IAS 19 EMPLOYEE BENEFITS

Employee benefits
There are all forms of consideration given by an entity in exchange for service rendered by employees.

Short term employee benefits

There are employee benefits other than termination benefits which fall due wholly within 12 months
after the end of the period in which the employees render the related service. Examples are: wages and
salaries, paid annual leave, paid sick leave, paid maternity/paternity leave and profit shares and
bonuses

Post-employment benefits
There are employee benefits other than termination benefits which are payable after completion of
employment. Examples are: pensions, post-employment medical care and post-employment insurance

Post-employment benefit plans

They are formal or informal arrangements under which an entity provides post-employment benefits for
one or more employees.

Defined contribution plans

They are post-employment 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.

Defined benefit plans

They are post-employment benefit plans other than contribution plans.

Multi-employer Plans
They are defined contribution plans (other than state plans) or defined benefit plans (other than state
plans) that:
a) Pool the assets contributed by various entities that are not under common control and
b) Use those assets to provide benefits to employees of more than one entity on the basis that
contribution of benefit levels are determined without regard to the identity of the entity that
employ the employees concerned.

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Other Long Term Employee Benefits
There are employee benefits (other than post-employment benefits and termination benefits) which do
not fall due wholly within 12 months after the end of the period in which the employees render the
related service.

Termination Benefits
They are employee benefits payable as a result of either:
a) An entity’s decision to terminate an employee’s employment before the normal retirement date or
b) Any decision to accept voluntary redundancy in exchange for those benefits.
Example: retrenchment package or severance pay, gratuity

Vested employee benefits

They are employee benefits that are not conditional on future employment.

Present Value of a Defined Benefit Obligation

It is the present value in deducting any plan assets of expected future payments required to settle the
obligation resulting from the employee service in the current and prior period.

Current Service Cost

It is the increase in the present value of the defined benefit obligation resulting from employee service
in the current period.

Interest Cost
It is the increase during a period in the present value of a defined benefit obligation which arises
because the benefits are one period closer to settlement.

Plan assets – comprise of

a) Assets such as stocks and shares, held by a fund that is legally separate from the reporting entity,
which exists solely to pay employee benefits.
b) Insurance policies, issued by an insurer that is not a related party, the proceeds of which can only be
used to pay employee benefits.

The return on plan assets is interest, dividends and other revenue derived from the plan assets
together with realised and unrealised gains or losses on the plan assets less any cost of
administering the plan and less any tax payable by the plan itself.

Actuarial gains & losses (gain or loss on re-measurement) – comprise

a) Experience adjustments (the effects of differences between the previous actuarial assumptions and
what has actually occurred.
b) The effects in changes of actuarial assumptions.

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Actuarial assumptions
They are needed to estimate the size of the future (post-employment) benefits that will be payable
under a defined benefits scheme. The main categories of actuarial assumptions are as follows:
a) Demographic assumptions are about mortality rates before and after retirement, the rate of
employee turnover, early retirement, claim rates under medical plans for former employees.
b) Financial assumptions include future salary levels (allowing for seniority, promotion as well as
inflation) and future rate of increase in medical costs

Past service cost

It is a change in the present value of the defined benefit obligations for employee service in prior
periods resulting in the current period from the introduction of /changes to post-employment benefits
or other long term employee benefits. Past Service Cost maybe either positive (when benefits are
introduced or changed so that the Present value of the defined benefit obligation increases) or negative
when existing benefits are changed so that the present value of a defined benefit obligation decreases.

Question 1
Name and briefly describe the four categories into which employee benefits can be classified in terms of
IAS 19 – Employee Benefits. [10]

Short term employee benefits

Accounting for short term employee benefits is simple because there are no actuarial assumptions to be
made and there is no requirement to discount future benefits because they are all payable not later
than 12 months after the end of the accounting period.

Recognition and Measurement

a) Unpaid short term employee benefits
The unpaid short term employee benefits as at the end of the accounting period should be
recognised as an accrued expense. Any short term benefits paid in advance should be recognised as
a prepayment (to the extent that it would lead to, for example a reduction in future payments or
cash refund.
b) The cost of short-term employee benefits should be recognised as an expense in the period when
the economic benefit is given, as employment costs.

Disclosure requirements
There are no specific disclosure requirements for short-term employee benefits.

Question 2
Show how the retailer in the following scenario should recognise transactions;

On 31 December 2014 a retailer paid its employees $1,000,000 (net of $400,000 income taxes deducted
from the employees’ remuneration and paid by the retailer on behalf of the employees to the tax
authority(ZIMRA)) for work performed in December 2014. On 1 February 2015 the entity paid ZIMRA the

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$400,000 deducted from its employees’ remuneration. On 2 February 2015 the retailer paid a further
$20,000 to ZIMRA. This tax was levied by ZIMRA directly on the retailer’s December 2014 payroll for late
remittances. (5 marks)

Defined Contribution Plans

a) The obligation is determined by the amount paid into the plan in each period.
b) There are no actuarial assumptions to make
c) If the obligation is settled in the current period (or at least) not later than 12 months after the end of
the current period there is no requirement for discounting.

IAS 19 requires the following:

a) Contributions to a defined contribution plan should be recognised as an expense in the period they
are payable (except to the extent that labour costs may be included within the costs of assets.
b) Any liability for unpaid contributions that are due as at the end of the period should be recognised
as a liability.
c) Any excess contributions paid should be recognised as an asset (prepaid expense) but only to the
extent that the prepayment will lead to, for example, a reduction in future payments or cash refund.

Disclosure requirements
a) A description of the plan
b) The amount recognised as an expense in the period.

Defined Benefit Plans

With these plans the size of the post-employment benefits is defined in advance i.e. benefits are
defined. The employer and possibly current employees pay contributions into the plan and the
contributions is set at an amount that is expected to earn enough investment returns to meet the
obligation to pay the post-employment benefits. If however, it becomes apparent that the assets in the
fund are insufficient the employer would be required to make additional contributions into the plan to
make the expected shortfall. On the other hand if the fund’s assets appear to be larger than they need
to be and in excess of what is required to pay the post-employment benefits the employer may be
allowed to take a contribution holiday i.e. to stop paying in contributions for a while.

Recognition of measurement
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 / prior years cannot be estimated
exactly, but whatever, they are the employer will have to pay them and the liability should therefore
be recognised now. To estimate these future obligations it is necessary to use actuarial assumptions.
b) The obligation payable in future years should be valued by discounting on a present value basis. This
is because the obligations maybe settled in many years’ time.
c) If actuarial assumptions change the amount of required contributions to the fund will change and
there maybe actuarial gains or losses. A contribution to the fund in any period is not necessarily the
total for that period due to actuarial gains or losses.

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Statement of Financial Position
The amount recognised as defined benefit liability/ (asset) should be the following
a) The present value of the defined obligation at the year-end, minus
b) The fair value of the plan assets as at the year-end.

In the statement of profit and loss we recognise the following:

i) Net interest on the net defined benefit liability/ (asset)
ii) Current service costs
iii) Past service costs
iv) Vested and non-vested benefits
v) Gain or loss on settlement

In the other comprehensive income we recognise the following:

 Actuarial losses and gains on obligations or plan assets (also known as gains or losses on re-
measurements of the net defined benefit (asset)

Asset Ceiling Test

IAS 19 states that plan assets must be measured at the lower of:
a) The net asset or liability, and
b) The present value of future refunds from the plan or reductions in future contributions.

Curtailments and settlements

A settlement occurs either when an employer enters into a transaction to eliminate part or all of its
post-employment benefit obligations (other than a payment of benefits to or on behalf of employees
under the terms of the plan and included in the actuarial assumptions).
A curtailment and settlement might happen together, for example when an employer brings a defined
benefit plan to an end by settling the obligation with a one-off lump sum payment and then scrapping
the plan.
The gain or losses on a settlement is the difference between:
(a) The present value of the defined benefit obligation being settled, as valued on the date of the
settlement; and
(b) The settlement price, including any plan assets transferred and any payments made by the entity
directly in connection with the settlement.

Plan obligation $
Present value of obligation b/d xxx
+ Discount (interest chg) xxx
+ Current service costs xxx
+ Past services costs xxx
- Benefits paid (xxx)
- Settlement (xxx)
= Gain/loss on Remeasurement (bal fig) xxx
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Present value of obligation c/d xxx

Plan assets $
Fair value of plan assets b/d xxx
+ Expected return (discount rate) xxx
+ Contributions paid xxx
-Benefits paid out (xxx)
- Settlement (xxx)
= Gain/ loss on Remeasurement xxx
Fair value of plan assets c/d xxx

Question 3
The following information relates to Secured Future Pension Fund which is a funded defined benefit
plan. On 1 October 2017 the present value of the obligation and the fair value of the plan assets both
amounted to $56 000 000.00.

Other relevant current and projected information was as follows:

Year ended 30 Sep 2018 2019 2020
Pre-tax discount rate at start of the year 15% 12% 10%
Current service cost 8 200 000 7 500 000 8 600 000
Benefits paid 8 250 000 10 000 000 10 640 000
Contributions 5 040 000 5 600 000 6 150 000
Present value of obligation at 30 Sep 63 896 000 72 032 000 79 605 520
Fair value of plan assets at 30 Sep 63 115 700 66 632 986 65 956 285

During the year ended 30 Sep 2019, the plan was amended to provide additional benefits with effect
from 1 Oct 2018. The present value on 1 Oct 2018 of additional benefits for employee service before
that date was $2 800 000 covering both vested and non-vested benefits. On that date the entity
estimated that the average period until the non-vested benefits would become vested was 4 years.
REQUIRED
Prepare schedules showing:
a) Changes in the present value of the obligation and in the fair value of plan assets
b) The amounts to be recognized in the statement of financial position and the statement of profit or
loss

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