IAS 19 — EMPLOYEE BENEFITS

Overview
- IAS 19 outlines the accounting requirements for employee benefits, including short-term benefits
(e.g. wages and salaries, annual leave), post-employment benefits such as retirement benefits,
other long-term benefits (e.g. long service leave) and termination benefits.
- The standard establishes the principle 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, and outlines how each category of employee benefits are measured, providing detailed
guidance in particular about post-employment benefits.

Objective of IAS 19
- 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).
- 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.

Scope
IAS 19 applies to (among other kinds of employee benefits):
- wages and salaries
- compensated absences (paid vacation and sick leave)
- profit sharing plans
- bonuses
- medical and life insurance benefits during employment
- housing benefits
- free or subsidized goods or services given to employees
- pension benefits
- post-employment medical and life insurance benefits
- long-service or sabbatical leave
- 'jubilee' benefits
- deferred compensation programmes
- termination benefits.

Basic principle of IAS 19

- 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.

Short-term employee benefits

- For short-term employee benefits (those payable within 12 months after service is rendered, such
as wages, paid vacation and sick leave, bonuses, and non-monetary benefits such as medical care
and housing), the undiscounted amount of the benefits expected to be paid in respect of service
rendered by employees in a period should be recognized in that period.
- The expected cost of short-term compensated absences should be recognized as the employees
render service that increases their entitlement or, in the case of non-accumulating absences, when
the absences occur.

Profit-sharing and bonus payments

- The entity should recognize the expected cost of profit-sharing and bonus payments when, and
only when, it has a legal or constructive obligation to make such payments as a result of past
events and a reliable estimate of the expected cost can be made.

Types of post-employment benefit plans

The accounting treatment for a post-employment benefit plan will be determined according to whether the
plan is a defined contribution or a defined benefit plan:
1. Defined contribution plan
- the entity pays fixed contributions into a fund but has no legal or constructive obligation to make
further payments if the fund does not have sufficient assets to pay all of the employees'
entitlements to post-employment benefits.
 - the cost to be recognized in the period is the contribution payable in exchange for service rendered
by employees during the period.
- If contributions to a defined contribution plan do not fall due within 12 months after the end of the
period in which the employee renders the service, they should be discounted to their present value.

2. Defined benefit plan

- a post-employment benefit plan other than a defined contribution plan. These would include
both formal plans and those informal practices that create a constructive obligation to the
entity's employees.
- the amount recognized in the balance sheet should be the present value of the defined benefit
obligation (that is, the present value of expected future payments required to settle the
obligation resulting from employee service in the current and prior periods), as adjusted for
unrecognized actuarial gains and losses and unrecognized past service cost, and reduced by the
fair value of plan assets at the balance sheet date.
- The present value of the defined benefit obligation should be determined using the Projected Unit
Credit Method.
- The rate used to discount estimated cash flows should be determined by reference to market yields
at the balance sheet date on high quality corporate bonds.

Note:
- IAS 19 specifies that if the accumulated unrecognized actuarial gains and losses exceed 10% of
the greater of the defined benefit obligation or the fair value of plan assets, a portion of that net
gain or loss is required to be recognized immediately as income or expense.
- The portion recognized is the excess divided by the expected average remaining working lives of
the participating employees. Actuarial gains and losses that do not breach the 10% limits
described above (the 'corridor') need not be recognized - although the entity may choose to do so.
- In December 2004, the IASB issued amendments to IAS 19 to allow the option of recognizing
actuarial gains and losses in full in the period in which they occur, outside profit or loss, in a
statement of comprehensive income.

Past service cost 

- is the term used to describe the change in the obligation for employee service in prior periods,
arising as a result of changes to plan arrangements in the current period.
- may be either positive (where benefits are introduced or improved) or negative (where existing
benefits are reduced).
- should be recognized immediately to the extent that it relates to former employees or to active
employees already vested. Otherwise, it should be amortized on a straight-line basis over the
average period until the amended benefits become vested.

Plan curtailments or settlements 

- Gains or losses resulting from curtailments or settlements of a plan are recognised when the
curtailment or settlement occurs.
- Curtailments are reductions in scope of employees covered or in benefits.
- If the calculation of the balance sheet amount as set out above results in an asset, the amount
recognised should be limited to the net total of unrecognised actuarial losses and past service cost,
plus the present value of available refunds and reductions in future contributions to the plan.

Note:
- The IASB issued the final 'asset ceiling' amendment to IAS 19 in May 2002. The amendment
prevents the recognition of gains solely as a result of deferral of actuarial losses or past service
cost, and prohibits the recognition of losses solely as a result of deferral of actuarial gains.

The charge to income recognized in a period in respect of a defined benefit plan will be made up of the
following components:
- current service cost (the actuarial estimate of benefits earned by employee service in the period)
- interest cost (the increase in the present value of the obligation as a result of moving one period
closer to settlement)
- expected return on plan assets *
- actuarial gains and losses, to the extent recognized
- past service cost, to the extent recognized
 - the effect of any plan curtailments or settlements

*The return on plan assets is interest, dividends and other revenue derived from the plan assets, together
with realized and unrealized gains or losses on the plan assets, less any costs of administering the plan
(other than those included in the actuarial assumptions used to measure the defined benefit obligation)
and less any tax payable by the plan itself.

Other long-term benefits

- IAS 19 requires a simplified application of the model described above for other long-term
employee benefits. This method differs from the accounting required for post-employment
benefits in that:
 actuarial gains and losses are recognized immediately and no 'corridor' is applied; and
 all past service costs are recognized immediately.

Termination benefits
- IAS 19 specifies that amounts payable should be recognized when, and only when, the entity is
demonstrably committed to either:
 terminate the employment of an employee or group of employees before the normal
retirement date; or
 provide termination benefits as a result of an offer made in order to encourage voluntary
redundancy.

Note:
- The entity will be demonstrably committed to a termination when, and only when, it has a detailed
formal plan for the termination and is without realistic possibility of withdrawal.
- Where termination benefits fall due after more than 12 months after the balance sheet date, they
should be discounted.

Overview of changes introduced by IAS 19 Employee Benefits (as amended in 2011)

- Require recognition of changes in the net defined benefit liability (asset) including immediate
recognition of defined benefit cost, disaggregation of defined benefit cost into components,
recognition of remeasurement in other comprehensive income, plan amendments, curtailments
and settlements
- Introduce enhanced disclosures about defined benefit plans
- Modify accounting for termination benefits, including distinguishing benefits provided in
exchange for service and benefits provided in exchange for the termination of employment and
affect the recognition and measurement of termination benefits
- Clarification of miscellaneous issues, including the classification of employee benefits, current
estimates of mortality rates, tax and administration costs and risk-sharing and conditional
indexation features
- Incorporate other matters submitted to the IFRS Interpretations Committee
- Applicable on a modified retrospective basis to annual periods beginning on or after 1 January
2013, with early adoption permitted.