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Post-Employment and Other Non-current Employee Benefits | 12 Months Ended
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Dec. 31, 2018
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Post-Employment and Other Non-current Employee Benefits | Note 16. Post-Employment and Other Non-current Employee Benefits The Company has various labor liabilities for employee benefits in connection with pension and retirement plans, seniority premiums and post-employment 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. 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. In Mexico, actuarial calculations for pension and retirement plans and seniority premiums, as well as the associated cost for the period, were determined using the following long-term assumptions:
Mexico |  | 2018 |  |  | 2017 |  |  | 2016 |
Financial: |  |  |  |  |  |  |  |  |  |  |  |
Discount rate used to calculate the defined benefit obligation |  |  | 9.4 | % |  |  | 7.60 | % |  |  | 7.00 | %
Salary increase |  |  | 4.6 | % |  |  | 4.60 | % |  |  | 4.50 | %
Future pension increases |  |  | 3.6 | % |  |  | 3.50 | % |  |  | 3.50 | %
Biometric: |  |  |  |  |  |  |  |  |  |  |  |
Mortality |  |  | EMSSA 2009 | (1) |  |  | EMSSA 2009 | (1) |  |  | EMSSA 2009 | (1)
Disability |  |  | IMSS-97 | (2) |  |  | IMSS-97 | (2) |  |  | IMSS-97 | (2)
Normal retirement age |  |  | 60 years |  |  |  | 60 years |  |  |  | 60 years |
Rest of employee turnover |  |  | BMAR2007 | (3) |  |  | BMAR2007 | (3) |  |  | BMAR2007 | (3)
(1) | EMSSA. Mexican Experience of Social Security (for its initials in Spanish)
(2) | IMSS. Mexican Experience of Instituto Mexicano del Seguro Social (for its initials in Spanish)
(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 the Mexican Federal Government Treasury Bond (known as CETES in Mexico) because there is no deep market in high quality corporate obligations in Mexico. In Mexico upon retirement, the Company purchases an annuity for senior executives, 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 |
2019 |  |  | 314 |  |  |  | 39 |
2020 |  |  | 230 |  |  |  | 30 |
2021 |  |  | 203 |  |  |  | 28 |
2022 |  |  | 182 |  |  |  | 27 |
2023 |  |  | 260 |  |  |  | 26 |
2024 to 2028 |  |  | 1,562 |  |  |  | 139 |
16.2 Balances of the liabilities for post-employment and other non-current employee benefits
|  | 2018 |  |  | 2017 |
Pension and Retirement Plans: |  |  |  |  |  |  |  |
Vested benefit obligation |  | Ps. | 480 |  |  | Ps. | 389 |
Non-vested benefit obligation |  |  | 1,210 |  |  |  | 1,398 |
Accumulated benefit obligation |  |  | 1,690 |  |  |  | 1,787 |
Excess of projected defined benefit obligation over accumulated benefit obligation |  |  | 1,695 |  |  |  | 2,582 |
Defined benefit obligation |  |  | 3,385 |  |  |  | 4,369 |
Pension plan funds at fair value |  |  | (1,031 | ) |  |  | (1,692 | )
Net defined benefit liability |  | Ps. | 2,354 |  |  | Ps. | 2,677 |
Seniority Premiums: |  |  |  |  |  |  |  |
Vested benefit obligation |  | Ps. | 40 |  |  | Ps. | 36 |
Non-vested benefit obligation |  |  | 204 |  |  |  | 267 |
Accumulated benefit obligation |  |  | 244 |  |  |  | 303 |
Excess of projected defined benefit obligation over accumulated benefit obligation |  |  | 165 |  |  |  | 158 |
Defined benefit obligation |  |  | 409 |  |  |  | 461 |
Seniority premium plan funds at fair value |  |  | (111 | ) |  |  | (109 | )
Net defined benefit liability |  | Ps. | 298 |  |  | Ps. | 352 |
Total post-employment and other non-current employee benefits |  | Ps. | 2,652 |  |  | Ps. | 3,029 |
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 |  | 2018 |  |  | 2017 |
Fixed return: |  |  |  |  |  |  |  |
Traded securities |  |  | 25 | % |  |  | 14 | %
Life annuities |  |  | 20 | % |  |  | 12 | %
Bank instruments |  |  | 4 | % |  |  | 6 | %
Federal government instruments |  |  | 32 | % |  |  | 50 | %
Variable return: |  |  |  |  |  |  |  |
Publicly traded shares |  |  | 19 | % |  |  | 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 the Federal Government, 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 the monitoring and supervision of the trust beneficiary. 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 plan 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:
|  | 2018 |  |  | 2017 |
Mexico |  |  |  |  |  |  |  |
Portfolio: |  |  |  |  |  |  |  |
Debt: |  |  |  |  |  |  |  |
Grupo Televisa, S.A.B. de C.V. |  | Ps. | 17 |  |  | Ps. | 17 |
Grupo Industrial Bimbo, S.A.B. de C. V. |  |  | 23 |  |  |  | 24 |
Grupo Financiero Banorte, S.A.B. de C.V. |  |  | 8 |  |  |  | 7 |
Banco Compartamos Banco. |  |  | 4 |  |  |  | — |
Gentera, S.A.B. de C.V. |  |  | — |  |  |  | 8 |
Capital: |  |  |  |  |  |  |  |
Walmart de Mexico S.A de C.V. |  |  | 6 |  |  |  | — |
Fomento Económico Mexicano, S.A.B de C.V. |  |  | 5 |  |  |  | 8 |
El Puerto de Liverpool, S.A.B. de C.V. |  |  | 3 |  |  |  | 5 |
Grupo aeropuerto del sureste |  |  | 2 |  |  |  | — |
Grupo Televisa, S.A.B. de C.V. |  |  | 1 |  |  |  | — |
Gruma, S.A.B. de C.V. |  |  | — |  |  |  | 3 |
Gentera, S.A.B. de C.V. |  |  | — |  |  |  | 4 |
During the years ended December 31, 2018, 2017 and 2016, 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. 16.4 Amounts recognized in the consolidated income statements and the consolidated statements of comprehensive income
|  | Income statement |  |  | Accumulated OCI |
2018 |  | 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 net of taxes |
Pension and retirement plans |  | Ps. | 195 |  |  | Ps. | — |  |  | Ps. | (5 | ) |  | Ps. | 265 |  |  | Ps. | 370 |
Seniority premiums |  |  | 42 |  |  |  | — |  |  |  | — |  |  |  | 34 |  |  |  | (26 | )
Total |  | Ps. | 237 |  |  | Ps. | — |  |  | Ps. | (5 | ) |  | Ps. | 299 |  |  | Ps. | 344 |
|  | Income statement |  |  | Accumulated OCI |
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 net of taxes |
Pension and retirement plans |  | Ps. | 145 |  |  | Ps. | 10 |  |  | Ps. | — |  |  | Ps. | 140 |  |  | Ps. | 539 |
Seniority premiums |  |  | 44 |  |  |  | — |  |  |  | — |  |  |  | 23 |  |  |  | 28 |
Total |  | Ps. | 189 |  |  | Ps. | 10 |  |  | Ps. | — |  |  | Ps. | 163 |  |  | Ps. | 567 |
|  | Income statement |  |  | Accumulated OCI |
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 net of taxes |
Pension and retirement plans |  | Ps. | 145 |  |  | Ps. | 43 |  |  | Ps. | (61 | ) |  | Ps. | 134 |  |  | Ps. | 558 |
Seniority premiums |  |  | 45 |  |  |  | — |  |  |  | — |  |  |  | 20 |  |  |  | 27 |
Total |  | Ps. | 190 |  |  | Ps. | 43 |  |  | Ps. | (61 | ) |  | Ps. | 154 |  |  | Ps. | 585 |
Remeasurements of the net defined benefit liability recognized in other comprehensive income are as follows (amounts are net of tax):
|  | 2018 |  |  | 2017 |  |  | 2016 |
Amount accumulated in other comprehensive income as of the beginning of the periods |  | Ps. | 567 |  |  | Ps. | 585 |  |  | Ps. | 462 |
Recognized during the year (obligation liability and plan assets) |  |  | 100 |  |  |  | (169 | ) |  |  | 75 |
Actuarial gains and losses arising from changes in financial assumptions |  |  | (357 | ) |  |  | 165 |  |  |  | (29 | )
Acquisitions |  |  | (83 | ) |  |  | — |  |  |  | — |
Foreign exchange rate valuation (gain) |  |  | (66 | ) |  |  | (14 | ) |  |  | 77 |
Philippines disposal |  |  | 183 |  |  |  | — |  |  |  | — |
Amount accumulated in other comprehensive income as of the end of the period, net of tax |  | Ps. | 344 |  |  | Ps. | 567 |  |  | Ps. | 585 |
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 and other non-current employee benefits
|  | 2018 |  |  | 2017 |  |  | 2016 |
Pension and Retirement Plans: |  |  |  |  |  |  |  |  |  |  |  |
Initial balance |  | Ps. | 4,369 |  |  | Ps. | 2,915 |  |  | Ps. | 2,687 |
Current service cost |  |  | 195 |  |  |  | 241 |  |  |  | 145 |
Effect on curtailment |  |  | (5 | ) |  |  | — |  |  |  | (61 | )
Interest expense |  |  | 265 |  |  |  | 258 |  |  |  | 194 |
Actuarial gains or losses |  |  | (391 | ) |  |  | 190 |  |  |  | (7 | )
Foreign exchange loss |  |  | (86 | ) |  |  | (69 | ) |  |  | 141 |
Benefits paid |  |  | (265 | ) |  |  | (385 | ) |  |  | (192 | )
Acquisitions |  |  | 417 |  |  |  | 1,209 |  |  |  | — |
Philippines disposal |  |  | (1,111 | ) |  |  | — |  |  |  | — |
Past service cost |  |  | — |  |  |  | 10 |  |  |  | 8 |
|  | Ps. | 3,388 |  |  | Ps. | 4,369 |  |  | Ps. | 2,915 |
Seniority Premiums: |  |  |  |  |  |  |  |  |  |  |  |
Initial balance |  | Ps. | 461 |  |  | Ps. | 416 |  |  | Ps. | 404 |
Current service cost |  |  | 42 |  |  |  | 44 |  |  |  | 45 |
Effect on curtailment |  |  | — |  |  |  | — |  |  |  | — |
Interest expense |  |  | 34 |  |  |  | 29 |  |  |  | 27 |
Actuarial gains or losses |  |  | (84 | ) |  |  | 12 |  |  |  | (22 | )
Benefits paid |  |  | (42 | ) |  |  | (40 | ) |  |  | (38 | )
|  | Ps. | 411 |  |  | Ps. | 461 |  |  | Ps. | 416 |
Post-employment: |  |  |  |  |  |  |  |  |  |  |  |
Initial balance |  | Ps. | — |  |  | Ps. | — |  |  | Ps. | 135 |
Current service cost |  |  | — |  |  |  | — |  |  |  | — |
Certain liability cost |  |  | — |  |  |  | — |  |  |  | — |
Interest expense |  |  | — |  |  |  | — |  |  |  | — |
Reclassification to certain liability cost |  |  | — |  |  |  | — |  |  |  | (135 | )
Actuarial gains or losses |  |  | — |  |  |  | — |  |  |  | — |
Foreign exchange gain |  |  | — |  |  |  | — |  |  |  | — |
Benefits paid |  |  | — |  |  |  | — |  |  |  | — |
Liabilities directly associated with assets held for sale |  |  | — |  |  |  | — |  |  |  | — |
|  | Ps. | — |  |  | Ps. | — |  |  | Ps. | — |
16.6 Changes in the balance of trust assets
|  | 2018 |  |  | 2017 |  |  | 2016 |
Pension and retirement plans: |  |  |  |  |  |  |  |  |  |  |  |
Balance at beginning of year |  | Ps. | 1,692 |  |  | Ps. | 910 |  |  | Ps. | 864 |
Actual return on trust assets |  |  | 30 |  |  |  | 113 |  |  |  | 15 |
Foreign exchange gain |  |  | (2 | ) |  |  | 86 |  |  |  | 4 |
Life annuities |  |  | 16 |  |  |  | 21 |  |  |  | 28 |
Benefits paid |  |  | (1 | ) |  |  | (136 | ) |  |  | (1 | )
Acquisitions |  |  | — |  |  |  | 698 |  |  |  | — |
Philippines diposal |  |  | (704 | ) |  |  | — |  |  |  | — |
Balance at end of year |  | Ps. | 1,031 |  |  | Ps. | 1,692 |  |  | Ps. | 910 |
Seniority premiums |  |  |  |  |  |  |  |  |  |  |  |
Balance at beginning of year |  | Ps. | 109 |  |  | Ps. | 102 |  |  | Ps. | 101 |
Actual return on trust assets |  |  | 2 |  |  |  | 7 |  |  |  | 1 |
Balance at end of year |  | Ps. | 111 |  |  | Ps. | 109 |  |  | Ps. | 102 |
As a result of the Company’s investments in life annuities plan, management does not expect the Company will need to make material contributions to the trust 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 and the salary 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.
The following table presents the 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 sensibility of this 0.5% on the significant actuarial assumptions is based on projected long-term discount rates to Mexico and a yield curve projections of long-term sovereign bonds:
+0.5%: |  |  |  |  |  |  |  | Income Statement |  |  | Accumulated OCI |
Discount rate used to calculate the defined benefit obligation and the net interest on the net defined benefit liability (asset) |  | 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. | 167 |  |  | Ps. | — |  |  | Ps. | (5 | ) |  | Ps. | 181 |  |  | Ps. | 130 |
Seniority premiums |  |  | 41 |  |  |  | — |  |  |  | — |  |  |  | 28 |  |  |  | (39 | )
Total |  | Ps. | 208 |  |  | Ps. | — |  |  | Ps. | (5 | ) |  | Ps. | 209 |  |  | Ps. | 91 |
Expected salary increase |  | 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. | 183 |  |  | Ps. | — |  |  | Ps. | (5 | ) |  | Ps. | 186 |  |  | Ps. | 266 |
Seniority premiums |  |  | 44 |  |  |  | — |  |  |  | — |  |  |  | 28 |  |  |  | (37 | )
Total |  | Ps. | 227 |  |  | Ps. | — |  |  | Ps. | (5 | ) |  | Ps. | 214 |  |  | Ps. | 229 |
16.8 Employee benefits expense For the years ended December 31, 2018, 2017 and 2016, employee benefits expenses recognized in the consolidated income statements are as follows:
|  | 2018 |  |  | 2017 |  |  | 2016 |
Included in cost of goods sold: |  |  |  |  |  |  |  |  |  |  |  |
Wages and salaries |  | Ps. | 4,295 |  |  | Ps. | 4,323 |  |  | Ps. | 4,827 |
Social security costs |  |  | 1,320 |  |  |  | 1,449 |  |  |  | 1,234 |
Employee profit sharing |  |  | 74 |  |  |  | 75 |  |  |  | 142 |
Pension and seniority premium costs (Note 16.4) |  |  | 26 |  |  |  | 22 |  |  |  | 57 |
Share-based payment expense (Note 17.2) |  |  | 3 |  |  |  | 6 |  |  |  | 11 |
Included in selling and distribution expenses: |  |  |  |  |  |  |  |  |  |  |  |
Wages and salaries |  |  | 16,590 |  |  |  | 12,001 |  |  |  | 13,526 |
Social security costs |  |  | 4,651 |  |  |  | 4,417 |  |  |  | 4,571 |
Employee profit sharing |  |  | 496 |  |  |  | 484 |  |  |  | 485 |
Pension and seniority premium costs (Note 16.4) |  |  | 158 |  |  |  | 125 |  |  |  | 65 |
Share-based payment expense (Note 17.2) |  |  | 11 |  |  |  | 7 |  |  |  | 18 |
Included in administrative expenses: |  |  |  |  |  |  |  |  |  |  |  |
Wages and salaries |  |  | 2,771 |  |  |  | 2,453 |  |  |  | 2,839 |
Social security costs |  |  | 557 |  |  |  | 585 |  |  |  | 472 |
Employee profit sharing |  |  | 31 |  |  |  | 31 |  |  |  | 56 |
Pension and seniority premium costs (Note 16.4) |  |  | 46 |  |  |  | 42 |  |  |  | 66 |
Post-employment benefits other (Note 16.4) |  |  | 2 |  |  |  | 10 |  |  |  | 5 |
Share-based payment expense (Note 17.2) |  |  | 143 |  |  |  | 161 |  |  |  | 177 |
Total employee benefits expense |  | Ps. | 31,174 |  |  | Ps. | 26,193 |  |  | Ps. | 28,551 |

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