Note 16. Employee Benefits

The Company has various labor liabilities for employee benefits in connection with pension, seniority and post-retirement medical benefits . Benefits vary depending upon the country where the individual employees are located. Presented below is a discussion of the Company’s labor liabilities in Mexico, which comprise the substantial majority of those recorded in the consolidated financial statements.

During 2016, Coca-Cola FEMSA settled its pension plan in Colombia and consequently Coca-Cola FEMSA recognized the corresponding effects of the settlement as disclosed below. The settlement of the complementary pension plan was only for certain executive employees.

16.1 Assumptions

The Company annually evaluates the reasonableness of the assumptions used in its labor liability for post-employment and other non-current employee benefits computations.

Actuarial calculations for pension and retirement plans, seniority premiums and post-retirement medical benefits, as well as the associated cost for the period, were determined using the following long-term assumptions for Mexico:


Mexico	December 31, 2017			December 31, 2016			December 31, 2015
Financial:
Discount rate used to calculate the defined benefit obligation		7.60	%		7.60	%		7.00	%
Salary increase		4.50	%		4.50	%		4.50	%
Future pension increases		3.50	%		3.50	%		3.50	%
Healthcare cost increase rate		5.10	%		5.10	%		5.10	%
Biometric:
Mortality ⁽¹⁾		EMSSA 2009			EMSSA 2009			EMSSA 2009
Disability ⁽²⁾		IMSS-97			IMSS-97			IMSS-97
Normal retirement age		60 years			60 years			60 years
Employee turnover table ⁽³⁾		BMAR 2007			BMAR 2007			BMAR 2007

Measurement date December:

(1)	EMSSA. Mexican Experience of social security.

(2)	IMSS. Mexican Experience of Instituto Mexicano del Seguro Social.

(3)	BMAR. Actuary experience.

In Mexico the methodology used to determine the discount rate was the Yield or Internal Rate of Return (“IRR”) which involves a yield curve. In this case, the expected rates of each period were taken from a yield curve of Mexican Federal Government Treasury Bonds (known as CETES in Mexico) because there is no deep market in high quality corporate obligations in Mexican pesos.

In Mexico upon retirement, the Company purchases an annuity for the employee, which will be paid according to the option chosen by the employee.

Based on these assumptions, the amounts of benefits expected to be paid out in the following years are as follows:


	Pension and Retirement Plans		Seniority Premiums		Post Retirement Medical Services		Total
2018	Ps.	611	Ps.	53	Ps.	19	Ps.	683
2019		233		52		20		305
2020		351		50		22		423
2021		263		48		24		335
2022		270		47		25		342
2023 to 2027		2,115		254		158		2,527

16.2 Balances of the liabilities for employee benefits


	December 31, 2017			December 31, 2016
Pension and Retirement Plans:
Defined benefit obligation	Ps.	7,370		Ps.	5,702
Pension plan funds at fair value		(3,131	)		(2,216	)

Net defined benefit liability	Ps.	4,239		Ps.	3,486

Seniority Premiums:
Defined benefit obligation	Ps.	783		Ps.	663
Seniority premium plan funds at fair value		(109	)		(102	)

Net defined benefit liability	Ps.	674		Ps.	561

Postretirement Medical Services:
Defined benefit obligation	Ps.	524		Ps.	460
Medical services funds at fair value		(64	)		(60	)

Net defined benefit liability	Ps.	460		Ps.	400

Total employee benefits	Ps.	5,373		Ps.	4,447

16.3 Trust assets

Trust assets consist of fixed and variable return financial instruments recorded at market value, which are invested as follows:


Type of Instrument	December 31, 2017			December 31, 2016
Fixed return:
Traded securities		18	%		15	%
Bank instruments		5	%		4	%
Federal government instruments of the respective countries		62	%		63	%
Variable return:
Publicly traded shares		15	%		18	%

		100	%		100	%

In Mexico, the regulatory framework for pension plans is established in the Income Tax Law and its Regulations, the Federal Labor Law and the Mexican Social Security Institute Law. None of these laws establish minimum funding levels or a minimum required level of contributions.

In Mexico, the Income Tax Law requires that, in the case of private plans, certain notifications must be submitted to the authorities and a certain level of instruments must be invested in Federal Government securities among others.

The Company’s various pension plans have a technical committee that is responsible for verifying the correct operation of the plan with regard to the payment of benefits, actuarial valuations of the plan, and supervise the trustee. The committee is responsible for determining the investment portfolio and the types of instruments the fund will be invested in. This technical committee is also responsible for reviewing the correct operation of the plans in all of the countries in which the Company has these benefits.

The risks related to the Company’s employee benefit plans are primarily attributable to the plan assets. The Company’s plan assets are invested in a diversified portfolio, which considers the term of the plan so as to invest in assets whose expected return coincides with the estimated future payments.

Since the Mexican Tax Law limits the plan asset investment to 10% for related parties, this risk is not considered to be significant for purposes of the Company’s Mexican subsidiaries.

In Mexico, the Company’s policy is to invest at least 30% of the fund assets in Mexican Federal Government instruments. Guidelines for the target portfolio have been established for the remaining percentage and investment decisions are made to comply with these guidelines insofar as the market conditions and available funds allow.

In Mexico, the amounts and types of securities of the Company in related parties included in portfolio fund are as follows:


	December 31, 2017		December 31, 2016
Debt:
Cementos Mexicanos. S.A.B. de C.V.	Ps.	—	Ps.	7
Grupo Televisa, S.A.B. de C.V.		28		45
Grupo Financiero Banorte, S.A.B. de C.V.		—		7
BBVA Bancomer S.A. de C.V.		10
El Puerto de Liverpool, S.A.B. de C.V.		30		5
Grupo Industrial Bimbo, S.A.B. de C. V.		5		19
Gentera, S.A.B. de C.V.		—		8
Capital:
Grupo Industrial Bimbo, S.A.B. de C.V.		—		6

During the years ended December 31, 2017, 2016 and 2015, the Company did not make significant contributions to the plan assets and does not expect to make material contributions to the plan assets during the following fiscal year. The plan assets include securities of the Company in portfolio fund in amount of Ps. 114, as of December 31, 2016. There are no restrictions placed on the trustee’s ability to sell those securities. As of December 31, 2017, the plan assets did not include securities of the Company in portfolio funds.

16.4 Amounts recognized in the consolidated income statements and the consolidated statement of comprehensive income


	Income Statement								AOCI⁽¹⁾
December 31, 2017	Current Service Cost		Past Service Cost		Gain or Loss on Settlement or Curtailment		Net Interest on the Net Defined Benefit Liability		Remeasurements of the Net Defined Benefit Liability
Pension and retirement plans	Ps.	341	Ps.	10	Ps.	(2)	Ps.	267	Ps.	1,060
Seniority premiums		106		—		(1)		41		46
Postretirement medical services		24		—		—		30		184

Total	Ps.	471	Ps.	10	Ps.	(3)	Ps.	338	Ps.	1,290


December 31, 2016	Current Service Cost		Past Service Cost		Gain or Loss on Settlement or Curtailment		Net Interest on the Net Defined Benefit Liability		Remeasurements of the Net Defined Benefit Liability
Pension and retirement plans	Ps.	245	Ps.	45	Ps.	(61)	Ps.	224	Ps.	1,102
Seniority premiums		93		—		—		34		18
Postretirement medical services		21		—		—		24		151

Total	Ps.	359	Ps.	45	Ps.	(61)	Ps.	282	Ps.	1,270

Pension and retirement plans	Ps.	233	Ps.	3	Ps.	(120)	Ps.	212	Ps.	913
Seniority premiums		88		—		(9)		32		39
Postretirement medical services		16		—		—		23		119
Post-employment Venezuela		6		—		—		9		—

Total	Ps.	343	Ps.	3	Ps.	(129)	Ps.	276	Ps.	1,071

(1)	Amounts accumulated in other comprehensive income as of the end of the period.

For the years ended December 31, 2017, 2016 and 2015, current service cost of Ps. 408, Ps. 359 and Ps. 343 has been included in the consolidated income statement as cost of goods sold, administrative and selling expenses.

Remeasurements of the net defined benefit liability recognized in accumulated other comprehensive income are as follows:


	December 31, 2017			December 31, 2016			December 31, 2015
Amount accumulated in other comprehensive income as of the beginning of the period, net of tax	Ps.	966		Ps.	810		Ps.	942
Actuarial losses arising from exchange rates		(2	)		123			(12	)
Remeasurements during the year, net of tax		295			288			(46	)
Actuarial gains and (losses) arising from changes in financial assumptions		(367	)		(255	)		(74	)

Amount accumulated in other comprehensive income as of the end of the period, net of tax	Ps.	892		Ps.	966		Ps.	810

Remeasurements of the net defined benefit liability include the following:

•

The return on plan assets, excluding amounts included in net interest expense.

•

Actuarial gains and losses arising from changes in demographic assumptions.

•

Actuarial gains and losses arising from changes in financial assumptions.

16.5 Changes in the balance of the defined benefit obligation for post-employment


	December 31, 2017			December 31, 2016			December 31, 2015
Pension and Retirement Plans:
Initial balance	Ps.	5,702		Ps.	5,308		Ps.	5,270
Current service cost		341			245			233
Past service cost		10			45			3
Interest expense		491			369			353
Effect on curtailment		(2	)		(61	)		(120	)
Remeasurements of the net defined benefit obligation		263			(67	)		(154	)
Foreign exchange loss (gain)		(79	)		150			39
Benefits paid		(550	)		(287	)		(316	)
Acquisitions		1,194			—			—

Ending balance	Ps.	7,370		Ps.	5,702		Ps.	5,308

Seniority Premiums:
Initial balance	Ps.	663		Ps.	610		Ps.	563
Current service cost		106			93			88
Interest expense		49			41			38
Settlement		(1	)		—			—
Effect on curtailment		—			—			(9	)
Remeasurements of the net defined benefit obligation		28			(43	)		(34	)
Benefits paid		(68	)		(55	)		(45	)
Acquisitions		6			17			9

Ending balance	Ps.	783		Ps.	663		Ps.	610

Postretirement Medical Services:
Initial balance	Ps.	460		Ps.	404		Ps.	338
Current service cost		24			22			16
Interest expense		34			27			26
Remeasurements of the net defined benefit obligation		32			30			44
Benefits paid		(26	)		(23	)		(20	)

Ending balance	Ps.	524		Ps.	460		Ps.	404

Post-employment:
Initial balance				Ps.	135		Ps.	194
Current service cost					—			5
Certain liability cost					—			73
Reclassification to certain liability cost					(135	)		—
Foreign exchange (gain)					—			(137	)

Ending balance				Ps.	—		Ps.	135

16.6 Changes in the balance of plan assets


	December 31, 2017			December 31, 2016			December 31, 2015
Total Plan Assets:
Initial balance	Ps.	2,378		Ps.	2,228		Ps.	2,158
Actual return on trust assets		213			40			65
Foreign exchange loss (gain)		86			4			7
Life annuities		65			107			61
Benefits paid		(136	)		(1	)		(63	)
Acquisitions		698			—			—

Ending balance	Ps.	3,304		Ps.	2,378		Ps.	2,228

As a result of the Company’s investments in life annuities plan, management does not expect it will need to make material contributions to plan assets in order to meet its future obligations.

16.7 Variation in assumptions

The Company decided that the relevant actuarial assumptions that are subject to sensitivity and valuated through the projected unit credit method, are the discount rate, the salary increase rate and healthcare cost increase rate. The reasons for choosing these assumptions are as follows:

•

Discount rate: The rate that determines the value of the obligations over time.

•

Salary increase rate: The rate that considers the salary increase which implies an increase in the benefit payable.

•

Healthcare cost increase rate: The rate that considers the trends of health care costs which implies an impact on the postretirement medical service obligations and the cost for the year.

The following table presents the amount of defined benefit plan expense and OCI impact in absolute terms of a variation of 0.5% in the assumptions on the net defined benefit liability associated with the Company’s defined benefit plans. The sensitivity of this 0.5% on the significant actuarial assumptions is based on a projected long-term discount rates for Mexico and a yield curve projections of long-term sovereign bonds:


+0.5%:		Income Statement		OCI (1)


Discount rate used to calculate the defined benefit obligation and the net interest on the net defined benefit liability	Current Service Cost		Past Service Cost		Gain or Loss on Settlement or Curtailment		Effect of Net Interest on the Net Defined Benefit Liability (Asset)		Remeasurements of the Net Defined Benefit Liability (Asset)
Pension and retirement plans	Ps.	322	Ps.	9	Ps.	(2)	Ps.	264	Ps.	1,289
Seniority premiums		102		—		(1)		41		44
Postretirement medical services		23		—		—		33		178
Post-employment		—		—		—		—		—

Total	Ps.	447	Ps.	9	Ps.	(3)	Ps.	338	Ps.	1,511


Expected salary increase	Current Service Cost		Past Service Cost		Gain or Loss on Settlement or Curtailment		Effect of Net Interest on the Net Defined Benefit Liability (Asset)		Remeasurements of the Net Defined Benefit Liability (Asset)
Pension and retirement plans	Ps.	355	Ps.	10	Ps.	(2)	Ps.	286	Ps.	1,496
Seniority premiums		112		—		(1)		43		42
Postretirement medical services		—		—		—		—		—
Post-employment		—		—		—		—		—

Total	Ps.	467	Ps.	10	Ps.	(3)	Ps.	329	Ps.	1,538


Assumed rate of increase in healthcare costs	Current Service Cost		Past Service Cost		Gain or Loss on Settlement or Curtailment		Effect of Net Interest on the Net Defined Benefit Liability (Asset)		Remeasurements of the Net Defined Benefit Liability (Asset)
Postretirement medical services	Ps.	26	Ps.	—	Ps.	—	Ps.	33	Ps.	265


-0.5%: Discount rate used to calculate the defined benefit obligation and the net interest on the net defined benefit liability	Current Service Cost		Past Service Cost		Gain or Loss on Settlement or Curtailment		Effect of Net Interest on the Net Defined Benefit Liability (Asset)		Remeasurements of the Net Defined Benefit Liability (Asset)
Pension and retirement plans	Ps.	355	Ps.	10	Ps.	(2)	Ps.	268	Ps.	1,506
Seniority premiums		111		—		(1)		40		46
Postretirement medical services		26		—		—		31		267
Post-employment		—		—		—		—		—

Total	Ps.	492	Ps.	10	Ps.	(3)	Ps.	339	Ps.	1,819

Expected salary increase
Pension and retirement plans	Ps.	323	Ps.	9	Ps.	(2)	Ps.	253	Ps.	1,291
Seniority premiums		100		—		(1)		38		56
Postretirement medical services		—		—		—		—		—
Post-employment		—		—		—		—		—

Total	Ps.	423	Ps.	9	Ps.	(3)	Ps.	291	Ps.	1,347

Assumed rate of increase in healthcare costs

Postretirement medical services	Ps.	23	Ps.	—	Ps.	—	Ps.	28	Ps.	179

(1)	Amounts accumulated in other comprehensive income as of the end of the period.

16.8 Employee benefits expense

For the years ended December 31, 2017, 2016 and 2015, employee benefits expenses recognized in the consolidated income statements as cost of goods sold, administrative and selling expenses are as follows:


	2017		2016		2015
Wages and salaries	Ps.	53,056	Ps.	39,459	Ps.	39,459
Social security costs		9,860		6,114		6,114
Employee profit sharing		1,209		1,506		1,243
Post employment benefits		815		625		493
Share-based payments		351		468		463
Termination benefits		455		503		503

	Ps.	65,746	Ps.	48,675	Ps.	48,275