee severance and

  retirement benefits – current year                       45,000

  Cr. Post retirement benefit provision                                          45,000

Please click here for Mazars Thailand’s TFRS Technical Bulletin.

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