Employee Benefits: IAS 19

KHALID AZIZ

0322-33857520336-8099762

R-1173, AL-NOOR SOCIETY, BLOCK 19, F.B.AREA, KARACHI.

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Related standards IAS 19 Current GAAP comparisons Looking ahead End-of-chapter practice

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Employee Benefits

IFRS 2 Share-based payment IAS 24 Related party disclosures

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Related Standards

Objective and scope Short-term employee benefits Post-employment benefit plans Post-employment benefits: defined

contribution plans Post-employment benefits: defined benefit

plans Other long-term employee benefits Termination benefits

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IAS 19 – Overview

Accounting and disclosure requirements for employee benefits: all forms of consideration given by an entity in exchange for employee services rendered

◦ Short-term employee benefits◦ Post-employment benefits◦ Other long-term employee benefits◦ Termination benefits

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IAS 19 – Objective and Scope

Short-term employee benefits – benefits other than termination benefits that are due to be settled within 12 months after the end of the period in which the related service is rendered

Example:◦ Salaries, wages, social security contributions◦ Short-term compensated absences such as paid

annual and sickness leaves◦ Profit-sharing and bonuses◦ Non-monetary benefits such as medical care,

housing, etc.

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IAS 19 – Short-term Employee Benefit

Short-term compensated absences:◦ Recognize a cost and liability = the undiscounted amount

of benefits expected to be paid

Some benefits accumulate ◦ Accrue as employee provides services (e.g., paid vacation

leave)

Some do not accrue (e.g., parental leave)◦ Recognize cost and liability when event occurs that

obligates the entity to provide the benefit

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IAS 19 – Short-term Employee Benefit

Profit-sharing and bonus plans:◦ Recognize cost and liability only when

a legal or constructive obligation exists, and amount can be reasonably estimated

 To reasonably estimate, must have one of the following:◦ plan has formal terms including a formula◦ amount is known before F/S are authorized for

release◦ past practice provides clear evidence of amount

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IAS 19 – Short-term Employee Benefits

Post-employment benefit plans – formal or informal arrangements to provide benefits after employment, such as pension benefits and post-employment medical care

Two types of plan:◦ defined contribution plan: employer makes

specific contributions, employee benefits = whatever has accumulated

◦ defined benefit plan: employer promises to pay a post-employment benefit, if not enough funds have accumulated, employer is responsible for the difference

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IAS 19 – Post-employment Benefit Plans

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IAS 19 – Post-employment Benefit Plans

 - Relatively straightforward

 - Liability is recognized only for contributions unpaid at the end of the period

 - Expense recognized in same period as services are rendered

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IAS 19 – Post-employment Benefits: Defined Contribution Plans

- Complex- Accounting measures depend on actuarial assumptions far into the future- Obligations are settled many years after service is provided by employees – need to take time value of money into account- Many plans are funded and rely on investment returns to grow- Employer underwrites actuarial and investment risks 22

IAS 19 – Post-employment Benefits: Defined Benefit Plans

 Accounting building blocks

◦ Present value of a defined benefit obligation – the discounted present value of the expected future payments required to settle an entity’s obligation resulting from employee service accumulated to date

◦ Plan assets – assets held by the long-term employee benefit fund that exists solely to pay employee benefits as they fall due.

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IAS 19 – Post-employment Benefits: Defined Benefit Plans

Changes in the PV of the defined benefit obligation (DBO) – based on projected salaries: 

Present value of the obligation, beginning of period+ Current period’s service cost+ Interest cost on the outstanding obligation for the

period+/- Past service costs from plan amendments in the

period- - Benefits paid under the plan in the period+/- +/- Actuarial gains (-) and losses (+) in the period_______________= = Present value of the obligation, end of period________________

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IAS 19 – Post-employment Benefits: Defined Benefit Plans

PV of the defined benefit obligation depends on:◦ actuarial assumptions (mortality rates, employee

turnover, dependants)◦ financial assumptions (discount rate, future salary

levels, future medical costs) 

Discount/interest rate = end-of-period market yield on high-quality corporate bonds with terms that correspond to obligation

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IAS 19 – Post-employment Benefits: Defined Benefit Plans

 Current service cost = PV of benefits earned for service in current period

Past service cost (PSC) = change in PV of DBO from introducing plan that includes benefits for past service or from a change in the benefits payable related to past service under existing plan

Actuarial gains/losses = effects of changes in actuarial assumptions and experience adjustments for difference between previous estimates and what actually occurred.

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IAS 19 – Post-employment Benefits: Defined Benefit Plans

 Changes in the FV of plan assets:  Fair value of plan assets, beginning of period

+ Contributions from employer/employees in the period+/- Actual return on plan assets in the period- Benefits paid under the plan in the

period__________

= Fair value of plan assets, end of period____________

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IAS 19 – Post-employment Benefits: Defined Benefit Plans

Actual return on plan assets = interest, dividends, other income and realized and unrealized gains and losses on assets held in plan Expected return on plan assets = return used by actuary in determining funding requirements

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IAS 19 – Post-employment Benefits: Defined Benefit Plans

 Benefit cost to recognize each period

Current service cost for the period + Interest cost for the period

- Expected return on plan assets for the period +/- Actuarial gain (-) or loss(+) amortized in the period +/- Past service cost recognized in the period = Post-employment benefit cost to profit or loss

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IAS 19 – Post-employment Benefits: Defined Benefit Plans

Benefit cost variables taken from ◦ PV of PBO, and ◦ Fund assets◦ Information in working papers for actuarial

gain/loss and PSC Amortization of actuarial gain/loss – use corridor method PSC

for vested benefits, expense in period for unvested benefits, amortize to expense on straight-

line basis over average period until vested

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IAS 19 – Post-employment Benefits: Defined Benefit Plans

Actuarial gains/losses: 2 options1. recognize all actuarial gains/losses in OCI when

they occur, and then directly to retained earnings – not through P&L

2. do not recognize/amortize unless accumulated net actuarial gain/loss is significant*; if significant, amortize excess amount to expense over average working lives of employees in plan

*significant: if at the first of the period, it is more than 10% of the larger of the beginning of the period PV of PBO and the fund assets

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IAS 19 – Post-employment Benefits: Defined Benefit Plans

Entries: 

Dr. Employee benefit expense $XCr. Defined benefit liability $X

To record expense and recognize liability. 

Dr. Defined benefit liability $YCr. Cash $Y

To record contribution to plan assets.

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IAS 19 – Post-employment Benefits: Defined Benefit Plans

Balance in Defined Benefit Liability on balance sheet can be reconciled to building blocks:

Present value of the defined benefit obligation - Fair value of the plan assets = Funded status of the plan +/- Net unrecognized actuarial gains (+) or losses

(-) - Unrecognized past service costs = Defined benefit liability

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IAS 19 – Post-employment Benefits: Defined Benefit Plans

 Extensive disclosures required◦ Description of plans and accounting policies◦ Reconciliation of changes in PV of PBO and fund

assets◦ Reconciliation of B/S account to funded status◦ Components of and total expense◦ Information about plan assets and actuarial

assumptions, sensitivity analysis, historical data◦ Best estimate of expected contribution to plan in

year after B/S date

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IAS 19 – Post-employment Benefits: Defined Benefit Plans

 Examples:◦ long-term disability benefits, long-service or

sabbatical leaves, deferred compensation (>12 months)

◦ similar to post-employment benefits, but with less measurement uncertainty

◦ all aspects recognized in expense in year; no defer and amortize

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IAS 19 – Other Long-term Employee Benefits

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IAS 19 – Other Long-term Employee Benefits

Termination benefits – benefits payable as a result of:◦ ending an employee’s employment before normal retirement

date, or◦ employee accepts voluntary termination in exchange for

benefits

Recognize liability and expense only when entity is demonstrably committed to plan. Plan sets out:

a) location, function and approximate number of employees being terminated;

b) termination benefits to be provided for each job classification or function; and

c) when the plan will be implemented Entire cost is expensed when entity is committed to plan

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IAS 19 – Termination Benefits

IAS 19 on IASB current agenda Goal - issue interim standard with

significant improvements by 2011 March 2008 Discussion Paper (DP) issued –

limited scope Exposure Draft expected in late 2009 After DP issues resolved, second phase of

project will begin

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Looking Ahead

Tentative decisions made by IAS Board◦ All changes in plan assets and benefit obligation should be

recognized when incurred◦ No need to separately recognize expected return

on plan assets◦ All past service cost should be recognized in

expense when plan amended◦ Variety of presentation approaches for components

of defined benefit expense – IASB seeking input◦ New definitions needed for post-employment

benefits and defined benefit plans

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Looking Ahead