Employee benefits Flashcards
Objective and scope of IAS 19
Employee Benefits
1.1 Objective
Employers provide a range of short-term, long-term and post-employment benefits
designed to motivate and reward different classes of employee.
The cost of long-term and post-employment benefits, which includes pension plans,
are difficult to estimate as the obligation depends upon factors such as life
expectancy, future wage and benefits rates and expected investment returns.
IAS 19 Employee Benefits sets detailed accounting and disclosure requirements to
ensure that all pension plans are accounted for consistently.
1.2 Scope
IAS 19 Employee Benefits should be applied by all entities in accounting for the
provision of employee benefits, except those which are equity-based and to which
IFRS 2 applies.
IAS 19 Employee Benefits considers the following employee benefits:
Post-employment benefits e.g. pensions
Other long-term benefits e.g. sabbaticals and long service leave
Short-term benefits e.g. bonuses and holiday pay
Termination payments e.g. redundancy and severance pay.
Types of pension scheme
There are two types of pension scheme:
Defined contribution schemes – where the contribution made is
normally a percentage of salary and the future pension depends
upon how the fund performs.
Defined benefit schemes – where the outcome is guaranteed and
typically depends upon the final salary and years worked. The
contributions therefore vary in order to achieve this outcome.
Accounting treatment: 3.1 Defined contribution plans
Contributions into a defined contribution plan by an employer are made in return for
services provided by an employee during that period, and as such:
The entity should recognise contributions payable as an expense in the
statement of profit or loss in the period in which the employee provides services
(unless another standard allows this to be capitalised as part of the cost of an
asset).
A liability should be recognised where contributions arise in relation to an
employee’s service but remain unpaid at the year end.
Accounting treatment 3.2 Defined benefit plans
A defined benefit plan provides employees with a promised level of benefits upon
retirement. These are based upon:
The final benefits promised under the plan.
The number of members.
The expected death age.
The expected returns on investment.
An actuary calculates the expected outcome and this is discounted to present value
and is known as the defined benefit obligation.
The defined benefit obligation is therefore a liability owed by the entity. However, this
is not the liability shown on the statement of financial position, as the entity will have
been making contributions into the scheme and therefore will have accumulated plan
assets.
If the liability exceeds the assets, there is a plan deficit and a liability is reported in
the statement of financial position.
If the plan assets exceed the liability, there is a surplus and an asset is reported in
the statement of financial position.
The statement of financial position balance is calculated as:
*Present value of the defined benefit obligation (Discounted at the high quality/AA corporate bond rate)
Less Fair value of the plan assets
Accounting treatment 3.2 Defined benefit plans Defined benefit obligation
What is it made up of?
Opening balance X
Interest cost X
Service costs X
Retirement benefits paid (X)
–––
Closing balance X
Accounting treatment 3.2 Defined benefit plans Interest cost
Interest cost – the liability is one year closer to being paid, so there is a need
to unwind the discount factor.
Dr Finance cost (net interest cost)
Cr Defined benefit obligation
NB: The same discount rate is applied to the plan assets at the start of the
period: the market yield on high quality fixed rate corporate bonds at the start of
the year. A net interest component is recognised in the profit or loss.
Accounting treatment 3.2 Defined benefit plans Service cost
Dr Service cost in profit or loss
Cr Defined benefit obligation
The main part of this is current service cost, the extra pension entitlement
arising from employee service in the current period. A past service cost may
also arise.
Past service cost is the change in the obligation ‘for employee
service in prior periods, arising from plan amendment. This results
from a plan amendment (the introduction or withdrawal of, or
changes to, a defined benefit plan) or a curtailment (a significant
reduction by the entity to the number of employees covered by the
plan)’ (IAS 19, para 8).
Accounting treatment 3.2 Defined benefit plans Retirement benefits paid
Retirement benefits paid – employees retire and take cash out of the scheme, so less is owed.
Dr Defined benefit obligation
Cr Plan assets
Accounting treatment 3.2 Defined benefit plans Fair value of plan assets:
What is it made up of?
Opening balance X
Interest on assets X
Contributions paid in X
Retirement benefits paid (X)
–––
Closing balance X
Accounting treatment 3.2 Defined benefit plans Interest on assets
Interest on assets – the plan assets will be invested earning an expected
return.
Dr Plan assets
Cr Profit or loss (net interest cost)
NB: The same rate is applied to the obligation at the start of the period.
A net interest component is recognised in the profit or loss.
Accounting treatment 3.2 Defined benefit plans Contributions paid –
Contributions paid – amount of cash actually paid into the scheme.
Dr Plan assets
Cr Cash
Accounting treatment 3.2 Defined benefit plans Retirement benefits paid –
Retirement benefits paid – employees retire and take cash out of the scheme,
so less is owed.
Dr Defined benefit obligation
Cr Plan assets
Accounting treatment 3.2 Defined benefit plans Remeasurement component
After posting all of the entries, the closing balance on the obligation and on the asset
should be equal to the closing actuarial valuation. However, this will not be 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 profit
or loss as part of the net interest component.
An adjustment, known as the remeasurement component, must therefore be
posted. This is charged or credited to other comprehensive income for the year and
identified as an item that will not be reclassified to profit or loss in future periods.
*Note – the remeasurement component is normally derived as a balancing or missing
figure.
Defined benefit obligation
Fair value of plan assets
Opening balance
Service cost
Interest charge/return
Contributions paid
Retirement benefits paid
Remeasurement gain or loss*
Closing balance
3.3 Other matters for defined benefit schemes Asset ceiling
The asset ceiling is a threshold to ensure that 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.
‘The asset ceiling is the present value of any economic
benefits available in the form of refunds from the plan or
reductions in future contributions to the plan.’ (IAS 19, para 8).
Any write down of the net defined benefit asset is treated as a remeasurement
component in other comprehensive income.
Other IAS 19 Employee Benefits issues 4.1 Other long-term employee benefits
Longer than 12m: Other long-term employee benefits are employee benefits that do not fall wholly
within 12 months after the end of the period in which the employees provide their
services.
Examples include: long-term disability benefits and sabbatical leave.
The accounting treatment is the same as for a defined benefit pension scheme but
there is less uncertainty. The accounting treatment is simplified and any
remeasurement differences are taken to the statement of profit or loss.
