1. Overview
IAS 19 – Employee Benefits applies to all forms of employee benefits, except for those covered under IFRS 2 – Share-based Payment; this standard also does not apply to reporting employee benefit plans.
The standard sets out the following basic principles:
(a) A liability is recognized when an employee has rendered service in exchange for benefits to be paid in the future.
(b) An expense is recognized when the entity consumes the economic benefit arising from the service provided by the employee in exchange for employee benefits.
Employee benefits encompass all forms of consideration given by an entity in exchange for services rendered by employees or for the termination of employment, including:
(a) Short-term employee benefits, expected to be settled wholly before twelve months after the end of the reporting period in which the employees render the related services, such as:
(i) wages, salaries, and social security contributions;
(ii) paid annual leave and paid sick leave;
(iii) profit-sharing and bonuses; and
(iv) non-monetary benefits (such as medical care, housing, cars, and free or subsidized goods or services) for current employees;
(b) Post-employment benefits, such as:
(i) retirement benefits (e.g., pensions and lump-sum payments on retirement); and
(ii) other post-employment benefits, such as post-employment life insurance and post-employment medical care;
(c) Other long-term employee benefits, such as:
(i) long-service leave or sabbatical leave;
(ii) jubilee or other long-service benefits; and
(iii) long-term disability benefits;
(d) Termination benefits.
2. Key Issues to Consider During Transition
| Content | IFRS |
| IAS 19 – Employee Benefits | |
| Objective | The objective of IAS 19 is to prescribe the accounting policies and disclosures for employee benefits. |
| Short-term Employee Benefits | 1. Recognition Principle: When an employee has rendered service to the entity during an accounting period, the entity shall recognize the undiscounted amount of the short-term employee benefits expected to be paid in exchange for that service: (a) As a liability (accrued expense), after deducting any amounts already paid. If the amount already paid exceeds the undiscounted amount of the benefits, the entity shall recognize that excess as an asset (prepaid expense) to the extent that the prepayment will lead to a reduction in future payments or a cash refund; (b) As an expense, unless another IFRS requires or permits the inclusion of the benefits in the cost of an asset (for example, IAS 2 Inventories or IAS 16 Property, Plant and Equipment). 2. Short-term Paid Absences: The entity recognizes the expected cost of short-term paid absences as follows: (a) In the case of accumulating paid absences, when the employees render service that increases their entitlement to future paid absences; (b) In the case of non-accumulating paid absences, when the absences occur. 3. Profit-sharing and Bonus Plans: The entity shall recognize the expected cost of profit-sharing and bonus payments when, and only when: (a) The entity has a present legal or constructive obligation to make such payments as a result of past events; and (b) There can be a reliable estimate of the obligation. A present obligation exists only when, and only to the extent that, the entity has no realistic alternative but to settle the obligation. |
| Post-employment Benefits | IAS 19 requires entities to classify post-employment benefits into two categories, depending on the terms: 1. Defined Contribution Plans: – The legal or constructive obligation of the entity is limited to the amount it agrees to contribute to the fund. Therefore, the benefit an employee receives after leaving employment is determined by the contributions paid by the entity (and possibly the employee) into a post-employment benefit plan or an insurance company, along with investment returns arising from those contributions. Consequently, actuarial risk (that benefits will be less than expected) and investment risk (that the assets invested will not be sufficient to meet expected benefits) fall on the employee. – When an employee has rendered service to an entity during a period, the entity shall recognize the contribution payable in exchange for that service: (a) As a liability (accrued expense), after deducting any contributions already paid. If the contributions already paid exceed the required contribution before the end of the reporting period, the entity recognizes that excess as an asset (prepaid expense) to the extent it will lead to a reduction in future payments or a cash refund; (b) As an expense, unless another standard requires or permits the inclusion of the employee benefit contributions in the cost of an asset (for example, IAS 2 Inventories or IAS 16 Property, Plant and Equipment). – When contributions to defined contribution plans are not expected to be settled wholly within twelve months after the end of the annual reporting period in which the employees render the related service, those amounts are discounted using the applicable discount rate. 2. Defined benefit pension plan – Defined benefit plans may not be funded, or they may be funded wholly or partly by an entity, and sometimes by contributions from employees or by a legally separate entity (a fund) that reports to and is separated from the reporting entity and from other benefits paid directly by the entity. The payment of benefits when due does not depend solely on the financial position and investment performance of the entity’s own assets but is also subject to actuarial risk (that benefits will cost more than expected) and investment risk (that assets invested will be insufficient to meet expected benefits). Therefore, in substance, the entity is responsible for ensuring that the plan is adequately funded, and the cost recognized is not necessarily limited to the contributions due for the period. – The entity’s accounting for a defined benefit plan involves the following steps: (a) Determining the deficit or surplus. This includes: (i) Using an actuarial model, statistical methods to reliably estimate the entity’s benefit cost from the employee’s service in the current and prior periods. This requires the entity to determine the benefit allocated to the current and prior periods and project (using actuarial assumptions) demographic variables (such as employee turnover and mortality rates) and financial variables (such as future salary increases and healthcare costs) that will affect the cost of employee benefits; (ii) Discounting the benefit to determine the present value of the defined benefit obligation and current service cost; (iii) Deducting the fair value of plan assets from the present value of the defined benefit obligation. (b) Determining the amount of the net defined benefit liability (or asset), defined as the deficit or surplus determined in (a), adjusted for the asset ceiling (i.e., the limit on the present value of available refunds or reductions in future contributions to the plan). (c) Determining the amount to be recognized in the statement of profit or loss. (i) current service cost; (ii) any past service cost and gains or losses on settlement; (iii) net interest on the net defined benefit liability (asset). (d) Remeasurements of the net defined benefit liability (asset), recognized in other comprehensive income, comprising: (i) actuarial gains and losses; (ii) the return on plan assets, excluding amounts included in net interest on the net defined benefit liability (asset); and (iii) any changes in the effect of the asset ceiling, excluding amounts included in net interest on the net defined benefit liability (asset). When an entity has more than one defined benefit plan, it applies these recognition steps separately for each material plan. |
| Discount Rate | The rate used to discount the obligation to pay post-employment benefits (both funded and unfunded) is determined by reference to market yields on high-quality corporate bonds at the end of the reporting period. Where there is no deep market for such bonds, the market yields (at the end of the reporting period) on government bonds are used. The currency and term of the corporate or government bonds must match the currency and estimated term of the post-employment benefit obligations. |
| Disclosures | The entity must disclose information about: (a) The characteristics of its defined benefit plans and the risks associated with those plans; (b) The amounts recognized in the financial statements arising from the entity’s defined benefit plans; and (c) How the defined benefit plans affect the entity’s future cash flows, including key factors such as value, timing, and uncertainty of those cash flows. |
2. Tasks to Be Performed?
- Identify all legal obligations under benefit arrangements in accordance with IAS 19.
- Determine the impact of IAS 19 on the financial statements and the data and information that need to be gathered and monitored for recognizing the net defined benefit liability (asset).
- If the entity has defined benefit plans, pay particular attention to identifying obligations, measuring (using actuarial models and cash flow discounting), and recognizing the related items.
