Question 2

Employee benefits includes all forms of consideration given by an entity in exchange for services
rendered by employees’

Required: Discuss the above statement and explain the principles applied in accounting for
employee benefits and compare defined benefit & defined contribution post-employment benefit
plans.
Word Limit: 500 words

Introduction
IAS 19 prescribes the accounting for all types of employee benefits except share-based payment,
to which IFRS 2 applies. Employee benefits are all forms of consideration given by an entity in
exchange for service rendered by employees or for the termination of employment. 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 the service
provided by an employee in exchange for employee benefits.

I. Scope and purpose of IAS 19

 The scope and purpose of IAS 19 is to prescribe the accounting and disclosure for employee
benefits (that is, all forms of consideration given by an entity in exchange for service rendered by
employees). ... Plans not defined as contribution plans are classed as defined benefit plans. The
principle underlying all of the detailed requirements of the Standard is that the cost of providing
employee benefits should be recognized in the period in which the benefit is earned by the
employee, rather than when it is paid or payable.

The standard identifies several categories of employee benefit including:

 short-term employee benefits, such as sick pay

 post-employment benefits such as pensions
 termination benefits, and
 other long-term employee benefits including long service leave
 II. Definition of employee benefits

According to Christina Merhar, the Senior Editor for Zane Benefits 2012. “Employee benefits
are defined as a form of compensation paid by employers to employees over and above regular
salary or wages. Employee benefits come in many forms and are an important part of the overall
compensation package offered to employees”.

“Employee benefits are defined as indirect, non-cash, or cash compensation paid to an employee
above and beyond regular salary or wages. Some employee benefits are required by law. For
example, employers are required to make payments on employees' behalf for Social Security and
Medicare. Employers must also pay for unemployment benefits on employees' behalf”.

“Other benefits are offered by employers to enhance the compensation provided to employees.
Employee benefits such as health insurance, life insurance, paid vacation, and workplace perks
are common offerings used to recruit and retain employees”.

III. Comparison of defined benefit and defined contribution post-

employment benefit plans

A defined benefit plan, most often known as a pension, is a retirement account for which your
employer ponies up all the money and promises you a set payout when you retire. A defined
contribution plan, requires you to put in your own money.

Because defined benefit plans are costly for employers than defined contribution plans, most of
them have scaled back dramatically or eliminated these plans altogether in recent years. If you
still have a defined benefit plan at your company, consider yourself lucky.

In general, defined benefit plans come in two varieties; traditional pensions and cash-balance
plans. In both cases, you just show up for work and, assuming you meet basic eligibility rules,
you’re automatically enrolled in the plan. In some instances, however, you aren’t enrolled until
you’ve completed your first year on the job. You also need to stick around on the job for several
years to be fully apportioned in the plan. The difference is in how the benefits are calculated; in a
pension, it’s based on a formula that takes into account how long you were on the job and your
average salary during your last few years of employment. The cash-balance plan credits your
account with a set percentage of your salary each year.

Another key difference: If you leave the company before retirement age, you may take the
contents of your cash-balance plan as a lump sum and roll it into an IRA. A traditional pension
isn’t portable.

Some employers offer both defined benefit plans and defined contribution plans. If yours does,
you should definitely participate in the defined contribution plan as well. That’s because more
often, the amount of your defined benefit plan won’t be enough to allow you to live comfortably
in retirement.

Conclusion
Accounting for post-employment benefits is an important financial reporting issue. It has been
suggested that many users of financial statements do not fully understand the information that
entities provide about post-employment benefits. Both users and preparers of financial
statements have criticized the accounting requirements for failing to provide high-quality,
transparent information about postemployment benefits.

Reference

https://www.ifrs.org/issued-standards/list-of-standards/ias-19-employee-benefits

https://www.iasplus.com/en/standards/ias/ias19

https://www.peoplekeep.com/blog/small-business-101-the-definition-of-employee-benefits

http://time.com/money/collection-post/2791222/difference-between-defined-benefit-plan-and-
defined-contribution-plan/