The following are extracts from the financial statements of Heidelberger Druckmaschinen AG showing the accounting policy and detailed notes regarding the provision of pensions according to IAS 19. As can be seen the disclosures are quite complex but they attempt to give a sensible balance sheet and income statements position.

Accounting policy disclosure Provisions for pensions and similar obligations comprise both the provision obligations of the Group under defined benefit plans and defined contribution plans. Pension obligations are determined according to the projected unit credit method (IAS 19) for defined benefit plans.
Actuarial expert opinions are obtained annually in this connection. Calculations are based on an assumed trend of 3.5% (previous year: 2.5%) for the growth in pensions, and a discount rate of 6.0% (previous year: 6.0%).The probability of death is determined according to Heubec’s current mortality tables as well as comparable foreign mortality tables.
In the case of defined contribution plans (for example, direct insurance policies), compulsory contributions are offset directly as an expense. No provisions for pension obligations are formed, as in these cases our Company does not have any liability over and above its liability to make premium payments.
Provisions for pensions and similar obligations (Note 15 in the financial statements)

We maintain benefit programs for the majority of employees for the period following their retirement – either a direct program or one financed by payments of premiums to private institutions.The level of benefits payments depends on the conditions in particular countries.The amounts are generally based on the term of employment and the salary of the employees.The liabilities include both those arising from current pensions as well as vested pension rights for pensions payable in the future.The pension payments expected following the beginning of benefit payment are accrued over the entire service time of the employee.

Required:

(a) Explain the projected unit credit method for determining pension obligations for defined benefit plans.

(b) Why does the company need to use a discount rate?

(c) Explain the reference to the 10% corridor.

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The provisions for pensions and similar obligations are broken down as follows: 31 Mar 98 31 Mar 99 Net present value of the pension claims 408,208 445,054 Adjustment amount based on (not offset) actuarial profits/losses Provisions for pensions and similar obligations -12,843 -18,225 395,365 426,829 The amount of 18,225 thousand (previous year: 12,843 thousand), which is not yet adjusted arises largely from profits/losses in connection with deviations of the actual income trends from the assumptions that were the basis of the calculation. As soon as it exceeds 10% of total liabilities, this amount is carried as an expense over the average remaining period of service of the staff (IAS 19). The expense for the pension plan is broken down as follows: Expense for pension claims added during the financial year* Interest expense for claims already acquired Net additions to pension provision Expenses for other pension plans* 31 Mar 98 31 Mar 99 16,902 17,084 21,583 22,855 38,485 39,939 14,848 19,407 53,333 59,346 *The expense for the pension plan included under personnel expenses totals 36,491 thousand (previous year: 31,750 thousand). We include interest expenses for already acquired pension claims under interest and similar expenses.