IAS 19

EMPLOYEE
BENEFITS
 Short-term benefits

Post-employment benefits

IAS 19
Other long-term benefits

Termination benefits
EMPLOYEE BENEFITS: All forms of consideration given by an entity
for service rendered by employees or for termination of employment

Short term benefits: Benefits other than termination benefits that are
wholly expected to be settled 12 months after the end of the reporting
period when the employees rendered the related service.
eg. - Wages, salaries, social security contributions,
- paid annual leave, sick pay leave,
- profit sharing and bonuses &
-non monetary benefits like medical care, housing free or subsidised
goods and services
Short term absences:
Accumulating paid absences – carried forward for use in future periods if
the current years’ entitlement is not used. Cost of such unused
entitlement that is carried forward and can in lieu of holidays is
recognised as an accrual at the year end eg. Earned leave

Non accumulating paid absences- cannot be carried forward and

recognised as an expense when absence occurs. Eg. Maternity leave
Plyman Co has 100 employees. Each is entitled to five working days' of
paid sick leave for each year, and unused sick leave can be carried
forward for one year. Sick leave is taken on a LIFO basis (ie first out of
the current year's entitlement and then out of any balance brought
forward).
As at 31 December 20X8, the average unused entitlement is two days
per employee. Plyman Co expects (based on past experience which is
expected to continue) that 92 employees will take five days or fewer
sick leave in 20X9 and the remaining eight employees will take an
average of six and a half days each. State the required accounting for
sick leave.
Plyman expects to pay 1.5* 8 employees = 12 days of sick leave out of
current years unused entitlement. Liability = 12 days of sick pay
An accrual should be made under IAS 19 Employee Benefits for the
holiday entitlement that can be carried forward to the following
year. This is because the employees have worked additional days in
the current period (generating additional economic benefits for the
company), but will work fewer days in the following period when
the salary for those days is paid. An accrual is therefore required to
match costs and revenues and apply the accruals concept.
Debit P/L ($42m x 94% x 4 days/255 days)$619,294
Credit Accruals
An entity will recognise expected cost of profit sharing and bonus
programs only when
The entity has a legal or constructive obligation to make such
payments
A reliable estimate of the obligation can be made
 POST-EMPLOYMENT BENEFIT PLAN

Defined Contribution Plan Defined Benefit Plan

• T h e c o m p a n y p ro m i s e s a l e v e l o f
• Company's only obligation is agreed
pension benefit upon retirement.
c o n t r i b u t i o n , [ e g 5 % × s a l a r y. ]
• F u t u r e Va l u e d e p e n d s o n f i n a l s a l a r y
• No g u a r a n t e e o f t h e b e n e f i t s p a i d o u t
a n d y e a r s wo r k e d .
• Em p l o y e e t a k e s a l l t h e r i s k
• Ad v i s e d b y a n a c t u a r y - t o e n s u r e f u n d
• F u t u r e p e n s i o n d e p e n d s o n VAL UE
has enough assets to pay future
OF F UND
pensions.
• Ac c o u n t e d f o r o n a c c r u a l s b a s i s
The sponsoring employee will contribute amounts to pension plan normally held
in the form of a trust separate from the sponsoring employer. Although directors
of the company may also be trustees of the pension plan.. They are separate legal
entities. The pension plan /trust will make payouts to employees in accordance
with plan rules.
In a defined contribution plan entity has no legal or constructive obligation to pay
further contributions even if the Fund does not hold sufficient funds to pay all
employees. Risk is on employee
In a defined benefit plan the employer has an obligation to pay the defined
benefit even if the Fund does not have sufficient amount. Risk is on employer.
 Defined Contribution Plan

Mouse, a public limited company, agrees to contribute 5% of employees' total

remuneration into a post-employment plan each period. In the year ended 31
December 20X9, the company paid total salaries of $10.5 million. A bonus of $3
million based on the income for the period was paid to the employees in March
20Y0. The company had paid $510,000 into the plan by 31 December 20X9.

Calculate the total profit or loss expense for post-employment benefits for the year
and the accrual which will appear in the statement of financial position at 31
December 20X9.
Defined Benefit Plans are post-employment plans that are not defined contribution
plans.

A fixed level of benefit is guaranteed by the entity to the employees, thus the
entity has on obligation of long-term liability which has to be measured at present
value.

Contributions made have to be invested into assets, these must be measured at fair
value.
Consulting an actuary to determine the value of plan assets and obligations is
recommended so as to ensure the fund has enough assets to pay obligations.

On the SOFP, a net position is reported:

If assets>obligations = Net Asset; If obligations>assets = Net Liability
 Defined Contribution Plan

The employee (entity) records the

- plan assets at fair value and
- plan liability at present value, and
- bears the risk and rewards of pension plan. Owns assets and owes liabilities.
Complexity lies in
- Future benefits of employees service cannot be estimated exactly. Actuarial
assumptions are required.
- Future obligations should be valued by discounting to present value, because these
obligations will be settled many years into the future.
- When actuarial assumptions change actuarial gains and losses will arise
Net Interest Component
Charged to SOPL if Net pension liability
(Debit Interest Credit Obligation - unwinding of discount) (Debit Plan Asset
Credit Interest – interest earned on investments)
Credited to SOPL in Net pension asset
We apply the discount rate to the net liability or asset at the start of the year to arrive
at the net interest cost to account for time value.
Service Cost Component
Current service cost is the increase in PV of obligation arising from employee service in the
current period.
Past service cost is the change in PV of obligation for employee service in prior periods,
resulting from a plan amendment or curtailment. (earlier of when plan
amendment/curtailment occurs or when entity recognises restructuring costs or termination
benefits) u Any gain or loss on settlement.
,
Past Service Cost

An amendment that increases benefit to employees will result in

increase in obligation
Debit Profit or Loss
Credit PV of Defined benefit obligation

Am amendment that reduces benefits (curtailment) results in a

reduction in obligation
Debit PV of Defined benefit obligation
Credit Profit or Loss
Contributions into the Plan
Cash payments made by the employer into the plan during the period
No impact on SOPL- Debit Plan assets Credit Cash/Bank
Benefits Paid
Amounts paid out of the plan to retiring employees during the period
Reduce both plan obligations and assets, hence no overall impact on the net assets or
deficits (Cash debit Assets credit Obligation Debit Cash Credit)
Remeasurement Component
Amount differs from amount calculated by actuary
a)Calculation assumptions such as life expectancy and final salaries may be different
b)Actual return on plan assets maybe different from amount reported in SOPL as part of net interest
component
Adjusted to reflect the fair value of net plan assets or deficits; charged or credited to OCI
and can’t be recycled to P&L in future periods
 Defined Benefit Plan
Net interest cost
• Interest applied to b/d obligation and assets (and netted
in profit or loss).
• If plan amendment, curtailment or settlement in
reporting period, interest for remaining period
calculated on remeasured obligation/asset, using the
discount rate used to remeasure obligation/asset.
• The interest on assets is time apportioned for
contributions less benefits paid in the period (if they
occur throughout the year rather than at the start or end
of the year). The interest on obligations is also time
apportioned for benefits paid in the period
 Defined Benefit Plan

Current service cost

• Increase in the present value of the

obligation resulting from employee service
in the current period
• Calculated using actuarial assumptions at
beginning of reporting period.
• If plan amendment, curtailment or
settlement in reporting period, current
service cost for remainder of reporting
period calculated using actuarial
assumptions used to remeasure
obligation/asset.
 Defined Benefit Plan

Past service cost

• Change in PV obligation for employee service in prior

periods, resulting from a plan amendment or curtailment
• Plan amendment -introduction /withdrawal/changes to
the employee benefit plan.
• Curtailments- significant reduction by the entity in the
no. of employees covered by the plan .
• Charged or credited immediately to profit or loss
 Defined Benefit Plan

Contributions
• Into the plan by the company
• As advised by actuary

Benefits
• Actual pension payments made
 Defined Benefit Plan
Remeasurements

• Arising from annual valuations of

obligation and assets
• On obligation, differences between
actuarial assumptions and actual
experience during the period, or
changes in actuarial assumptions
• On assets, differences between actual
return on plan assets and amounts
included in net interest
Defined Benefit Plan- Curtailments
 Defined Benefit Plan
Asset Ceiling Test
• Most defined benefit pension plans are in deficit (i.e. the obligation exceeds the plan assets)
although some defined benefit pension plans show a surplus.
• 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 – net defined benefit asset

• 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. ( impairment)

• 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
• Such impairment loss is recognized immediately in OCI credit Net plan Assets Debit OCI
Defined Benefit Plan- Asset Ceiling