IAS 19 | Employee Benefits

1

Objective

The objective is to prescribe accounting and disclosure for employee benefits. Entities must recognise a liability when employees provide service for future benefits and an expense when the entity consumes the economic benefit of that service.

2

Scope

The standard applies to all employee benefits provided by an employer, except for share-based payments (which are covered by IFRS 2).

3

Exclusions

It does not deal with reporting by employee benefit plans themselves (covered by IAS 26).

4

Types of Plans

Benefits may be provided under formal plans, legislative requirements, or informal practices that create a constructive obligation (where the entity has no realistic alternative but to pay).

5

Categories

Benefits are categorised into: (a) short-term benefits (settled within 12 months); (b) post-employment benefits (retirement benefits); (c) other long-term benefits (long-service leave); and (d) termination benefits.

8

Definitions

The following terms are used in this Standard with the meanings specified:

• Employee benefits: All forms of consideration given by an entity in exchange for service rendered by employees or for the termination of employment.
• Short-term employee benefits: Employee benefits (other than termination benefits) that are expected to be settled wholly before twelve months after the end of the annual reporting period in which the employees render the related service.
• Post-employment benefits: Employee benefits (other than termination benefits and short-term employee benefits) that are payable after the completion of employment.
• Other long-term employee benefits: All employee benefits other than short-term employee benefits, post-employment benefits and termination benefits.
• Termination benefits: Employee benefits provided in exchange for the termination of an employee's employment.
• Defined contribution plans: Post-employment benefit plans under which 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.
• Defined benefit plans: Post-employment benefit plans other than defined contribution plans.
• Net defined benefit liability (asset): The deficit or surplus, adjusted for any effect of limiting a net defined benefit asset to the asset ceiling.
• Fair value: The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
• Service cost: Comprises current service cost, past service cost, and any gain or loss on settlement.
• Net interest: The change during the period in the net defined benefit liability (asset) that arises from the passage of time.
• Remeasurements: Comprise actuarial gains and losses, the return on plan assets (excluding interest), and any change in the effect of the asset ceiling (excluding interest).

95

Short-term Items

Examples include wages, salaries, social security, paid annual/sick leave, profit-sharing, bonuses, and non-monetary benefits for current employees.

11

Short-term Recognition

When an employee renders service, the undiscounted amount of benefits expected to be paid is recognised as a liability (accrued expense) after deducting amounts paid, and as an expense (unless capitalised in an asset like inventory).

13

Paid Absences

Expected costs of paid absences are recognised: (a) for accumulating absences, when service is rendered that increases entitlement; and (b) for non-accumulating absences, when the absence occurs.

16

Measurement of Absences

The obligation for accumulating paid absences is measured as the additional amount the entity expects to pay as a result of the unused entitlement accumulated at the reporting date.

19

Profit-Sharing/Bonuses

Expected costs are recognised only when the entity has a present legal or constructive obligation to make payments due to past events and a reliable estimate can be made.

26

Post-employment Plans

These are classified as either defined contribution or defined benefit plans, depending on the economic substance of the plan's terms and conditions.

28

Defined Contribution (DC)

The entity's obligation is limited to the amount it agrees to contribute. Actuarial risk (benefits less than expected) and investment risk (assets insufficient) fall on the employee.

30

Defined Benefit (DB)

The entity's obligation is to provide the agreed benefits. Actuarial and investment risks fall on the entity. If experience is worse than expected, the entity's obligation increases.

32

Multi-employer Plans

Classified as DC or DB based on terms. If a DB plan, the entity accounts for its proportionate share of the obligation, assets, and cost.

34

Multi-employer Exception

If sufficient information is not available to use DB accounting for a multi-employer DB plan, the entity accounts for it as if it were a DC plan and provides additional disclosures.

37

Contractual Agreements

If a multi-employer plan accounted for as DC has a contractual agreement to fund a deficit, the participant recognises the liability arising from the agreement and the resulting expense.

43

State Plans

State plans (social security) are accounted for largely the same as multi-employer plans. They are usually defined contribution in nature as the entity's obligation is limited to paying contributions.

46

Insured Benefits

Plans funded by insurance premiums are treated as DC unless the entity retains a legal or constructive obligation to pay benefits directly or pay further amounts if the insurer defaults.

50

DC Accounting

Accounting for DC plans is straightforward. Obligations are determined by contributions for the period. No actuarial assumptions are needed, and there are no actuarial gains/losses.

51

DC Recognition

Contributions payable in exchange for service are recognised as a liability (accrued expense) and an expense (unless capitalised).

55

DB Complexity

Accounting for DB plans is complex. It requires actuarial assumptions to measure the obligation and expense, and there is a possibility of actuarial gains and losses. Obligations are discounted.

57

DB Accounting Steps

Steps include: (a) Determining deficit/surplus using the projected unit credit method, attributing benefits, and making assumptions; (b) Determining the net defined benefit liability/asset; (c) Recognising amounts in profit or loss (service cost, net interest); (d) Recognising remeasurements in other comprehensive income.

63

Statement of Financial Position

The entity recognises the net defined benefit liability (asset) in the statement of financial position.

64

Asset Ceiling

If a plan is in surplus, the net defined benefit asset is measured at the lower of the surplus and the asset ceiling (present value of economic benefits available as refunds or reductions in future contributions).

67

Actuarial Valuation

The projected unit credit method is used to determine the present value of defined benefit obligations and related current service cost.

68

Projected Unit Credit Method

This method views each period of service as giving rise to an additional unit of benefit entitlement and measures each unit separately to build up the final obligation.

70

Attributing Benefit

Benefit is attributed to periods of service under the plan's formula. If service in later years leads to materially higher benefits, attribution is done on a straight-line basis.

76

Actuarial Assumptions

Assumptions must be unbiased and mutually compatible. They include demographic assumptions (mortality, turnover) and financial assumptions (discount rate, salary increases).

83

Discount Rate

The rate used to discount obligations is determined by reference to market yields on high quality corporate bonds at the reporting date. If no deep market exists, government bond yields are used.

87

Salaries/Benefits

Measurement reflects benefits set out in plan terms, estimated future salary increases, limits on employer shares of cost, and contributions from employees.

99

Past Service Cost

When a plan amendment or curtailment occurs, the entity remeasures the net liability using current assumptions and fair values.

102

Recognising Past Service Cost

Past service cost is recognised as an expense at the earlier of when the amendment/curtailment occurs or when the entity recognises related restructuring costs or termination benefits.

109

Settlement

A gain or loss on settlement is the difference between the present value of the obligation settled and the settlement price (including assets transferred). It is recognised when the settlement occurs.

113

Plan Assets

The fair value of plan assets is deducted from the present value of the obligation to determine the deficit or surplus.

120

Components of Cost

Service cost and net interest are recognised in profit or loss. Remeasurements are recognised in other comprehensive income.

123

Net Interest

Net interest on the net defined benefit liability (asset) is determined by multiplying the net liability (asset) by the discount rate.

127

Remeasurements

These comprise actuarial gains and losses, the return on plan assets (excluding interest), and changes in the effect of the asset ceiling (excluding interest).

135

Disclosure

An entity must disclose information explaining the characteristics and risks of plans, identifying amounts in financial statements, and describing effects on future cash flows.

153

Other Long-term Benefits

Includes long-term paid absences, jubilee benefits, and long-term disability benefits.

156

Long-term Measurement

The simplified method requires recognising the net total of service cost, net interest, and remeasurements in profit or loss. Remeasurements are not recognised in other comprehensive income.

159

Termination Benefits

These deal with events where the obligation arises from the termination of employment rather than employee service.

165

Termination Recognition

A liability and expense are recognised at the earlier of when the entity can no longer withdraw the offer of benefits or when it recognises costs for a restructuring involving termination benefits.

172

Effective Date

The standard is applied for annual periods beginning on or after 1 January 2013, with retrospective application (with exceptions).