IAS 19 - EMPLOYEE BENEFITS

Employee benefits are all forms of consideration given by an entity in exchange for
service rendered by employees or for the termination of employment.

Employee benefits include

Employee benefits include benefits provided either to
 employees or
 their dependents or
 beneficiaries and may be settled by payments (or the provision of goods or services) or to
others, such as insurance companies.

OBJECTIVE
The objective of this Standard is to prescribe the accounting and disclosure for
employee benefits. The Standard requires an entity to recognise:

(a) a liability when an employee has (b) an expense when the entity
provided service in exchange for consumes the economic benefit arising
employee benefits to be paid in the from service provided by an employee
future; and in exchange for employee benefits.

SCOPE
This Standard shall be applied by an employer in accounting for all employee benefits, except those
to which IFRS 2 Share-based Payment applies.
This Standard does not deal with reporting by employee benefit plans (see IAS 26 Accounting and
Reporting by Retirement Benefit Plans).

Zubair Saleem AAFR notes IAS 19 1

 Employee benefits include:

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

benefits employee benefits

Short-term employee benefits are
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 Other long-term Termination benefits are
benefits are employee employee benefits are all employee benefits provided in
benefits (other than employee benefits other exchange for the termination of
termination benefits than short-term an employee’s employment as a
and short-term employee benefits, post- result of either:
employee benefits) that employment benefits
are payable after the and termination (a) an entity’s decision to
completion of benefits. terminate an employee’s
employment. employment before the normal
retirement date; or

(b) an employee’s decision to

accept an offer of benefits in
exchange for the termination of
employment.

Such as the following, Such as the following: Such as the following: Such as
If expected to be settled wholly (i) retirement benefits (i) long-term paid
before twelve months after the end (e.g. pensions and lump absences such as long- Redundancy pays.
of the annual reporting period in sum payments on service leave or
which the employees render the retirement); and sabbatical leave;
related services: (ii) other post- (ii) jubilee or other long-
(i) wages, salaries and social employment benefits,
service benefits; and
security contributions; such as post-
(iii) long-term disability
(ii) paid annual leave and paid sick employment life
leave; insurance and benefits; and
(iii) profit-sharing and bonuses; and postemployment Long term bonus
(iv) non-monetary benefits (such as medical care;
medical care, housing, cars and free
or subsidised goods or services) for
current employees;

Zubair Saleem AAFR notes IAS 19 2

 POST-EMPLOYMENT BENEFIT PLANS
There are two main types of post-employment benefit plans:

POST-EMPLOYMENT BENEFIT PLANS

1.Defined contribution plans 2. Defined benefit 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.
are post-employment benefit plans other
than defined contribution plans.
Under defined benefit plans:
the entity’s obligation is to provide the
agreed benefits to current and former
employees; and
actuarial risk (that benefits will cost more
than expected) and investment risk fall, in
substance, on the entity.
If actuarial or investment experience are
worse than expected, the entity’s obligation
may be increased.

Example of cases where an entity’s obligation is not limited to the amount that it agrees to
contribute to the fund are when the entity has a legal or constructive obligation through:
(a) a plan benefit formula that is not linked solely to the amount of contributions and requires the
Example entity to provide further contributions if assets are insufficient to meet the benefits in the plan
benefit formula;
(b) a guarantee, either indirectly through a plan or directly, of a specified return on contributions;
or
(c) those informal practices that give rise to a constructive obligation. For example, a constructive
obligation may arise where an entity has a history of increasing benefits for former employees to
keep pace with inflation even where there is no legal obligation to do so.

Zubair Saleem AAFR notes IAS 19 3

Complexity of accounting
Accounting for defined benefit plans is much more complex. The complexity of accounting for
defined benefit plans stems largely from the following factors.
a) The future benefits (arising from employee service in the current or prior years) cannot be
measured exactly, but whatever they are, the employer will have to pay them, and the
liability should therefore be recognised now. To measure these future obligations, it is
necessary to use actuarial assumptions.
b) The obligations payable in future years should be valued, by discounting, on a present value
basis. This is because the obligations may be settled in many years' time.
c) If actuarial assumptions change, the amount of required contributions to the fund will
change, and there may be actuarial gains or losses. A contribution into a fund in any period
will not equal the expense for that period, due to actuarial gains or losses

Zubair Saleem AAFR notes IAS 19 4

Accounting-Defined benefit plans

Recognise

Plan asset at fair value Defined benefit pension liability at present value

Definition Definition

(a) assets held by a long-term
employee benefit fund;
(b) qualifying insurance policies
present value, without deducting any plan
assets, of expected future payments
required to settle the obligation resulting
from employee service in the current and
prior periods. Plan

Step Item Recognition

1 Record opening figures:
 Asset
 Obligation
2 Interest cost on obligation DEBIT Interest cost (P/L)
 Based on discount rate and PV (x% x b/d obligation)
obligation at start of period.
 Should also reflect any changes in CREDIT PV defined benefit obligation (SOFP)
obligation during period.
3 Interest on plan assets DEBIT Plan assets (SOFP)
 Based on discount rate and asset
value at start of period. CREDIT Interest cost (P/L) (x% x b/d assets)
 Technically, this interest is also time
apportioned on contributions less
benefits paid in the period.
4 Current service cost DEBIT Current service cost (P/L)
 Increase in the present value of the
obligation resulting from employee CREDIT PV defined benefit obligation (SOFP)
service in the current period.
5 Contributions DEBIT Plan assets (SOFP)
 As advised by actuary. CREDIT Company cash
6 Benefits DEBIT PV defined benefit obligation (SOFP)
 Actual pension payments made. CREDIT Plan assets (SOFP)
7 Past service cost Positive (increase in obligation):
 Increase/decrease in PV obligation as DEBIT Past service cost (P/L)
a result of introduction or CREDIT PV defined benefit obligation (SOFP)
improvement of benefits.
Negative (decrease in obligation):
DEBIT PV defined benefit obligation (SOFP)
CREDIT Past service cost (P/L)

Zubair Saleem AAFR notes IAS 19 5

 8 Gains and losses on settlement Gain
 Difference between the value of the DEBIT PV defined benefit obligation (SOFP)
obligation being settled and the CREDIT Service cost (P/L)
settlement price.
Loss
DEBIT Service cost (P/L)
CREDIT PV defined benefit obligation (SOFP)
9 Re-measurements: actuarial gains and Gain
losses DEBIT PV defined benefit obligation (SOFP)
 Arising from annual valuations of CREDIT Other comprehensive income
obligation.
 On obligation, differences between Loss
actuarial assumptions and actual DEBIT Other comprehensive income
experience during the period, or CREDIT PV defined benefit obligation (SOFP)
changes in actuarial assumptions.
10 Re-measurements: return on assets Gain
(excluding amounts in net-interest) DEBIT FV plan assets (SOFP)
 Arising from annual valuations of CREDIT Other comprehensive income
plan assets
Loss
DEBIT Other comprehensive income
CREDIT FV plan assets (SOFP)
11 Disclose in accordance with the See comprehensive question.
standard

Financial Statements Extract

Statement of Comprehensive Income Statement of financial position

Profit and loss Non-current asset

operation cost (Note 1) net defined benefit plan asset ( Note -3)
(surplus)

other comprehensive income Long term liability

Net measurement Gain loss (Note 2) net defined benefit pension liability (Note -3)
(deficit)

Note 1 charge to profit and loss

Rs.
(a) Current service cost XXXX
(b) Any past service cost and gain or loss on settlement XXXX
(c) Net interest on the net defined benefit liability (asset) XXXX

Note 2 charge to to other comprehensive income

Rs.
(a) Actuarial gains and losses XXXX
(b) Return on plan assets (excluding amounts included in net interest on the net XXXX
defined benefit liability (asset))

Zubair Saleem AAFR notes IAS 19 6

(c) Any change in the effect of the asset ceiling (excluding amounts included in net XXXX
interest on the net defined benefit liability (asset))
Note 3- Statement of financial position
Rs.
PV of defined benefit obligation (I) XXX
LESS: Fair value of plan assets ( II ) XXX
Net liability/(asset) ( III ) XXX/ (XXX)

IF above amount is negative i.e. (surplus) (asset)

Entity shall measure asset at lower off
(i) above calculated amount AND
(ii) PV of economic benefits available in form of refunds from plan or reductions in future
contributions to plan discounted at same discount rate

I- Reconciliation of PV of defined benefit obligation

Opening PV of defined benefit obligation XXX
ADD: Interest cost XXX
ADD: Current service cost XXX
ADD: Past service cost XXX
LESS: Benefits paid
LESS: Settlement XXX
ADD / LESS: Actuarial (gains) / losses (balancing figure) XXX
Clos. PV of defined benefit obligation XXX

II - Reconciliation of FV of plan assets

Opening. FV of plan assets XXX
ADD: Interest on plan assets XXX
ADD: Contributions made XXX
LESS: Benefits paid XXX
LESS: Settlement XXX
ADD / LESS: Return on plan assets (balancing figure) XXX
Clos. FV of of plan assets XXX

Reconcile the movement in the net obligation or asset

Net obligation as at 1 Jan XXX
Current service cost XXX
past service cost XXX
Net interest charge XXX
Contribution into plan XXX
Net re measurement component XXX
Net obligation as at 31 December XXX

Statement of Cashflows
Cash flows from operating activities XXX
+ operating expenses XXX

Zubair Saleem AAFR notes IAS 19 7

- Pension contribution paid XXX

Zubair Saleem AAFR notes IAS 19 8

Defined benefit plan- Practice Question
Brutus operates a defined benefit pension plan for its employees. The present value of the future
benefit obligations and the fair value of its plan assets on 1 January 20X1 were $110
million and $150 million respectively.

The pension plan received contributions of $7 million and paid pensions to former employees of
$10 million during the year.

Extracts from the most recent actuarial report shows the following:

Present value of pension plan obligation at 31 December 20X1 16m

Fair value of plan assets at 31 December 20X1 40m
Present cost of pensions earned in the period 11m
Yield on high quality corporate bonds at 1 January 20X1 10%
On 1 January 20X1, the rules of the pension plan were changed to improve benefits for plan
members. The actuary has advised that this will cost $10 million.

Required: Prepare extracts from the notes to Brutus' financial statements for the year ended 31
December 20X1 which show how the pension plan should be accounted for

Note. Assume contributions and benefits were paid on 31 December

Defined benefit plan- Practice Question (BBP Example)

For the sake of simplicity and clarity, all transactions are assumed to occur at the year end.
The following data applies to the post employment defined benefit compensation scheme of BCD
Co.

Discount rate: 10% (each year)

Present value of obligation at start of 20X2: $1 m
Market value of plan assets at start of 20X2: $1 m

The following figures are relevant.

20X2 20X3 20X4
$'000 $'000 $'000
Current service cost 140 150 150
Benefits paid out 120 140 150
Contributions paid by entity 110 120 120
Present value of obligation at year end 1,200 1,650 1,700
Fair value of plan assets at year end 1,250 1,450 1,610

Additional information:
 At the end of 20X3, a division of the company was sold. As a result of this, a large number
of the employees of that division opted to transfer their accumulated pension entitlement to
their new employer’s plan. Assets with a fair value of $48,000 were transferred to the other
company’s plan and the actuary has calculated that the reduction in BCD’s defined benefit

Zubair Saleem AAFR notes IAS 19 9

 liability is $50,000. The year-end valuations in the table above were carried out before this
transfer was recorded.
 At the end of 20X4, a decision was taken to make a one-off additional payment to former
employees currently receiving pensions from the plan. This was announced to the former
employees before the year end. This payment was not allowed for in the original terms of the
scheme. The actuarial valuation of the obligation in the table above includes the additional
liability of $40,000 relating to this additional payment.

Required
Show how the reporting entity should account for this defined benefit plan in each of years
20X2,20X3 and 20X4.

Plan assets comprise:

a) Assets held by a long-term employee benefit fund; and
(Assets held by a long-term employee benefit fund are assets (other than non-transferable
financial instruments issued by the reporting entity) that:
a. Are held by an entity (a fund) that is legally separate from the reporting entity and exists
solely to pay or fund employee benefits; and
b. Are available to be used only to pay or fund employee benefits, are not available to the
reporting entity’s own creditors (even in bankruptcy), and cannot be returned to the
reporting entity, unless either:
i. The remaining assets of the fund are sufficient to meet all the related employee benefit
obligations of the plan or the reporting entity; or
ii. The assets are returned to the reporting entity to reimburse it for employee benefits
already paid.

b) Qualifying insurance policies

A qualifying insurance policy is an insurance policy issued by an insurer that is not a
related party (as defined in IAS 24 Related party disclosures) of the reporting entity, if the
proceeds of the policy:
a. Can be used only to pay or fund employee benefits under a defined benefit plan; and
b. are not available to the reporting entity’s own creditors (even in bankruptcy) and cannot
be paid to the reporting entity, unless either:
i. The proceeds represent surplus assets that are not needed for the policy to meet all the
related employee benefit obligations; or
ii. The proceeds are returned to the reporting entity to reimburse it for employee benefits
already paid.

Zubair Saleem AAFR notes IAS 19 10

 SHORT-TERM EMPLOYEE BENEFITS
Recognition and measurement
 When an employee has rendered service to an entity during an accounting period,
 the entity shall recognize the undiscounted amount of short-term employee benefits expected
to be paid in exchange for that service:
a. as a liability
b. as an expense, unless another IFRS requires or permits the inclusion of the benefits in the
cost of an asset

Short-term paid absences

An entity shall recognise the expected cost of short-term employee benefits in the form of paid
absences as follows:
a. in the case of accumulating paid absences, when the employees render service that increases
their entitlement to future paid absences.
b. in the case of non-accumulating paid absences,
When the absences occur. An entity may pay employees for absence for various reasons including
holidays, sickness and short-term disability, maternity or paternity, jury service and military service.
Entitlement to paid absences falls into two categories:
a. accumulating; and
b. non-accumulating.
Accumulating paid absences are those that are carried forward and can be used in future periods if
the current period’s entitlement is not used in full.
Accumulating paid absences may be either
 Vesting (in other words, employees are entitled to a cash payment for unused entitlement on
leaving the entity)
 Non-vesting (when employees are not entitled to a cash payment for unused entitlement on
leaving). An obligation arises as employees render service that increases their entitlement to
future paid absences.
The obligation exists, and is recognised, even if the paid absences are non-vesting, although the
possibility that employees may leave before they use an accumulated non-vesting entitlement affects
the measurement of that obligation.
An entity shall measure
 the expected cost of accumulating paid absences
 as the additional amount that the entity expects to pay
 as a result of the unused entitlement that has accumulated
 at the end of the reporting period.

Zubair Saleem AAFR notes IAS 19 11

 An entity has 100 employees, who are each entitled to five working days of paid sick leave
for each year. Unused sick leave may be carried forward for one calendar year. Sick leave is
taken first out of the current year’s entitlement and then out of any balance brought forward
Example from the previous year (a LIFO basis). At 31 December 20X1 the average unused
entitlement is two days per employee. The entity expects, on the basis of experience that is
expected to continue, that 92 employees will take no more than five days of paid sick leave
in 20X2 and that the remaining eight employees will take an average of six and a half days
each. The entity expects that it will pay an additional twelve days of sick pay as a result of
the unused entitlement that has accumulated at 31 December 20X1 (one and a half days
each, for eight employees). Therefore, the entity recognises a liability equal to twelve days
of sick pay.

Non-accumulating paid absences do not carry forward: they lapse if the current period’s entitlement
is not used in full and do not entitle employees to a cash payment for unused entitlement on leaving
the entity.

An entity recognises
 No liability or expense until the time of the absence,
 Because employee service does not increase the amount of the benefit.

Profit-sharing and bonus plans

An entity shall recognise the expected cost of profit-sharing and bonus payments when, and only
when:
(a) the entity has a present legal or constructive obligation to make such payments as a result of past
events; and
(b) 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.
Under some profit-sharing plans, employees receive a share of the profit only if they remain with the
entity for a specified period. Such plans create a constructive obligation as employees render service
that increases the amount to be paid if they remain in service until the end of the specified period.
The measurement of such constructive obligations reflects the possibility that some employees may
leave without receiving profit-sharing payments.

Profit-sharing plan requires an entity to pay a specified proportion of its profit for the year
to employees who serve throughout the year. If no employees leave during the year, the
total profit sharing payments for the year will be 3 per cent of profit. The entity estimates
Example that staff turnover will reduce the payments to 2.5 per cent of profit.

The entity recognises a liability and an expense of 2.5 per cent of profit.

Zubair Saleem AAFR notes IAS 19 12

An entity may have no legal obligation to pay a bonus. Nevertheless, in some cases, an entity has a
practice of paying bonuses. In such cases, the entity has a constructive obligation because the entity
has no realistic alternative but to pay the bonus. The measurement of the constructive obligation
reflects the possibility that some employees may leave without receiving a bonus.
An entity can make a reliable estimate of its legal or constructive obligation under a profit sharing or
bonus plan when, and only when:
a) The formal terms of the plan contain a formula for determining the amount of the benefit;
b) The entity determines the amounts to be paid before the financial statements are authorised for
issue; or
c) Past practice gives clear evidence of the amount of the entity’s constructive obligation.
If profit-sharing and bonus payments are not expected to be settled wholly before twelve months
after the end of the annual reporting period in which the employees render the related service, those
payments are other long-term employee benefits.

DISCLOSURE
Although this Standard does not require specific disclosures about short-term employee benefits,
other IFRSs may require disclosures. For example, IAS 24 requires disclosures about employee
benefits for key management personnel. IAS 1 Presentation of Financial Statements requires
disclosure of employee benefits expense.

Zubair Saleem AAFR notes IAS 19 13

 OTHER LONG - TERM EMPLOYEE BENEFITS.
Recognition and measurement
An entity shall recognize other long-term employee benefits in a similar manner to account for post-
employment benefits, typically using the projected unit credit method, as benefits are payable more
than twelve months after the period in which services are provided by an employee.

Exception. Recognise remeasurements in profit and loss.

A cumulative bonus is payable at start of year 6(1 January 2016) and equal to 2% of
cumulative final salary of 5 years of service. The salary in year ended 31 December 2011 is
20,000 and is assumed to increase at 10% (compound) each year. The discount rate used is
Example 8% per annum.

Required: - prepare extracts from statement of comprehensive income (along with journal
entries) to each of years ended 31 December 2011 to 2015?

Zubair Saleem AAFR notes IAS 19 14

Disclosure
Although this Standard does not require specific disclosures about other long-term employee
benefits, other IFRSs may require disclosures.
For example, IAS 24 requires disclosures about employee benefits for key management personnel.
IAS 1 requires disclosure of employee benefits expense.

Termination benefits.
Termination benefits are to be recognised at the earlier of

(a). when the entity can no longer withdraw the offer of those benefits,
And
(b) when the entity recognises costs for a restructuring that is within the scope of IAS 37.
Since termination benefits do not confer any future economic benefits on the employing entity, these
must be expensed immediately.

Zubair Saleem AAFR notes IAS 19 15

 FFC DISCLOSURE NOTE

Zubair Saleem AAFR notes IAS 19 16

Zubair Saleem AAFR notes IAS 19 17
Zubair Saleem AAFR notes IAS 19 18