The ‘OBJECTIVE‘ of IAS 19 is to prescribe the accounting and disclosure for employee benefits.
IAS 19 requires an entity to RECOGNIZE:
- A Liability when an employee has provided service in exchange for employee benefits to be paid in the future; AND
- An Expense when the entity consumes the economic benefit arising from a service provided by an employee in exchange for employee benefits.
Table of Contents
IAS 19 Effective Date
An entity shall apply this Standard for annual periods beginning on or after 1 January 2013.
Earlier application is ‘PERMITTED’.
If an entity applies this Standard for an earlier period, it shall disclose that fact.
IAS 19 – Scope
This Standard shall be applied by an employer in accounting for all employee benefits, except those to which IFRS 2 applies.
IAS 19 – Classification of Employee Benefits
IAS 19 CLASSIFIES ‘Employee Benefits‘ into 4 categories:
| 1. Short-Term Employee Benefits |
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| Employee Benefits (OTHER than termination benefits) that are expected to be settled wholly before 12 months after the end of the annual reporting period in which the employees render the related service. |
| 2. Post-Employment Benefits |
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| Employee Benefits (OTHER than termination benefits and short-term) that are payable after the completion of employment. |
| 3. Other Long-Term Benefits |
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| All Employee Benefits (OTHER than short-term, post-employment and termination benefits). |
| 4. Termination Benefits |
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| Employee Benefits provided in exchange for the termination of an employee’s employment as a result of EITHER: – Entity’s decision to terminate an employee’s employment before the ‘Retirement Date’; OR – Employee’s decision to accept an offer of benefits in exchange for the termination of employment. |
1. Short-Term Employee Benefits
Short-term Employee Benefits INCLUDE all the following items (if payable within 12 months after the end of the reporting period):
- Wages, Salaries and Social Security Contributions;
- Paid Annual Leave and Paid Sick Leave;
- Profit-Sharing and Bonuses; AND
- Non-Monetary Benefits (INCLDING Medical Care, Housing, Cars and Free or Subsidized Goods for current employees).
1.1 How to Account for Short-Term Benefits
The Entity shall RECOGNIZE these as an Expense to P&L (UNLESS another IFRS requires or permits the inclusion of the benefits in the cost of an asset).
| Accounting Entry |
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| Debit: Expense for Employee Benefits P&L / Cost of assets Credit: Liability / Accrued Expense / Cash |
[Short-Term Paid Absences: Expected cost shall be recognized when the employees render service that increases their entitlement to future paid absences (‘Accumulating’ e.g Annual Leave); OR when the absences occur (‘Non-Accumulating‘ e.g Sick Leave).
[Profit-Sharing and Bonuses: An entity shall RECOGNIZE the expected cost of profit-sharing and bonus payments when the entity has a Present Legal or Constructive Obligation to make such payments as a result of past events, and a reliable estimate of the obligation can be Made.
A ‘Present Obligation‘ exists when the entity has NO realistic alternative but to Make the payments.
2. Post-Employment Benefits
Post-employment benefits INCLUDE Pensions, Retirement Benefits, Post-Employment Life Insurance and Post-Employment Medical Care.
There are 2 basic types of:
- Defined Contribution Plans; AND
- Defined Benefit Plans.
2.1 Defined Contribution Plans
An Entity pays ‘Fixed Contributions’ into a SEPARATE entity (a fund) and will have NO legal or constructive obligation to pay further contributions if the fund does not hold sufficient assets to pay all ‘Employee Benefits‘ relating to employee service in the current and prior periods.
| How to Account for Defined Contribution Plans |
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| The Employer shall recognize contributions payable as an expense to P&L (UNLESS another IFRS requires or permits the inclusion of the benefits in the cost of an asset). Accounting Entry; Debit: Expense for Employee Benefits P&L / Cost of assets Credit: Liability / Accrued Expense / Cash |
2.2 Defined Benefit Plans
These are Post-Employment Benefit Plans OTHER than ‘Defined Contribution Plans’. Employer has the obligation to pay specified amount of benefits to the employee and all investment and actuarial risk thus fall on the entity.
| How to Account for Defined Benefit Plans |
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| Employer shall PERFORM the following steps: |
| [Step 1: Determine Deficit/Surplus] It is the difference between the present value (PV) of defined benefit obligation and the fair value of plan assets at the end of the reporting period. The entity Must: – Estimate the ‘Ultimate Cost‘ of the Benefit The entity Must use Projected Unit Credit Method to Estimate how much the employees have earned for their work in the current and prior periods, to attribute the benefit to the periods of service and to incorporate estimates about demographic and financial variables (actuarial assumptions) into calculations. – Discount the Benefit in order to determine the present value (PV) of the defined benefit obligation and the current service cost. – Deduct the Fair Value of any Plan Assets from the present value (PV) of the defined benefit obligation. |
| [Step 2: Determine Amount in the Statement of Financial Position (SOFP)] IAS 19 Requires to present all the calculations performed as 1 single amount – The Net Defined Benefit Liability/(Asset), which is basically deficit or surplus calculated in the step 1 but adjusted for the effect of ‘Asset Ceiling‘. Asset Ceiling is the present value (PV) of any economic benefits available in the form of refunds from the plan or reductions in future contributions. |
| [Step 3: Determine Amount in the P&L] The Entity shall PRESENT: (a) Current Service Cost – the Increase in the present value (PV) of the defined benefit obligation resulting from employee service in the current period. (b) Past Service Cost – the Change in the present value (PV) of the defined benefit obligation for employee service in prior periods, resulting from a plan amendment or curtailment. (c) Gain/(Loss) on Settlement (d) Net Interest on the Net Defined Benefit Liability / (Asset) – the Change in the net defined benefit liability / (asset) during the period due to passage of time (Unwinding of the Discount). |
| [Step 4: Determine Re-Measurement in Other Comprehensive Income (OCI)] The Entity shall PRESENT: – Actuarial Gain/(Losses) – the Changes in the present value (PV) of the defined benefit obligation resulting from experience adjustments or the effects of changes in actuarial assumptions. – Return on Plan Assets EXCLUDING amounts included in net interest on the net defined benefit liability/(asset). – Any Change in the Effect of the Asset Ceiling. |
3. Other Long-Term Benefits
Other long-term benefits INCLUDE the following (if not expected to be settled within 12 months after the end of the period in which the Employee renders the related service):
- Long-Term Paid Absences INCLUDING Long Service or Sabbatical Leave;
- Jubilee or Other Long Service Benefits;
- Long-Term Disability Benefits;
- Profit Sharing and Bonuses; AND
- Deferred Remuneration.
3.1 How to Account for Other Long-Term Benefits
The Entity should PERFORM the Same 4 steps as described in ‘Defined Benefit Plans‘.
The only DIFFERENCE is that all items as Mentioned there should be presented in the Profit or Loss i.e. Nothing goes to (OCI).
4. Termination Benefits
Termination benefits are provided in exchange for the ‘Termination of Employment‘ RATHER than in exchange for the service of the employee.
However, they include the benefit for BOTH the termination of employment AND the service of the employee.
4.1 How to Account for Termination Benefits
| Primary Question is WHEN to Recognize the Liability and Expense for Termination Benefits. It is at the Earlier of: |
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| – When Co. can NO longer withdraw the offer of those benefits (Either the termination plan exists or Employee accepts the offer); AND – When Co. RECOGNIZES ‘Cost of Restructuring’ under IAS 37 and involves the payment of termination benefits. |
| Secondary Question is HOW to Recognize Termination Benefits. This Depends on the Specific Terms of the Benefits: |
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| – If the ‘termination benefits‘ are Expected to be settled wholly before 12 months after the end of the reporting period, then Co. should recognize it as an expense to profit or loss (P&L) on un-discounted basis. – If the ‘termination benefits‘ are NOT Expected to be settled wholly before 12 months after the end of the reporting period, then Co. should recognize it as an expense to profit or loss (P&L) on discounted basis. |
Synopsis
IAS 19 ISSUED in 2011 outlines the accounting for ‘Employee Benefits‘, INCLUDING Short-Term Benefits, Post-Employment Benefits, Other Long-Term Benefits and Termination Benefits.
Chartered Accountant (Institute of Chartered Accountants of Pakistan)
Bachelor of Accounting Honours (Asia e University, Malaysia)