What you need to know for IAS 19 Employee Benefits
- Accounting treatment of short term and long term employee benefits
- Accounting treatment of pension plans (defined contribution and defined benefit)
- How to account for gains and losses on settlements and curtailments
- How to account for the “Asset Ceiling” test and the reporting of actuarial gains and losses.
What are Employee Benefits?
Employee Benefits are all forms of consideration given by an entity in exchange for services rendered or for the termination of employment.
Short-term Employee Benefits
Those expected to be settled wholly within the 12 months after the reporting period end, in which the employee has rendered the related services.
No need to reclassify if timing of settlement changes.
Compensated absences (e.g. sick leave)
- Accumulating – expense when service that increases entitlement is rendered. e.g. leave pay
- Non-accumulating – expense when absence occurs.
All short term benefits
Recognise undiscounted amount as an expense/liability
(e.g. wages, salaries, bonuses, etc. )
Bonus/Profit-sharing schemes
Recognise the expense when entity has a present legal or constructive obligation to make payments; and a reliable estimate of the obligation can be made.
Termination Benefits
Employee benefits provided in exchange for the termination of an employee’s employment, as a result of either:
a) An entity’s decision to terminate an employee’s employment before the normal retirement date
b)An employee’s decision to accept an offer of benefits in exchange for the termination of employment.
- Recognise liability and expense at the earlier of:
- The date the entity can no longer withdraw the benefit or offer
- The date the entity recognises restructuring costs under IAS 37.
- If termination benefits settled wholly before 12 months from reporting date – apply requirements for short-term employee benefits
- If termination benefits are not settled wholly before 12 months from reporting date – apply requirements for other long term employee benefits.
Post-Employment Benefits (Pensions)
Employee benefits payable after the completion of employment (excluding termination and short term benefits), such as:
- Retirement benefits (e.g. pensions, lump sum payments)
- Other post-employment benefits (e.g. post employment life insurance, medical care).
Defined Contribution Plan (‘DCP’)
The entity pays fixed contributions into a fund and does not
have an obligation to pay further contributions if the fund does not hold sufficient assets
- Recognise the contribution expense /liability when the employee has rendered the service.
Defined Benefit Plan (‘DBP’)
Post employment plans other than defined contribution plans.
Statement of financial position
Recognise the net defined benefit liability/(asset) in the statement of financial position (being equal to the deficit (surplus) in the defined benefit plan and the possible effect of the asset ceiling).
When an entity has a surplus in a DBP, measure the net defined benefit asset at the lower of:
- The surplus in the defined benefit plan
- The asset ceiling (i.e. PV of any economic benefits available in the form of refunds from the plan or reductions in future contributions to the plan), determined using appropriate discount rate.
Statement of comprehensive income
- Recognise actuarial gains/losses in OCI in the period in which they occur.
- Past-service-costs are recognised in P&L in the period incurred.
- Net interest on defined benefit liability/(asset) is recognised in P&L.
- Represents unwinding of discount on DBP liability/(asset) from passage of time.
- Multiply DBP liability/(asset) by discount rate; adjust for actual contributions and benefits paid in period
‘Defined Benefit Cost’ (3 components)
- Service cost (current, past, curtailment loss/(gain), and settlement loss/(gain) in P&L
- Net Interest (see above) in P&L
- Remeasurements (actuarial gains, the return on plan assets (excl. net interest), change in the effect of the asset ceiling) in OCI.
Other long-term employee benefits
Employee benefits other than short-term employee benefits, post-employment benefits, and termination benefits.
Statement of financial position
- Carrying amount of liability = PV of obligation minus the fair value of any plan assets
- Actuarial gains and losses (OCI) and past service costs (P&L are recognised immediately and in full in the SOCI.
Statement of comprehensive income
Recognise the net total of: Current service cost + Net interest on net defined benefit liability/(asset) + remeasurement of the net defined benefit liability/(asset).