statement of sfas no.

financial accounting standards

24
indonesian institute of accountants

accounting for retirement benefit costs

this is an unofficial publication of iai (indonesian institute of accountants).

if there is any inconsistency between indonesian and english version of the sfas, the user of
1
accounting for retirement benefit cost sfas no. 24
sfas should follow the indonesian version as the official publication of the institute.
accounting for retirement benefit cost sfas no. 24

statement of financial accounting standards (sfas) no. 24, accounting for retirement benefit
cost , was adopted by the indonesian accounting principles committee on august, 24, 1994 and
ratified by the national council of the indonesian institute of accountants on september 7,
1994.

compliance with the policies contained in this statement is not obligatory in the case of
immaterial items.

jakarta, september 7, 1994

national council
indonesian institute of accountants

indonesian accounting principles committee

hans kartikahadi chairman

jusuf halim secretary
hein g. surjaatmadja member
katjep k. abdoelkadir member
jan hoesada member
m. ashadi member
mirza mochtar member
ipg. ary suta member
sobo sitorus member
timoty marnandus member
mirawati sudjono member
accounting for retirement benefit cost sfas no. 24

contents

paragraphs

introduction 01 - 10
objective
scope 01 - 04
definition 05
types of plans 06 - 08
accounting for retirement benefit costs 09 - 10

explanation 11 - 35
defined contribution plans 11 - 16
recognition of retirement benefit expenses 11 - 14
disclosure 15 - 16
defined benefit plans 17 - 30
retirement benefit expenses 17
recognition of current service costs 18 - 20
recognition of retirement benefit costs
other than service costs 21 - 30
actuarial valuation methods 31 - 33
disclosure 34 - 35

statement of financial accounting standard no 24

accounting for retirement benefit costs 36 - 47
defined contribution plans 37 - 38
recognition of retirement benefit expenses 37
disclosure 38
defined benefit plans 39 - 45
recognition of current service cost 39
recognition of retirement benefit costs
other than current service costs 40 - 42
actuarial valuation method 43 - 44
disclosure 45
transition 46
effective date 47

appendix
introduction

objective

the provision of retirement benefits is a significant element of an enterprise’s remuneration

package for its employees. from the employer’s point of view, the main issues in accounting
for retirement benefits are that the cost of providing retirement benefits are properly
accounted for and that appropriate disclosures are made in the financial statements of the
employer.

the objective of this statement is to prescribe when the cost of providing retirement benefits
should be recognized as an expense, how much to recognize and what information should be
disclosed in the employer’s financial statements in relation with the plans.

scope

01 this statement should be applied in accounting for the employer’s cost of retirement
benefits.

02 this statement does not address other forms of employee welfare, like severance pay,
deferred compensation arrangements, medical and welfare plans, bonus plans, etc. obligatory
workers’ insurance imposed by the government is also excluded from the scope of this
statement.

03 sfas no. 18, accounting by retirement funds, addresses accounting and reporting by
retirement funds as an entity. this statement therefore complements sfas no. 18.

04 this statement applies to defined benefit plans and defined contribution plans as defined
under prevailing statutory requirements.

definitions

05 the terms used in this statement are defined as follows:

plans are all programs that provide retirement benefits for participants.

retirement benefit funds represent a legal entity that arranges and manages a program that
provides retirement benefits.

a retirement fund regulation is a regulation consisting of provisions that are used as a basis to
conduct a plan.

defined contribution plans are plans in which the amounts of contribution to be paid are fixed
accounting for retirement benefit costs sfas no.24

by retirement fund regulations and all contributions, together with the investment earnings,
are recorded in the participants’ accounts as retirement benefits.

defined benefit plans are plans in which the amounts of benefit are fixed by the retirement
fund regulations or any other plan that does not represent a defined contribution plan.

employer retirement benefit fund is a retirement fund established by an individual or an entity

employing staff, as a founder, to conduct defined benefit plans of defined contribution plans
for the interest of a part or all of its employees, as participants, ad the resulting liability to the
employee.

financial institution retirement benefit fund is a retirement fund established by a bank or life
insurance enterprise to manage defined contribution plans for individual, either employees or
independent workers. this fund is distinct from the related employer retirement funds for bank
employees or life insurance enterprise employees.

a retirement benefit is a periodic payment that is paid to the participant at the time and in the
manner stated in the retirement fund regulations.

a participant is every person that fulfills the required retirement fund regulations in order to
be eligible to receive a retirement benefit.

an employer is an enterprise or sole proprietorship that has a plan for its employees. the
employer could be the founder, founder’s partner or enterprise/sole proprietorship which
enrolls its employees in a financial institution retirement fund.

a founder is:

a) an individual or an entity that establishes employer retirement fund; or

(b) a bank or life insurance enterprise that establishes a financial institution retirement fund.

a founder’s partner is an employer who participates in a founder employer retirement fund for
the interest of a portion or all its employees.

funding is the non-refundable asset contributions paid by the employer, or by the employer
and the participant, or by the participant to provide retirement funds in order to meet the
obligations for payment of retirement benefits in the future.

actuarial valuation is the process used by actuaries to estimate the present value of retirement
benefits which should be paid and average remaining working life of plan participants as well
as recommend the current service cost and installments required to be made to the retirement
fund.

the accrued benefit valuation method is an actuarial valuation method which reflects the value
of retirement benefits based on services already rendered by the employees as of the valuation
date. this method may include assumptions of salary level projections through the retirement
date.

the projected benefit valuation method is an actuarial valuation method which reflects the
value of retirement benefits based on both services already rendered and services expected to
be rendered in the future by the employees as of valuation date. this method may include
assumptions of salary level projections through the retirement date.

current service cost is the cost to an employer under a defined benefit plan for services
rendered by participants in the current period.

past service cost is the cost to an employer under a defined benefit plan for services rendered
until the actuarial valuation date by participants and resulting from:

a) the introduction of a plan; or

(b) amendments to the plan

the present value of accumulated retirement benefit (or actuarial present value of promised
retirement benefits) is the present value of the expected retirement benefit plan payable by
retirement fund to support employees and retirees based on service already rendered.

experience adjustments are adjustments to the value of retirement benefits resulting from the
differences between previous actuarial assumptions and what has actually occurred.

types of plans

06 for the purpose of this statement, plans are classified as either defined contribution plans
or defined benefit plans.

07 under a defined contribution plan, the amount received by participants on retirement is

determined by reference to the amount of contributions paid by the employer and the
participant, and the performance of that fund. an employer’s obligation is to make the
contributions as determined by the retirement fund regulations. an actuary’s assistance is not
necessary, except to estimate the amount of future retirement benefits that may be achievable
by participants on retirement which are based on present contribution levels and estimates of
the performance of the fund.

08 under a defined benefit plan, the amount of a participant’s future retirement benefits is
determined by reference to a retirement benefit formula, which normally include variables like
years of service and retirement income. the employer’s obligation is to provide for the amount
of retirement benefits which will be paid to participants on retirement. an actuary’s assistance
is necessary to estimate the amount of actuarial liability, to reassess the actuarial assumptions
accounting for retirement benefit costs sfas no.24

and to recommend the future contribution to be paid.

accounting for retirement benefit costs

09 the recognition of retirement benefit cost by an employer arises as services are rendered
by the participants who will be entitled to receive such benefits.consequently, the cost of
retirement benefits is recognized as an expense in the periods during which the services are
rendered. the recognition of retirement benefit costs only when employees retire or receive
retirement benefits does not reflect allocation of those costs to the periods in which the
services were rendered.

10 the amount of retirement benefit cost recognized as an expense in a period is not

necessarily the same amount as the contribution paid by the employer to the retirement fund.
there is a clear distinction between the funding of retirement benefits and the allocation of the
cost of providing those benefits for purposes of recognizing the expense. funding is a financial
procedure. in determining the periodic amounts to be contributed, the employer’s decision
may be influenced by such factors as the availability of cash/financial conditions and tax
considerations. in contrast, the objective of accounting for retirement benefit costs is to ensure
that the cost of the retirement benefit costs is recognized as an expense as services are
rendered by the participants

explanation

defined contribution plans

recognition of retirement benefit expense

11 under a defined contribution plan, the employer’s contributions with respect to service
in a particular period should be recognized as an expense in that period.

12 the employer’s contribution to a defined contribution plan is usually determined by a

formula stated under the retirement fund regulations. therefore, the retirement benefit expense
recognized is normally the contribution due for the period.

13 if an employer agrees to make additional contributions in a certain period, the increased

contributions are recognized as an expense in the periods during which the associated service
are rendered by employees. if the increased contributions are granted by reference to existing
employees for their services in prior periods, ad are in return for services to be rendered by
existing employees in the current and future periods, the increased contributions are
recognized as an expense systematically over the expected remaining working lives of those
employees. when the additional contributions relate to retired employees, the contributions are
recognized as an expense in the period in which the promise of additional contributions is
made, since no further services are expected to be received by the employer from those
participants.

14 an employer’s contributions determine the amount of the retirement benefit expense and
the amount of the obligation which should be recognized by the employer for the period.
therefore, when the program is terminated, it is usually not necessary to make an adjustment
to recognize expenses and additional obligations. however, to the extent that additional
contributions have been agreed to but not recognized as an expense, the employer should
recognize the additional contributions as a liability when it is known that there is a probability
of termination of the plan.

disclosure

15 the financial statements for employers who provide defined contribution retirement
programs should disclose the following information:

(a) in the balance sheet, the total liability resulting from the difference between the amounts
funded by the employer since the inception of the program, and the amounts recognized
as expenses over the same period;

(b) in the income statement, the amounts recognized as a retirement benefit expense during
the related period;

(c) in the notes to the financial statements :

(i) a general description of the plan, including employees or employee groups

participating in the program;

(ii) any other significant matters related to the plan that may affect the comparability
of the financial satatements in the period with those of the previous periods.

16 when an employer has more than one defined contribution plan, the disclosures in the
financial statements may be reported in the total for all such programs, or separately for each
program, or several groupings whichever is considered to be the more informative.

defined benefit plans

retirement benefit expense

17 under a defined benefit plan, the expense in the current period consists of:

(a) the current service cost;

(b) amounts recognized in the current period with respect to past service costs of current
and retired employees, experience adjustments and changes in actuarial assumptions;
and

(c) cost resulting of any plan termination, and curtailment of the number of participants.
accounting for retirement benefit costs sfas no.24

recognition of current service costs

18 the current service cost of a defined benefit plan should be recognized as an expense in
the current period.

19 retirement benefit costs in defined benefit plans, especially those that promise retirement
benefits based on remuneration levels at or near retirement, are difficult to estimate. the
amount of the employer’s obligation under such programs is usually uncertain because there
are many variables that influence the amount of the ultimate retirement benefits, and hence,
the cost of these benefits. this uncertainty is likely to remain for a long period of time until the
retirement benefits are received by the participants. for example, the amount of future
retirements benefits may be determined by employees’ remuneration at retirement and by their
years of service, both of which are uncertain. moreover, in estimating the obligation,
assumptions need to be made regarding future conditions and events which are largely outside
the employer’s control, such as employee turnover levels and investment earnings of the
retirement fund. furthermore, these long-term uncertainties may give rise to changes of
estimates that can have a very significant effect on current service costs.

20 because of the potentially significant effect of differences between assumptions and

actual experience, it is necessary to obtain actuarial valuations at appropriate intervals.

recognition of retirement benefit costs other than current service costs

(i) existing employees

21 past service costs, experience adjustments, the effects of changes in actuarial

assumptions and the effects of program amendments with respect to existing employees
should be recognized as an expense or as income systematically over the estimated average
remaining working lives of those employees. except in the situations covered under
paragraph 26 and except in the case of certain program amendments when the use of a shorter
time period is necessary to reflect the economic benefits received by the employer.

22 past service costs arise upon the introduction of a plan for services already rendered by
participants prior to the introduction of the plan or upon the making of amendments to the
plan for services rendered prior to the amendment. a plan could provide additional benefits to
existing employees when retirement benefits are deemed to be inadequate, because of
inflation or for other reasons, as long as the additional benefits do not exceed the maximum
benefits allowable under prevailing laws and regulations. such entitlements to retirement
benefits are in return for services to be rendered by those employees in the future. therefore,
the past service cost for existing employees is usually allocated over the current and future
periods during which the services are to be rendered by the participants, regardless of the fact
that these costs are computed by reference to employee service in previous periods.

23 experience adjustments arise because actual events inevitably differ from actuarial
assumptions. for example, the retirement fund’s investment result may differ from the long-
term investment rate of return on investment assumed by the actuary in the last actuarial
valuation. these experience adjustments may give rise to either expense or income. the
actuarially determined cost is intended to provide a more reliable measure of expenses in each
period rather than expenses determined by actual experience. furthermore, in the long term,
experience adjustments may offset one another. therefore, experience adjustments are usually
allocated over the expected remaining working lives of existing employees.

24 changes in actuarial assumptions are made only when actual experience in the long term
consistently differs from the original actuarial assumptions. these changes may give rise to
expenses or income, which are treated in a similar manner as changes in accounting estimates
(see sfas no.25, net profit or loss for the period, fundamental errors and changes in accounting
policies). therefore, the effects of changes in actuarial assumptions are usually allocated over
the expected average remaining working lives of existing employees.

25 retirement benefit costs, other than current service costs for existing employees, may
provide economic benefits over a shorter time period than the expected average remaining
working lives of the employees concerned. such costs are recognized as an expense over that
shorter time period. for example, when program amendments are made regularly, the
additional cost may be recognized as an expense or income systematically over the period to
the next expected plan amendment.

(ii) plan termination and curtailments

26 when it is probable that a defined benefit plan will be terminated or that there will be a
significant curtailment of the number of participants, then :

(a) any resulting increase in the retirement benefit costs should be immediately recognized
as an expense; and

(b) any resulting gain should be recognized as income in the period in which the
termination of the retirement fund, or the curtailment of the number of participants of
the plan occurs; taking into consideration the prevailing laws and regulations.

27 a curtailment occurs either when there is a significant reduction in the number of

employees covered by a program or when an element of future service with respect to existing
employees will no longer qualify for benefits. a curtailment may arise from an isolated event,
such as the closing of a plant or discontinuation of a segment, that results in a significant
reduction in the number of employees.
accounting for retirement benefit costs sfas no.24

28 the gain or loss arising from a program termination or curtailment of the number of
participants includes proportion of past service costs, actuarial adjustments, the effect of
changes in actuarial assumptions and the effect of program amendments which have not
previously been recognized as income or expenses.

(iii) retired employees

29 taking into consideration that the employer’s obligation to retired participants is

regulated by the retirement fund regulations, the actuarial present value amount resulting from
amended retirement benefits in respect of retired employees is recognized as an expense or as
income in the period in which the amendments are made. if the amount cannot be estimated,
the reasons should be disclosed.

30 the effect of providing amended retirement benefits for retired employees should be
recognized as an expense or as income in the period in which the plan amendment is made
since no further benefits in the form of future services are expected to be received by the
employer from the retired employees, taking into consideration the employer’s obligation as
regulated by the retirement fund regulations.

actuarial valuation methods

31 a number of actuarial valuation methods have been developed to estimate the

employer’s obligation under defined benefit plans. while these methods are primarily
designed for funding purposes, they are also frequently used for accounting purposes to
determine the retirement benefit expense to be recognized each period. several actuarial
valuation methods are described in the appendix of this statement.

32 retirement benefit costs are determined based on a single actuarial valuation method
which is applied consistently over each period. if the valuation method is not used
consistently, the reasons should be disclosed.

33 the effect of a change in the actuarial valuation method from one method to another
method should be accounted for and disclosed in a similar manner as a change in accounting
policy in accordance with sfas no.25, net profit or loss for the period, fundamental errors and
changes in accounting policies.

disclosure

34 the financial statements for employers who provide a defined benefit plan should
disclose the following information :

(a) in the balance sheet, the total liability resulting from the difference between amounts
funded by the employer since the inception of the program, and the amounts recognized
as expenses (or which are charged to retained earnings due to a change in accounting
policy) over the same period;
(b) in the income statement, the amount recognized as retirement benefit expenses during
the period;

(c) in the notes to the financial statements:

(i) a general description of the plan, including employees or employee groups

participating in the program;

(ii) the accounting policies adopted by the employer for retirement benefit costs,
including the amortization method for past service costs, experience adjustment,
the effect of changes in actuarial assumptions and the effect of amendments to the
program and the changes in actuarial valuation methods used by the actuary (see
sfas no. 1, disclosure on accounting policies);

(iii) the funding policy used;

(iv) the principal actuarial assumptions used in determining the retirement benefit cost
and any significant changes in those assumptions (if any);

(v) the actuarial obligations, the fair value of the retirement fund’s net assets and the
difference between actuarial obligations and the fair value of the retirement fund’s
net assets (see sfas no.18, accounting for retirement funds);

(vi) the date of the most recent actuarial valuation, the name of the actuary and the
frequency in which valuations are made; and

(vii) any other significant matters related to the retirement benefits, including the
effects of a program termination and curtailment, that may affect the
comparability of the financial statements with those of prior periods.

35 when an employer has more than one defined benefit plan, the disclosures in the
financial statement may be reported in total for all such programs or separately for each
program, or several groupings, whichever is considered to be the most informative. however,
the value of information is decreased if the amount of surplus from one or several programs is
offset against a deficit in another program, therefore such disclosure is not appropriate.
accounting for retirement benefit costs sfas no.24

statement of financial accounting standards number 24

accounting for retirement benefit costs

statement of financial accounting standards no.24 consists of paragraphs 36 - 47. this

statement should be read in the context of paragraphs 1-35.

36 this statement should be applied in accounting for the employer’s cost of retirement
benefits.

defined contribution plans

recognition of retirement benefit expenses

37 under a defined contribution plan, the employer’s contribution with respect to service in
a particular period should be recognized as an expense in that period.

disclosure

38 the financial statements for employers who provide defined contribution plans should
disclose the following information :

(a) in the balance sheet, the total liability resulting from the difference between the amounts
funded by the employer since the inception of the program, and the amounts recognized
as expenses over the same period.

(b) in the income statement, the amounts recognized as retirement benefit expense during
the related period; and

(c) in the notes to the financial statements,

(i) a general description of the plan, including employees or employee groups

participating in the plan; and

(ii) any other significant matters related to the plan that may affect the comparability
of the financial statements in the period with those of the previous period.

defined benefit plans

recognition of current service cost

39 under a defined benefit plan, the current service costs should be recognized as an
expense in the current period.

recognition of retirement benefit cost other than current service costs

40 past services costs, experience adjustments, the effects of changes in actuarial
assumptions and the effects of program amendments with respect to existing employees
should be recognized as an expense or as income systematically over the estimated average
remaining working lives of those employees, except in the situations covered under
paragraph 42 and except in the case of certain program amendments when the use of a shorter
time period in recognizing expense or income is necessary to reflect the economic benefits
received by the employer.

41 when it is probable that a defined benefit plan will be terminated or that there will be a
significant curtailment in the number of participants, then:

(a) any resulting increase in the employer’s retirement benefit cost should be immediately
recognized as an expense; and

(b) any resulting gain should be recognized as income in the period in which the
termination of the retirement fund, and the curtailment of the number of participants of
the plan occurs; taking into consideration prevailing laws.

42 taking into consideration the employer's obligation to retired participants is regulated by

retirement fund regulations, the actuarial present value amount resulting from amended
retirement benefit in respect of retired participants is recognized as an expense or as income in
the period in which the amendments are made. if the amount cannot be estimated, the reasons
should be disclosed.

actuarial valuation method

43 retirement benefit costs are determined based on a single actuarial valuation method
which is applied consistently over each period. if the valuation method is not used
consistently, the reasons should be disclosed.

44 the effect of a change in the actuarial valuation method from one method to another
method should be accounted for and disclosed in a similar manner as a change in accounting
policy in accordance with sfas no.25, net profit or loss for the period, fundamental errors and
changes in accounting policies.

disclosure

45 the financial statements for employers who provide a defined benefit plan should
disclose the following information :

(a) in the balance sheet, the total liability resulting from the difference between the amounts
funded by the employer since the inception of the program, and the amounts recognized
as expenses (or which are charged to retained earnings due to a change in accounting
policy) over the same period;

(b) in the income statement, the amount recognized as a retirement benefit expense during
the period;
accounting for retirement benefit costs sfas no.24

(c) in the notes to the financial statements:

(i) a general description of the plan, including employees or employee groups

participating in the program;

(ii) the accounting policies adopted by the employer for retirement benefit costs,
including the amortization method for past service costs, experience adjustments,
the effect of change in actuarial assumptions and the effect of amendments to the
program and the changes in actuarial valuation methods used by the actuary (see
sfas no.1, disclosure of accounting policies);

(iii) the funding policy used;

(iv) the principal actuarial assumptions used in determining the retirement benefit cost
and any significant changes in those assumptions (if any);

(v) the actuarial obligations, the fair value of the retirement fund’s net assets, and the
difference between the actuarial obligation and the fair value of the retirement
fund’s net assets (see sfas no.18, accounting by retirement funds)

(vi) the date of the most recent actuarial valuation, the name of the actuary and the
frequency in which valuations are made; and

(vii) any other significant matters related to the retirement benefits, including the
effects of a program termination and curtailment, that may affect the
comparability of the financial statements with those of previous periods.

transition

46 if the application of this statement results in a change in accounting policy, the change
should be reported prospectively.

effective date

47 this statement becomes effective for financial statements covering periods beginning on
or after january 1, 1995. early application is highly recommended.
appendix

this appendix is for illustration purposes only and does not form part of the statement. the
purpose of this appendix is to illustrate the application of the statement of financial standards
on accounting for retirement benefit costs.

this appendix briefly describes several actuarial assumptions and actuarial valuation
methods which are commonly used by actuaries to determine retirement benefit costs. certain
aspects of some of the actuarial valuation methods described in this appendix are not
consistent with the requirements of the statement, in particular, the individual level premium
method and the aggragate method, which do not separately identify past service costs from
current service costs.

actuarial assumptions and actuarial valuation methods

in allocating the retirement benefit cost over the periods in which participants’ services are
rendered, it is usually appropriate to determine the actuarial present value of promised
retirement benefits based on methods and assumptions that result in current service costs that
bear a systematic relationship to participants’ remuneration level. the actuarial present value
of promised retirement benefits or, the present value of the expected accumulated retirement
benefit payments in the future to existing and retired employees, is attributed to the service
already rendered. the retirement benefit cost recognized as an expense may differ significantly
depending on the actuarial valuation method used and the actuarial assumptions applied.

a. actuarial assumptions

the uncertainties inherent in projecting trends in inflation rates, salary levels and earnings on
investments are taken into consideration in the actuarial valuations by using a set of actuarial
assumptions. actuarial assumptions are determined in such a manner that they reflect the long
term economic relationships between inflation rates, salary level increases, rates of return on
investments and discount rates, even though the absolute of several of the assumptions used
may not reflect actual conditions in the short term. these assumptions are projected over the
long term, i.e. until the estimated date of the death of the last participants.

the following actuarial assumptions are normally used in determining the retirement benefit
cost:

(a) the long-term discount rate assumed in determining the actuarial present value of
promised retirement benefits with respect to services already rendered as of the
valuation date;

(b) retirement assets are valued at fair value. when fair values are estimated by discounting
future cash flows, the assumption of a long-term rate of return is used to reflect the
average rate of total investment income (interest, dividends and appreciation in value)
expected to be earned during the period until the retirement benefits are paid.
accounting for retirement benefit costs sfas no.24

(c) when retirement benefits are based on future salaries, or on the final salary level before
retirement or on the average salary level of participants (career average programs),
salary increases reflect factors such as inflation, promotions and merit awards; and

(d) automatic increases in retirement benefits, such as cost of living adjustments, are also
consideredt. if the employer promises a periodic increase in retirement benefits, then it
is assumed that the increase will be fulfilled as promised.

actuarial assumptions used to determine retirement benefit costs are based on long term
considerations. however, these actuarial assumptions should be reconsidered from time to
time . for example, if the actual increase in salary levels during a period is higher than the
assumed amount and it is expected that this trend will continue, the actuary should adjust the
salary level assumption used. however, if the salary level differences are temporary in nature
and represents normal fluctuations, the actuary does not need to adjust the salary level
assumption used.

b. actuarial valuation methods

actuarial valuation methods generally fall into two broad categories: the accrued benefit
valuation method and the projected benefit valuation method.

accrued benefit valuation method

under these methods:

(a) current service costs is the present value of retirement benefits payable in the future in
respect of service rendered in the current period;

(b) past service cost is the actuarial present value of retirement benefits which should be
paid in the future, resulting from the introduction of a plan, program amendments, and
completion of the minimum service period as a condition for participation in the
retirement benefit program which related to a defined retirement benefit for services
rendered by the employees until the occurrence date of one or more of events above;

(c) the accrued actuarial liability is the present value of retirement benefits payable in the
future with respect to service to a certain date.

this method, assuming no inflation or deflation, could result in a current service cost that
increases each year as the period to retirement shortens, the decrease in the investment income
accumulated from the contributions and the increase in the probability of the employee
surviving to retirement. however, for the plan as a whole, the annual current service costs tend
to be approximately the same each year since the number and age distribution of active
employees remains relatively unchanged. in a salary level related program, inflation adds to
the rate of increase in current service cost each year. for a defined benefit plan, this method is
often modified by using assumptions of final salary level projections and the values of
benefits obtained allocated over the periods in which the services are rendered by employees
to determine each year’s current service costs.
projected benefit valuation methods

projected benefit valuation methods are actuarial valuation methods which reflect the value of
retirement benefits based on services by the employees as of date of the actuarial valuation.
these methods allocate retirement benefit costs evenly (either in absolute amounts or as a
percentage of salaries) over the employee's service period

there are four principal forms of the projected benefit valuation method:

(a) the entry age normal method

under this method, each employee is assumed to have participated in the program when
first employed or as soon as the employee became eligible. the current service cost is a
level annual amount of a fixed percentage of salary which, when invested at the rate of
interest assumed in the actuarial valuation, is sufficient to provide the required
retirement benefit as promised. past service costs is the the present value of the excess of
projected retirement benefits over the amount expected to be provided by future
contributions based on the current service cost. the application of this method
conceptually requires calculations to be made for each individual employee, however, in
practice, and the application of the method is often simplified by assuming one entry
date for all employees.

(b) the individual level premium method

this method allocates the cost of each employee's retirement benefit over the period from
the date of entry into the program to the date of retirement by using annual level
amounts or a fixed percentage of salary. under this method there is no separate
calculation for past service costs as in other methods, because the whole cost of the
ultimate benefit is spread between the date the employee participates in the program and
the retirement date. under this method, annual current service costs is higher than that
calculated under the entry age normal method because the annual current service costs
includes some component of past service costs.

(c) the aggregate method

this method uses the same basic principles as the individual level premium method but it
is applied to the program as a whole rather than to individual employees. the retirement
benefit cost is allocated over the estimated average working lives of active employees.
the effect of averaging the cost for all employees or groups of employees under this
method is that the relatively high annual current service cost in early years of the
accounting for retirement benefit costs sfas no.24

program is less pronounced than under the individual level premium method.

under this method, past service costs and experience adjustments are not separately
identified but are spread over future periods.

(d) the attained age normal method

this method is similar to the aggregate method and the individual level premium method
except that under this method the past service cost is calculated and identified using the
accrued benefit method. thus, current service costs are determined using the aggregate
method but applied only to service which will be rendered in the future.