Actuarial Severance Pay Liability Calculations

Severance pay liability is one month’s gross salary for each year served. Severance pay is certain under certain conditions. Hence, the probability of the payment requires a detailed calculation. We calculate severance pay liability according to International Accounting Standard No.19 and Turkish Accounting Standard No.19, using actuarial methods.

The severance pay liability acquires an actuarial approach with the financial and demographic assumptions are modeled correctly by an actuary.

• The financial assumptions are defined compatible with conditions of the market and to be in accordance with International Accounting Standards,
• The demographic assumptions are defined coherent with data of the company and to be in accordance with client sector trends,
• "Projected Unit Credit" method is used in the actuarial valuations,
• Amount of actuarial (gain)/loss are explained thoroughly and clearly,
• The significant events about demographic structure can be reflected at the Disclosures,
• The next year’s projections, which can be service cost figure, interest cost figure or net periodic pension cost figure, can be made with actuarial valuation,
• The actuarial valuation is necessary for all defined benefit plans not only severance pay liability,
• The actuarial valuation report provides confidence of an Actuary Signature

The discount rate is a crucial parameter in the actuarial valuation of employee benefits. In Turkey, where the severance pay liability covers a large part in the long term benefits, the discount rate is determined by the initiative of companies since the end of 2010. Principles of actuarial valuation require that maturity date of plan coincides with the maturity date of financial instruments. On the other hand, in a long term projection such as the severance pay liability, short term fluctuations adversely affect the health of actuarial valuations.

Our approach in determining the long term discount rate and explanations for this important issue follows;

• Long term discount rate is determined by the weighted average rates of T-bonds with 10 or more years to maturity. The bonds in focus are included and excluded by a 2-year window method since the beginning of 2011. Assuming the T-bond is bought at the auction date and held until the end of the window or the redemption date, average discount rates are recorded throughout time.
• Next to past data, future expectations should also be taken into account for the long term determination of interest rates. While determining financial assumptions for the future, long term (15 – 20 years) effects of high regional risks should not be ignored for Turkey.

Dated 16 June 2011changes to the content of the International Accounting Standard 19 (IAS 19) took effect as of January 1st, 2013.

The changes affect the severance pay liability accounting, that is the most common actuarial valuation in the Turkey.

• All actuarial (gain) / loss figures and the all past service cost figures, which occur in the financial year, will be completely recognized in the appropriate accounting item at current year. The amortization method will not be applicable in coming financial years for the two figures.
• According to the new regulations, the employee benefits will be classified as short term or long term. The condition of the recognition of actuarial valuation results is searched in the long term employee benefits. In this connection, the long term accumulating leave of absences should be subject to actuarial valuation in Turkey.

Adendum pursues all changes for its clients. If severance pay liability figure of your company is valuated by Adendum, appropriate information will be shared with you.

If you want to be informed about the changes, you can follow the link IFRS.

The bylaw concerning the details of IFRS applications have been published on the Turkish Official Gazette dated 13.06.2013. The bylaw defines which companies must obey International Financial Reporting Standards in their financial tables and defines exceptional cases.