Chapter 6 Employee benefits Flashcards
1.1 Objective and scope of IAS19 Employee Benefits
IAS 19 sets out detailed accounting and disclosure requirements to ensure all pension plans are accounted for consistently. IAS19 should be used by all entities, except those which are equity-based and to which IFRS 2 applies. IAS 19 considers post-employment benefits, other long-term benefits, short term benefits and termination payments.
2.1 Types of pension scheme
Defined contribution schemes: where contribution made it normally a percentage of salary and the future pension depends upon how the fund performs.
Defined benefit schemes: where the outcome is guaranteed and depends upon the final salary and year worked. The contributions therefore vary in order to achieve this outcome.
3.1 Accounting treatment – defined contribution schemes
Defined contribution plans: the entity should recognise contributions payable as an expense in the SPL in the period in which the employee provides services. A liability should be recognised where contributions arise in relation to an employee’s service but remain unpaid at year end.
3.2 Accounting treatment – defined benefit schemes
A defined benefit plan provides employees with a promised level of benefits upon retirement. These are based on the benefits promised, number of members, expected death age and the expected returns on investment. An actuary calculates the expected outcome, and this is discounted to PV and known as the defined benefit obligation.
The defined benefit obligation is a liability owed by the entity. This is not the liability on the SFP, as the entity will have made contributions into the scheme and have accumulated assets. If the liability exceeds the assets, there is a deficit, and this liability is reported in the SFP. A surplus can occur and is recorded as an asset on the SFP.
The defined benefit obligation is the opening balance plus interest cost and service costs less retirement benefits paid.
- Interest cost: liability is one year closer to paid, so there is a need to unwind the discount factor. Dr Finance cost (net interest cost) Cr Defined benefit obligation.
- Service cost: Dr Service cost in P+L Cr Defined benefit obligation. The main part of this is the extra pension entitlement arising from employee service in the current period.
- Retirement benefits paid employees retire and take cash out of the scheme. Dr Defined benefit obligation Cr Plan assets.
The fair value of plan assets is the opening balance plus interest on assets and contributions paid in less the retirement benefits paid.
- Interest on assets: plan assets will be invested earning an expected return. Dr Plan assets Cr Profit or loss (net interest cost)
- Contributions paid amount of cash actually paid in the scheme. Dr Plan Assets Cr Cash
- Retirement benefits paid employee retire and take cash out the scheme, so less is owed. Dr Defined benefit obligation Cr Plan assets.
Remeasurement component: after posting the entries, the closing balance on the obligation and on the asset should be equal to the closing actuarial valuation. This is not the case because:
- The actuary’s valuation of the value of the plan assets and obligation is based on assumptions, such as life expectancy and final salaries.
- The actual return on plan assets is different from the amount taken to the P+L as part of the net interest component.
An adjustment known as the remeasurement component must be posted. This is charged or credited to OCI for the year and identified as an item that will not be reclassified to the P+L.
3.3 Other matters for defined benefit schemes
Settlement: this occurs when an entity eliminates the obligation for part or all of the benefits under a plan. This can occur when an employee leaves and the pension plan is transferred to the new employer. The different between the amount paid out and the reduction in the PV of the obligation is recorded as a gain or loss and is treated as part of service cost. Dr Plan obligations Cr Plan assets Dr/Cr SPL (balancing figure).
Asset ceiling: this is a threshold to ensure any defined benefit asset (surplus) is carried at no more that its recoverable amount. Any net asset is restricted to the amount of cash savings that will be available to the entity in the future.
Any write down of the net defined benefit asset is treated as a remeasurement component in OCI.
4.1 Other IAS 19 Employee benefits issues
Other long-term employee benefits: these are benefits that do not fall wholly within 12 months after the end of the period in which the employees provide their services (e.g., sabbatical leave). The accounting treatment is the same for a defined benefit pension scheme but there is less uncertainty. The treatment is simplified and any remeasurement differences are taken to SPL.
Short-term benefits: benefits fall due within 12 months from end of period (e.g., holiday pay). Accruals concept is applied, and they are treated as an expense in the period in which the employee provided the service, a liability recognised if it is not paid.
Termination payments: relate to any amount payable on the termination of employment either through voluntary redundancy or a decision made by the employer. IAS 37 is applied and if the entity is committed to terminating the employment, and this will result in the transfer of economic benefits, then a provision should be recognised.
5.1 IAS 26 Accounting and reporting by retirement benefit plans (defined contribution)
A defined contribution plan is one in which the annual pension payable to retired employees is based upon the accumulated value of the assets in the fund. According to IAS26 the financial report should contain a statement of the net assets available to meet the benefits payable and a description of the funding policy of the plan. It should typically contain a description of any significant activities along with any changes to the plan, plan membership T+Cs, financial statements containing information on the performance for the period and the position at the end of the period and a description of investment policies.
5.2 IAS 26 Accounting and reporting by retirement benefit plans (defined benefit)
Under defined benefit plans the annual pensions payable to retired employees are based upon a formula. The typical report should have the same content as for the defined contribution plan plus actuarial information such as the PV of the promised benefits and any assumptions made in making the estimates.
6.1 Audit and assurance implications for accounting for IAS 19 Employee Benefits
Audit risks Audit tests
Actuarial assumptions may be incorrect Ascertain the qualification/experience and independence of the actuaries. Consider whether it is appropriate to rely on the actuary’s work. Obtain an understanding of the assumptions used and compare to assumptions in prior years. Enquire about any material changes to the data, assumptions and methods used by actuary. Obtain written representation from directors confirming the assumptions are consistent with their understanding. Review correspondence between company and actuary
Valuation of plan assets and liabilities maybe incorrect Obtain confirmation of the scheme’s assets and liabilities. Review the validity and accuracy of the actuarial valuation. Agree actuary valuation to SFP figures
Error in calculation/posting Agree the cash contributions paid into the scheme to the bank statement. Recalculate the net interest component and compare to the statement of profit or loss. Check disclosures for IAS 19 Employee Benefits
