Common practice
Linear proration
Allocates the benefit in proportion to length of service. Assumes aligned rates and salary growth, and an individual fund consistent with years of service.
IAS 19 · TFR
TFR on the balance sheet calls for an actuarial valuation
Valuation of Italian employee severance pay (TFR) under IAS 19 for IAS/IFRS financial statements and group reporting
For companies applying international accounting standards, TFR is a post-employment benefit: the liability is measured by projecting what each employee will receive on leaving and discounting it to the reporting date. We work alongside finance departments and auditors with a documented actuarial model, reasoned assumptions and results ready for the notes to the accounts.
— 01 / Context
When TFR becomes a defined benefit plan
TFR, the severance pay governed by Article 2120 of the Italian Civil Code, read in the light of IAS 19 'Employee Benefits' as endorsed by Regulation (EC) No 1725/2003, is not recognised at its nominal accrued amount. The standard requires the cost to be recognised in the period in which the service is rendered and the obligation to be measured with reference to when it will be paid.
The Italian supplementary pension reform (Legislative Decree 252/2005 and Law 296/2006) separates two situations. In companies with 50 or more employees, amounts accruing from 2007 are paid into pension funds or the INPS Treasury Fund and form a defined contribution plan: the valuation covers the fund accumulated up to 31 December 2006. In smaller companies, TFR retained by the employer remains a defined benefit plan and the valuation also projects future salary growth.
In both cases the valuation applies the Projected Unit Credit Method (PUCM). The result is broken down into the items the standard requires: service cost, interest and remeasurements, the latter recognised in other comprehensive income (OCI).
Entities applying IAS 19 include
Listed companies and issuers
Companies with securities traded on regulated markets and companies with financial instruments widely distributed among the public.
Banks and supervised intermediaries
Credit institutions and supervised financial intermediaries, and insurance undertakings in the cases set out in Legislative Decree 38/2005.
Groups reporting under IFRS
Companies preparing consolidated financial statements under international standards, and subsidiaries within the scope of consolidation, listed or not.
Voluntary adoption
Companies that elect to apply international accounting standards where the law permits.
— 02 / Methodology
Financial proration, beyond the linear calculation
Common practice attributes benefits to years of service through Linear proration, which allocates the expected benefit in proportion to length of service. The method gives reliable results only when the fund's revaluation rate matches salary growth and when each employee's accumulated fund is consistent with their length of service. Advances already paid and enrolment in supplementary pension schemes break that consistency.
We developed Financial proration, a methodology that generalises Linear proration and treats advances on the fund and full or partial enrolment in pension funds analytically. When the assumptions behind Linear proration hold, the two methods coincide; when they do not, Financial proration produces an estimate consistent with each employee's actual history.
Eurokleis methodology
Financial proration
Reconstructs how the fund has actually accrued, including advances paid and amounts directed to supplementary pensions. Treats Linear proration as a special case.
— 03 / Process
From the data set to the notes to the accounts
Data collection and checks
We collect staff records, individual fund balances, advances paid and each employee's TFR allocation choices. We check the data for consistency and completeness before any calculation.
Setting the technical bases
We agree with the finance department the demographic assumptions (mortality, disability, turnover, frequency of advances) and the economic and financial ones (inflation, salary growth, discount rate based on high-quality corporate bonds).
Calculation and reconciliation
We measure the obligation using PUCM and Financial proration. We reconcile it with the previous year, separating service cost, interest, benefits paid and actuarial gains or losses by source.
Report and disclosure
We deliver a technical report setting out the assumptions adopted, the sensitivity analysis, the duration of the obligation and the tables for the notes. We remain available to the auditor for any clarification.
— Related valuations
— A valuation for your next reporting date
Let's talk before your year-end close
Tell us the scope of the valuation: headcount, how TFR is allocated, reporting and audit deadlines. We will set out the data we need and the delivery timetable.
Let's talk