The COVID-19 outbreak has developed rapidly in 2020 - measures taken to contain the virus have affected the global economic activity which in turn has implications for financial reporting. As per Mercer’s recently published GCC COVID – 19 Compensation & Benefits survey, 70% of the participating organizations (169 organizations) have taken cost containment actions.

 

As always, our mission is to keep you informed about macroeconomic changes that may impact your financial results under IFRS/US GAAP.

 

Our communication with you today focuses on three main elements that determine the actuarial liability booked in your financial statements and highlights some key findings from the survey mentioned above:


1. Salary freeze/reduction:

Some companies are contemplating or have already decided to freeze salary for a few years, while others have reduced salaries of their employee. The survey indicates 27% of organizations of the organizations have indicated that they have already made reductions to the base salary.


2. Head count decrease:

Some companies have either decided or are thinking about reducing their head count. The survey indicates 36% of the organizations have either taken or considering the following headcount actions: permanent terminations, hiring freezes and placing employees on furlough. Further in the light of the headcount reduction by some organization, we would also like to highlight that reduction of headcount may lead to cash flow strain, particularly in paying out the end of service (EOS) benefit payments. To mitigate this strain in the future, the survey results indicates that 40% of the organization would support a DIFC like initiative in replacing the end of service benefit with a defined contribution scheme.


3. Discount rate:

Spot rates as at 30 June 2020 have reduced by around 50bps since 31 March 2020.



If your company is considering implementing either a salary freeze/reduction or a decrease in head count, please let us know and we can help measure the impact on your financial statements.

 

What does this mean for your company’s financial disclosures?

 

Salary freeze/reduction or head count decrease

A number of companies in the region that have undergone restructuring and as a result reduced their headcount thus triggering an element of special accounting and re-measurement under IAS 19R. If your company or any of your branches/entities have experienced – or will undergo - a reduction in total headcount or a drastic decrease in payroll, we suggest contacting us to discuss further the need to reflect this event in your mid-year financial statements as there may be an impact on your P&L for the year.

 

As a rough measure of the impact of 1% decrease in the salary rate assumption used to determine the end of service liability, please refer to the table below.

 


Discount rate

You may recall that according to IAS 19R, the rate used to discount your company’s future benefit obligations is determined by reference to market yields at the balance sheet date. This yield is calculated based on high quality corporate bonds. In countries where there is no “deep market in such bonds”, market yields on government bonds should be used instead.

 

Mercer has been monitoring the corporate and government bond market in the GCC region and still believes that there is not a deep enough corporate bond market within the GCC region and the limited number of government bonds available do not provide an adequate reference. Therefore, Mercer feels the most sensible approach would be to continue relying on the US AA-rated corporate bond market as a proxy for determining discount rates for actuarial valuations in the GCC under IAS 19R.

 

 

Update on the US Yield Curve over last three months ending 30 June 2020

Spot rates as at 30 June 2020 have reduced by around 50bps since 31 March 2020. We suggest having this impact assessed, which will help you gauge the approximate amount to be booked at the half year mark – thus avoiding any surprises at the year end.

 

 

 

*duration represents how sensitive the defined benefit obligation (DBO) is to changes in the discount rate (i.e. duration of 5 means that 1% drop in discount rate will lead to 5% increase in DBO) – the duration can be found in the sensitivity analysis section of the disclosures provided by Mercer.