IAS 19 Employee Benefits - Summary

IAS 19 Employee Benefits

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IFRS Summaries by Imad Uddin, FRM

Objective

Prescribe the accounting and disclosure for employee benefits (all forms of consideration given by an entity in exchange for service rendered by employees or for termination).
Requires recognition of:
A liability when an employee has provided service in exchange for future benefits.
An expense when the entity consumes the economic benefit arising from service provided by an employee.

Scope of IAS 19

Applies To:

All employee benefits, except those covered by IFRS 2 *Share-based Payment*.
Includes benefits provided:
Under formal plans or agreements between entity and employees/representatives.
By legislative requirements (e.g., state pension contributions).
Through informal practices that give rise to a constructive obligation (where past practice, published policies or statements indicate acceptance of responsibilities).

Categories of Employee Benefits

IAS 19 classifies employee benefits into four main categories based on timing and nature.

Category Expected Timing of Settlement Examples
Short-term Benefits Wholly due within 12 months after the end of the period in which employees render the related service. Wages, salaries, social security contributions; Paid annual leave & sick leave; Profit-sharing & bonuses; Non-monetary benefits (medical care, housing, cars).
Post-employment Benefits Payable after the completion of employment. Pensions (retirement benefits); Other post-employment benefits like life insurance & medical care.
Other Long-term Benefits Employee benefits (other than post-employment & termination) not wholly due within 12 months after the end of the service period. Long-service leave or sabbatical leave; Jubilee or other long-service benefits; Long-term disability benefits; Deferred compensation payable 12+ months after service.
Termination Benefits Payable as a result of either: (a) entity's decision to terminate employment before normal retirement, or (b) employee's decision to accept an offer of benefits in exchange for termination (voluntary redundancy). Severance pay; Redundancy compensation; Enhanced retirement benefits offered for voluntary departure.

Short-Term Employee Benefits

Accounting Treatment:

Recognize the undiscounted amount expected to be paid in exchange for service rendered in a period.
Recognize as a liability (accrued expense) after deducting amounts already paid. If payment exceeds undiscounted amount, recognize a prepayment (asset).
Recognize as an expense (unless included in cost of another asset like inventory or PPE per other standards).

Examples of Recognition Timing:

Paid Absences (e.g., Annual Leave): Recognize expected cost as employees render service that increases their entitlement. Recognize accumulating absences when service is rendered; non-accumulating when absence occurs.
Profit-Sharing and Bonuses: Recognize expected cost only when:
Entity has a present legal or constructive obligation to make payments due to past events; AND
A reliable estimate of the obligation can be made.

Post-Employment Benefits (Overview)

Classification is Crucial:

Defined Contribution Plans (DC Plans): Entity pays fixed contributions into a separate fund. Entity has no legal/constructive obligation to pay further if fund insufficient. Actuarial/investment risk falls on the employee.
Defined Benefit Plans (DB Plans): Entity's obligation is to provide the agreed benefits to current/former employees. Actuarial/investment risk falls substantially on the entity. Requires complex accounting.
Classification depends on the economic substance of the plan.

Defined Contribution Plans (DC)

Characteristics:

Employer pays fixed contributions (e.g., % of salary) into a separate entity (a fund).
Employer has no legal or constructive obligation to pay further contributions if the fund lacks sufficient assets to pay all benefits.
Actuarial risk (benefits less than expected) and investment risk (assets invested insufficient) fall on the employee.

Accounting Treatment (Simple):

Recognize contributions payable as an expense in the period service is rendered by the employee.
Recognize unpaid contributions due at period end as a liability (accrued expense).
Recognize prepaid contributions as an asset if it leads to cash refund or reduction in future payments.

Defined Benefit Plans (DB)

Characteristics:

Entity's obligation is to provide the agreed level of benefits (defined by formula, e.g., based on final salary and years of service).
Actuarial risk and investment risk fall, in substance, on the employer. If experience is worse than expected, obligation may increase.
Accounting is complex, requiring actuarial assumptions.

Key Accounting Elements:

Present Value of Defined Benefit Obligation (PVDBO): The present value (discounted) of expected future payments required to settle the obligation resulting from employee service in current and prior periods.
Fair Value of Plan Assets: Assets held by a long-term employee benefit fund (if any) to meet the obligation. Measured at fair value (IFRS 13).
Net Defined Benefit Liability (Asset): The deficit or surplus, calculated as PVDBO less Fair Value of Plan Assets.

Recognition in Statement of Financial Position:

Recognize the Net Defined Benefit Liability (Asset) on the balance sheet.
If resulting number is an asset (surplus), it is limited by the asset ceiling.
Asset Ceiling: The present value of any economic benefits available in the form of refunds from the plan or reductions in future contributions to the plan.

Measurement of Defined Benefit Obligation (PVDBO)

Method:

Must use the Projected Unit Credit Method.
Views 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.

Key Actuarial Inputs & Assumptions:

Assumptions must be unbiased and mutually compatible.
Discount Rate: Determined by reference to market yields at the end of the reporting period on high-quality corporate bonds (HQCB). Currency and term should match obligation currency/term. If no deep market in HQCB, use government bond yields.
Demographic Assumptions: Mortality (pre- & post-retirement), rates of employee turnover, disability, early retirement.
Financial Assumptions: Future salary increases, future benefit levels (if linked to price indices), medical cost trends (for medical plans).

Components of Defined Benefit Cost (Recognized in P&L and OCI)

Component Recognized In Description
Service Cost P&L Comprises:
Current service cost: Increase in PVDBO from employee service in current period.
Past service cost: Change in PVDBO from plan amendment or curtailment affecting past service.
Gains/losses on settlement.
Net Interest on Net Defined Benefit Liability (Asset) P&L Change during period arising from passage of time. Calculated by multiplying the net DB liability/asset by the discount rate used for PVDBO. Represents unwinding of discount on obligation and expected return on plan assets based on that rate.
Remeasurements of Net Defined Benefit Liability (Asset) OCI Comprises:
Actuarial gains and losses (effects of changes in demographic/financial assumptions & experience adjustments).
Return on plan assets (excluding amounts included in net interest).
Any change in the effect of the asset ceiling (excluding amounts in net interest).
Note: Remeasurements in OCI are never reclassified ('recycled') to P&L subsequently. Can be transferred within equity (e.g., to retained earnings).

Remeasurements in OCI (Details)

Represents volatility arising from changes in actuarial assumptions and differences between assumptions and actual experience.

Components Included:

Actuarial Gains and Losses: Arise from increases/decreases in PVDBO due to changes in actuarial assumptions (e.g., discount rate changes, updated mortality tables) or experience adjustments (difference between previous assumptions and what actually occurred).
Return on Plan Assets: The actual return (interest, dividends, realized/unrealized gains/losses) less the amount included in Net Interest calculation (which is based on the discount rate).
Effect of the Asset Ceiling: Changes in the limit on a recognized DB asset, excluding interest component.

Crucially, these remeasurement components recognized in OCI are NOT reclassified to profit or loss in subsequent periods.

Other Long-Term Employee Benefits

Examples:

Long-service leave or sabbatical leave.
Jubilee or other long-service benefits.
Long-term disability benefits.
Deferred compensation payable 12 months or more after the end of the period in which it is earned.

Accounting Treatment:

Simplified approach compared to DB plans. Uses Projected Unit Credit method, but the components are calculated slightly differently.
Net total of service cost, net interest, and remeasurements is recognized in profit or loss.
No recognition of remeasurements in OCI for other long-term benefits.

Termination Benefits

Recognition Criteria (Recognize Liability & Expense):

Recognize at the earlier of:
When the entity can no longer withdraw the offer of those benefits (e.g., employee accepts voluntary redundancy offer).
When the entity recognizes costs for a restructuring within the scope of IAS 37 that involves the payment of termination benefits (e.g., detailed formal plan announced).

Measurement:

Measure based on the nature of the benefit (e.g., lump sum, enhanced pension).
If benefits are expected to be settled wholly within 12 months, apply short-term benefit rules (undiscounted).
If expected to be settled beyond 12 months, measure at present value using discount rate per DB rules.

Disclosure Requirements

Requirement Category Example Notes / Detail Required
Plan Characteristics & Risks Description of DB plans and risks entity exposed to (actuarial, investment risks). Description of any regulatory framework.
Amounts in Financial Statements Explanation of amounts recognized in primary statements. Disaggregation of DB cost components (service cost, net interest, remeasurements). Details of line items containing these amounts.
Reconciliation of DB Obligation (PVDBO) Roll-forward from opening to closing balance showing effects of: current service cost, interest cost, remeasurements (actuarial G/L from assumption changes & experience), past service cost, settlements, benefits paid, FX changes, business combinations/disposals.
Reconciliation of Plan Assets Roll-forward of fair value from opening to closing showing effects of: interest income (part of net interest), remeasurements (return on assets excl. interest), employer/employee contributions, benefits paid, settlements, FX changes, business combinations/disposals. Disaggregation of plan assets into major classes.
Sensitivity Analysis For significant actuarial assumptions (e.g., discount rate, mortality, salary growth), show how DBO would have been affected by reasonably possible changes.
Funding & Maturity Profile Description of funding arrangements and policy. Expected contributions for next period. Maturity profile of the DBO (e.g., weighted average duration).
Related Party Transactions Contributions to post-employment plans for key management personnel.

Key Judgments and Estimates

Significant Estimates Required For DB Plans:

Discount rates.
Expected rates of salary increases.
Employee mortality and turnover rates.
Future medical cost trends (for medical plans).

Actuarial Valuation Frequency:

IAS 19 requires determining the PVDBO and current service cost using actuarial valuation method with sufficient regularity that amounts recognized do not differ materially from using values at end of reporting period. Standard implies update is needed at each reporting date.

Summary Table: Defined Benefit (DB) vs Defined Contribution (DC)

Feature Defined Contribution (DC) Defined Benefit (DB)
Employer Obligation Limited to agreed contributions. Provide agreed future benefits.
Primary Risk Bearer Employee Employer
Accounting Complexity Low (Expense contributions) High (Actuarial valuations needed)
Remeasurements Not Applicable Recognized in OCI (Not recycled)
Actuarial Valuation Not Required Required Regularly
Balance Sheet Item Accrued Contribution (Liability) / Prepayment Net Defined Benefit Liability / Asset (subject to ceiling)
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Imad Uddin is deeply passionate about IFRS and has founded Analyqt, a consulting firm dedicated to helping clients navigate complex accounting and financial reporting challenges. In addition to his advisory work, Imad is committed to education and knowledge-sharing, which led to the creation of IFRSMasterclass.com, a platform offering high-quality IFRS training and resources.

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