IAS - 19 - Employee Benefits
IAS - 19 - Employee Benefits
IAS - 19 - Employee Benefits
Accounting for short-term employee benefit costs tends to be quite straightforward, because they are simply recognized as an
expense in the employer’s FS of the current period. Accounting for deferred employee benefit costs is much more difficult, this is
because of the large amounts involved, as well as the long-time scale, complicated estimates and uncertainties.
In the past entities accounted for these benefits simply by charging them in profit or loss on the basis of actual payments made.
This led to substantial variations in reported profits of these entities and disclosure of information on these costs was usually sparse.
IAS 19 is intended to prescribe the following: When the cost of employee benefits should be recognised as a liability or an expense
and the amount of the liability or expense that should be recognised. As a basic rule, IAS 19 states the following:
1. A liability should be recognised when an employee has provided a service in exchange for employee benefits to be received by
the employee at some time in the future
2. An expense should be recognised when the entity consumes the economic benefits from a service provided by an employee in
exchange for employee benefits.
The basic problem is therefore straightforward. An entity will often enjoy the economic benefits from the services provided by its
employees in advance of the employees receiving all the employment benefits from the work they have done. For example they will
not receive pension benefits until after they retire.
The standard recognises four categories of employee benefits and proposes a different accounting treatment for each: Short-term;
Post-employment; other long-term and termination benefits. Benefits may be paid to the employees themselves, to their dependants
(spouses, children) or to third parties.
Employee benefits are all forms of consideration given by an entity in exchange for service rendered by employees or for the
termination of employment
Short-term employee benefits: Are employee benefits (other than termination benefits) that are expected to be settled
wholly before 12 months after the end of the annual reporting period in which the employees render the related service.
o Wages, salaries, social security contributions, paid annual leave, sick leave, maternity/paternity leave; Profit-sharing and bonuses,
paid jury service, military service; Non-monetary benefits: medical care, housing, cars, free or subsidised goods
The accounting for short-term benefits is simple and straightforward because there are no actuarial assumptions to be made, and
there is no requirement to discount future benefits (because they are all, by definition, payable no later than 12 months after the end
of the accounting period). The principles are the same as for any expense that is accrued over a period.
The rules for short-term benefits are essentially an application of basic accounting principles and practice.
1. Unpaid short-term employee benefits as at the end of an accounting period should be recognised as a liability (accrued expense).
2. Any short-term benefits paid in advance should be recognised as an asset (prepaid expense) to the extent that it will led to a
reduction in future payments or a cash refund
3. The cost of short-term employee benefits should be recognised as an expense in the period when the economic benefit is given,
as employment costs (except insofar as employment costs may be included within the cost of an asset, PPE)
Short-term accumulating paid absences. These are absences for which an employee is paid and if the employee’s entitlement has not
been used up at the end of the period, they are carried forward to the next period. An example is paid holiday leave, where any unused
holidays in one year are carried forward to the next year.
The cost of the benefits of such absences should be charged as an expense as the employees render service that increases their
entitlement to future compensated absences.
The cost of accumulating paid absences should be measured 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
Short-term non-accumulating paid absence. These are absences for which an employee is paid when they occur, but an entitlement to
the absences does not accumulate. The employee can be absent and be paid, but only if and only when the circumstances arise.
Examples are maternity/paternity leave, sick pay and paid absence for jury service.
An entity should recognise no liability or expense until the time of the absence, because employee service does not increase the
amount of the benefit
Profit sharing or bonuses payable within 12 months after the end of the accounting period should be recognised as an expected cost
when: the entity has a present legal or constructive obligation to make such payments as result of past events and 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
An entity can make a reliable estimate of the obligation when recognises the profit or other performance achievement to which the
profit share or bonus relates.
Employees receive a share of the profit only if they remain with the entity for a specific period.
The measurement of the constructive obligation reflects the possibility that some employees may leave without receiving a bonus.
An entity recognises the cost of profit-sharing and bonus plans as an expense
Other long-term employee benefits: Other long-term benefits are all employee benefits other than short-term, post-
employment and termination benefits if not expected to be settled wholly before 12 months after the end of the annual reporting
period in which the employees render the related service: Long-term paid absences such as long-service leave or sabbatical leave, Long-
service benefits, long-term disability benefits , Bonuses or deferred compensation payable later than 12 months after the year end
There are many similarities between these types of benefits and defined benefit pensions. However, there is generally less
uncertainty in the measurement of a long-term benefit than a defined benefit pension.
The accounting treatment for other long-term benefit plans therefore follows the treatment for defined benefit pension, with a
simplification: re-measurements are not recognised in OCI, instead the net total of the following amounts is recognised in profit
or loss unless another IFRS requires or permits their inclusion in the cost of an asset: Service cost, Net interest on the net defined
benefit liability/asset, Re-measurement of the net defined benefit liability/asset
Termination benefits
Are employee benefits provided in exchange for the termination of an employee’s employment as result of either:
1. An entity’s decision to terminate an employee’s employment before the normal retirement date (compulsory redundancy)
2. An employee’s decision to accept an offer of benefits in exchange for the termination of employment (voluntary redundancy)
Termination benefits are accounted for differently from other employee benefits because the event that gives rise to the obligation to
pay termination benefits is the termination of employment rather than rendering of services by employees.
Termination benefits are only those benefits paid when employment is terminated at the request of the employer.
Termination benefits are usually lump sum payments (redundancy/retrenchment pay) but may also include: enhancement of post-
employment benefits or the payment of salary until the end of a notice period in which the employee does not work (sometimes
knows as “gardening leave”). A termination of an employment contract may also lead to a plan amendment or curtailment of other
employee benefits. For example employees who have been redundant will no longer accrue service with the entity and so the
obligations to those employees will be reduced.
Benefits paid on retirement or on resignation are not termination benefits. Employee benefits that are conditional on future
service being provided by the employee are not termination benefits
An entity shall recognise a liability and expense for termination benefits at the earlier of the date at which the entity:
1. Can no longer withdraw the offer of those termination benefits
2. Recognises costs for a restructuring provision in accordance with IAS 37 and the restructuring involves the payment of termination
benefits.
1. The date when the entity can no longer withdraw the offer of the termination benefit depends on whether: the employee is
accepting an offer of termination, or the termination of employment is the entity’s decision.
a) For termination benefits payable as a result of an employee’s decision to accept an offer of benefits in exchange for the termination
of employment, the time when an entity can no longer withdraw the offer of termination benefits is the earlier of:
When the employee accepts the offer
When a restriction legal, regulatory or contractual on the entity’s ability to withdraw the offer takes effect. This would be
when the offer is made, if the restriction existed at the time of the offer.
b) For termination benefits payable as a result of an entity’s decision to terminate an employee’s employment, the entity can no longer
withdraw the offer of the termination benefit when the entity has communicated to the affected employees a plan of termination
meeting all of the following criteria:
Is unlikely to significantly change
Identify the number of affected employees, their jobs and their location, and expected termination date
Establish the termination benefits that the employee will received in sufficient detail that employees can determine the type and
amount of benefits they will receive when the employment is terminated
The initial and subsequent measurement of termination benefits depends on whether those benefits are expected to be settled:
1. Termination benefits are expected to be settled wholly before 12 months after the end of reporting period → the entity shall
apply requirements for short-term employee benefits
2. All other termination benefits → the entity shall apply requirements for other long-term employee benefits
The key difference between the two types of plans is the nature of the “promise” made by the entity to the employees:
1. Under a defined contribution plan, the “promise” is to pay the agreed amount of contributions. Once this is done, the entity has no
further liability and no exposure to risks related to the performance of the assets held in the plan. Actuarial risk (that benefits will
be less than expected) and investment risk (the assets invested will be insufficient to meet expected benefits) fall in substance on the
employee
2. Under a defined benefit plan, the “promise” is to pay the amount of benefits agreed under the plan. The entity is taking on a far
more uncertain liability that may change in future as a result of many variables and has continuing exposure to risks related to the
performance of assets held in the plan. In simple terms, if the plan assets are insufficient to meet the plan liabilities to pay pensions
in future, the entity will have to make up any deficit. Actuarial risk (that benefits will cost more than expected) and investment
risk fall in substance on the entity
It is important to make a clear distinction between the following:
Funding a defined benefit plan, paying contributions into the plan.
Accounting for the cost of funding a defined benefit plan.
A. Defined contribution plans: A typical defined contribution plan would be where the employing company agreed to
contribute an amount of, say, 5% of employees’ salaries into a post-employment plan.
Accounting for payments into defined contribution plan is straightforward
The obligation for each period is measured by the amounts to be contributed for that period
There are no actuarial assumptions to measure the obligation or the expenses, no possibility of any actuarial gain or loss
If the obligation is settled in the current period there is no requirement for discounting (or at least no later than 12 months after the
end of the current period),
In the (unusual) situation where contributions to a defined contribution plan, do not fall due entirely within 12 months after the end
of the period in which the employees performed the related service, then these should be discounted.
When an employee has rendered service to an entity during a period, the entity shall recognise the contribution payable as:
1. Contributions to a defined contribution plan, should be recognised as an expense in the period they are payable (unless another
IFRS requires or permits the inclusion of the contribution in the cost of an assets)
2. Any unpaid contributions that are due as at the end of the period should be recognised as a liability (accrued expense)
3. Any excess contributions paid should be recognised as an asset (prepaid expense) but only to the extent that the prepayment will lead
to a reduction in future payments or a cash refund.
Plan assets comprise: Assets held by a long-term employee benefit fund, and Qualifying insurance policies
The standard requires that the plan assets are measured at fair value as per IFRS13.
Investments which may be used for purposes other than to pay employee benefits are not plan assets
Assets held by a long-term employee benefit fund are assets (such as stocks and shares, other than non-transferable financial instruments
issued by the reporting entity) that:
1. Are held by an entity/fund that is legally separate from the reporting entity and exists solely to pay or fund employee benefits
2. Are available to be used only to pay or fund employee benefits under a defined benefit plan
3. Are not available to the reporting entity’s own creditors even in bankruptcy and cannot be returned to the reporting entity, unless
either:
The remaining assets of the fund are sufficient to meet all the related employee benefit obligations of the plan or the reporting entity,
The assets are returned to the reporting entity to reimburse it for employee benefits already paid
Qualifying insurance policies: is an insurance policy issued by an issuer that is not a related party of the reporting entity, if the
proceeds of the policy:
1. Can be used only to pay or fund employee benefits under a defined benefit plan, and
2. Are not available to the reporting entity’s own creditors even in bankruptcy and cannot be paid to the reporting entity, unless either:
The proceeds represent surplus assets that are not needed for the policy to meet all the related employee benefit obligations
The proceeds are returned to the reporting entity to reimburse it for employee benefits already paid.
Constructive obligation. IAS 19 makes it very clear that it is not only its legal obligation under the formal terms of a defined benefit
plant that an entity must account for, but also for any constructive obligation that it may have. A constructive obligation, which will arise
from the entity’s informal practices, exists when the entity has no realistic alternative but to pay employee benefits, for example if any
change in the informal practices would cause unacceptable damage to employee relationships.
The Projected Unit Credit Method. An entity shall use Unit Credit Method to determine the present value of its defined benefit
obligation and the related current service cost, and where applicable the past service cost
With this method, it is assumed that each period of service by an employee gives rise to an additional unit of future benefits.
The present value of that unit of future benefits can be calculated, and attributed to the period in which the service is given.
The units, each measured separately, build up the overall obligation.
The present value of the obligation is included in the FS and an interest expense is recognised as the discount is unwound.
The calculation of the obligation and the interest rates are complex and would be carried out by an actuary.
There is a four-step method for recognising and measuring the expenses and liabilities of a defined benefit pension plan.
1. Determining the deficit or surplus.
2. Determining the amount of the net defined benefit liability/asset as the amount of the deficit or surplus adjusted for any effect of limiting a net
defined benefit asset to the asset ceiling.
3. Determining amounts to be recognised in P/L
4. Determine the re-measurement of the net defined benefit liability/asset to be recognised in OCI (item that will not be reclassified to profit or
loss)
Step 2: Determining the amount of the net defined benefit liability/asset as the amount of the deficit or surplus adjusted for any effect
of limiting a net defined benefit asset to the asset ceiling.
Step 4: Determine the re-measurement of the net defined benefit liability/asset, to be recognised in OCI (item that will not be
reclassified to profit/loss):
Actuarial gains and losses
Return on plan assets, excluding amounts included in the net interest on the net defined benefit liability/asset
Any change in the effect of the asset ceiling, excluding amounts included in the net interest on the net defined benefit liability/asset
The SOFP. An entity shall recognise in SOFP the net defined benefit liability/asset. The amount recognised as a defined benefit
liability (which may be a negative amount, ie an asset) should be the following: The present value of the defined benefit obligation at
the year-end minus the fair value of the assets of the plan as at the year-end (if there are any) out of which the future obligations to
current and past employees will be directly entitled.
The SOPLOCI. All of the gains and losses that affect the plan obligation and plan asset must be recognised.
The components of defined benefit cost must be recognised as follows in the SOPLOCI
A. Service cost: P/L
B. Net interest on the net defined benefit liability/asset: P/L
C. Re-measurement of the net defined benefit liability/asset: OCI (not reclassified to P/L). However the entity may transfer those
amount recognised in OCI within equity.
A. Service costs: Total service cost may comprise : current service cost, past service cost and gains and losses on settlement
1. Current service cost: the increase in the present value of the defined benefit obligation resulting from employee service in the
current period.
An entity shall determine current service cost using actuarial assumptions determined at the start of the annual reporting period.
However, if an entity re-measures the net defined benefit liability/asset, it shall determine current service cost and net interest for
the remainder of the annual reporting period after the plan amendment, curtailment or settlement using the actuarial assumptions
used to re-measure the net defined benefit liability/asset
2. Past service cost: the change (increase or decrease) in the present value of the defined benefit obligation for employee service in
prior periods, resulting from a plan amendment (introduction or withdrawal) or curtailment (significant reduction).
Past service cost can be either positive (if the changes increase the obligation) or negative (if the change reduces the obligation).
An entity shall recognise past service cost as an expense at the earlier of the following dates:
When the plan amendment or curtailment occurs
When the entity recognises related restructuring costs in accordance with IAS 37 or termination benefits.
A plan amendment arises when an entity either introduces/withdraw a defined benefits plan or changes the benefits payable under
an existing plan. As a result, the entity has taken on additional obligation that is has not hitherto provided for.
For example, an employer might decide to introduce a medical benefits plan for former employees. This will create a new defined
benefit obligation that has not yet been provided for.
A curtailment occurs when an entity significantly reduces the number of employees covered by a plan. This could result from an
isolated event, such as closing a plant, discontinuing an operation or the termination or suspension of a plan.
3. The gain or loss on a settlement is the difference between present value of the defined benefit obligation being settled (as
determined on the date of settlement) and the settlement price, including any plan assets transferred and any payments made
directly by the entity in connection with the settlement.
A settlement occurs when an employer enters into a transaction to eliminate part or all of its post-employment benefit obligations
(other than a payment of benefits to, or on behalf of, employees under the terms of the plan and included in the actuarial assumptions).
The gain or loss on a settlement is recognised in profit or loss when the settlement occurs:
A curtailment and settlement might happen together, for example when an employer brings a defined benefit plan to an end by
settling the obligation with a one-off lump sum payment and then scrapping the plan.
When determining past service costs, or a gain or loss on settlement, an entity shall re-measure the net defined benefit
liability/asset using current fair value of plan assets and current actuarial assumptions, reflecting the benefits offered under the
plan and the plan assets before and after the plan amendment, curtailment or settlement.
B. Net interest on the net defined benefit liability/asset.
Is the change during the period in the net defined benefit liability/asset that arises from the passage of time
This figure is the discounted present value of the future benefits payable.
Every year the discount must be unwound, increasing the present value of the obligation as time passes through an interest charge.
However, if an entity re-measures the net defined benefit liability/asset, it shall determine net interest for the remainder of the
annual reporting period after the plan amendment, curtailment or settlement using the actuarial assumptions used to re-measure
the net defined benefit liability/asset
Interest calculation:
IAS 19 requires that the interest should be calculated on the net defined benefit liability/asset.
This means that the amount recognised in profit or loss is the net of the interest charge on the obligation and the interest income
recognised on the assets.
The net defined benefit liability/asset should be measured as at the start of the accounting period, taking account of changes
during the period as a result of contributions paid into the plan and benefits paid out.
Discount rate.
The discount rate adopted should be determined by reference to market yields on high quality fixed-rate corporate bonds.
The bonds should be denominated in the same currency as the benefits to be paid. In the absence of a deep market in such bonds, the yields on
comparable government bonds should be used as reference instead.
The maturity of the corporate bonds that are used to determine a discount rate should have a term to maturity that is consistent with the expected
maturity of the post-employment benefit obligations, although a single weighted average discount rate is sufficient.
The guidelines comment that there may be some difficulty in obtaining a reliable yield for long-term maturities, say 30 or 40 years from now. This
should not, however, be a significant problem: the present value of obligations payable in many years’ time will be relatively small and unlikely to
be a significant proportion of the total defined benefit obligation.
The total obligation is therefore unlikely to be sensitive to errors in the assumptions about the discount rate for long-term maturities (beyond the
maturities of long-term corporate or government bonds)
2. The return on plan assets, excluding amounts included in net interest on the net defined benefit liability/asset
Is interest, dividends and other income derived from the plan assets, together with the realised and unrealised gains or losses on the
plan assets, less any cost of managing plan assets and tax payable by the plan itself
The return on plan assets must be calculated.
A new valuation of the plan assets is carried out at each period end, using current fair values.
Any difference between new value and what has been recognised up to date (normally the opening balance, interest and any cash
payments into or out of the plan) is treated as a re-measurement and recognised in OCI
3. Any change in the effect of the asset ceiling, excluding amounts included in net interest on the net defined benefit liability/asset.
This term relates to a threshold established by IAS 19 to ensure that any net benefit asset (a pension surplus) is carried at no more
than its recoverable amount. In simple terms, this means that any net asset is restricted to the amount of cash saving that will be
available to the entity in future.
When an entity has a surplus in a defined benefit plan, it shall measure the net defined benefit asset at the lower of:
the surplus in the defined benefit plan; and
the asset ceiling, determined using the discount rate.
Net defined benefit assets. A net defined benefit asset may rise if the plan has been overfund or if actuarial gains have arisen.
This meets the definition of an asset because all of the following apply:
1. The entity controls a resource – the ability to use the surplus to generate future benefits
2. That control is the result of past events – contributions paid by the entity and service rendered by the employee
3. Future economic benefits are available to the entity in the form of a reduction in future contributions or a cash refund, either
directly to the entity or indirectly to another plan in deficit.
Gains and losses on settlement Gai -PV defined benefit -Service cost
n obligation(SOFP) (P/L)
Difference between the value of the obligation being settled and the settlement price Loss +Service cost +PV defined benefit
(P/L) obligation (SOFP)
Re-measurement: actuarial gains and losses. Arising from annual valuation of obligation Gai - PV defined benefit +OCI
n obligation(SOFP)
On obligation, differences between actuarial assumptions and actual experience during the period or Loss -OCI +PV defined benefit
changes in actuarial assumption obligation (SOFP)
Re-measurement: return on assets (excluding amounts in net-interest) Gai +Plan Assets +OCI
n (SOFP)
Arising from annual valuation of obligation of plan assets Loss -OCI - Plan Assets
(SOFP)