Wiecek and Young IFRS Primer Chapter 25 Employee Benefits: IAS 19

Wiecek and Young

IFRS PrimerChapter 25

Employee Benefits: IAS 19

Employee Benefits

Related standards IAS 19 Current GAAP comparisons Looking ahead End-of-chapter practice

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Related Standards

IFRS 2 Share-based payment IAS 24 Related party disclosures

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Related Standards

FAS 87 Employers’ accounting for pensions FAS 88 Employers’ accounting for settlements

and curtailments FAS 106 Employers’ accounting for

postretirement benefits other than pensions FAS 112 Employers’ accounting for

postemployment benefits FAS 158 Employers’ accounting for defined

benefit pension and other postretirement plans

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IAS 19 – Overview

Objective and scope Short-term employee benefits Post-employment benefit plans Post-employment benefits: defined contribution

plans Post-employment benefits: defined benefit

plans Other long-term employee benefits Termination benefits

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IAS 19 – Objective and Scope

Accounting and disclosure requirements for employee benefits: all forms of consideration given by an entity in exchange for employee services rendered

– Short-term employee benefits– Post-employment benefits– Other long-term employee benefits– Termination benefits

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IAS 19 – Short-term Employee Benefit

Short-term employee benefits – benefits other than termination benefits that are due to be settled within 12 months after the end of the period in which the related service is rendered

Example:– Salaries, wages, social security contributions– Short-term compensated absences such as paid annual

and sickness leaves– Profit-sharing and bonuses– Non-monetary benefits such as medical care, housing,

etc.

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Short-term compensated absences:– Recognize a cost and liability = the undiscounted amount of

benefits expected to be paid

Some benefits accumulate – Accrue as employee provides services (e.g., paid vacation

leave)

Some do not accrue (e.g., parental leave)– Recognize cost and liability when event occurs that obligates

the entity to provide the benefit

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IAS 19 – Short-term Employee Benefit

IAS 19 – Short-term Employee Benefits

Profit-sharing and bonus plans:– Recognize cost and liability only when

a legal or constructive obligation exists, and amount can be reasonably estimated

To reasonably estimate, must have one of the

following:– plan has formal terms including a formula– amount is known before F/S are authorized for

release– past practice provides clear evidence of amount

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IAS 19 – Post-employment Benefit Plans

Post-employment benefit plans – formal or informal arrangements to provide benefits after employment, such as pension benefits and post-employment medical care

Two types of plan:– defined contribution plan: employer makes specific

contributions, employee benefits = whatever has accumulated

– defined benefit plan: employer promises to pay a post-employment benefit, if not enough funds have accumulated, employer is responsible for the difference

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IAS 19 – Post-employment Benefit Plans

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IAS 19 – Post-employment Benefits: Defined Contribution Plans

- Relatively straightforward

- Liability is recognized only for contributions unpaid at the end of the period

- Expense recognized in same period as services are rendered

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IAS 19 – Post-employment Benefits: Defined Benefit Plans

- Complex - Accounting measures depend on actuarial

assumptions far into the future - Obligations are settled many years after service

is provided by employees – need to take time value of money into account

- Many plans are funded and rely on investment returns to grow

- Employer underwrites actuarial and investment risks

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Accounting building blocks

– Present value of a defined benefit obligation – the discounted present value of the expected future payments required to settle an entity’s obligation resulting from employee service accumulated to date

– Plan assets – assets held by the long-term employee benefit fund that exists solely to pay employee benefits as they fall due.

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Changes in the PV of the defined benefit obligation (DBO) – based on projected salaries:

Present value of the obligation, beginning of period

+ Current period’s service cost+ Interest cost on the outstanding obligation for the period+/- Past service costs from plan amendments in the period

- - Benefits paid under the plan in the period+/- +/- Actuarial gains (-) and losses (+) in the

period_______________= = Present value of the obligation, end of

period________________

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PV of the defined benefit obligation depends on:– actuarial assumptions (mortality rates, employee

turnover, dependants)– financial assumptions (discount rate, future salary

levels, future medical costs)

Discount/interest rate = end-of-period market

yield on high-quality corporate bonds with terms that correspond to obligation

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Current service cost = PV of benefits earned for service in current period

Past service cost (PSC) = change in PV of DBO from introducing plan that includes benefits for past service or from a change in the benefits payable related to past service under existing plan

Actuarial gains/losses = effects of changes in actuarial assumptions and experience adjustments for difference between previous estimates and what actually occurred.

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Changes in the FV of plan assets: Fair value of plan assets, beginning of period

+ Contributions from employer/employees in the period

+/- Actual return on plan assets in the period

- Benefits paid under the plan in the period__________

= Fair value of plan assets, end of period____________

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Actual return on plan assets = interest, dividends, other income and realized and unrealized gains and losses on assets held in plan

Expected return on plan assets = return used

by actuary in determining funding requirements

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Benefit cost to recognize each period

Current service cost for the period + Interest cost for the period

- Expected return on plan assets for the period +/- Actuarial gain (-) or loss(+) amortized in the period +/- Past service cost recognized in the period = Post-employment benefit cost to profit or loss

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Benefit cost variables taken from – PV of PBO, and – Fund assets– Information in working papers for actuarial gain/loss

and PSC Amortization of actuarial gain/loss – use corridor method PSC

– for vested benefits, expense in period– for unvested benefits, amortize to expense on straight-

line basis over average period until vested

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Actuarial gains/losses: 2 options1. recognize all actuarial gains/losses in OCI when they occur,

and then directly to retained earnings – not through P&L

2. do not recognize/amortize unless accumulated net actuarial gain/loss is significant*; if significant, amortize excess amount to expense over average working lives of employees in plan

*significant: if at the first of the period, it is more than 10% of the larger of the beginning of the period PV of PBO and the fund assets

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Entries:

Dr. Employee benefit expense $XCr. Defined benefit liability $X

To record expense and recognize liability.

Dr. Defined benefit liability $YCr. Cash $Y

To record contribution to plan assets.

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Balance in Defined Benefit Liability on balance sheet can be reconciled to building blocks:

Present value of the defined benefit obligation - Fair value of the plan assets = Funded status of the plan +/- Net unrecognized actuarial gains (+) or losses (-) - Unrecognized past service costs = Defined benefit liability

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Extensive disclosures required– Description of plans and accounting policies– Reconciliation of changes in PV of PBO and fund

assets– Reconciliation of B/S account to funded status– Components of and total expense– Information about plan assets and actuarial

assumptions, sensitivity analysis, historical data– Best estimate of expected contribution to plan in

year after B/S date

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IAS 19 – Other Long-term Employee Benefits

Examples:– long-term disability benefits, long-service or

sabbatical leaves, deferred compensation (>12 months)

– similar to post-employment benefits, but with less measurement uncertainty

– all aspects recognized in expense in year; no defer and amortize

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IAS 19 – Other Long-term Employee Benefits

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IAS 19 – Termination Benefits Termination benefits – benefits payable as a result of:

– ending an employee’s employment before normal retirement date, or– employee accepts voluntary termination in exchange for benefits

Recognize liability and expense only when entity is demonstrably committed to plan. Plan sets out:

a) location, function and approximate number of employees being terminated;b) termination benefits to be provided for each job classification or function; andc) when the plan will be implemented Entire cost is expensed when entity is committed to plan

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Current GAAP Comparisons

Pages 37 to 38 of 49 ofhttp://www.ey.com/Global/assets.nsf/International/IFRS_US_GAAP_vs_IFRS/$file/US_GAAP_vs_IFRS.pdf Pages 110 to 115 of 164 ofhttp://www.kpmg.co.uk/pubs/IFRScomparedtoU.S.GAAPAnOverview(2008).pdf

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Looking Ahead

IAS 19 on IASB current agenda Goal - issue interim standard with significant

improvements by 2011 March 2008 Discussion Paper (DP) issued –

limited scope Exposure Draft expected in late 2009 After DP issues resolved, second phase of

project will begin

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Looking Ahead

Tentative decisions made by IAS Board– All changes in plan assets and benefit obligation should be

recognized when incurred– No need to separately recognize expected return on

plan assets– All past service cost should be recognized in

expense when plan amended– Variety of presentation approaches for components

of defined benefit expense – IASB seeking input– New definitions needed for post-employment

benefits and defined benefit plans

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End-of-Chapter Practice

25-1 IAS 19 applies to employee benefits including short-term employee benefits, post-employment benefits, other long-term employee benefits, and termination benefits.

Instructions(a) What differentiates each type of employee benefit that IAS

19 applies to?(b) Identify the general principles evident in IAS 19 that

underlie accounting for employee benefits.

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End-of-Chapter Practice 25-2 Quayot Corp. (QC) is provided with the following information related to its defined benefit

pension plan for the current year.$

Defined benefit obligation, Jan. 1 80Plan assets, Jan. 1 64Contribution to the plan assets 11Current service cost 9Actual return on plan assets 2Expected return on plan assets 6Past service cost recognized (amortized) 5Pension benefits paid 4Discount rate 10%Net actuarial losses in current year, benefit obligation 1Net actuarial losses in current year, plan assets 4

QC follows a policy of amortizing (i.e. ,recognizing) the minimum amount of actuarial gains and

losses allowed under IAS 19 in determining pension benefit expense. There were no accumulated actuarial gains or losses at the beginning of the current year. The cost of past service benefits granted early in the current year was $8, of which $5 is recognized. To simplify, assume all other transactions and events affecting the obligation and plan assets take place at the end of the period.

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End-of-Chapter Practice25-2 Instructions(a) Prepare a reconciliation of the opening to closing balances for the

current year for the pension benefit obligation and for the plan assets.

(b) Determine pension benefit expense for the current year.(c) If the balance in the pension benefit liability account is $16 at the

beginning of the year, what is its ending balance?(d) If QC had chosen different, but acceptable, GAAP policies for

calculating its pension expense and liability, what pension expense would have been reported?

(e) If the changes proposed in the IASB Discussion Paper issued in 2008 are accepted and IAS 19 is amended, identify how your answers to (a) and (b) above would differ.

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End-of-Chapter Practice

25-3 In this chapter, flag icons identify areas where there are GAAP differences between IFRS requirements and national standards. InstructionsAccess the website(s) identified on the inside back cover of this book, and prepare a concise summary of the differences that are flagged throughout the chapter material.

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Wiecek and Young IFRS Primer Chapter 25 Employee Benefits: IAS 19