Employee Benefits

Ind-AS 19
Agenda

► Background and objectives

► Scope
► What are Employee benefits?
► Types of Employee Benefits
► Distinction between Short-term and Other long-term
employee benefits
► Actuarial Gains and Losses
► Constructive Obligation
► Presentation and disclosure
► Key Differences

Page 2 Ind-AS 19 Employee Benefit

Background and objectives

Objective is to:
► Prescribe the accounting & disclosure for employee
benefits.
Standard requires an entity to recognise:
► Liability when an employee has provided service.
► Expense when the entity consumes the economic benefit
arising from service provided by an employee.

Page 3 Ind-AS 19 Employee Benefit

Scope

Page 4 Ind-AS 19 Employee Benefit

Scope

In Scope Ind-AS 19: Out of Scope:

All forms of employee Share based payments
benefits including made to employees
- Formal plans and covered by Ind-AS 102.
agreements
- Required under legislative
requirements or industry
arrangements
-Informal practices that give
rise to constructive
obligations

Page 5 Ind-AS 19 Employee Benefit

What are Employee benefits?

Page 6 Ind-AS 19 Employee Benefit

What are Employee benefits?

Employee benefits are all forms of consideration given by an

entity in exchange for service rendered by employees.
Entity should recognize employee benefits when service
rendered in exchange for those benefits.

An Overview:
► Short-term benefits

► Post-employment benefits

► Other long-term benefits

► Termination benefits

Page 7 Ind-AS 19 Employee Benefit

Types of Employee Benefits
Short-term employee benefits
What are Short-term employee benefits ?
Benefits (other than termination benefits) due to be settled within 12
months after end of the period and includes:

(a) wages, salaries and social security contributions;

(b) short-term compensated absences (such as paid annual leave
and paid sick leave).
(c) profit-sharing and bonuses payable within twelve months after
the end of the period.
(d) non-monetary benefits (such as medical care, housing, cars and
free or subsidised goods or services) for current employees.

► No actuarial assumptions are required to measure the

obligation.
► No possibility of any actuarial gain or loss.

Page 8 Ind-AS 19 Employee Benefit

Types of Employee Benefits
Short-term employee benefits (Contd.)
What to recognize in Balance Sheet ?
Undiscounted Amount Liability or accrued
amount of already paid expense / (Asset or
short-term prepaid expense)
employee
benefit

What to recognize in Profit or Loss ?

Undiscounted Expense unless another
amount of standard requires or
short-term permits the
employee inclusion of the benefits
benefit in the cost of an asset

Page 9 Ind-AS 19 Employee Benefit

Types of Employee Benefits
Short-term employee benefits (Contd.)
When to recognize ?
Short-term Accumulating – when the
employee employees render service
benefits that increases their
entitlement to future
compensated absences.
Short-term Profit-sharing Profit-sharing & bonus
compensated and bonus plan – when, and only
absences plans when:
entity has a present legal or
constructive obligation to
make
Non-
Accumulating
Accumulating
such payments, and
reliable estimate can be
made.

Page 10 Ind-AS 19 Employee Benefit

Types of Employee Benefits
Post-employee benefits
What are Post-employee benefits ?

Benefits (other than termination benefits) payable after

the completion of employment and include:

(a) retirement benefits, such as pensions; and

(b) other post-employment benefits, such as post-
employment life insurance and post-employment
medical care.

Page 11 Ind-AS 19 Employee Benefit

Types of Employee Benefits
Post-employee benefits (Contd.)
Post-employment benefit plans can be classified as:
► Defined Contribution Plan (DC) and
► Defined Benefit Plan (DB)

Defined
Defined Benefit
Contribution
Plans (DB)
Plans (DC)

Entity’s legal or Entity’s obligation is to

constructive obligation provide the agreed
is limited to the amount benefits to current and
that it agrees to
contribute to the fund former employees

Actuarial risk and Actuarial risk and

investment risk fall on investment risk fall in
the employee substance, on the entity

Page 12 Ind-AS 19 Employee Benefit

Types of Employee Benefits
Post-employee benefits (Contd.)
Defined Contribution Plan (DC)

What to recognize in Balance Sheet under DC Plan ?

Contribution Contribution
payable to already paid Liability or accrued expense
the plan / (Asset or prepaid
expense)

► No actuarial assumptions are required to measure the obligation

or the expense and there is no possibility of any actuarial gain
or loss.
► Disclose the amount recognised as an expense.

Page 13 Ind-AS 19 Employee Benefit

Types of Employee Benefits
Post-employee benefits (Contd.)
Defined Contribution Plan (DC)
What to recognize in Profit or loss under DC Plan ?

Expense unless another

Contribution standard requires or
payable to permits the inclusion of the
the plan benefits in the cost of an
asset

► If whole of the contributions are not due within 12 months after

period end, same shall be discounted.
► Discount rate used shall be determined by reference to market
yields at the end of the reporting period on high quality
corporate bonds

Page 14 Ind-AS 19 Employee Benefit

Types of Employee Benefits
Post-employee benefits (Contd.)
Defined Benefit Plan (DB)
Make reliable estimate of the amount of benefit earned by
employees in the current & prior periods & to make estimates
(actuarial assumptions) about demographic and financial
variables.
Steps to
be Discount the benefit using Projected Unit Credit Method to
determine the present value of defined benefit obligation &
followed current service cost.
for
Determine the fair value of plan assets (if funded).
accounting
of DB Plan Determine the total amount of actuarial gains & losses, which
shall all be recognised in OCI.
Where a plan has been introduced or changed, determine
the resulting past service cost.
Where a plan has been curtailed or settled, determine the
resulting gain or loss.

Page 15 Ind-AS 19 Employee Benefit

Types of Employee Benefits
Post-employee benefits (Contd.)
Plan Asset:
Fair value of any plan assets is deducted in determining
the amount recognised in the balance sheet.
Determine Fair value by reference to -

(a)Market Price

(b)When no market price is available, estimated fair

value for example, by discounting expected future cash
flows using a discount rate that reflects both the risk
associated with the plan assets and the maturity or
expected disposal date of those assets.

Page 16 Ind-AS 19 Employee Benefit

Types of Employee Benefits
Post-employee benefits (Contd.)
Plan Asset (contd.):
► Where plan assets include qualifying insurance policies
that exactly match the amount & timing of some or all
of the benefits payable under the plan, fair value of
those insurance policies is deemed to be the present
value of the related obligation.
► Exclude from Plan Assets any unpaid contributions due
from the reporting entity to the fund & any non
transferable financial instruments issued by the entity
and held by the fund.
► Plan assets are reduced by Any liabilities of the fund
that do not relate to employee benefits, for example,
trade and other payables.

Page 17 Ind-AS 19 Employee Benefit

Types of Employee Benefits
Post-employee benefits (Contd.)
Past Service Cost:
Past service cost arises when an entity introduces a defined benefit
plan that attributes benefits to past service or changes the benefits
payable for past service under an existing defined benefit plan.

Recognition of Past Service Cost:

Past service cost is to be measured and recognised immediately in

the income statement (including unvested amounts) when any of the
following occurs:

► when restructuring costs (i.e. costs related to restructuring that

result in past service costs) are recognised
► when termination benefits related to amendments that result in
past service costs are recognised
► when plan amendments that result in past service costs occur

Page 18 Ind-AS 19 Employee Benefit

Types of Employee Benefits
Post-employee benefits (Contd.)
Example

XYZ operates a pension plan that provides a pension of 1.5% of the

final salary for each year of service. The benefits become vested after
seven years of service. On 1 January 2006 the enterprise increases
the pension to 2% of the final salary for each year of service starting
from 1 January 1999. On the date of the improvement, the present
value of the additional benefits for service from 1 January 1999 to 1
January 2006 is as follows: Employees with more than seven years’
service on 1 January 2006: $275,000 and less than 7 years: 221,000
(average 4 years to go):

The enterprise shall recognises the total amount of $496,000

($275,000+$221,000) immediately, as for the sake of recognition it
does not make any difference as to whether the benefits are already
vested or not.

Page 19 Ind-AS 19 Employee Benefit

Types of Employee Benefits
Post-employee benefits (Contd.)
What to recognize in Balance Sheet under DB Plan ?

Defined Present value of the Fair value at the

Benefit defined benefit end of the
Liability obligation at the end reporting period
of the reporting of plan assets
period (if any)

If the amount determined above is negative, then apply

asset ceiling.

The asset ceiling is the present value of any economic

benefits available in the form of refunds from the plan or
reductions in future contributions to the plan.

Page 20 Ind-AS 19 Employee Benefit

Types of Employee Benefits
Post-employee benefits (Contd.)
What to recognize in Profit or loss under DB Plan ?
Current Interest Effect of
Interest Past any
service income service
cost curtailments
cost on plan cost
assets & or
on any settlements
reimburs-
ement
rights

Interest Cost = Present value of the defined benefit obligation throughout a

period x Discount rate at the beginning of the period.
Reimbursement - When, and only when, it is virtually certain that another party
will reimburse some or all of the expenditure required to settle a defined benefit
obligation, an entity shall recognise its right to reimbursement as a separate
asset at fair value.

Page 21 Ind-AS 19 Employee Benefit

Types of Employee Benefits
Other long-term benefits
What are Other long-term employee benefits ?
Benefits (other than post-employment benefits and termination
benefits) that are not due to be settled wholly within 12 months after
end of the period and include:

(a) long-term compensated absences such as long-service

or sabbatical leave;
(b) jubilee or other long-service benefits;
(c) long-term disability benefits;
(d) profit-sharing and bonuses payable twelve months or more after
the end of the period in which the employees render the related
service; and
(e) deferred compensation paid twelve months or more after the end
of the period in which it is earned.

Page 22 Ind-AS 19 Employee Benefit

Types of Employee Benefits
Other long-term benefits (Contd.)
What to recognize in Balance Sheet ?

Liability Present value of the Fair value at the end of

defined benefit the reporting period of
obligation at the end of plan assets
the reporting period (if any)

Page 23 Ind-AS 19 Employee Benefit

Types of Employee Benefits
Other long-term benefits (Contd.)
What to recognize in Profit or Loss ?

Expense Current Interest Interest Past

Service Cost income service
Cost on plan cost
assets

Effect of any
curtailments or
settlements

Page 24 Ind-AS 19 Employee Benefit

Types of Employee Benefits
Termination benefits
What are Termination benefits ?
Benefits payable as a result of either:
► entity’s decision to terminate an employee’s employment
before normal retirement date, or
► employee’s decision to accept voluntary redundancy in
exchange for benefits.
Termination benefits:
► Do not provide an entity with future economic benefits and are recognised
as an expense immediately.
► Recognition may also required to account for curtailment of retirement
benefits or other employee benefits.
► If fall due more than 12 months after the reporting period, they shall be
discounted.
► In the case an offer made to encourage voluntary redundancy,
measurement of termination benefits shall be based on the number of
employees expected to accept the offer.

Page 25 Ind-AS 19 Employee Benefit

Types of Employee Benefits
Termination benefits (Contd.)
When to Recognize?
Recognise 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.

► 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.
► Detailed plan shall include, as a minimum:
► location, function, and approximate number of employees whose
services are to be terminated;
► termination benefits for each job classification or function, and
► time at which the plan will be implemented.

Page 26 Ind-AS 19 Employee Benefit

Distinction between short-term and other
long-term employee benefit
► Distinction between short-term and other long-term employee benefits is
now based on expected timing of settlement rather than employee
entitlement.
► Classification of benefits based on the characteristics of the benefits (e.g.
accumulating or non-accumulating).
► Reclassify if change in expectations.
Example (accumulating annual leave):
An entity provides 30 days of accumulating annual leave to all of its employees.
The annual leave will continue to rollover for a period of 3 years if not taken in
the first year. However, leave rolled-over to subsequent periods is not paid out
in the event of employment termination at the request of the employee.
At the end of the entity’s annual reporting period (31 December 2014), the
entity notes the following:
► 2,000 employees have average 16 days of annual leave remaining.
► Based on historical trend, 50% (8 days) of the outstanding leave is expected
to be taken in the next 12 months and 25% (4 days) in each of the
subsequent 2 years.

Page 27 Ind-AS 19 Employee Benefit

Distinction between short-term and other
long-term employee benefit (Contd.)
► Employees’ average salary is Rs.70,000, with 10% increases expected p.a.
► Turnover is expected to be 20% per annum.
► Discount rate is 5%.
Solution:
In this example, the fact that the outstanding annual leave is not expected to be
settled wholly within 12 months of the end of the annual reporting period results
in these benefits being classified as other long-term employee benefits.
Particulars 2015 2016 2017
Number of employees (with 20% turnover) 1,600 1,280 1,024
Rollover days taken 8 4 4

Expected salary (with 10% increases) 77,000 84,700 93,170

Expected cash flow 2,700,274 1,188,121 1,045,546

Discounted at 5% 2,571,690 1,077,660 903,182
Benefit obligation at 31 December 2014: 4,552,532

Page 28 Ind-AS 19 Employee Benefit

Actuarial Gains and Losses
(Contd.)
Actuarial gains and losses may result from increases or decreases in
either the present value of a defined benefit obligation or the fair
value of any related plan assets.

Reasons for Actuarial Gains and Losses include:

► Unexpectedly high or low rates of employee turnover, early retirement or
mortality or of increases in salaries.
► Effect of changes in estimates of future employee turnover, early
retirement or mortality or of increases in salaries.
► Effect of changes in the discount rate; and
► Differences between the actual return on plan assets and the expected
return on plan assets.

► Actuarial gains and losses that have been recognised in OCI and shall
not be reclassified to profit or loss in a subsequent period.
► However, the entity may transfer those amounts recognised in OCI within
equity.

Page 29 Ind-AS 19 Employee Benefit

Actuarial Gains and Losses
(Contd.)
Example:

Plan Assets
• At 1 January 2014, the fair value of plan assets was $10,000.
• Contribution to the plan assets done on 31 December 2014 $ 3,000
• Amount paid on 31 December 2014 $ 300
• At 31 December 2014, the fair value of plan assets was $ 14,700
• Actual return on plan assets $ 2,000

Defined Benefit Obligation

• At 1 January 2014, present value of the defined benefit obligation was $
12,000.
• At 31 December 2014, present value of the defined benefit obligation was
$ 15,500.
• Actuarial losses on the obligation for 2014 were $ 100.
• Current Service Cost $ 2,500
• Benefit paid $ 300
• Discount rate used to calculate defined benefit liability 10%

Page 30 Ind-AS 19 Employee Benefit

Actuarial Gains and Losses
(Contd.)
(Amount in $)
Defined benefit liability as at 1 January 2014 12,000
Fair value of plan asset as at 1 January 2014 10,000
Net defined benefit liability (asset) 2,000
Net interest expense (as it is a liability) is 10% of 2,000 = 200

Actual return on plan assets for 2014 2,000

Less: Interest income on $10,000 held for 12 months at 10% 1,000
Remeasurement 1,000

Sol.: Net actuarial gains of $900 ($1,000 - $100 (actuarial loss on the
obligation) would be recognised in other comprehensive income.

Page 31 Ind-AS 19 Employee Benefit

Case study

Amicable has a defined benefit plan and a 31 December financial year

end. The table below provides information about the plan. No
contributions were made to the plan or benefits paid in 2015.
1 January 2015 31 December 2015
► Present value of defined

benefit obligation $80 $120

► Fair value of plan assets $60 $70
► Net defined benefit liability $20 $50
► Service cost $20
► Discount rate

(high quality corporate bond yield) 3%

Page 32 Ind-AS 19 Employee Benefit

Case study

Required
► Identify the balance to be included in Amicable’s
statement of financial position at 31 December 2015.
► Calculate the amounts to be included in the statement of
profit or loss and other comprehensive income for the
year ended 31 December 2015.

Page 33 Ind-AS 19 Employee Benefit

Case study- solution

Statement of financial position at 31 December 2015

Net defined benefit liability 50
Statement of profit or loss and other comprehensive
income in 2015
Service cost 20
Net interest (W1) 0.6
Profit or loss 20.6
Other comprehensive income:
Remeasurements (W2) 9.4
Total comprehensive income 30

Page 34 Ind-AS 19 Employee Benefit

Case study- solution

WORKINGS
1) 3% × $20 net defined benefit liability at 1 January 2015
(i.e. $60 – $80).
2) Actuarial loss on defined benefit liability:

Opening liability 80
Current service cost 20
Interest ($80 × 30%) 2.4
Actuarial loss 17.6 to balance
Closing liability 120

Income Computation and Disclosure Standard VII relating to government grants

Page 35 Ind-AS 19 Employee Benefit
Case study- solution

WORKINGS
► Actual return on plan assets:

Opening asset 60
Actual return on plan asset 10 to balance
Closing asset 70
Net interest on opening plan asset is $1.8 ($60 × 3%) and so
increase in plan assets due to remeasurement is $8.2
($10 – $1.8).
Net remeasurement is $9.4 ($17.6 - $8.2).

Income Computation and Disclosure Standard VII relating to government grants

Page 36 Ind-AS 19 Employee Benefit
Constructive Obligation

What is Constructive Obligation ?

Informal practices give rise to a constructive obligation where the entity has
no realistic alternative but to pay employee benefits. An example of a
constructive obligation is where a change in the entity’s informal practices
would cause unacceptable damage to its relationship with employees.

For instance, an entity may have no legal obligation to pay a bonus.

Nevertheless entity has a practice of paying bonuses. In such cases, the
entity has a constructive obligation because the entity has no realistic
alternative but to pay the bonus.

Formal terms of a defined benefit plan may permit an entity to terminate its
obligation under the plan but it is usually difficult if employees are to be
retained. Therefore, in the absence of evidence to the contrary, accounting for
post-employment benefits assumes that an entity which is currently promising
such benefits will continue to do so over the remaining working lives of
employees.

Page 37 Ind-AS 19 Employee Benefit

Presentation

► Offset an asset relating to one plan against a liability

relating to another plan when, and only when, the entity:
► has a legally enforceable right to use a surplus in one
plan to settle obligations under the other plan; and
► intends either to settle the obligations on a net basis, or
to realise the surplus in one plan and settle its
obligation under the other plan simultaneously

Page 38 Ind-AS 19 Employee Benefit

Disclosure

► Disclose information that:

► explains the characteristics and the risks associated
with an entity’s defined benefit plans
► identifies and explains the amounts in its financial
statements arising from its defined benefit plans; and
► describes how its defined benefit plans may affect the
amount, timing and uncertainty of the entity's future
cash flows.
► An entity shall assess whether all or some disclosures
should be disaggregated to distinguish plans or groups of
plans with materially different risks

Page 39 Ind-AS 19 Employee Benefit

IGAAP AS 15 vs Ind-AS 19

Topic Ind-AS Indian Gaap

Employee Detailed actuarial valuation to determine the present Similar to Ind-AS, except that
benefits – value of defined benefit obligation and the fair value of detailed actuarial valuation to
actuarial plan assets is performed with sufficient regularity so determine present value of the
valuation that the amounts recognised in the financial statements benefit obligation is carried
do not differ materially from the amounts that would out at least once every three
have been determined at the end of the reporting years and fair value of plan
period. Ind-AS 19 does not specify sufficient regularity. assets are determined at each
balance sheet date.
Employee Actuarial gains and losses representing changes in the All actuarial gains and losses
benefits — present value of the defined benefit obligation resulting should be recognised
actuarial from experience adjustment and effects of changes in immediately in the statement
gains and actuarial assumptions are recognised in other of profit and loss as an
losses comprehensive income and not reclassified to profit or income or expense.
loss in a subsequent period.
Employee Post-employment benefit obligations (both funded and Market yields at the balance
benefits – unfunded) are discounted using a discount rate sheet date on government
discount determined by reference to market yields at the end of bonds are used as discount
rate the reporting period on high quality corporate bonds. In rates.
countries where there is no deep market in such bonds,
the market yields on government bonds denominated in
that currency should be used.

Page 40 Ind-AS 19 Employee Benefit

IGAAP AS 15 vs Ind-AS 19

Topic Ind-AS Indian Gaap

Employee benefits Past service cost (includes curtailments) is
– past service recognised as an expense (vested or unvested)
cost and it at the earlier of the following dates:
Curtailments • when the plan amendment or curtailment
occurs; and
• when the entity recognises related
restructuring costs or termination benefits.
The Limit on a Addresses when refunds or reductions in future
Defined Benefit contributions are regarded as available for
Asset, Minimum recognition of an asset; how funding
Funding requirements in future may effect the availability
Requirement and of reductions in future contributions and when
their minimum funding requirement may give rise to
Interaction a liability. It also deals with prepayments of a
minimum funding requirement.
Past service cost is recognised
as under:
• As an expense on a straight-
line basis over the average
period until the benefits
become vested.
• If benefits already vested,
recognised as an expense
immediately. Entities recognise
a curtailment when it occurs.
However when a curtailment is
linked with a restructuring, it is
accounted for at the same time
as the related restructuring.
No specific guidance.

Page 41 Ind-AS 19 Employee Benefit

Thank You!