Chapter 5

Employee benefits

- All forms of consideration given by an entity in exchange for service rendered by employees or for the
termination of employment.

Short-term benefits

- Employee benefits (other than termination benefits) that are expected to be settled wholly before 12 months
after the end of the annual reporting period in which the employees render the related service.
- Wages, salaries and social security contributions, paid annual leave and paid sick leave, profit-sharing and
bonuses, non-monetary benefits (eg medical care, housing, cars and free or subsidised goods or services)
- Recognised as a liability and an expense when an employee has rendered service during an accounting period, ie
on an accruals basis
- Not discounted to present value
- Short-term paid absences
(a) Accumulating paid absences – Can be carried forward for future use; recognised as an accrual.
(b) Non-accumulating paid absences – Cannot be carried forward; recognised as an expense.
- An entity recognises the expected cost of profit-sharing and bonus payments when the entity has a present legal
or constructive obligation to make such payments as a result of past events; and a reliable estimate of the
obligation can be made. A present obligation exists when and only when the entity has no realistic alternative
but to make payments.

Post-employment benefits

- Employee benefits which are payable after the completion of employment

- Defined contribution plans
(a) Eg annual contribution = 5% salary
(b) Future pension depends on the value of the fund.
- Defined benefit plans
(a) Eg annual pension = Final salary × (years worked/60)
(b) Future pension depends on final salary, years worked and terms and conditions of the plan.
- A pension plan will normally be held in a form of trust separate from the sponsoring employer. Although the
directors of the sponsoring company may also be trustees of the pension plan, the sponsoring company and the
pension plan are separate legal entities that are accounted for separately.
Defined contribution plans

- Post-employment benefit plans under which an entity pays fixed contributions into a separate entity (a fund)
and will have no legal or constructive obligation to pay further contributions if the fund does not hold sufficient
assets to pay all employee benefits relating to employee service in the current and prior periods.
- Shown as an expense in PL.

Defined benefit plans

- Post-employment benefit plans other than defined contribution plans.

- Typically, a separate plan is established into which the company makes regular payments, as advised by an
actuary. This fund needs to ensure that it has enough assets to pay future pensions to pensioners. The entity
records the pension plan assets (at fair value) and liabilities (at present value) in its own books.
- Complexities
(a) The future benefits (arising from employee service in the current or prior years) cannot be measured
exactly, but whatever they are, the employer will have to pay them, and the liability should therefore be
recognised now. To measure these future obligations, it is necessary to use actuarial assumptions.
(b) The obligations payable in future years should be valued, by discounting, on a present value basis. This is
because the obligations may be settled in many years’ time.
(c) If actuarial assumptions change, the amount of required contributions to the fund will change, and there
may be actuarial (remeasurement) gains or losses. A contribution into a fund in any period will not equal the
expense for that period, due to remeasurement gains or losses.
- Measurement of plan obligation
(a) Projected unit credit method
• Sees each period of service as giving rise to an additional unit of benefit entitlement and measures
each unit separately to build up the final liability. PV of obligation is included in the FS, interest
expense is recognised as the discount is unwound.
(b) Actuarial assumptions
• Needed to estimate the size of the future (post-employment) benefits that will be payable under a
defined benefits scheme. Should be unbiased and based on market assumptions.
• Demographic assumptions – mortality rates before and after retirement, rate of employee turnover,
early retirement etc
• Financial assumptions – future salary rises.
(c) Discounting – current service cost
• Benefits earned must be discounted to arrive at a present value.
• Increase of the obligation during the year is called current service cost, which is shown as an
expense in PL.
• The discount rate used is determined by reference to market yields at the end of the reporting
period on high quality corporate bonds.
• The term of the bonds should be consistent with that of the post-employment benefit obligations.
 (d) Compounding – interest cost
• The obligation must be compounded back up each year reflecting the fact that the benefits are one
period closer to settlement. This increase in the obligation is called interest cost and is also shown as
an expense in profit or loss.

(e) Remeasurement of plan obligation

• Remeasurement gains or losses may arise due to differences between the year-end actuarial
valuation of the defined benefit obligation and its accounting value.
• They are made up of changes in the present value of the obligation resulting from Experience
adjustments (the effects of differences between the previous actuarial assumptions and what has
actually occurred); and the effects of changes in actuarial assumptions.
• Remeasurement gains and losses are recognised in other comprehensive income.
- Disclosure
• Risk-based disclosures, including detail on investments, future cash requirements and information about
risks to which the plan exposes the company.
• Disclosure requirements are generally seen as an opportunity for entities to explain their pension plan
risks and, crucially, how such risks are being managed.
• The entity should:
(i) Explain the characteristics of, and risks associated with, the entity’s defined benefit plans,
focusing on unusual, entity-specific or plan-specific risks, or risks that arise from a concentration
of investments in one particular area.
(ii) Identify and explain the amounts in the entity’s financial statements arising from its defined
benefit plans.
(iii) Explain how the defined benefit plans may affect the entity’s future cash flows, including a
sensitivity analysis which shows the potential impact of changes in actuarial assumptions.
Disclosure is required as to the funding arrangements and commitments from the company to
make contributions to the plan.

Plan assets

- Plan assets are:

• Assets such as stocks and shares, held by a fund that is legally separate from the reporting entity, which
exists solely to pay employee benefits.
• Insurance policies, issued by an insurer that is not a related party, the proceeds of which can only be
used to pay employee benefits.
 - Interest income is applied to the asset and netted against the interest cost on the defined benefit obligation. Net
amount is recognised in PL.

- Remeasurement
• Return on plan assets – Interest, dividends and other income derived from the plan assets together with
realised and unrealised gains or losses on the plan assets, less any costs of managing plan assets and tax
payable by the plan itself.
• The difference between the return on plan assets and the interest income referred to above is a
remeasurement and recognised in OCI.

Past service cost

- The increase or decrease in the present value of the defined benefit obligation for employee service in prior
periods, resulting from a plan amendment or curtailment.
- Recognised as an adjustment to the obligation and as an expense/income at the earlier of when the amendment
or curtailment occurs or when the entity recognises related restructuring costs or termination benefits.

Settlements

- A transaction that eliminates all further legal or constructive obligations for part or all of the benefits provided
under a defined benefit plan.
- The gain or loss on a settlement is recognised in profit or loss when the settlement occurs. (DR: PV Obligation, CR: FV Plan
Assets, CR: Cash, DR/CR: P&L)

The asset ceiling test

- Amounts recognised as a net pension asset in the SOFP must not be stated at more than their recoverable
amount. Net pension asset is measured at the lower of net defined benefit asset (FV of plan assets – PV of
obligation) and the PV of any refunds/reduction of future contributions available from the pension plan.
- Impairment loss charged in OCI.
- Possible risks to which a defined benefit pension plan exposes an entity include investment risk, interest risk,
salary risk and longevity risk.

Other long-term benefits

- All employee benefits other than short-term employee benefits, post-employment benefits and termination
benefits.
- Eg: Long-term paid absences such as long-service or sabbatical leave, Jubilee or other long-service benefits,
Long-term disability benefits, Profit-sharing and bonuses and Deferred remuneration
 - The accounting treatment for other long-term benefit plans follows the treatment for defined benefit pension
plans, but with a simplification: remeasurements are not recognised in OCI. Instead, the net total of the
following amounts is recognised in profit or loss:
(a) Service cost
(b) Net interest on the defined benefit liability
(c) Re-measurement of the defined benefit liability

Termination benefits

- Employee benefits provided in exchange for the termination of an employee’s employment as a result of either
an entity’s decision to terminate an employee’s employment before the normal retirement date or an
employee’s decision to accept an offer of benefits in exchange for the termination of employment.
- Accounted for differently from other employee benefits because the event that gives rise to the obligation to
pay termination benefits is the termination of employment.
- Termination benefits are only those benefits paid when employment is terminated at the request of the
employer. Benefits paid on retirement or on resignation are not termination benefits.
- Usually lump sum payments but may also include enhancement of post-employment benefits or salary until end
of notice period (gardening leave).
- Benefits that are conditional on future service being provided by the employee are not termination benefits.
- Should be recognised as an expense at the earliest of the date which the entity can no longer withdraw the offer
of the termination benefit or the date which the entity recognises costs for a restructuring provision and the
restructuring involves the payment of termination benefits.
- The date when the entity can no longer withdraw the offer of the termination benefit depends on whether the
employee is accepting an offer of termination or whether the termination of employment is the entity’s
decision.
(a) Employee’s decision to accept offer of termination.
• Earlier of when the employee accepts the offer and when a restriction (eg legal or contractual) on
the entity’s ability to withdraw the offer takes effect. This could be when the offer is made if the
restriction exists at the date of the offer.
(b) Entity’s decision
• Date when the entity has communicated a plan of termination to the affected employees. The plan
must be unlikely to significantly change, identify the number of affected employees, their jobs and
their locations and expected termination date, and detail the termination benefits payable.
- A termination of an employment contract may also lead to a plan amendment or curtailment of other employee
benefits.
- Measurement:
(a) Termination benefits are expected to be settled wholly before 12 months after end of reporting period –
Apply requirements for short-term employee benefits.
(b) All other termination benefits – Apply requirements for other long-term employee benefits.
(c) Entity must distinguish between termination benefits and enhancement of post-employment benefits.

Criticisms of IAS 19

- Definitions of the types of plan.

• Not all plans fit easily into the definitions of defined benefit or defined contribution.
- Measurement of plan liabilities
• IAS 19 uses the ‘projected unit credit method’ for recognition of pension obligations, which means
that future anticipated increases in salary based on years worked to date are included. It could be
argued that this approach does not comply with the Conceptual Framework because those increases
have not been earned yet and therefore do not relate to the period.
- Offsetting defined benefit assets and liabilities
 • IAS 19 requires the presentation of a net defined benefit obligation/asset. This is not consistent with
other IFRS Standards which, except for in specific situations, do not permit offsetting of assets and
liabilities.
- Use of P&L vs OCI
• Under IAS 19 the interest element is recognised in profit or loss while the ‘correction’ (difference
between actual return and interest applied) is recognised in other comprehensive income. The logic
for this split is that the interest element shows the financing effect of paying for benefits in advance
or arrears. IAS 19 could also be criticised for reporting estimated figures in profit or loss, while
reporting the difference to arrive at the actual return in other comprehensive income.
- Previously IAS 19 implied that entities should not revise the assumptions for the calculation of current service
cost and net interest during the period, even if an entity remeasures the net defined benefit liability (asset) in
the case of a plan amendment, curtailment, or settlement. In other words, the calculation should be based on
the assumptions as at the start of the annual reporting period. The amendments provide clarification that, when
the net defined benefit liability or asset is remeasured as a result of a plan amendment, curtailment or
settlement, updated actuarial assumptions should be used to determine current service cost and net interest for
the remainder of the reporting period. The IASB believes that this change will enhance understandability and
provide more useful information to users of financial statements.