IAS 19 – Class notes

SCOPE

This standard shall be applied in accounting for all employee benefits, except those to which IFRS 2
applies.

EMPLOYEE BENEFITS

Employee benefits are all forms of consideration given by an entity in exchange for service rendered by
employees or for the termination of employment. Employee benefits include:

(a) Short‑term employee benefits

Employee benefits (other than termination benefits) that are expected to be settled wholly before
twelve months after the end of the annual reporting period in which the employees render the related
service.
Examples:
(i) wages, salaries and social security contributions;
(ii) paid annual leave and paid sick leave;
(iii) profit‑sharing and bonuses; and
(iv) non‑monetary benefits (such as medical care, housing, cars and free or subsidised goods or
services) for current employees;

(b) Post‑employment benefits

Employee benefits (other than termination benefits and short‑term employee benefits) that are
payable after the completion of employment.
Examples:
(i) retirement benefits (e.g. pensions and lump sum payments on retirement); and
(ii) other post‑employment benefits, such as post‑employment life insurance and post‑employment
medical care;

(c) Other long‑term employee benefits

All employee benefits other than short‑term employee benefits, post‑employment benefits and
termination benefits.
Examples:
(i) long‑term paid absences such as long‑service leave or sabbatical leave;
(ii) jubilee or other long‑service benefits; and
(iii) long‑term disability benefits;

(d) Termination benefits

Employee benefits provided in exchange for the termination of an employee’s employment as a result
of either:
(i) an entity’s decision to terminate an employee’s employment before the normal retirement date;
or
(ii) an employee’s decision to accept an offer of benefits in exchange for the termination of
employment.

Nasir Abbas FCA Page 1 | 14

 IAS 19 – Class notes

SHORT TERM BENEFITS – Recognition and measurement

All short-term employee benefits

When an employee has rendered service to entity during an accounting year, the entity shall recognize
the undiscounted amount of short-term benefit expected to be paid for that service as an expense, unless
any other IFRS requires the inclusion in the cost of an assets (e.g. IAS 2 and IAS 16)

Prepayment or accrual
If payment is different from the amount of benefits, an entity shall recognize the difference as an
accrued expense (if amount of benefits exceeds payment) or prepayment (if payment exceeds the
amount of benefits).

Short-term paid absences

An entity may pay employees for absence for various reasons including holidays, sickness and short‑term
disability, maternity or paternity, jury service and military service. Entitlement to paid absences falls into
two categories:
(a) accumulating; and
(b) non‑accumulating.

Accumulating paid absences

1. Accumulating paid absences are those that are carried forward and can be used in future periods if
the current period’s entitlement is not used in full.

2. Accumulating paid absences may be either:

• Vesting (i.e. employees are entitled to a cash payment for unused entitlement); or
• Non‑vesting (i.e. employees are not entitled to a cash payment for unused entitlement).

3. An obligation arises as employees render service that increases their entitlement to future paid
absences. An entity shall measure the obligation at the expected cost of accumulating paid absences
as the additional amount that the entity expects to pay as a result of the unused entitlement that has
accumulated at the end of the reporting period.
Non-vesting:
The obligation exists, and is recognised, even if the paid absences are non‑vesting, although the
possibility that employees may leave before they use an accumulated non‑vesting entitlement
affects the measurement of that obligation.

Non-accumulating paid absences

Non‑accumulating paid absences do not carry forward: they lapse if the current period’s entitlement is
not used in full and do not entitle employees to a cash payment for unused entitlement on leaving the
entity. This is commonly the case for sick pay (to the extent that unused past entitlement does not
increase future entitlement), maternity or paternity leave and paid absences for jury service or military
service. An entity recognises no liability or expense until the time of the absence, because employee
service does not increase the amount of the benefit.

Nasir Abbas FCA Page 2 | 14

 IAS 19 – Class notes

Profit-sharing and bonus plans

1. An entity shall recognise the expected cost of profit‑sharing and bonus payments when, and only
when:
(a) the entity has a present legal or constructive obligation to make such payments as a result of past
events; and
(b) a reliable estimate of the obligation can be made.

A present obligation exists when, and only when, the entity has no realistic alternative but to make
the payments.

2. Under some profit‑sharing plans, employees receive a share of the profit only if they remain with the
entity for a specified period. Such plans create a constructive obligation as employees render service
that increases the amount to be paid if they remain in service until the end of the specified period.
The measurement of such constructive obligations reflects the possibility that some employees may
leave without receiving profit‑sharing payments.

3. An entity can make a reliable estimate of its legal or constructive obligation under a profit‑sharing or
bonus plan when, and only when:
(a) the formal terms of the plan contain a formula for determining the amount of the benefit;
(b) the entity determines the amounts to be paid before the financial statements are authorised for
issue; or
(c) past practice gives clear evidence of the amount of the entity’s constructive obligation.

Difference between bonus plan and dividend

An obligation under profit‑sharing and bonus plans results from employee service and not from a
transaction with the entity’s owners. Therefore, an entity recognises the cost of profit‑sharing and
bonus plans not as a distribution of profit but as an expense.

POST-EMPLOYMENT BENEFITS

Arrangements whereby an entity provides post-employment benefits are post-employment benefit plans.

Defined contribution plan Defined benefit plan

- It is a post-employment benefit plan under - It is a post-employment benefit plan other
which an entity pays fixed contribution into a than defined contribution plan. It may be
separate entity (fund) and will have no legal or unfunded or it may be fully or partially funded.
constructive obligation to pay further - Entity’s legal or constructive obligation is to
contributions if the fund does not hold provide the agreed benefits to current and
sufficient assets to pay all employee benefits former employees.
relating to employee service in the current and - The amount of the post-employment benefit
past periods. received by the employee is determined by
- Entity’s legal or constructive obligation is defined formula for the benefit.
limited to the amount that it agrees to - The actuarial risk and investment risk fall on
contribute to the fund or an insurance the entity.
company.
- The amount of the post-employment benefit
received by the employee is the amount of

Nasir Abbas FCA Page 3 | 14

 IAS 19 – Class notes

contributions (employer and employee) plus

investment returns.
- The actuarial risk and investment risk fall on
the employee.

Actuarial risk – is a risk that benefits will be less than expected

Investment risk – is a risk that assets invested will be insufficient to meet expected benefits

Defined contribution plan

Recognition and measurement
When an employee has rendered service to entity during an accounting year, the entity shall recognize
the contribution payable to a defined contribution plan for that service as an expense, unless any other
IFRS requires the inclusion in the cost of an assets (e.g. IAS 2 and IAS 16)
Prepayment or accrual
If payment is different from the amount of contribution payable, an entity shall recognize the difference
as an accrued expense (if amount of contribution payable exceeds payment) or prepayment (if payment
exceeds the amount of contribution payable).
When contributions are not expected to be paid before twelve months after the end of year in which
employees render the related service, these shall be discounted.

Disclosures
The entity shall disclose the amount recognized as expense for defined contribution plans.

Defined benefit plan

Note for students:
Whole process for recognition and measurement under defined benefit plan is better understood by
first showing the presentation in SOFP, SOCI and notes. Afterwards, all terms will be explained one by
one.

Statement of financial position [under NCL/(NCA)]

Net defined benefit liability / (asset) XXX

Note:
PV of defined benefit obligation XXX
Fair value of plan assets (XXX)
Net defined benefit liability / (asset)* XXX

* Asset ceiling test:

In case of net defined benefit asset, it shall be measured at the lower of:
(a) surplus in defined benefit plan (as calculated above)
(b) Present value of future economic benefits available to the entity in the form of a reduction in future
contribution or a cash refund. (same discount rate is used as used for defined benefit obligation)

Nasir Abbas FCA Page 4 | 14

 IAS 19 – Class notes

Statement of comprehensive income

Current service cost * X
Past service cost * X
Net interest * X
Gain / loss on settlement * X
Other comprehensive income:
Actuarial gain/loss ** X
Return on plan assets ** X
Asset ceiling adjustment ** X

* All these costs are shown as a single line item “salaries & wages”
** All these items are shown as a single line item “Remeasurement gain/loss”

Notes – Reconciliation of PV of defined benefit obligation

Opening balance X
Interest cost X
Current service cost X
Past service cost X
Benefits paid (X)
Settlement (X)
Actuarial (gain) / loss [balancing figure] X
Closing balance X

Notes – Reconciliation of fair value of plan assets

Opening fair value X
Interest income X
Contributions to the plan X
Benefits paid (X)
Settlement (X)
Return on plan assets (+/-) [balancing figure] X
Closing fair value X

1) Present value of defined benefit obligation and current service cost

1. Present value of defined benefit obligation is the present value, without deducting any plan
assets, of expected future payments required to settle the obligation resulting from employee
service in the current and prior periods. Current service cost is the increase in the present value
of defined benefit obligation resulting from employee service in the current period.

Dr. Current service cost X

Cr. PV of Defined benefit obligation X

2. An entity shall use projected unit credit method to determine the present value of defined
obligation and related service cost. This method sees each period of service as giving rise to an
additional unit of benefit entitlement and measures each unit separately to build up the final

Nasir Abbas FCA Page 5 | 14

 IAS 19 – Class notes

obligation. An entity shall attribute benefits of service under the plan’s benefit formula to periods
in which the obligation to provide post-employment benefit arises.

Example:
A lumpsum benefit equal to 1% of final salary multiplied by number of years of service will be paid
on retirement. Annual salary in year 1 is expected to be Rs. 25,000 and it is assumed to increase
8% per year. Appropriate discount rate is 10%. Assuming that employee will remain employed for
5 years, following is the calculation of defined benefit obligation and its related costs:

Lumpsum benefit = Rs. 25,000 x 1.084 x 1% x 5 = Rs. 1,700

Benefit unit for each year service = Rs. 1,700 / 5 = Rs. 340

Yr-1 Yr-2 Yr-3 Yr-4 Yr-5

------------------------- Rs. --------------------------
Opening balance 232 511 843 1,236
Interest cost [Opening x 10%] - 23 51 84 124
Current service cost 232 256 281 309 340
[PV of single unit i.e. Rs. 340]
Closing balance 232 511 843 1,236 1,700
[PV of cumulative units]

Post-employment benefit in form of annuity:

If benefit is not a lumpsum amount rather a series of payments (e.g. pension, medical facility)
then for calculation of a single unit of benefit per year of service, total amount of benefit is the
present value, at the expected retirement date, of series of expected payments.

3. Employee service gives rise to an obligation under a defined benefit plan even if the benefits:
- are conditional on future employment (in other words they are not yet vested); or
- become payable only if a specified event occurs when an employee is no longer employed
(e.g. medical support).
In measuring its defined benefit obligation, an entity considers the probability that some
employees may not satisfy any vesting requirements or the specified event will not occur.

Examples:
1. A plan pays a benefit of Rs. 100 for each year of service. The benefits vest after ten years
of service.
A benefit of Rs. 100 is attributed to each year. In each of the first ten years, the current
service cost and the present value of the obligation reflect the probability that the employee
may not complete ten years of service.

2. A plan pays a benefit of Rs. 100 for each year of service, excluding service before the age
of 25. The benefits vest immediately.
No benefit is attributed to service before the age of 25 because service before that date does
not lead to benefits (conditional or unconditional). A benefit of Rs. 100 is attributed to each
subsequent year.

Nasir Abbas FCA Page 6 | 14

 IAS 19 – Class notes

4. If further service of an employee will lead to no material amount of further benefits, then all
benefit is attributed to the service periods ending on or before that date.

Examples:
1. A plan pays a lumpsum of Rs. 1,000 that vests after 10 years of service. The plan provides
no further benefit for subsequent service.
A benefit of Rs. 100 (i.e. Rs. 1,000 divided by ten) is attributed to each of the first ten years.
In each of the first ten years, the current service cost and the present value of the obligation
reflect the probability that the employee may not complete ten years of service. No benefit
is attributed to subsequent years.

2. A plan pays a lumpsum retirement benefit of Rs. 2,000 to all employees who are still
employed at the age of 55 or above and completed twenty years of service, OR who are
still employed at the age of 65 or above, regardless of their length of service.
For employees who join before the age of 35, service first leads to benefits under the plan
at the age of 35 (an employee could leave at the age of 30 and return at the age of 33, with
no effect on the amount or timing of benefits). Those benefits are conditional on further
service. Also, service beyond the age of 55 will lead to no material amount of further
benefits. For these employees, the entity attributes benefit of Rs. 100 (Rs. 2,000 divided by
twenty) to each year from the age of 35 to the age of 55.
For employees who join between the ages of 35 and 45, service beyond twenty years will
lead to no material amount of further benefits. For these employees, the entity attributes
benefit of Rs. 100 (Rs. 2,000 divided by twenty) to each of the first twenty years.
For an employee who joins at the age of 55, service beyond ten years will lead to no material
amount of further benefits. For this employee, the entity attributes benefit of Rs. 200 (Rs.
2,000 divided by ten) to each of the first ten years.
For all employees, the current service cost and the present value of the obligation reflect the
probability that the employee may not complete the necessary period of service.

3. A post-employment medical plan reimburses 40% of an employee’s post-employment

medical costs if the employee leaves after more than ten and less than twenty years of
service and 50% of those costs if the employee leaves after twenty or more years of
service.
Under the plan’s benefit formula, the entity attributes 4 per cent of the present value of the
expected medical costs (40 per cent divided by ten) to each of the first ten years and 1 per
cent (10 per cent divided by ten) to each of the second ten years. The current service cost in
each year reflects the probability that the employee may not complete the necessary period
of service to earn part or all of the benefits. For employees expected to leave within ten
years, no benefit is attributed.

5. If an employee’s service in later years will lead to a materially higher level of benefit than in earlier
years, an entity shall attribute benefit on a straight‑line basis from:
(a) the date when service by the employee first leads to benefits under the plan (whether or not
the benefits are conditional on further service) until

Nasir Abbas FCA Page 7 | 14

 IAS 19 – Class notes

(b) the date when further service by the employee will lead to no material amount of further
benefits under the plan, other than from further salary increases.
That is because the employee’s service throughout the entire period will ultimately lead to a
benefit at that higher level.
Example:
A post-employment medical plan reimburses 10% of an employee’s post-employment
medical costs if the employee leaves after more than ten and less than twenty years of service
and 50% of those costs if the employee leaves after twenty or more years of service.
Service in later years will lead to a materially higher level of benefit than in earlier years.
Therefore, for employees expected to leave after twenty or more years, the entity attributes
benefit on a straight-line basis. Service beyond twenty years will lead to no material amount of
further benefits. Therefore, the benefit attributed to each of the first twenty years is 2.5 per cent
of the present value of the expected medical costs (50 per cent divided by twenty).
For employees expected to leave between ten and twenty years, the benefit attributed to each
of the first ten years is 1 per cent of the present value of the expected medical costs. For these
employees, no benefit is attributed to service between the end of the tenth year and the
estimated date of leaving.
For employees expected to leave within ten years, no benefit is attributed.

6. Estimates for defined benefit obligation and related service cost are based on actuarial
assumptions. Such assumptions shall be unbiased (i.e. neither imprudent nor excessively
conservative) and mutually compatible (i.e. reflect economic relationship between factors such
as inflation, rates of salary increase and discount rate). These assumptions are entity’s best
estimates of the variables that will determine the ultimate cost of providing post-employment
benefits. Actuarial assumptions comprise of:
(a) Demographic assumptions that deal with matters such as:
- Mortality
- Rate of employee turnover, disability and early retirement
- The proportion of plan members with dependents who will be eligible for benefits
- The proportion of plan members who will select each form of payment option available
under the plan terms
- Claim rates under medical plans
(b) Financial assumptions that deal with items such as:
- The discount rate (It shall be determined in nominal terms by reference to market yield
at end of reporting period on high quality corporate bonds.)
- Benefits levels and future salary
- In case of medical benefits, future medical costs, claim handling costs
- Tax payable by the plan on contributions relating to service
Financial assumptions shall be based on market expectations at the end of the reporting
period, for the period over which the obligations are to be settled.

Nasir Abbas FCA Page 8 | 14

 IAS 19 – Class notes

7. Some defined benefit plans require employees or third parties to contribute to the cost of the
plan. It is explained in application guidance of IAS as follows:

2) Past service cost

1. Past service cost is the change in the present value of the defined benefit obligation for employee
service in prior periods, resulting from a plan amendment (i.e. the introduction or withdrawal of
or a change to defined benefit plan) or a curtailment (i.e. significant reduction by the entity in the
number of employees covered by a plan e.g. pant closure, discontinued operations or termination
of a plan).

2. Past service cost may be either positive or negative. An entity shall recognize past service cost as
an expense at the earliest of:
(a) When the plan amendment or curtailment occurs; and
(b) When the entity recognises related restructuring costs or termination benefits

Dr. Past service cost X

Cr. PV of Defined benefit obligation X
In case of negative past service cost, above entry shall be reversed.

3) Settlement
1. Settlement is a transaction that eliminates all further legal or constructive obligations for part or
all of the benefits provided under a defined benefits plan, other than a payment of benefits to
employees that set out in the terms of plan and included in the actuarial assumptions. For

Nasir Abbas FCA Page 9 | 14

 IAS 19 – Class notes

example: one off transfer of significant employer obligations under the plan to an insurance
company through purchase of an insurance policy.

2. An entity shall recognize a gain or loss on settlement of a defined benefit plan when the
settlement occurs. The gain or loss on settlement is calculated as the difference between:
(a) The present value of the defined benefit obligation being settled, as determined on the date
of settlement; and
(b) The settlement price, including any plan assets transferred and any payments made directly
by the entity in connection with the settlement.

Dr. PV of defined benefit obligation X

Cr. Plan assets / Cash X
Dr/Cr. Gain on settlement (balancing) X

4) Interest cost
1. Interest cost is the change during the period in the present value of defined benefit obligation
that arises from the passage of time.

2. It is calculated by applying discount rate (determined at end of last year) to year start present
value of defined benefit obligation.

Interest cost = Opening PV of defined benefit obligation x discount rate %

Exam note:
Generally other movements in PV of defined benefit obligation are assumed to occur at year
end. However, interest calculation will be made on time proportionate basis to accommodate
the effect of changes (e.g. benefits paid) made during the year.

Dr. Interest cost X

Cr. PV of defined benefit obligation X

5) Fair value of plan assets

1. Plan assets comprise of assets held by a long-term employee benefit fund and qualifying
insurance policies.

2. Fair value of plan assets is determined at end of every year and it is deducted from present value
of defined benefit obligation in determining net defined benefit obligation/(asset).

3. For disclosures in notes, fair value of plan assets is disaggregated into classes such as cash & cash
equivalents, equity instruments, debt instruments, real estate etc.

4. Plan assets:
(a) Exclude unpaid contributions due from the reporting entity to the fund.
(b) Are reduced by accrued liabilities of the fund that do not relate to employee benefits.

Nasir Abbas FCA Page 10 | 14

 IAS 19 – Class notes

6) Interest income
Interest income is calculated by applying discount rate (determined at end of last year) to year start
fair value of plan assets.

Interest income = Opening fair value of plan assets x discount rate %

Exam note:
Generally other movements in fair value of plan assets are assumed to occur at year end. However,
interest calculation will be made on time proportionate basis to accommodate the effect of changes
(e.g. benefits paid, contributions) made during the year.

Dr. Plan assets X

Cr. Interest cost X

7) Contributions to fund
Necessary and timely contributions are made to fund.

Dr. Plan assets X

Cr. Cash X

8) Benefits paid
Post-employment benefits are paid to retiring employees out of plan assets.

Dr. PV of defined benefit obligation X

Cr. Plan assets X

9) Remeasurement
1. Actuarial gain/loss is the change during the period in the present value of defined benefit
obligation because of changes in actuarial assumptions and experience adjustments. Such
gain/loss is recognized in other comprehensive income.

Dr. Actuarial loss [OCI] X

Cr. PV of defined benefit obligation X

OR

Dr. PV of defined benefit obligation X

Cr. Actuarial gain [OCI] X

2. Return on plan assets is interest, dividend and other income derived from the plan assets net of
the costs of managing the plan assets. It is determined as a balancing figure in movement in fair
value of plan assets. This return is recognized in other comprehensive income.

Nasir Abbas FCA Page 11 | 14

 IAS 19 – Class notes

Dr. Plan assets X

Cr. Return on plan assets [OCI] X

OR

Dr. Return on plan assets [OCI] X

Cr. Plan assets X

3. Any adjustment for asset ceiling test (other than interest as discussed in IFRIC 14) shall be
recognized in other comprehensive income.

Reclassification to P&L:
All above remeasurements recognized in other comprehensive income shall not be reclassified to
P&L in a subsequent period. However, an entity may transfer those amounts within equity.

Multi-employer plans
1. Multi-employer plans are defined contribution plans or defined benefit plans that pool the assets
contributed by various entities that are not under common control and use those assets to provide
benefits to employees of more than one entity on the basis that contribution and benefit levels are
determined without regard to the identity of the entity that employs the employees.

2. An entity shall classify a multi-employer plan as a defined contribution plan or a defined benefit plan
under the terms of the plan.

3. If multi-employer plan is a defined benefit plan then entity shall account for its proportionate share
of the defined benefit obligation, plan assets and related costs as studied earlier. When sufficient
information is not available for defined benefit plan accounting, then entity shall account for the plan
as defined contribution plan.

Group plans
Defined benefit plans that share risks between group entities e.g. parent and subsidiary, are not multi-
employer plans.

State plans
An entity shall account for state plan in the same way as for a multi-employer plan.

OTHER LONG-TERM EMPLOYEE BENEFITS

Examples:
- Long-term paid absences
- Jubilee
- Long-term disability benefits
- Profit sharing and bonuses
- Deferred remuneration

Nasir Abbas FCA Page 12 | 14

 IAS 19 – Class notes

Recognition and measurement

It is accounted for same as learnt for defined benefit plan except remeasurement changes are also
recognized in P&L.

TERMINATION BENEFITS

Termination benefits result from either an entity’s decision to terminate the employment or an
employee’s decision to accept an entity’s offer of benefits in exchange for termination of employment.

Recognition
An entity shall recognize a liability and expense for termination benefits at the earlier of the following
dates:
(a) When the entity can no longer withdraw the offer of those benefits; and
(b) When the entity recognizes cost for a restructuring that is within the scope of IAS 37 and involves the
payment of termination benefits.

Measurement
If termination benefits are expected to be settled wholly before twelve months after the end of the year
in which the termination benefit is recognized, then entity shall account for these benefits same as short-
term benefits.
If termination benefits are not expected to be settled wholly before twelve months after the end of the
year in which the termination benefit is recognized, then entity shall account for these benefits same as
other long-term benefits.

Example
Background
As a result of a recent acquisition, an entity plans to close a factory in ten months and, at that time,
terminate the employment of all of the remaining employees at the factory. Because the entity needs
the expertise of the employees at the factory to complete some contracts, it announces a plan of
termination as follows.
Each employee who stays and renders service until the closure of the factory will receive on the
termination date a cash payment of RS. 30,000. Employees leaving before closure of the factory will
receive RS. 10,000.
There are 120 employees at the factory. At the time of announcing the plan, the entity expects 20 of
them to leave before closure. Therefore, the total expected cash outflows under the plan are RS.
3,200,000 (ie 20 × RS. 10,000 + 100 × RS. 30,000). The entity accounts for benefits provided in exchange
for termination of employment as termination benefits and accounts for benefits provided in exchange
for services as short-term employee benefits.

Termination benefits
The benefit provided in exchange for termination of employment is RS. 10,000. This is the amount that
an entity would have to pay for terminating the employment regardless of whether the employees stay
and render service until closure of the factory or they leave before closure. Even though the employees
can leave before closure, the termination of all employees’ employment is a result of the entity’s
decision to close the factory and terminate their employment (ie all employees will leave employment

Nasir Abbas FCA Page 13 | 14

 IAS 19 – Class notes

when the factory closes). Therefore the entity recognises a liability of RS. 1,200,000 (ie 120 × RS. 10,000)
for the termination benefits provided in accordance with the employee benefit plan at the earlier of
when the plan of termination is announced and when the entity recognizes the restructuring costs
associated with the closure of the factory.

Benefits provided in exchange for service

The incremental benefits that employees will receive if they provide services for the full ten-month
period are in exchange for services provided over that period. The entity accounts for them as short-
term employee benefits because the entity expects to settle them before twelve months after the end
of the annual reporting period. In this example, discounting is not required, so an expense of RS.
200,000 (ie RS. 2,000,000 ÷ 10) is recognised in each month during the service period of ten months,
with a corresponding increase in the carrying amount of the liability.

Nasir Abbas FCA Page 14 | 14