Accounting for Employee

Benefits
(LKAS 19)
 Learning Outcomes
• At end of this session you should be able to:
1. Identify the categories of employee benefits
2. Accounts for each type of employee benefits
as per relevant accounting standard
 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 provided service in
exchange for employee benefits to be paid in the
future; and
(b) an expense when the entity consumes the
economic benefit arising from service provided by an
employee in exchange for employee benefits.

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 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.
Categories of Employee Benefits
1. Short-term employee benefits
2. Post-employment benefits
3. Other long-term employee benefits
4. Termination benefits
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 Short –term 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.
Examples
• 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 subsidised goods or
services) for current employees;
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 Recognition and measurement -
Short-term Employee Benefits
Short term employee benefit cost is recognized as
expense in the period it incurs in the statement of
profit or loss ( Excepts which is included under cost
of assets as per another SLFRS)
Unpaid Short term employee benefit at end of the
reporting period recognized as a liability ( accrued
expense) in SOFP
Short term employee benefit paid in advance at end
of the reporting period recognized as an asset (
prepayments) in SOFP
 Recognition and Measurement -
Short-term Employee Benefits
Short-term absences
• 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 paid absences
(b) Non-accumulating paid absences.
 Accumulating Paid Absences
• Carried forward to next period if unused in the
current period.
(e.g. some employees are allow unused paid holiday leaves, sick leaves to carry
forward)

• Expense is recognised when employee render

service which increases their entitlement to
paid absences.
Non-accumulating Paid Absences
• Do not carried forward to next period if unused
in the current period.
(e.g. maternity pay and sick pay )

• Expense is recognised when absences occurs.

 Activity 1
Alfa PLC 300 employees who are entitle for paid holiday leaves of 10
days and Sick leaves of 7 days per each employee. Both unused
holiday leavers and sick leaves can be carried forward for a period of
12 month . An employee is paid Rs.500 per day.
1. There were 40 unused holiday leaves by employees as at
31.03.2020.
2. As at 31.03.2020, average unused entitlement of sick leaves were
4 days per an employee.
3. Alfa PLC expects that 270 employees will take 6 days or less sick
leaves in the next year and 30 employees will take 9 days of sick
leave in next year. (Sick leaves are taken on LIFO method)

Required:
State the accounting treatment and show the financial statement
extracts for 2019/20.
 Post-employment Benefits
Post-employment benefits are employee benefits
(other than termination benefits and short-term
employee benefits) that are payable after the
completion of employment.
Examples
• Pensions
• Gratuity
• Provident funds
• Post-employment life insurance
• Post-employment medical care
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 Definitions Relating to
Classification of Plans
Post-employment benefit plans are formal or
informal arrangements under which an entity
provides post-employment benefits for one or more
employees.
Depending on the economic substance of those
plans as derived from its principle terms and
conditions these post employments plans are
classified into two categories.
1. Defined contribution plans
2. Defined benefits plans
 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.
(size of post employment benefit is variable and
employer makes a fixed contribution)
 Recognition and Measurement –
Defined Contribution Plans
•Accounting is straight forward
•Recognses as expense in the period in which
they are payable in the statement of profit or
loss ( Excepts which is included under cost of
assets as per another SLFRS)
•Any unpaid amount at end of the reporting
period recognized as a liability (accrued
Expense) in SOFP
 Activity 2
Beta PLC contributes 12 % of the employees
salary for a post employment benefit plan. Total
salary expense for the year ending 31.03.2020
was Rs.50 million and Beta PLC has paid Rs.4
million to post employment benefit plan during
the year.

Required: State the accounting treatment and

show the financial statement extracts.
 Defined Benefit Plans
• Defined benefit plans are post-employment
benefit plans other than defined contribution
plans.
• (size of post employment benefit is fixed and
employer makes a variable contribution)
 Recognition and Measurement –
Defined Benefit Plans
•Accounting is relatively complicated.
•The obligations are measured on discounted
basis because they may be settled many years
after the employee provide the related service.
•Actuarial assumptions are required to measure
the obligation and the expense and there is a
possibility of actuarial gains and losses.
 Important Definitions
The deficit or surplus is:
(a) the present value of the defined benefit obligation less
(b) the fair value of plan assets (if any).

The present value of a defined benefit obligation is the

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 assets comprise:

(a) assets held by a long-term employee benefit fund; and
(b) qualifying insurance policies.
 Important Definitions
The net defined benefit liability (asset) is the deficit or
surplus, adjusted for any effect of limiting a net defined
benefit asset to the asset ceiling.

The asset ceiling is the present value of any economic

benefits available in the form of refunds from the plan or
reductions in future contributions to the plan.

Fair value is 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. .
 Important Definitions
Service cost comprises:
(a) current service cost, which is the increase in the
present value of the defined benefit obligation
resulting from employee service in the current period;
(b) past service cost, which is the change in the present
value of the defined benefit obligation for employee
service in prior periods, resulting from a plan
amendment (the introduction or withdrawal of, or
changes to, a defined benefit plan) or a curtailment (a
significant reduction by the entity in the number of
employees covered by a plan); and
(c) any gain or loss on settlement.
 Accounting Steps
Step 1 : Measure the deficit or surplus
(a) An actuarial technique is used to make reliable estimate of
the cost to the entity of providing the post employee
benefits earned by the employee in the current and prior
period.
(b) The benefit is discounted to arrive at the present value of
the defined benefit obligation.
(c) The fair value of plan assets is deducted from the present
value of the defined benefit obligations.
 Accounting Steps
Step 2 : Determined the amount of net defined
benefit asset or liability
The surplus or deficit determined in step 1 may have to be
adjusted if a net benefit of asset has to be restricted by asset
ceiling.
 Activity 3
Sigma PLC operates a defined benefit pension for its
employees. The actuaries of the company has
advice to the company that fair value of the plan
assets was Rs.25.2 million and present value of
defined benefit obligations was Rs.21.5 million. The
present value of future economic benefit of the
plan was Rs.3 million.

Required:
State the accounting treatment and show the
financial statement extracts.
 Accounting Steps
Step 3: Determine the amount to be recognized
in profit or loss
This may include:
(a) Current service cost
(b) Any past service cost and gain or loss on settlement
(c) Net interest on defined benefit liability
 Accounting Steps
Step 4 : Determine the remeasurements to be
recognized in Other Comprehensive Income
This may include:
(a) Actuarial gains and losses
(b) Return on plan assets (excluding the amount included in the
net interest on net defined benefit liability/ asset)
(c) Any change in the effect of asset ceiling (excluding the
amount included in the net interest on net defined benefit
liability/ asset)
 Activity 4
The following information is relevant to Platinum PLC.
As at 01.04.2019
The fair value of assets of the defined benefit plan – Rs.2,750,000
Present value of defined benefit obligations – Rs.3,125,000
For Y/E 31.03.2020
Contribution received by plan from employer– Rs.1,225,000
Benefits paid – Rs.475,000
Current service cost – Rs.900,000
As at 31.03.2020
The fair value of assets of the defined benefit plan – Rs.3,750,000
Present value of defined benefit obligations – Rs.3,890,000

The discount rate of 10% is applicable for net assets/liabilities

Required: State the accounting treatment and show the financial statement
extracts.
 Activity 5
The following information is relevant to Titanium PLC.
As at 01.04.2019
The fair value of assets of the defined benefit plan – Rs.7,000,000
Present value of defined benefit obligations – Rs.7,150,000
For Y/E 31.03.2020
Contribution received by plan from employer– Rs.400,000
Benefits paid – Rs.600,000
Current service cost – Rs.700,000
As at 31.03.2020
The fair value of assets of the defined benefit plan – Rs.7,650,000
Present value of defined benefit obligations – Rs.8,800,000

The discount rate of 8% is applicable for net assets/liabilities

The rules of the plan was changed on 01.04.2019 and present value of defined
benefit obligations was increased to Rs.8,200,000.

Required: State the accounting treatment and show the financial statement
extracts.
 Other Long-term Employment
Benefits
Other long-term employee benefits are all
employee benefits other than short-term
employee benefits, post-employment benefits and
termination benefits.
Examples
• long-term paid absences such as long-service
leave or sabbatical leave;
• jubilee or other long-service benefits; and
• long-term disability benefits; and
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 Recognition and Measurement -Other
Long-term Employment Benefits
Accounting is very similar to post-employment
benefits.
But not complicated such as defined benefit plans.

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 Termination Benefits
Termination benefits are employee benefits
provided in exchange for the termination of an
employee’s employment as a result of either:
(a) an entity’s decision to terminate an employee’s
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.
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 Recognition and Measurement:
Termination Benefits
• An entity shall recognise a liability and expense
for termination benefits at the earlier of the
following dates:
(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 LKAS 37
and involves the payment of termination
benefits..
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