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IAS 19- Employee Benefit

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  • ObjectiveIAS 19 prescribes the accounting treatment and disclosure by employers for employee benefits This Standard that IFRIC Did Not Add to Its Agenda

  • Scope of IAS 19The Standard identifies four main categories of employee benefit:(1) Short-term employee benefits, such as wages, salaries, vocational holiday benefit, sick pay, profit sharing or bonus plans paid within 12 months of the end of the period, and non monetary benefits, such as medical care and so on, for current employees.(2) Post employment benefits, such as pensions, post employment medical benefits, and post employment life insurance.(3) Termination benefits, such as severance pay.(4) Other long-term employee benefits including long service leave or sabbatical leave.

  • Scope of IAS 19ButShare base payments (IFRS 2) is beyond the scope of this IAS.

  • Key ConceptsMultiemployer plan. Either a defined contribution or a defined benefit plan that pools the assets contributed by various companies that are not under common control and uses those assets to provide benefits to employees of more than one entity.Present value of a defined benefit obligation. The present value before deducting any plan assets or any expected payments required to settle the obligation that has occurred as a result of the service of employees in the current and previous periods.Current service cost. The increase in the present value of the defined benefit obligation that occurs as a result of employee service in the current period.Interest cost. The increase in the period in the present value of the defined benefit obligation that arises because the benefits payable are one year closer to the settlement of the scheme.

  • Key ConceptsPlan assets. Those assets held by the employee benefit fund, including any qualifying insurance policies.Return on plan assets. The interest, dividends, and any other income that is derived from the plan assets together with any realized or unrealized gains or losses on those assets less the cost of administering the plan and any tax payable by the plan.Actuarial gains and losses. Experience adjustments and the effects of any changes in actuarial assumptions. Experience adjustments are differences between the previous actuarial assumptions and what has actually happened.Past service cost. The increased present value of a defined benefit obligation for employee service in previous periods that has arisen because of the introduction of changes to the benefits payable to employees. Past service costs may be positive or negative depending on whether the benefits are improved or reduced.

  • Types of Employee benefits(1) Short-term employee benefits(2) Post employment benefits (3) Termination benefits (4) Other long-term employee benefits

  • Accounting Treatment-SHORT-TERM EMPLOYEE BENEFITS

    SHORT-TERM EMPLOYEE BENEFITS Short-term employee benefits are monetary benefits that are payable within 12 months after the end of the period in which services are rendered and the nonmonetary benefits for current employees. Monetary benefits include salaries, wages, social security contributions, paid annual leave, paid sick leave, profit sharing, and bonuses. Nonmonetary benefits include perquisites to employees like housing, medical care, use of motor vehicles, and subsidized goods or services.

  • Accounting Treatment-SHORT-TERM EMPLOYEE BENEFITS

    Short-term employee benefit obligations are measured on an undiscounted basis since they are due to be paid within 12 months of the reporting date. This undiscounted amount of the employee benefits that is to be paid to an employee who has rendered service during the reporting period must be recognized as a liability (accrued expense) and the associated costs as an expense. When the payment made exceeds the amount of benefits that is to be paid, the excess must be recognized as an asset (prepaid expense).

  • Accounting Treatment-SHORT-TERM EMPLOYEE BENEFITS

    It is very common that an employer grants an employee compensation for short-term absences from work. This compensation for short-term absence can be either accumulating or nonaccumulating in nature.

  • Accounting Treatment-SHORT-TERM EMPLOYEE BENEFITS

    Payments for accumulating compensated absences, such as unutilized paid annual leave to the credit of the employee at the end of the reporting period, are carried forward and the employee is entitled to either take the leave or to cash in the entitlement. In this case, the employer must make an accrual for the amount that is expected to be paid as a result of the unsettled or unutilized entitlement at the reporting date.Payments for nonaccumulating compensated absences, such as eligible maternity leave, are not carried forward to be used in future periods and also cannot be cashed in. Therefore, in such cases, the liability and cost are not recognized until the event has occurred.

  • Accounting Treatment-SHORT-TERM EMPLOYEE BENEFITS

    When an employer has entered into an agreement with employees to share profits or to make incentive payments at the end of the reporting period, the cost and liability thereof must be recognized as there is a constructive or legal obligation to make the payment and the amount that is expected to be paid can be reliably estimated.

  • Disclosure-SHORT-TERM EMPLOYEE BENEFITS

    There are no specific disclosure requirements regarding short-term employee benefits. However, other standards, like IAS 24, Related-Party Disclosures, require that disclosures relating to remuneration and benefits paid to key management personnel be disclosed. Similarly,IAS 1, Presentation of Financial Statements, requires that employee benefits be disclosedas an expense.

  • Accounting Treatment-POSTEMPLOYMENT BENEFIT PLANSPost employment benefit plans are the formal or informal arrangements under which the employer provides post employment benefits to the employees. This will include retirement benefits such as pensions, life insurance cover, and post employment medical insurance facilities.

  • Accounting Treatment-POSTEMPLOYMENT BENEFIT PLANSPost employment benefit plans can either be defined contribution plans defined benefit plans.

  • Accounting Treatment-POSTEMPLOYMENT BENEFIT PLANSUnder a defined contribution plan, the employer enters into an arrangement to make a fixed contribution to a fund for a certain period of time, under the condition that the employer is not obligated to make further payments, even in a case where the assets of the fund are insufficient to pay all the employee benefits. An example of this plan is the contribution that the employer makes to an employee pension fund, wherein the benefits that are paid to the employee are solely based on the asset and income generation of the fund. Therefore, under this plan, the employees assume the risk that the benefits will be less than what is expected in the future (actuarial risk) and that the assets invested by the fund will not earn enough returns to meet the expected benefits (investment risk).

  • Accounting Treatment-POSTEMPLOYMENT BENEFIT PLANSDefined benefit plans are those post employment benefit plans that are not defined contribution plans. Under this plan, the employer assumes the responsibility and related risk of meeting the obligation to the current and former employees.

  • Accounting Treatment-POSTEMPLOYMENT BENEFIT PLANSRecognition and MeasurementDEFINED CONTRIBUTION PLANSThe obligation of the employer under this plan for the reporting period is limited to the amount of contribution that is required to be made during that period. Therefore, there is no requirement for an actuarial valuation to be carried out to measure the obligation or the expense and account for the gain or loss that may arise on such an actuarial valuation. Similarly, for measurement purposes, the contribution that is due does not have to be discounted unless it is due beyond a period of 12 months from the reporting date. In such cases, the contributions that are due have to be discounted using a rate that has reference to the market yield on good quality corporate bonds.

  • Accounting Treatment-POSTEMPLOYMENT BENEFIT PLANSRecognition and MeasurementDEFINED CONTRIBUTION PLANSAs in the case of short-term employee benefit obligations, the contribution to a defined contribution plan should be recognized as a liability (accrued expense) and the associated costs as an expense. When the payment made exceeds the amount of contribution that is due to be paid at the reporting date, such excess must be recognized as an asset (prepaid expense).

  • DisclosureThe amount that is recognized as an expense for defined contribution plans should be disclosed in the financial statements. Similarly contributions made to defined contribution plans for key management personnel must also be disclosed, as required by IAS 24, Related- Party Disclosures.In the case of a multiemployer plan, the entity must disclose the fact that the plan is a defined benefit plan and explain the reason why it is accounted for as a defined contribution plan.

  • Accounting Treatment-POSTEMPLOYMENT BENEFIT PLANSDEFINED BENEFIT PLANSUnlike in defined contribution plans, the benefits payable to employees under a defined benefits scheme are based on the terms of the plan and not on the amount of the contributions. This means that the employer undertakes the risks of providing the required funds to meet the obligations relating to the benefits to current and former employees. Therefore, the measurement and recognition for defined benefit plans is more complex than that of defined contributions plans

  • Accounting Treatment-POSTEMPLOYMENT BENEFIT PLANSDEFINED BENEFIT PLANS Example Under the terms of a pension plan, the employer contributes 10% of the employees salary per month and the employees contribute 5% of their salary per month. The employer guarantees a payment to the employee equivalent to 103% of the amount of the contributions made. This pension scheme will be a defined benefit plan since the employer has guaranteed a fixed rate of return and therefore assumes the risk.

  • Accounting Treatment-POSTEMPLOYMENT BENEFIT PLANSIn many cases, the contributions in defined benefit plans are made to funds that are independent of the employer. The contributions to these funds are made either by the employer or by the employer and employee jointly. The benefits to the employees are paid at a future date from asset and income generation of the fund; therefore there is no guarantee that the assets of the fund will be sufficient to meet the future benefit obligations. Since the employer undertakes this risk of shortfall, the expense recognized in a defined benefit plan is not equal to the contribution made for the period

  • Accounting Treatment-POSTEMPLOYMENT BENEFIT PLANSThe accounting for a defined benefit plan is complex because the actuarial assumptions made in the actuarial techniques for the valuation of the benefits payable in the future might change over time. In addition, the obligations have to be recognized at the reporting date by discounting, since the benefits are settled several years after the employee renders the services.

  • Accounting Treatment-POSTEMPLOYMENT BENEFIT PLANSAccounting for assets or liabilities of the defined benefit plan. The asset or liability on account of the defined benefit plan that is recognized in the statement of financial position shall be the net total of the following: The present value of the defined benefit obligation, plus or minusAny actuarial gains less losses not yet recognized because the gains and losses fall outside the limits of the corridor (10% of the fair value of the plan assets), minusPast service cost not yet recognized, minusThe fair value of the plan assets at the reporting date

  • When the net total is a positive amount, a liability is recorded in the statement of financial position. When the net total amount is negative, an asset is recognized at the lower of the amounts calculated above and the net total of any unrecognized net actuarial losses and past service costs, and the present value of any benefits available in the form of refunds or reductions in future employer contributions to the plan.

  • The present value of a defined benefit obligation is the discounted value of the expected future payments that is required to settle the obligation from past and current employee services. This present value is based on the future salaries payable, application of applying the projected unit credit actuarial method, and attributing the benefits to the periods of service under the plans benefit formula.

  • The projected unit credit actuarial method looks at each period of service, which creates an additional increment of benefit entitlement and measures each unit of benefit entitlement separately to determine the final obligation. The whole post employment benefit obligation is then discounted. The use of this method involves a number of actuarial assumptions, like mortality rates, retirement age, and discount rates, which are some of the factors that go into determining the final cost of the post employment benefits provided. The rate used for discounting the obligations is the market yield of high-quality corporate bonds with terms similar to the obligations at the reporting date.

  • The actuarial gains and losses represent the adjustments that are made on account of the differences between the previous actuarial assumptions and the actual occurrence and the effect of any changes in actuarial assumptions

  • The past service cost is the increase or decrease in the present value of a defined benefit obligation for employee service in previous periods that arises on account of changes in the post employment, or long-term employee benefits, plan. Any benefit paid to employees during the period under the plan will reduce the liability.

  • Plan assets are those assets that are held by a long-term employee benefit fund and any qualifying insurance policies. The assets in a long-term employee benefit fund are held by separate legal entities that exist only to pay or fund employee benefits. The assets in these funds are not returned to the reporting entity, other than as a reimbursement of the employee benefit payments and when the value of the assets is in excess of all of the employee benefit obligations. Similarly, qualifying insurance policies are issued by an insurer who is not a related party (IAS 24, Related-Party Disclosures), and the proceeds of the policy are not returned to the reporting entity other than as a reimbursement of the employee benefit payments and when the value of the assets is in excess of all of the employee benefit obligations

  • The fair value of plan assets at the end of the reporting period is the total of the following amounts:Fair value of the plan assets at the beginning of the reporting period, plusContributions from employer or employee during the reporting period, plus or minusThe actual return on plan assets during the reporting period (interest income, dividend income), minus The benefits paid under the plan during the reporting period.

  • An entity has the following balances relating to its defined benefit plan: Present value of the obligation: $33 million Fair value of plan assets: $37 million Actuarial losses: $3 million unrecognized Past service cost: $2 million unrecognized Present value of available future refunds and reduction in future contributions: $1 millionCalculate the value of the net plan asset.

  • The negative amount (asset) determined under the standard will bePresent value of the obligation $33 millionFair value of plan assets ($37 million)Unrecognized actuarial losses ($3 million)Unrecognized past service cost ($2 million)($9 million)The limit under this standard will beUnrecognized actuarial losses $3 millionUnrecognized past service cost $2 millionPresent value of available future refunds and reduction in future contributions $1 million$6 millionThe entity recognizes an asset of $6 million and discloses the fact that the limit has reduced the carrying amount of the asset by $3 million.

  • Accounting for expense or income of the defined benefit plan. An entity shall recognize the net total of the following amounts in the statement of profit and loss, except to the extent that another standard requires or permits their inclusion in the cost of an asset:

  • Current service cost; Interest cost for the reporting period; The expected return on any plan assets; Actuarial gains and losses amortized in the reporting period; and Past service cost recognized in the reporting period.

  • The current service cost, that is, the increase in the present value of the defined benefit obligation arising from employee service in the current period, is affected by variables that are key in determining the defined benefit obligation and how these benefits are attributed to the period of service.

  • The actuarial gains and losses are the excess of the net cumulative unrecognized actuarial gains and losses at the end of the previous reporting period over the greater of 10% of the present value of the defined benefit obligation at the beginning of the reporting period; and 10% of the fair value of the plan assets at the same date.

  • The excess determined by the above method (corridor approach) is then divided by the expected average remaining lives of the employees in the plan. An entity can recognize the whole amount of the actuarial gains and losses in other comprehensive income in the reporting period in which they occur and include it under retained earnings. However, when they do so the same treatment must be applied to all defined benefit plans and for all actuarial gains or losses.

  • Past service cost arises when an entity introduces a defined benefit plan or changes the benefits payable under an existing defined benefit plan. In measuring its defined benefit liability, an entity should recognize past service cost as an expense on a straight-line basis over the average period until the benefits become vested. To the extent that the benefits are already vested immediately following the introduction of, or changes to, a defined benefit plan, an entity should recognize past service cost immediately. In addition, the effects of settlements and curtailments and adjustments to the benefit asset recognized in the statement of the financial position may also affect the employee benefit expense recognized in the statement of income.

  • A chief executive officer (CEO) of an entity receives a retirement benefit of 10% of his final annual salary for his contractual period of three years. The CEO does not contribute to the scheme. His anticipated salary over the three years is Year 1 $100,000, Year 2 $120,000, and Year 3 $144,000. Assume a discount rate of 5%. What would be the current service cost, the pension liability, and the interest cost for the three years?

  • DisclosureThe following major disclosures are required for post employment defined benefit plan by this standard: Description of type of plan; Accounting policy for recognizing actuarial gains or losses; Reconciliation of the opening balance of the present value of defined benefit obligation to the closing balance, disclosing each item that has been affected; Reconciliation of difference between the employee benefit asset or liability reported on the statement of financial position to the funded status of the plans; Total expense reported in the statement of profit or loss; Amounts recognized in the statement of comprehensive income;

  • OTHER LONG-TERM EMPLOYEE BENEFITSOther long-term employee benefits will include the share of profits payable after 12 months of the reporting date, benefits payable on long-term disability of employees, and so on.

  • The liability on account of other long-term employee benefits that is recognized in the statement of financial position shall be the net total of the following: The present value of the defined benefit obligation at the reporting date, minus The fair value of the plan assets at the reporting date.

  • DisclosureThere are no specific disclosures required for other long-term employee benefits. However, IAS 1, Presentation of Financial Statements, and IAS 24, Related-Party Disclosures, may have to be applied.

  • TERMINATION BENEFITSTermination benefits are those benefits payable to an employee on account of the employers decision to terminate the individuals services before the normal agreed period, or on account of an employees decision to opt for voluntary retirement in exchange for these benefits.

  • An entity should recognize the termination benefits as a liability and an expense only when the entity is committed either to terminate the employment of an employee or group of employees before the normal agreed period or provide termination benefits as a result of an offer made in order to encourage voluntary withdrawal from the entity.