IAS 19 Employee Benefits

Scope

– Short / Long term benefits, Post-employment benefits and Termination benefits

– Formal Plans, Legislative requirements and Informal Practices

– Directly to employees or their spouse, children, other dependents, legal heirs or

nominees, or to others i.e.. trust, Insurance companies etc.

– Full time, part time, temporary or casual employee

IAS 19 Employee Benefits Contd….

• Short Term – fall due wholly within twelve months after the end of the period in
which employees render the related services. Undiscounted amount expected
to be paid is recognised in the profit and loss account.

• Long Term
 Defined Contribution plan – enterprise pays fixed contributions into a
separate entity (a fund) and will have no 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.
Contribution made is recognised as expense by the enterprise.

 Defined Benefit plan (Funded / Unfunded) – Other than defined

contribution plan. Expense recognised based on actuarial valuation.
IAS 19 Employee Benefits Contd….

Actuarial valuation
Detailed actuarial valuation to determine the present value of defined benefit obligation and the
fair value of plan assets is performed for defined benefit plans, with sufficient regularity so that the
amounts recognized in the financial statements do not differ materially from the amounts that
would have been determined at the end of the reporting period.
Projected Unit Credit Method is used to determine the present value of defined benefit obligation.
This method treats each period of service as giving rise to an additional unit of benefit entitlement
and measures each unit separately to build up the final obligation.

Defined Benefit Obligation (DBO) – Expected future payments required to settle the obligation
resulting from employee service in the current and prior periods. Obligation can be –
– By established past practice
– Published policies

Fair Value of Plan Assets – The amount for which an asset could be exchanged by a willing party
on arm’s length transaction. This is the market value of the investments done by the trust, formed
separately by the employer.
IAS 19 Employee Benefits Contd….

Measurement of DBO
Assumptions Used
• Demographic Assumptions
 Mortality
 Attrition
 Medical cost trend rates

• Financial assumptions
 Discount Rate – Market yields on high quality corporate bonds. In countries where there
are no deep market in such bonds, government bonds rates to be used. The rate should
be consistent with the estimated timing of the benefits payments, which is average
payback period.
 Future Salary and benefits levels – As expected by the management, taking into account
inflation, promotion and supply and demand in the employment market.
 Rate of return on investments – Based on the past average return on assets
 Future Medical costs / Medical inflation
IAS 19 Employee Benefits Contd….

Reconciliation of Opening and closing DBO

Present Value of DBO at beginning of year 309.98

Current Service cost 15.18
Past Service Cost -
Interest cost 24.99
Settlements -
Curtailments -
Actuarial (gains)/ losses 47.30
Foreign Currency Translation differences -
Contribution by plan participants -
Business Combination -
Benefits paid (32.05)
Present Value of DBO at the end of year 365.40
IAS 19 Employee Benefits Contd….

Current Service Cost - Increase in the present value of DBO resulting from employee
service in the current year.
Past Service Cost – Increase in the present value of DBO for employee service in prior
periods, in the current period from the introduction of, or changes to the employee
benefits.
Interest Cost – Increase in the present value of DBO arising because of the benefits
are one period closer to settlement.
(Opening DBO – Benefits Payment / 2)*Discount rate at the start of the period. As
given above (309.98-32.05 / 2)*8.50%=24.99.
Settlements – Transaction that eliminates all further legal or constructive obligation for
part or all of the benefits provided under a defined benefit plan
Curtailments – Change in plan resulting in material reduction in the number of
employees covered in the plan or amendment in the terms resulting in the reduction in
the benefits or the current employees are no longer qualified for the benefits.
Actuarial Gains / Losses – experience adjustments – differences between the previous
actuarial assumptions and what has actually occurred and effects of changes in
actuarial assumptions.
IAS 19 Employee Benefits Contd….

Foreign Currency Translation Difference – Currency Translation from opening rate and average
rate to closing rate.
Contribution by plan participants – Contribution by employees covered in the plan
Business Combination – Acquisition of a subsidiary / merger etc.
Benefits Paid – Actual payments made to employees
IAS 19 Employee Benefits Contd….
Reconciliation of Opening and closing Fair Value of Plan Assets

Plan assets at beginning of year 311.11

Actual return on plan assets 27.07
Foreign Currency Translation differences -
Contribution by plan participants -
Actual Company contributions 65.48
Business Combination -
Settlements -
Benefits paid (32.05)
Plan assets at the end of year 371.61

Actual Return on plan assets – Interest, dividends and other revenue derived from the plan assets,
together with realised and unrealised gains or losses on the plan assets, less any costs of
administering the plan and less any tax payable by the plan itself (Expected Return on plan assets
+ Actuarial gain or loss).
Expected return on plan assets is calculated as [(Opening Fair Value of Plan assets +
(Contribution by employer – benefits payment) / 2)) * expected return] i.e.. [(311.11+ (65.48-32.05)
/ 2) * 8%]
IAS 19 Employee Benefits Contd….

Expense recognised in the statement of profit and loss

Current Service cost 15.18
Interest cost 24.99
Expected return on plan assets (26.23)
Actuarial Losses/(Gains) 46.46
Past Service Cost -
Settlements -
Curtailments -
To tal expense / (income) recognised in the Statement of Profit &
Loss Account in 60.40

Actuarial gains and losses – (47.30-(27.07-26.23)) i.e. (Actuarial gains and losses as per DBO
Reconciliation –(Actual return on plan assets – Expected Return on plan assets))

Expense recognised in Profit and loss account can be derived as – [ (365.40-309.98) + 32.05 – 27.07] i. e.
[(Closing DBO – Opening DBO) + Benefit Payments – Actual Return on Plan assets].
IAS 19 Employee Benefits Contd….

Share – Based payment transactions

The fair value of shares and options awarded to employees is recognised over the period to which
the employees services relates. The award is presumed to be for past services if it is
unconditional and vests immediately. For equity-settled share-based payment transactions
involving employees, the fair value of employee services, received is measured by reference to
the fair value of the equity instruments granted with a corresponding increase in equity. If the
equity-settled share-based payment does not vest because a non-market condition is not met,
there is no charge. For cash-settled share-based payment transactions, the services received and
the liability incurred are measured at the fair value of the liability.

For I GAAP, although there is no accounting standard, the guidance issued by ICAI and SEBI is
similar to IFRS. However, SEBI guidelines require cost to be recognised and amortised on a
straight-line basis over the vesting period. Also, there is a choice of accounting methods for
determining the costs of benefits – Intrinsic value method or fair value method. Under the intrinsic
value method, the compensation cost is the difference between the market price of the share at
the measurement date and the price to be contributed by the employee (exercise price).
IAS 19 Employee Benefits Contd….

Difference between IFRS and I GAAP

Actuarial gains and losses
• As per I GAAP Actuarial gains and losses are recognized immediately in profit or loss;

• As per IFRS Actuarial gains and losses may be:

• recognized immediately in profit or loss;
• recognized immediately in other comprehensive income; or
• deferred upto a maximum with any excess of 10% of the greater of
• the defined benefit obligation or
• the fair value of the plan assets at the end of the previous reporting period
being recognized over the expected average remaining working lives of the
participating employees or other accelerated basis.
IAS 19 Employee Benefits Contd….

Discount rate
Market yields at the balance sheet date on high quality corporate bonds (or, in countries where
there is no deep markets for such bonds, government bonds) of a currency and term of the
post-employment benefit obligations.
As per AS 15 (Revised) market yields should be determined on the government bond rates

Asset Ceiling
If the net amount determined to be recognized in the balance sheet is negative (an asset),
recognition of the asset is limited to the lower of:
(a) the asset resulting from applying the standard, and
(b) the net total of any unrecognized actuarial losses and past service cost and the
present value of any available refunds from the plan or reduction in future
contributions to the plan.
As per AS 15 (Revised) same as above except for unrecognised actuarial losses as the same
is recognised immediately in profit and loss account.
IAS 19 Employee Benefits Contd….
Termination Benefits
• An entity shall recognise termination benefits as a liability and an expense when, and only
when, the entity is demonstrably committed to either:
a) terminate the employment of an employee or group of employees before the normal retirement date; or
b) provide termination benefits as a result of an offer made in order to encourage voluntary redundancy.

• An entity is demonstrably committed to a termination when, and only when, the entity has a
detailed formal plan for the termination and is without realistic possibility of withdrawal. If the
termination benefits fall due more than one year after the balance sheet date they should be
discounted, using a rate determined by reference to the market yields on high quality corporate
bonds at the balance sheet date. In countries where there is no deep market in such bonds,
the market yields (at the balance sheet date) on government bonds should be used.

• Under IFRS, option to defer the termination benefit expenditure is not available. With the
adoption of AS-15 (Revised) termination benefits are to be expensed when incurred. However,
as a transition provision, for the liability incurred on termination benefits upto March 31, 2009,
may be deferred over its pay-back period but any unamortised amount cannot be carried
forward to accounting periods commencing on or after April 1, 2010.
IAS 19 Employee Benefits Contd….
Limit on a Defined Benefit Asset, Minimum Funding Requirements and their
interaction
Addresses when refunds or reductions are regarded as available for recognition of an
asset; how funding requirements in future may effect the availability of reductions in future
contributions and when minimum funding requirement may give rise to a liability.

There is no guidance under I GAAP in this regard.