IAS 19 - Employee Benefits Flashcards
IAS 19 deals with various types of employee benefits, which two types have we covered?
Short-term benefits (salaries, bonuses, commissions etc)
Post-employment benefits (pensions)
What are short-term benefits and how are they treated?
Short-term benefits include salaries, wages, commissions, bonuses, non-cash benefits etc.
Accounting treatment: Benefits to be paid are recognised on an accruals basis in exchange for employees services in the period.
For instance, a bonus in respect of a share of profit in year ended 31 December 2017 should be included in that year’s statement of profit or loss and other comprehensive income, irrespective of when it is paid to the employee.
What are the two types of post-employment benefit plans?
Defined contribution plans
Defined benefit plans
What are defined contribution plans?
Fixed amount/separate fund e.g., annual contribution = 5% salary
Future pensions depends on value of fund
Accounting treatment: Expense to P/L on an accruals basis
What are defined benefit plans?
Size of pension is determined in advance (pension guaranteed) (annual pension = final salary/60 x years worked)
Future pension depends on final salary/years worked
Employer contributions invested to pay for future pensions (if fund is in deficit, employers contribute more, if fund is in surplus, employers take a contribution holiday)
Company has an uncertain liability which may change due to many variables (age, life expectancy, interest rates etc)
A separate plan is established into which the company makes regular payments, as advised by an actuary
These funds need to ensure that they have enough assets to pay future pensions to pensioners
How are defined benefit plans broken down?
Sponsoring employer (pay contibutions) –> Pension plan/scheme, which is a separate fund from the company itself (pays pensions in accordance with the plan’s rule) –> Pensioners
Recognitions of assets and liabilities (obligations) with post-employment benefit plans:
Pension liabilities (or obligations) and the assets held to fund these are owned by the pension plan, but the concept of substance over form requires them to be recognised by the sponsoring company, as it is the company that:
Has an obligation to provide the agreed benefits to current and former employees, and
Is exposed to actuarial risk (that benefits will cost more than expected) and investment risk
The liabilities (at present value) and assets (at fair value) must therefore be recognised on the company’s statement of financial position.
How is net pension liability (SOFP) calculated?
Present value obligation minus fair value of plan assets = net pension liability (as generally, the plan obligations are higher than the plan assets)
Ideally, the perfect net pension is zero, as you do not want to have too many liabilities nor too many assets, therefore you want to find the sweet spot of 0
In regards to the the measurement of plan liabilities, what is the projected unit credit method?
IAS 19 requires the use of the project unit credit method.
Each period of service as giving rise to additional unit of benefit entitlement (the more you work the more you are entitled to)
Increase during the year in these liabilities is called the current service cost shown as expense in profit or loss.
Measures each unit separately to build up the final liability (obligation)
Benefits earned must be discounted to arrive at the present value of the defined benefit liabilities. Discount rate uses should be related to market yields (given in question)
Accounting Treatment: Dr Current service cost (P/L) Cr Pension Fund Liability (PV obligation)
Unwinding of the discount factor (interest cost):
Benefits earned must be discounted to arrive at the present value of the defined benefit liabilities.
Each year discount factor on opening liabilities is unwound
At opening rate of interest
Accounting Treatment: Dr Interest cost (P/L), Cr Pension Fund Liability (PV obligation)
In regards to the measurement of plan liabilities, what are past service costs?
The increase/decrease in present value of the defined benefit liabilities for employee service in prior periods, resulting from:
In regards to the measurement of plan liabilities, what are past service costs?
The increase/decrease in present value of the defined benefit liabilities for employee service in prior periods, resulting from: an amendment (the introduction or withdrawal, of changes to, a defined benefit plan) or a curtailment (a significant reduction by the entity in the number of employees)
Past service cost is recognised as an adjustment to the obligation and as an expense (or income) at the earlier of the following dates:
when the plan amendment or curtailment occurs or;
when the entity recognises related restructuring costs (in accordance with IAS37) or termination benefits
How are obligations amended in the following scenarios:
changes made to plan which improves benefits for plan members
discontinuance of an operation, so that employees services are terminated earlier than expected
An amendment is made to the plan which improves benefits for plan members, therefore an increase to the obligation (and expense) is recognised when the amendment occurs.
Discontinuance of an operation, so that employees services are terminated earlier than expected, therefore a reduction in the obligation (and income - asset interest) is recognised at the same time as termination benefits are recognised (redundancy pay-out)
What is the accounting treatment for benefits -(pensions paid to former employees)
Pension Fund Maturity
Not to be recognised as expense in P&L
Accounting treatment: Dr Pension fund liabilities/ Cr Pension Fund Assets
Why might re-measurement (actuarial) gain or losses arise?
Re-measurement (actuarial) gain or losses may arise due to differences between the year end actuarial valuation of the defined benefit liabilities and the accounting value.
Made up changes to present value of the liabilities resulting from:
experience adjustments (differences between previous assumptions and what has actually occurred), and
effect of changes in actuarial assumptions (terms, of employment, retirement changes, final salary)
