IAS 19 Employee Benefits

IAS 19: EMPLOYEE BENEFITS
What is the objective of IAS 19?

The main objective of IAS 19 is to prescribe the accounting and disclosure for employee benefits. IAS 19
requires and 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 service provided by an employee in
exchange for employee benefits.
That’s the clear demonstration of matching principle—to recognize an expense in the period when matching
revenue is recognized.
Classification of Employee Benefits

IAS 19 classifies employee benefits into 4 main categories:
 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 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
as a result of either:
o (a) an entity’s decision to terminate an employee’s employment before the normal retirement date; or
o (b) an employee’s decision to accept an offer of benefits in exchange for the termination of employment.
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 (such as medical care, housing, cars and free or subsidized goods for current employees).
Well, all Google’s expenses for free haircuts or gourmet food probably belong to this category.
How to account for short-term benefits

The entity shall recognize short-term employee benefits as an expense to profit or loss (unless another IFRS
requires or permits the inclusion of the benefits in the cost of an asset).
The expense shall be recognized in the undiscounted amount of short-term employee benefits expected to be

paid in exchange for employee’s service rendered during an accounting period.
The accounting entry is as follows:
Short-term paid absences: Expected cost of short-term paid absences shall be recognized when the employees
render service that increases their entitlement to future paid absences (in the case of accumulating paid
absences); or when the absences occur (in the case of non-accumulating paid absences).
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, and only when, the
entity has no realistic alternative but to make the payments.
Post-Employment Benefits
Post-employment benefits include items such as various pensions, retirement benefits, post-employment life
insurance and post-employment medical care.
There are 2 basic types of post-employment benefits:
 Defined contribution plans

 Defined benefit plans
It is absolutely crucial to know the difference between the two and to classify your post-employment benefit
correctly, as the accounting treatment is totally different for each of them.
Defined Contribution Plans

Defined contribution plans are 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 to pay all employee benefits relating to employee service in the current and
prior periods.
How to account for defined contribution plans
The employer shall recognize contributions payable to a defined contribution plan as an expense to profit or
loss (unless another IFRS requires or permits the inclusion of the benefits in the cost of an asset).
When the contributions are not expected to be settled wholly before twelve months after the end of the reporting
period, they shall be discounted.
The accounting entry is as follows:
Defined Benefit Plans

Defined benefit plans are post-employment benefit plans other than defined contribution plans. Under defined
benefit plan, the employer has the obligation to pay specified amount of benefits according to the plan to the
employee and all investment and actuarial risk thus fall on the entity.
Accounting for defined benefit plans is probably one of the most complex issues in IFRS because it involves
incorporating actuarial assumptions into measurement of the obligation and the expenses. Therefore, actuarial
gain and losses arise. Also, obligations are measured on a discounted basis, because they might be settled many
years after the employees render the related services.
How to account for defined benefit plans

The employers shall perform the following steps in order to account for the defined benefit plan:
Step 1: Determine Deficit or Surplus
Deficit or surplus is a difference between the present value of defined benefit obligation and fair value of plan
assets as at the end of the reporting period. In order to determine it, the entity must:
 Estimate the ultimate cost of a 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 of the defined benefit obligation and the current
service cost.
 Deduct the fair value of any plan assets from the present value of the defined benefit obligation.
Step 2: Determine amount in the statement of financial position
Although there is quite enough numbers involved in accounting for defined benefit plan, IAS 19 requires to
present them as 1 single amount in the statement of financial position – 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 of any economic benefits available in the form of refunds from the plan or
reductions in the future contributions to the plan.
Step 3: Determine amount in the profit or loss

The entity shall present the following amounts to profit or loss:
 Current service cost = the increase in the present value of the defined benefit obligation resulting from employee
service in the current period;
 Any past service cost = the change in the present value of the defined benefit obligation for employee service in
prior periods, resulting from a plan amendment or a curtailment
 Any gain or loss on settlement
 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 the discount”)
Step 4: Determine remeasurements in other comprehensive income
The entity shall present the following remeasurements to other comprehensive income:
 Actuarial gains and losses = the changes in the present value 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.
Other long-term benefits

Other long-term benefits include the following items (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 such as long-service or sabbatical leave;

 jubilee or other long-service benefits;
 long-term disability benefits;
 profit-sharing and bonuses; and
 deferred remuneration.
How to account for other long-term benefits
As other long-term benefits are not subject to so much uncertainty as defined benefit plans, the accounting
treatment is a bit easier.
However, the entity should perform the same steps as I have described at defined benefit plans. The only
difference is that all items such as service cost, net interest on the net defined benefit liability (asset) and
remeasurements of the net defined benefit liability (asset) are presented in the profit or loss – so nothing goes to
other comprehensive income.
Termination benefits
Termination benefits represent quite a different cup of tea than the previous 3 categories. Why? Because they
are not provided in exchange for the service of the employee; instead, they are provided in exchange for the
termination of employment.
However, be careful here, because the termination benefit sometimes includes the benefit for BOTH the
termination of employment AND the service of employee at the same time.
For example, a company closes one of its production plants and offers the bonus of 1 000 USD to all employees
who will be laid off. But because this company needs qualified people to perform the closure, it offers the bonus
of 3 000 USD to each employee who stays with the company until the closure is completed.
In this small example, the bonus of 1 000 USD paid to all fired employees represents termination benefit and
additional 2 000 USD paid to all employees who stay until the closure is completed represents the benefit for
the employee’s service, mostly classified as other long-term benefit in line with IAS 19.
How to account for termination benefits

The primary question here is WHEN to recognize the liability and expense for termination benefits. It is at the
earlier of:
 when the company can no longer withdraw the offer of those benefits (either the termination plan exists or
employee accepts the offer of benefits) and
 when the company recognizes cost for a restructuring (IAS 37) and involves the payment of termination benefits.
The next question is HOW to recognize termination benefits. This depends on the specific terms of the benefits:
 if the termination benefits are expected to be settled wholly before 12 months after the end of the reporting
period, then we should apply the requirements for short-term employee benefits (so recognize it as an expense to
profit or loss on undiscounted basis)
 if the termination benefits are not expected to be settled wholly before 12 months after the end of the reporting
period, then we should apply the requirements for other long-term employee benefits (so recognize it as an
expense to profit or loss on discounted basis)
SOURCE: ifrsbox.com

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IAS 19: EMPLOYEE BENEFITS

What is the objective of IAS 19?

Classification of Employee Benefits

Short-term Employee Benefits

 wages, salaries and social security contributions;

How to account for short-term benefits

The expense shall be recognized in the undiscounted amount of short-term employee benefits expected to be

The accounting entry is as follows:

There are 2 basic types of post-employment benefits:

 Defined contribution plans

Defined Contribution Plans

The accounting entry is as follows:

Defined Benefit Plans

How to account for defined benefit plans

Step 1: Determine Deficit or Surplus

 Estimate the ultimate cost of a benefit.

Step 2: Determine amount in the statement of financial position

Step 3: Determine amount in the profit or loss

Step 4: Determine remeasurements in other comprehensive income

Other long-term benefits

 long-term paid absences such as long-service or sabbatical leave;

How to account for other long-term benefits

How to account for termination benefits

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