Appendix B – Employee home loan example

Fact Pattern
Employee home loan arrangements bear many similarities to employee home ownership
programmes, but also some differences. The off-market loan, typically interest-free, is
provided on day 1 so that the employee can buy the house. In these cases, the house is chosen
by the employee and not provided by the entity. However, similar scoping issues arise with
respect to the asset on the balance sheet.
The employee typically makes a down payment similar to regular mortgage loans. Should the
employee leave employment for any reason, the full legal principal amount of the loan is
repayable. Otherwise, amounts are deducted from salary until the balance is eliminated. Also
in similar fashion to the home ownership programmes discussed in Appendix A, the value of
the property is substantially higher than the value of the payments that the employee must
make (particularly once the time value of money is considered). Consequently, there is no
substantive optionality in the arrangement such that the employee might choose to avoid
paying the balance and hand over the house to the entity.
Despite the similarities with programmes where actual houses are provided by the employer,
in practice some entities account for home loan plans differently to home ownership plans
(once the asset has been transferred). Some entities account for cash loans as financial assets
while home ownership plans are treated as prepaid employee benefits.
Questions for the Committee
3. Does the form of the asset given to the employee (i.e. house or cash) impact the
accounting for the programme?
Analysis – Question 3
View A: Yes
Although the method of repayment is the same in both cases (service and/or cash on
resignation), an assessment of the substance cannot ignore the legal form of the agreements.
One is intended to be the exchange of a house for service, while the other is a loan in legal
form. IAS 32 para 18 states that the substance of a financial instrument and its legal form are
commonly consistent. In the case of a home loan, a legal debt exists and the employer
requires it to be repaid. The employer is indifferent where the cash comes from and it is
simply a matter of convenience that it is offset against salary. Recovering the cash through a
convenient offset doesn’t change the substance that a loan is a financial instrument and
different from other employee benefits such as housing.
View B: No
In the case of both employee home ownership and home loan plans, the scoping
considerations are the same once the employee has control of the asset because the substance
is the same. In both cases the employee is able to pay off the outstanding balance entirely
through future service, and should he resign he is strongly incentivised to keep the house and
pay off the remaining balance to the employer. In both cases a decision has to be made as to
whether this is entirely a prepaid IAS 19 employee benefit, or a financial asset with a smaller
employee benefit related only to the off-market element. Nothing in the scoping sections of
IAS 19 or IAS 32/IFRS 9 indicates that the form of the consideration paid in advance impacts
whether employee benefit or financial instrument accounting applies.
Appendix C – Reasons for the Interpretations Committee to address the matter
Does the matter have widespread effect and does it, or is it expected to, have a material effect
on those affected?
While the specific issue of employee home ownership plans may be more limited, loans to
employees are extremely common. Amounts and durations that are observed will vary by
market, but the practice is widespread. We believe that significant diversity in practice exists
in terms of when loans and advances to employees should be treated as employee benefits in
their entirety, and when (if ever) they should be treated as financial instruments. For example,
we have seen examples of entities that have treated employee home ownership plans as
prepaid employee benefits, while at the same time treating similar employee loans as
financial instruments. There are many examples in our market where amounts advanced to
employees through employee home ownership plans or home loans are material.
Is it necessary to add or change requirements in IFRS Standards to improve financial
reporting—that is, do the principles and requirements in the Standards not provide an
adequate basis for an entity to determine the required accounting?
We believe that the diversity in practice we have observed indicates that current IFRS does
not provide adequate guidance. Some hold the view that loans to employees only trigger IAS
19 accounting where the loan is off-market, and in those cases only the off-market element is
the employee benefit. Others take the view that the full amount of cash and assets given to
employees in advance of service, and which can be repaid entirely through future service, are
entirely prepaid employee benefits. Others still believe that the nature of the consideration
paid to the employee (e.g. house or cash) can influence the scoping of the arrangement.
Depending on how the scoping issue is resolved, we believe that it might also be necessary to
address the IAS 19 treatment of prepaid employee benefits. At present, no matter how far in
advance of service a benefit is paid, it meets the definition of a short-term employee benefit
and the time-value of money may not be taken into account.
Can the matter be resolved efficiently within the confines of the existing Standards and the
Conceptual Framework for Financial Reporting?
We believe that the matter can be efficiently resolved through the issuance of an
Interpretation that provides scoping guidance for amounts paid to employees in advance of
service. As part of this project, the Committee should also be able to assess whether any
minor amendments should be made to IAS 19 and make appropriate recommendations to the
Board accordingly.