Ias 19

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IAS 19
Strategic Business Reporting (SBR) (Association of Chartered Certified Accountants)
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IAS 19 — Employee Benefits
Objective of IAS 19: The objective of IAS 19 is to prescribe the accounting and disclosure for employee
benefits, requiring an entity to recognise a liability where an employee has provided service and an
expense when the entity consumes the economic benefits of employee service.
Scope: Employee benefits are all forms of consideration given by an entity in exchange for service
rendered by employees or for the termination of employment.
A company may reward its employees in ways other than payment of a basic salary. Employers often
provide entitlements to paid holidays, or pay an annual cash bonus to some employees, or provide
employees with a company car, medical insurance and pension benefits.
IAS 19 does not apply to employee benefits within the scope of IFRS 2 Share-based Payment or the
reporting by employee benefit plans (IAS 26 Accounting and Reporting by Retirement Benefit Plans). IAS
19 sets out rules of accounting and disclosure for:
• Short term employee benefits;
 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;
• Post-employment benefits, such as the following:
 Retirement benefits (e.g. pensions and lump sum payments on retirement); and
 Other post-employment benefits, such as post-employment life insurance and post-employment
medical care;
• Other long-term employee benefits, such as the following:
 Long-term paid absences such as long-service leave or sabbatical leave;

 Jubilee or other long-service benefits; and
 Long-term disability benefits; and
• Termination benefits.
Accounting principle: The basic principle in IAS 19 is that the cost of providing benefits to employees
should be matched with the period during which the employees work to earn the benefits. This principle
applies even when the benefits are payable in the future, such as pension benefits. IAS 19 requires an
entity:
• To recognise a liability when an employee has provided a service in exchange for a benefit that will be
paid in the future, and

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• To recognise an expense when the entity makes use of the service provided by the employee.
The basic double entry may therefore be (depending on the nature of the employee benefits):
Debit: Employment cost (charged as an expense in the statement of profit or loss)
Credit: Liability for employee benefits
Types of employee benefit: IAS 19 identifies four types of employee benefit as follows:
• Post-employment benefits: This normally relates to retirement benefits.
• Short-term employee benefits: This includes wages and salaries, bonuses and other benefits.
Dr. Expenses
Cr. Liability
• Termination benefits: Termination benefits arise when benefits become payable upon employment
being terminated, either by the employer or by the employee accepting terms to have employment
terminated.
• Other long-term employee benefits: This comprises other items not within the above classifications
and will include long-service leave or awards, long-term disability benefits and other long-service
benefits.
2. Post-employment benefit plans: Post-employment benefits are employee benefits (other than
termination benefits and short-term employee benefits) that are payable after the completion of
employment.
A pension plan (sometimes called a post-employment benefit plan or scheme) consists of a pool of
assets, together with a liability for pensions owed. Pension plan assets normally consist of investments,
cash and (sometimes) properties. The return earned on the assets is used to pay pensions. Post-
employment benefit plans are informal or formal arrangements where an entity provides post-
employment benefits to one or more employees, e.g. retirement benefits (pensions or lump sum
payments), life insurance and medical care. The accounting treatment for a post-employment benefit
plan depends on the economic substance of the plan and results in the plan. An entity may, or may not,
establish a separate entity to receive contributions and to pay benefits, although it is convenient to think
of the plan as a separate entity. There are two main types of pension plan:
• Defined contribution plans
• Defined benefit plans.
This distinction is important because the accounting treatment of the two types of pension plan is very
different.

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• Defined contribution plans: Defined contribution plans are benefit plans where the entity 'pays fixed
contributions into a separate entity 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 their
service'. The entity's obligation is therefore effectively limited to the amount it agrees to contribute to
the fund and effectively place actuarial and investment risk on the employee. If no contribution is made,
then it is automatically classed as a defined benefit plan.
The contributions to the fund are invested to earn a return and increase the value of the fund. When an
employee retires, he or she is paid a pension out of the fund. The amount of pension received by the
employee is not pre-determined, but depends on the size of the employee’s share of the fund at
retirement.
Thus, the amount of the post-employment benefits received by the employee is determined by the
amount of contributions paid to the plan, together with investment returns arising from the
contributions. In consequence, any risks with regard to the size of the pension paid fall on the employee.
Accounting for defined contribution plans is straightforward because the reporting entity's obligation for
each period is determined by the amounts to be contributed for that period.
An entity pays fixed contributions of 5% of employee salaries into a pension plan each month. The entity
has no obligation outside of its fixed contributions.
The lack of any obligation to contribute further assets into the fund means that this is a defined
contribution plan.
For defined contribution plans, the amount recognised in the period is the contribution payable in
exchange for service rendered by employees during the period.
Contributions to a defined contribution plan which are not expected to be wholly settled within 12
months after the end of the annual reporting period in which the employee renders the related service
are discounted to their present value.
Accounting for defined contribution plans: The entity should charge the agreed pension contribution to
profit or loss as an employment expense in each period.
The expense of providing pensions in the period is often the same as the amount of contributions paid.
However, an accrual or prepayment arises if the cash paid does not equal the value of contributions due
for the period. Any unpaid contributions at the end of the year will be shown in the statement of
financial position as an accrual/liability and any prepaid contributions will be shown as an asset (a
prepayment).
Example: An employee has a salary of 10,000 and entitled to provident fund. 10% is paid by the
employee and 10% is paid by the employer.
Dr. Staff salary: 11,000
Cr. Provident fund payable: 2,000
Cr. Cash: 9,000

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• Defined benefit plans: Defined benefit plans are post-employment plans that are not defined
contribution plans. These plans create an obligation on the entity to provide agreed benefits to current
and past employees and effectively places actuarial and investment risk on the entity.
A company might save cash into a separate fund (just as for defined contribution plans) in order to build
up an asset that can be used to pay the pensions of employees when they retire. This would be known as
a funded plan. If an employer does not save up in this way the plan is described as being unfunded.
Defined benefit plans are often known as “final salary schemes”.
Pensions are paid by the defined benefit plan which is a separate legal entity from the company.
However, the company has the legal obligation to pay the pensions. The defined benefit plan is a special
entity set up in order to handle a large number of complex and long term transactions for the company
and to separate the plan’s assets from those of the company (the pensions of the employees are
protected if the company runs into difficulties).
Present value of a defined benefit obligation: 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.
An entity guarantees a particular level of pension benefit to its employees upon retirement. The annual
pension income that employees will receive is based on the following formula:
Salary at retirement × (no. of years worked/60 years)
The entity has an obligation to pay extra funds into the pension plan to meet this promised level of
pension benefits. If this happens then the entity will have to provide for any shortfall (e.g. plans in which
an employee is guaranteed a specified return).This is therefore a defined benefit plan.
Example: The following information relates to the assets and liabilities of the retirement benefit plan of
Limo Co. (This is not a summary of Limo’s statement of financial position but that of the plan.)
2014 2015
$m $m
Market value of plan assets 100 110
Present value of plan obligations (120) (135)
Net liability of the plan (20) (25)
The basic rule (simplified for this illustration) is that: In 2014 Limo must recognise a liability of $20m.
In 2015 Limo must recognise a liability of $25m.
If Limo had made a payment of $1m to the fund in 2015 the full. Journal entry would be:
Dr Profit or loss: 6
Cr Liability (25 –20): 5
Cr Cash: 1
Accounting for defined benefit plans: An entity is required to recognise the net defined benefit liability
or asset in its statement of financial position. However, the measurement of a net defined benefit asset

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is the lower of any surplus in the fund and the 'asset ceiling' (i.e. the present value of any economic
benefits available in the form of refunds from the plan or reductions in future contributions to the plan).
The statement of financial position: Under a defined benefit plan, an entity has an obligation to its
employees. The entity therefore has a long-term liability that must be measured at present value.
The entity will also be making regular contributions into the pension plan. These contributions will be
invested and the investments will generate returns. This means that the entity has assets held within the
pension plan, which IAS 19 states must be measured at fair value.
On the statement of financial position, an entity offsets its pension obligation and its plan assets and
reports the net position:
• If the obligation exceeds the assets, there is a plan deficit (the usual situation) and a liability is reported
in the statement of financial position.
• If the assets exceed the obligation, there is a surplus and an asset is reported in the statement of
financial position.
It is difficult to calculate the size of the defined benefit pension obligation and plan assets.
Measuring the plan assets and liabilities: In practice, an actuary measures the plan assets and liabilities
by applying carefully developed estimates and assumptions relevant to the defined benefit pension plan.
• The plan liability is measured at the present value of the defined benefit obligation, using the Projected
Unit Credit Method. This is an actuarial valuation method.
• Discounting is necessary because the liability will be settled many years in the future and, therefore,
the effect of the time value of money is material. The discount rate used should be determined by
market yields on high quality corporate bonds at the start of the reporting period, and applied to the net
liability or asset at the start of the reporting period.
• Plan assets are measured at fair value. IFRS 13 Fair Value Measurement provides a framework for
determining how fair value should be established.
• IAS 19 does not prescribe a maximum time interval between valuations. However, valuations should be
carried out with sufficient regularity to ensure that the amounts recognised in the financial statements
do not differ materially from actual fair values at the reporting date.
• Where there are unpaid contributions at the reporting date, these are not included in the plan assets.
Unpaid contributions are treated as a liability owed by the entity/employer to the plan.
Separate disclosure of the plan assets and obligation: For the purposes of the exam it will be quicker to
account for the net pension obligation.
However, in a set of published financial statements that are prepared in accordance with IFRS Standards,
an entity should disclose separate reconciliations for the defined benefit obligation and the plan assets,
showing the movement between the opening and closing balances. These would appear as follows:
(1) Calculation of assets (Stated at Fair Value)

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Assets
$000
Opening value of assets/Brought forward XXX
Interest (return) on plan assets [Opening discount rate] XXX
Contributions into plan XXX
Benefits paid (XXX)
X
Remeasurement component (bal. fig) [OCI] X/(X)
Closing value of assets/Carried forward X
Accounting Entries
(a). Interest (return) on plan assets [Opening discount rate]
Dr. Fair Value of Assets
Cr. Interest Income
(Being interest received from plan assets)
(b). Contributions into plan
Dr. Fair Value of Assets
Cr. Cash
(Being contribution made to plan)
(c). Benefits paid
Dr. Cash
Cr. Fair Value of Assets
(Being benefit paid)
(d). Remeasurement component (bal. fig) [OCI]
For Profit For Loss

Dr. Fair Value of Assets Dr. Remeasurement Component (OCI)
Cr. Remeasurement Component (OCI) Cr. Fair Value of Assets
(Being actuarial gain made) (Being actuarial loss made)
(2) Calculation of liability (Stated at Present Value)
Obligations
$000
Opening Present Value of Obligation/Brought forward XXX
Interest cost on obligation [Opening discount rate] XXX
Past Service cost XXX
Current Service cost
Benefits paid (XXX)

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X
Remeasurement component (bal. fig) [OCI] X/(X)
Closing Present Value of Obligation /Carried forward X
Accounting Entries
(a). Interest cost on obligation [Opening discount rate]
Dr. Interest cost
Cr. Liability
(Being interest on obligation paid).
(b). Past Service cost and Current service cost
Dr. Expenses (Past and Current Service Cost).
Cr. Present Value of Obligation
(Being past and present service cost paid).
(c). Benefits paid
Dr. Liability
Cr. Cash
(Being benefit paid to the obligation).
(d). Remeasurement component (bal. fig) [OCI]
For Profit For Loss (Positive is loss)

Dr. Present Value of Obligation Dr. Remeasurement Component (OCI)
Cr. Remeasurement Component (OCI) Cr. Present Value of Obligation
(Being actuarial gain made) (Being actuarial loss made)
The year-on-year movement (Reconciliation Statement): An entity must account for the year-on-year
movement in its defined benefit pension scheme deficit (or surplus).The following proforma shows the
movement on the defined benefit deficit (surplus) over a reporting period:
$00
0
Net deficit/(asset) brought forward X/
(Obligation bfd – assets bfd) (X)
Net interest component X/
(X)
Service cost component X
Contributions into plan (X)
Benefits paid -
Remeasurement component (bal. fig) X/
(X)

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X/
(X)
Net deficit/(asset) carried forward X/
(Obligation cfd – assets cfd) (X)
Illustration 1 – Defined benefit plan – Celine: The following information is provided in relation to a
defined benefit plan operated by Celine. At 1 January 20X4, the present value of the obligation was $140
million and the fair value of the plan assets amounted to $80 million.
20X 20X5
4
Discount rate at start of year 4% 3%
Current and past service cost ($m) 30 32
Benefits paid ($m) 20 22
Contributions into plan ($m) 25 30
Present value of obligation at 31 December ($m) 200 230
Fair value of plan assets at 31 December ($m) 120 140
Required: Determine the net plan obligation or asset at 31 December 20X4 and 20X5 and the amounts
to be taken to profit or loss and other comprehensive income for both financial years.
Solution: The statement of financial position
20X4 20X5
$m $m
PV of plan obligation 200.0 230.0
FV of plan assets (120.0 (140.0
) )
Closing net liability 80.0 90.0
The statement of profit or loss and other comprehensive income: Both the service cost component and
the net interest component are charged to profit or loss for the year. The remeasurement component,
which comprises actuarial gains and losses, together with returns on plan assets to the extent that they
are not included within the net interest component, is taken to other comprehensive income.
20X 20X5
4 $m
$m
Profit or loss
Service cost component 30.0 32.0
Net interest component 2.4 2.4
32.4 34.4
Other comprehensive income

Remeasurement component 12.6 5.6
Total comprehensive income charge for year 45.0 40.0

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Reconciliation of the net obligation for 20X4 and 20X5
20X4 20X5
$m $m
Obligation bal b/fwd 1 January 140.0 200.0
Asset bal b/fwd at 1 January (80.0 (120.0)
)
Net obligation b/fwd at 1 January 60.0 80.0
Service cost component 30.0 32.0
Net interest component
4% × $60m 2.4
3% × $80m 2.4
Contributions into plan (25.0 (30.0)
)
Benefits paid – –
Remeasurement component (bal. fig.) 12.6 5.6
Net obligation c/fwd at 31 December 80.0 90.0
The net interest component: this is charged (or credited) to profit or loss and represents the change in
the net pension liability (or asset) due to the passage in time. It is computed by applying the discount
rate at the start of the year to the net defined benefit liability (or asset) or net interest on the net
defined benefit liability, or asset. This cost is calculated by taking the net liability, or asset, at the start of
the period and applying the respective discount rate. The interest is expensed, credited, to profit or loss.
Actuarial gains and losses are changes in the present value of the defined benefit obligation resulting
from:
-Experience adjustments (the effects of differences between the previous actuarial assumptions and
what has actually occurred) and
-The effects of changes in actuarial assumptions.
The service cost component: this is charged to profit or loss and is comprised of three elements:
• 'Current service cost, which is the increase in the present value of the obligation arising from
employee service in the current period.
• Past service cost, which is the change in the present value of the obligation for employee service in
prior periods, resulting from a plan amendment or curtailment
• Any gain or loss on settlement' (IAS 19, para 8).
Explanation of terms: A past service cost is the 'change in the present value of the defined benefit
obligation for employee service in prior periods, resulting from a plan amendment or a curtailment'.
An amendment arises when an entity changes the benefits payable under a defined benefit plan. For
example, increasing the plan's payout from 1% to 1.2% of final salary for each year of service including

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past service (i.e. back-dated) would increase the liability. The increase in the liability is charged to profit
or loss in the year of change.
• Past service costs could arise when there has been an improvement in the benefits to be provided
under the plan. This will apply whether or not the benefits have vested (i.e. whether or not employees
are immediately entitled to those enhanced benefits), or whether they are obliged to provide additional
work and service to become eligible for those enhanced benefits.
• Past service costs are included within the service cost component for the year.
• Past service cost may be either positive (where benefits are introduced or improved) or negative
(where existing benefits are reduced). Past service costs are recognised at the earlier of:
– 'when the plan amendment or curtailment occurs
– When the entity recognises related restructuring costs or termination benefit' (IAS 19, para 103) or
related restructuring costs under IAS 37 Provisions, Contingent Liabilities and Contingent Assets.
Gains or losses on the settlement of a defined benefit plan are recognised when the settlement occurs.
Example: An entity is making redundant 100 employees who have pension entitlements under the
entity's defined benefit scheme. As a result of the redundancy, an obligation of $1.2 million is to be
settled with immediate payouts amounting to $0.9 million. The gain on the settlement of $0.3 million is
recognised in profit or loss immediately.
Before past service costs are determined, or a gain or loss on settlement is recognised, the net defined
benefit liability or asset is required to be remeasured, however an entity is not required to distinguish
between past service costs resulting from curtailments and gains and losses on settlement where these
transactions occur together.
Illustration – Accounting for past service costs: An entity operates a pension plan that provides a
pension of 2% of final salary for each year of service. On 1 January 20X5, the entity improves the pension
to 2.5% of final salary for each year of service, including service before this date. Employees must have
worked for the entity for at least five years in order to obtain this increased benefit. At the date of the
improvement, the present value of the additional benefits for service from 1 January 20X1 to 1 January
20X5, is as follows:
$00
0
Employees with more than five years’ service at 1.1.X5 150
Employees with less than five years’ service at 1.1.X5 120
(average length of service: two years)
270
Required: Explain how the additional benefits are accounted for in the financial statements of the
entity.
Solution: The entity recognises all $270,000 immediately as an increase in the defined benefit obligation
following the amendment to the plan on 1 January 20X5. This will form part of the service cost

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component. Whether or not the benefits have vested by the reporting date is not relevant to their
recognition as an expense in the financial statements.
Contributions into the plan: these are the cash payments paid into the plan during the reporting period
by the employer. This has no impact on the statement of profit or loss and other comprehensive income.
Benefits paid: these are the amounts paid out of the plan assets to retired employees during the period.
These payments reduce both the plan obligation and the plan assets. Therefore, this has no overall
impact on the net pension deficit (or asset).
After accounting for the above, the net pension deficit will differ from the amount calculated by the
actuary as at the current year end. This is for a number of reasons that include the following:
• The actuary's calculation of the value of the plan obligation and assets is based on assumptions, such
as life expectancy and final salaries, and these will have changed year-on-year.
• The actual return on plan assets is different from the amount taken to profit or loss as part of the net
interest component.
An adjustment, known as the remeasurement component, must therefore be posted. This is charged or
credited to other comprehensive income for the year and identified as an item that will not be
reclassified to profit or loss in future periods or remeasurements of the net defined liability or asset. This
includes actuarial gains and losses on the defined benefit liability, the return on plan assets excluding the
amount included in the net interest calculation, and any change in the asset ceiling. This element of cost
is included in other comprehensive income.
A curtailment is a significant reduction in the number of employees covered by a pension plan. This may
be a consequence of an individual event such as plant closure or discontinuance of an operation, which
will typically result in employees being made redundant also this will usually lead to some settlement of
the obligation to the employees.
Illustration – Curtailments: AB decides to close a business segment. The segment’s employees will be
made redundant and will earn no further pension benefits after being made redundant. Their plan assets
will remain in the scheme so that the employees will be paid a pension when they reach retirement age
(i.e. this is a curtailment without settlement).
Before the curtailment, the scheme assets had a fair value of $500,000, and the defined benefit
obligation had a present value of $600,000. It is estimated that the curtailment will reduce the present
value of the future obligation by 10%, which reflects the fact that employees will not benefit from future
salary increases and therefore will be entitled to a smaller pension than previously estimated.
Required: What is net gain or loss on curtailment and how will this be treated in the financial
statements?
Solution: The obligation is to be reduced by 10% × $600,000 = $60,000, with no change in the fair value
of the assets as they remain in the plan. The reduction in the obligation represents a gain on curtailment

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which should be included as part of the service cost component and taken to profit or loss for the year.
The net position of the plan following curtailment will be:
Before On curtailment After

$000 $000 $000
Present value of obligation 600 (60) 540
Fair value of plan assets (500) – (500)
Net obligation in SOFP 100 (60) 40
The gain on curtailment is $60,000 and this will be included as part of the service cost component in
profit or loss for the year.
A settlement occurs when an entity enters into a transaction to eliminate the obligation for part or all of
the benefits under a plan. For example, an employee may leave the entity for a new job elsewhere, and a
payment is made from that pension plan to the pension plan operated by the new employer.
• The gain or loss on settlement comprises the difference between the fair value of the plan assets paid
out and the reduction in the present value of the defined benefit obligation and is included as part of the
service cost component.
• The gain or loss on settlement is recognised on the date when the entity eliminates the obligation for
all or part of the benefits provided under the defined benefit plan.
Summary of the amounts recognised in the financial statements
Defined benefit pension plan

Profit or loss Other comprehensive Statement of financial
 Service cost income statement
attributable to  Remeasurement  Plan obligation
the current and of the net  Plan assets
past periods defined liability  Asset ceiling
 Net interest on or asset,
the net defined comprising:
benefit liability 1. Actuarial gains
or asset, and losses
determined 2. Return on plan
using the assets
discount rate at 3. Some changes
the beginning in the effect of
of the period. the asset
ceiling.
(Not reclassified to
profit or loss in a
subsequent period).
Fair Value of Plan Assets: In a funded scheme the trustees of the fund will invest any contributions into
various forms of assets. These assets will include property, shares, debt assets and cash. IFRS 13 applies

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to the measurement of the fair value of the plan assets. If no market price exists for a particular asset
then the fair value should be estimated by discounting expected future cash flows. The fair value of the
plan assets will then be deducted from the defined benefit liability to identify the net liability, or asset,
that will be recognised by the entity. The plan assets exclude any unpaid contributions due from the
entity as well as any non-transferable financial instruments issued by the entity and held by the fund.
Example: Benefit plan of EVO for three years:
2013 2014 2015
$000 $000 $000
Current service cost 125 140 155
Benefits paid 130 150 170
Contributions paid 80 90 100
Present value of the obligation at 31 December 1,215 1,386 1,400
Fair value of the plan assets at 31 December 1,147 1,137 1,200
Discount rate at the start of the year 9% 8% 8%
The present value of the obligation and the fair value of the plan assets were both $1 million at 1 January
2013. In December 2014, a segment of the entity was sold and this resulted in a number of employees
being made redundant and the pension scheme for these employees was curtailed. Most of the
employees found new jobs and took the option to transfer their benefits to their new employers. As a
result of this, EVO transferred assets with a value of $27,000 to the new employers' pension schemes in
full settlement of the employees' pension entitlements; this settlement reduced the pension obligation
of Evoby$31,000. The settlement has not yet been reflected in the 2014 balances given above.
Required:
(a) Reconcile the present values of the obligation to determine the actuarial loss or gain for each year.
(b) Reconcile the fair values of the plan assets to determine the remeasurement gain or loss for each
year.
(c) Calculate the net liability (or asset) that should be recognised in the statement of financial position
at the end of each year.
(d) Calculate the amounts to be included in the statement of comprehensive income for each year.
(e) Present a journal summarising the accounting entries for each year.
(a) Present Value of Obligation
2013 2014 2015

$000 $000 $000
Present value 1,00 1,21 1,35
0 5 5

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Interest (9%/8%/8%) 90 97 108

Current service cost 125 140 155
Benefits paid (130) (150) (170)
Settlement - (31) -
Expected value 1,08 1,27 1,44
5 1 8
Actuarial loss/gain (to balance) 130 84 (48)
Present value at 31 December 1,21 1,35 1,40
5 5 0
b) Fair Value of Asset
2013 2014 2015

$000 $000 $000
Present value 1,00 1,14 1,11
0 7 0
Interest (9%/8%/8%) 90 92 89
Contributions 80 90 100
Benefits paid (130) (150) (170)
Settlement - (27) -
Expected value 1,04 1,15 1,12
0 2 9
Actuarial loss/gain (to balance) 107 (42) 71
(other comprehensive income)
Present value at 31 December 1,14 1,11 1,20
7 0 0
(c) Net Liability
2013 2014 2015

$000 $000 $000
Present value of the obligation 1,21 1,35 1,40
5 5 0
Fair value of the plan assets 1,14 1,11 1,20
7 0 0
Net liability 68 245 200
(d) Statement of Profit or Loss or other comprehensive income
Profit or loss
201 201 2015
3 4 $000
$000 $000
Current service costs 125 140 155
Net interest on opening net liability — 5 19
Gain on settlement (31 − 27) — (4) —
Profit or loss expense 125 141 174

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Other comprehensive income

Remeasurement
Actuarial loss/(gain) on obligation 130 84 (48)
Actual (gain)/loss on asset (107 42 (71)
)
Net other comprehensive income 23 126 (119
)
Total other comprehensive income 148 267 55
(e) Accounting Entries
2013: Dr Comprehensive income: 148
Cr liability (w): 68
Cr Cash: 80
Cr liability (w): 177
Cr cash: 90
Dr Liability (w): 45
Cr Cash: 100
Working: Movements on net liability
2013 2014 2015

$000 $000 $000
Opening net liability — 68 245
Net movement 68 177 (45)
Closing net liability 68 245 200
Actuarial assumptions used in measurement: An actuary is a highly qualified specialist in the financial
impact of risk and uncertainty. They advise companies on the conduct of their pension plans. An actuary
will advise the company how much to pay in contributions into the pension plan each year, in order to
ensure there are sufficient funds to cover the company’s obligation to make the pension payments.
The overall actuarial assumptions used must be unbiased and mutually compatible, and represent the
best estimate of the variables determining the ultimate post-employment benefit cost.
• Financial assumptions must be based on market expectations at the end of the reporting period.

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• Mortality assumptions are determined by reference to the best estimate of the mortality of plan
members during and after employment.
• The discount rate used is determined by reference to market yields at the end of the reporting period
on high quality corporate bonds, or where there is no deep market in such bonds, by reference to market
yields on government bonds. Currencies and terms of bond yields used must be consistent with the
currency and estimated term of the obligation being discounted.
• Assumptions about expected salaries and benefits reflect the terms of the plan, future salary increases,
any limits on the employer's share of cost, contributions from employees or third parties, and estimated
future changes in state benefits that impact benefits payable
• Medical cost assumptions incorporate future changes resulting from inflation and specific changes in
medical costs
• Updated actuarial assumptions must be used to determine the current service cost and net interest for
the remainder of the annual reporting period after a plan amendment, curtailment or settlement when
an entity remeasures its net defined benefit liability (asset)
When a surplus or deficit occurs an employer might take no action. This would be the case when the
company believes that the actuarial assumptions may not be true in the short term but will be true over
the long term. Alternatively, the company might decide to eliminate a deficit (not necessarily
immediately) by making additional contributions into the fund.
When the fund is in surplus, the employer might stop making contributions into the fund for a period of
time (and ‘take a pension holiday’). Alternatively the company may withdraw the surplus from the fund,
for its own benefit.
Disclosures about defined benefit plans: IAS 19 sets the following disclosure objectives in relation to
defined benefit plans:
• An explanation of the characteristics of an entity's defined benefit plans, and the associated risks.
• Identification and explanation of the amounts arising in the financial statements from defined benefit
plans.
• A description of how defined benefit plans may affect the amount, timing and uncertainty of the
entity's future cash flows.
Extensive specific disclosures in relation to meeting each the above objectives are specified, e.g. a
reconciliation from the opening balance to the closing balance of the net defined benefit liability or
asset, disaggregation of the fair value of plan assets into classes, and sensitivity analysis of each
significant actuarial assumption.
Additional disclosures are required in relation to multi-employer plans and defined benefit plans sharing
risk between entities under common control.

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Other guidance: IAS 19 also provides guidance in relation to:
• When an entity should recognise a reimbursement of expenditure to settle a defined benefit

obligation.
• When it is appropriate to offset an asset relating to one plan against a liability relating to another plan.
• Accounting for multi-employer plans by individual employers.
• Defined benefit plans sharing risks between entities under common control.
• Entities participating in state plans.
• Insurance premiums paid to fund post-employment benefit plans.
5. The asset ceiling: Most defined benefit pension plans are in deficit (i.e. the obligation exceeds the
plan assets). However, some defined benefit pension plans do show a surplus. If a fund is "in surplus",
assets exceed liabilities. A degree of prudence is attached to the recognition of this net asset position. A
net asset position can arise due to:
• Actuarial assumptions being over pessimistic; or
• Asset returns being higher than expected.
The asset meets the Framework definition of an asset, as the entity controls a resource that is expected
to generate future economic benefits.
If a defined benefit plan is in surplus, IAS 19 states that the surplus must be measured at the lower of:
• The amount calculated as normal [FV of assets – PV of obligation].
• The total of the present value of any economic benefits available in the form of refunds from the plan
or reductions in future contributions to the plan.
This is known as applying the ‘asset ceiling’. It means that a surplus can only be recognised to the extent
that it will be recoverable in the form of refunds or reduced contributions in the future. In other words,
it ensures that the surplus recognised in the financial statements meets the definition of an 'asset' (a
resource controlled by the entity that will lead to a probable inflow of economic benefits).
Or the maximum amount that can be recognised for this asset is the lower of:
• The fund surplus; and
• The asset ceiling.
Example: A defined benefit fund has obligations of $720,000 and plan assets of $868,000 leading to a
surplus of $148,000. The terms of the fund state that any surplus must be split 50:50 between the fund
and the entity. The present value of $148,000 using an appropriate discount rate is $84,000. The asset
ceiling restricts the amount of the surplus of $148,000 that can be recognised. As only 50% of the
surplus can be refunded, the entity recognises only 50% of the present value (i.e. $42,000).

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Illustration 2 – The asset ceiling: The following information relates to a defined benefit plan:
$00
0
Fair value of plan assets 950
Present value of pension liability 800
Present value of future refunds and reductions in future contributions 70
Required: What is the value of the asset that recognised in the financial statements?
Solution: The amount that can be recognised is the lower of:
$000
Present value of plan obligation 800
Fair value of plan assets (950)
(150)
$000
PV of future refunds and/or reductions in future contributions (70)
Therefore the asset that can be recognised is restricted to $70,000.
Example: The following information relates to the defined benefit plan of Company X for the year to 31
December 20X6.
20X5 20X6
$000 $000
Fair value of the plan assets 1,15 1,39
0 5
Present value of the plan obligations 1,10 1,31
0 5
Surplus 50 80
Asset ceiling adjustment (balancing figure) (10) (15)
Asset ceiling (PV of economic benefits available)
Recognised on face of statement of financial position 40 65
During 20X6: $00

0
Current service cost 126
Contributions paid into the plan 80
Benefits paid out by the plan 130
Actuarial assumptions:
Discount rate: 10%
Solution
Fund position Company

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position
Liab. Asset Asset ceiling Net
adj.
$000 $000 $000 $000
At start of year (1,100) 1,15 (10) 40
0
Interest (@ 10%) (110) 115 (1) 4
Contributions paid 80 80
Current service cost (125) (125)
Benefits paid out 130 (130) 0
Expected year end position (1,205 1,21 (11) (1)
) 5
Remeasurement (balancing fig.) (110) 180 (4) 66
Actual year end position (1,315 1,39 (15) 65
) 5
The double entry to record this transaction in the company’s accounts is as follows:
$00 $000
0
DR Profit or loss (125 – 4) 121
CR Cash (contributions) 80
DR Pension asset (65 – 40) 25
CR OCI 66
Disclosure requirements: IAS 19 has extensive disclosure requirements. An entity should disclose the
following information about defined benefit plans:
• Explanation of the regulatory framework within which the plan operates, together with explanation of
the nature of benefits provided by the plan
• Explanation of the nature of the risks the entity is exposed to as a consequence of operating the plan,
together with explanation of any plan amendments, settlements or curtailments in the year
• The entity’s accounting policy for recognising actuarial gains and losses, together with disclosure of the
significant actuarial assumptions used to determine the net defined benefit obligation or assets.
Although there is no longer a choice of accounting policy for actuarial gains and losses, it may still be
helpful to users to explain how they have been accounted for within the financial statements.
• A general description of the type of plan operated
• A reconciliation of the assets and liabilities recognised in the statement of financial position
• A reconciliation showing the movements during the period in the net liability (or asset) recognised in
the statement of financial position
• The charge to total comprehensive income for the year, separated into the appropriate components

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• Analysis of the remeasurement component to identify returns on plan assets, together with actuarial
gains and losses arising on the net plan obligation
• Sensitivity analysis and narrative description of how the defined benefit plan may affect the nature,
timing and uncertainty of the entity’s future cash flows.
Other employee benefits: IAS 19 covers a number of other issues in addition to post-employment
benefits as follows:
Short-term employee benefits – Short-term employee benefits are those expected to be settled wholly
before or within twelve months after the end of the annual reporting period during which employee
services are rendered, but do not include termination benefits. Examples include social security
contributions, wages, salaries, profit-sharing and bonuses and non-monetary benefits (e.g. medical care,
housing, cars and free or subsidised goods or services) for current employees. Short-term compensated
absences (e.g. paid annual leave and paid sick leave) where the absences are expected to occur.
The undiscounted amount of the benefits expected to be paid in respect of service rendered by
employees in an accounting period is recognised in that period. The expected cost of short-term
compensated absences is recognised as the employees render service that increases their entitlement
or, in the case of non-accumulating absences, when the absences occur, and includes any additional
amounts an entity expects to pay as a result of unused entitlements at the end of the period.
The expense must be accounted for on an accruals basis and any unpaid entitlement should be
recognised as a short-term liability. Discounting the liability to a present value is not required, because it
is payable within 12 months. This includes a number of issues including:
• Wages and salaries and bonuses and other benefits: The general principle is that wages and salaries
costs are expenses as they are incurred on a normal accruals basis, unless capitalisation is permitted in
accordance with another reporting standard, such as IAS 16 or IAS 38.
Profit-sharing and bonus plans: The expected cost of profit-sharing and bonus payments must be
recognised when, and only when:
 the entity has a present legal or constructive obligation to make such payments as a result of
past events; and
 a reliable estimate of the obligation can be made.
A reliable estimate of its legal or constructive obligation under a profit-sharing or bonus plan can be
made when, and only when:
 the formal terms of the plan contain a formula for determining the amount of the benefit;
 the entity determines the amounts to be paid before the financial statements are authorised for
issue; or
 Past practice gives clear evidence of the amount of the entity’s constructive obligation.
A present obligation exists when, and only when, the entity has no realistic alternative but to make the
payments.

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• Compensated absences/Short-term paid absences: This covers issues such as holiday pay, sick leave,
maternity leave, jury service, study leave and military service. The key issue is whether the absences are
regarded as being accumulating or non-accumulating:
– Accumulating benefits are earned over time and are capable of being carried forward. In this situation,
the expense for future compensated absences is recognised over the period services are provided by the
employee. This will typically result in the recognition of a liability at the reporting date for the expected
cost of the accumulated benefit earned but not yet claimed by an employee. An example of this would
be a holiday pay accrual at the reporting date where unused holiday entitlement can be carried forward
and claimed in a future period.
– For non-accumulating benefits, an expense should only be recognised when the absence occurs. This
may arise, for example, where an employee continues to receive their normal remuneration whilst being
absent due to illness or other permitted reason. A charge to profit or loss would be made only when the
authorised absence occurs; if there is no such absence, there will be no charge to profit or loss.
• Benefits in kind: Recognition of cost should be based on the same principles as benefits payable in
cash; it should be measured based upon the cost to the employer of providing the benefit and
recognised as it is earned.
Termination benefits: Termination benefits may be defined as benefits payable as a result of

employment being terminated, either by the employer, or by the employee accepting voluntary
redundancy. Such payments are normally in the form of a lump sum; entitlement to such payments is
not accrued over time, and only become available in a relatively short period prior to any such payment
being agreed and paid to the employee. Types
-Typically lump sum payments;
-Enhanced post-employment benefits (e.g. pensions);
-Salary to the end of a notice period during which the employee renders no service (e.g. “gardening
leave”).
Termination benefits are measured in accordance with the nature of the employee benefit, that is to say
short term benefits, other long- term benefits or postemployment benefits.
The obligation to pay such benefits is recognised either when the employer can no longer withdraw the
offer of such benefits (i.e. they are committed to paying them), or when it recognises related
restructuring costs (normally in accordance with IAS 37). Payments which are due to be paid more than
twelve months after the reporting date should be discounted to their present value.
A termination benefit liability is recognised at the earlier of the following dates:
 when the entity can no longer withdraw the offer of those benefits - additional guidance is
provided on when this date occurs in relation to an employee's decision to accept an offer of
benefits on termination, and as a result of an entity's decision to terminate an employee's
employment

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 When the entity recognises costs for a restructuring under IAS 37 Provisions, Contingent
Liabilities and Contingent Assets which involves the payment of termination benefits.
Termination benefits are measured in accordance with the nature of employee benefit, i.e. as an
enhancement of other post-employment benefits, or otherwise as a short-term employee benefit or
other long-term employee benefit.
Other long-term employee benefits: This comprises other items not within the above classifications and
will include long-service leave, long-term disability benefits and other long service benefits. These
employee benefits are accounted for in a similar manner to accounting 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. The types of benefit will include:
-Long-term paid absences (e.g. long-service and sabbatical leave)
-Jubilee awards
-Long-term disability benefits
-Profit sharing and bonuses and
-Deferred remuneration.
There is not as much uncertainty about the measurement of other long-term employee benefits as there
is with post-employment benefits and so the standard requires a much simpler accounting model for
these other long-term benefits. As an example, there is no need to recognise any remeasurement in
other comprehensive income (unlike postretirement benefits).IAS 19 (2011) prescribes a modified
application of the post-employment benefit model described above for other long-term employee
benefits:
 the recognition and measurement of a surplus or deficit in an other long-term employee benefit
plan is consistent with the requirements outlined above
 Service cost, net interest and remeasurements are all recognised in profit or loss (unless
recognised in the cost of an asset under another IFRS), i.e. when compared to accounting for
defined benefit plans, the effects of remeasurements are not recognised in other comprehensive
income.
A liability and expense is recognised:
-When the entity cannot withdraw the offer of benefits (e.g. because it is accepted by the employee) or
-On recognising a restructuring under IAS 37 involving termination payments, if earlier.
-A termination benefit to be settled wholly within 12 months after the end of the reporting period is
treated as a short-term benefit.
-Otherwise it is treated as a long-term benefit (i.e. with remeasurement at the end of each reporting
period).

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Liability is measured as:
 The present value of the obligation for the benefit; less

 The fair value of assets set aside to meet the obligation (if any).
Criticisms of IAS 19: Retirement benefit accounting continues to be a controversial area. Commentators
have perceived the following problems with the IAS 19 approach:
• Some types of pension plans cannot be easily classified as 'defined benefit' or 'defined contribution'.
• The fair values of defined benefit plan assets may be volatile or difficult to measure reliably.
• IAS 19 requires defined benefit plan assets to be valued at fair value. Under the requirements of IAS
19, assets are valued at short-term amounts, but most pension scheme assets and liabilities are held for
the long term.
• The treatment of defined benefit pension costs in the statement of profit or loss and other
comprehensive income is complex and may not be easily understood by users of the financial
statements. It has been argued that all the components of the pension cost are so interrelated that it
does not make sense to present them separately.
• The requirement to reflect future salary increases and unvested benefits when measuring the defined
benefit obligation seems to be at odds with the Framework’s definition of a liability.
• As per IAS 19, defined benefit assets and obligations are reported net on the statement of financial
position. This is inconsistent with other accounting standards which prohibit offsetting (except in very
specific circumstances).
Investor perspective: IAS 19 recommends the use of an actuary to calculate the defined benefit
obligation. The use of an independent expert should reduce the potential for management bias.
However, even when using an actuary, the net defined benefit obligation is still susceptible to volatility
because the longterm assumptions used are likely to change over time.
As such, IAS 19 requires entities to disclose the results of a sensitivity analysis. This shows the potential
impact on the net deficit of changes in the main actuarial assumptions.
An example is provided below:
$m
Defined benefit deficit as at 31 December 20X1 500
Sensitivity of 0.1% increase in:
Discount rate (69
)
Inflation 50
Salary increases 18
Sensitivity of one year increase in life expectancy 104

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This information will help investors to understand the risks underlying amounts recognised in the
financial statements. Some investors may be deterred by the impact of these reasonably possible
changes and therefore decide to invest in other entities which are less susceptible to volatility.

Ias 19

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Strategic Business Reporting (SBR) (Association of Chartered Certified Accountants)

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IAS 19 — Employee Benefits

• Short term employee benefits;

 Wages, salaries and social security contributions;

• Post-employment benefits, such as the following:

• Other long-term employee benefits, such as the following:

 Long-term paid absences such as long-service leave or sabbatical leave;

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Debit: Employment cost (charged as an expense in the statement of profit or loss)

Credit: Liability for employee benefits

• Post-employment benefits: This normally relates to retirement benefits.

• Defined contribution plans

• Defined benefit plans.

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Dr. Staff salary: 11,000

Cr. Provident fund payable: 2,000

Cr. Cash: 9,000

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Salary at retirement × (no. of years worked/60 years)

In 2015 Limo must recognise a liability of $25m.

Cr Liability (25 –20): 5

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(1) Calculation of assets (Stated at Fair Value)

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(a). Interest (return) on plan assets [Opening discount rate]

Dr. Fair Value of Assets

Cr. Interest Income

(Being interest received from plan assets)

(b). Contributions into plan

Dr. Fair Value of Assets

(Being contribution made to plan)

(c). Benefits paid

Cr. Fair Value of Assets

(Being benefit paid)

(d). Remeasurement component (bal. fig) [OCI]

For Profit For Loss

(2) Calculation of liability (Stated at Present Value)

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(a). Interest cost on obligation [Opening discount rate]

Dr. Interest cost

(Being interest on obligation paid).

(b). Past Service cost and Current service cost

Dr. Expenses (Past and Current Service Cost).

Cr. Present Value of Obligation

(Being past and present service cost paid).

(c). Benefits paid

(Being benefit paid to the obligation).

(d). Remeasurement component (bal. fig) [OCI]

For Profit For Loss (Positive is loss)

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Solution: The statement of financial position

Other comprehensive income

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Reconciliation of the net obligation for 20X4 and 20X5

-The effects of changes in actuarial assumptions.

• Any gain or loss on settlement' (IAS 19, para 8).

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– 'when the plan amendment or curtailment occurs

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Before On curtailment After