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FINANCIAL ACCOUNTING 300

DEPARTMENT OF
IAS 19: EMPLOYEE BENEFITS ACCOUNTING
NOTES AND CLASS EXAMPLES
UP
A Carrim

1. What are employee benefits?

Employee benefits are all forms of consideration (remuneration) paid by an entity to its
employees in exchange for the service rendered by those employees or for the termination of
their service (IAS 19.8).

IAS 19.5 distinguishes between different types of employee benefits, namely:

 Short-term employee benefits;

 Post-employment benefits;

 Other long-term employee benefits; and

 Termination benefits.

Examples of each of these types of employee benefits are provided in IAS 19.5.

Employee benefits are not limited to the benefits provided directly to only the employees of the
entity but include also, for example, the payments that are made to the dependants of
employees (IAS 19.6). Employees in the context of the standard include full-time, part-time,
permanent, casual or temporary appointments and also include directors and management
personnel of the entity (IAS 19.7).

Note that a formal contract between the employer and employee is not a requirement for
employee benefits (IAS 19.4).

2. The scope of IAS 19

IAS 19 applies to all employee benefits listed under 1 above except for share based payments
that are made in accordance with IFRS 2 (IAS 19.2). Share based payments are where an
entity remunerates its employees by giving them shares or contracts (based on these shares)
where the shares are owned by that entity or the parent of that entity.

IAS 19 only deals with the reporting by employers and not the reporting by benefit plans (such
as pension and provident funds) (IAS 19.3)
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3. Basic principle of IAS 19

The general principle of IAS 19 is that an entity has an obligation for employee benefits as soon
as the employee has rendered service to the entity (IAS 19.1). The principle is thus that the
entity must recognise an expense and a related liability as soon as the employee has rendered
service and not when the cash amounts are paid out.

This principle is in accordance with the Conceptual Framework for Financial Reporting 2018
(Conceptual Framework) which requires that transactions and events are recognised when
they occur and not when the cash flows take place. This means then that as soon as an
employee has rendered service to the entity, a liability arises in terms of the Conceptual
Framework:

Definition of a liability per the Conceptual How are the criteria met?
Framework [para 4.26]
A liability is:
- A liability is a present obligation of the
entity
An obligation is a duty or responsibility that As soon as the employee renders service to
an entity has no practical ability to avoid. the entity, the entity has an obligation to
pay/remunerate the employee.

The obligation can be established per A contract exists between the employer and
contract. employee which requires the payment to be
made.

- to transfer an economic resource The entity will need to settle the obligation
in the future and will need to use its
resources (cash or other) to do this.

- as a result of a past event The past event is the service rendered by

the employee.

Therefore, if an employee has rendered service to the entity during a reporting period,
the entity has an obligation to pay that employee benefit on the reporting date (if it has
not already been paid during the reporting period).

IAS 19 requires that this obligation must be recognised at the reporting date rather than when
the related cash flows take place.
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IAS 19 requires that a related expense must also be recognised when an entity has consumed
the economic benefits arising from the service provided by the employee. This principle is also
in agreement with the requirements of the Conceptual Framework:

Definition of an expense per the How are the criteria met?

Conceptual Framework [para 4.69]
An expense is:
a decrease in assets, or increase in
liabilities, that result in a decrease in equity,
other than those relating to distributions to
holders of equity claims.
The recognition of an obligation for employee
benefits will result in an increase in an
obligation and this is not attributable to
distributions to be made to equity
participants. Unless the debit meets the
definition of an asset (e.g.: inventories), this
will be an expense.

The entity has thus incurred an employee benefit expense during the accounting period.
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4. IAS 19 and the line items of the financial statements

Note: The impact on the line items of the statement of cash flows will be addressed in
the lecture material of IAS 7, Statement of Cash Flows, later in the year.

The following provides a basic overview of the line items that will be affected by IAS 19:
Example Limited R
Statement of financial position as at ………..
Assets
Non-current assets
Property, plant and equipment
Investment property
Goodwill
Other intangible assets
Financial assets
Deferred tax (if debit balance)
Current assets
Inventories
Trade receivables
Other current assets
Cash and cash equivalents
Current tax prepaid (if current tax owing by SARS)
Total assets

Note: An asset (for example, inventories) will be affected by IAS 19 if employee benefits are
capitalised to the inventories in terms of the applicable standard (i.e.: the employee benefit
costs could be in respect of employees involved in the manufacturing of finished goods).

Equity and liabilities R

Total equity
Share capital
Retained earnings/Accumulated loss
Non-current liabilities
Long-term borrowings
Deferred tax (if credit balance)
Long-term provisions
Current liabilities
Trade and other payables
Short-term borrowings
Short-term portion of long-term borrowings
Current tax payable (if current tax owing to SARS)
Short-term provisions
Bank overdraft
Total equity and liabilities
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Example Limited
Statement of profit or loss and other comprehensive income for the
year ended on ……….. R
Revenue
Cost of sales **
Gross profit
Other income
Distribution costs
Administrative expenses **
Other expenses ***
Net finance costs
Finance costs
Finance income
Profit before tax
Income tax expense (including current and deferred tax)
Profit for the year
Other comprehensive income
Items that will not be reclassified to profit or loss:
Revaluations of property, plant and equipment
Revaluation surplus/(deficit) on plant
Income tax expense
Mark-to-market reserve for equity instruments
Items that will be reclassified to profit or loss:
Mark-to-market reserve for debt instruments
Foreign currency translation reserve
Total comprehensive income for the year

** The classification of employee benefits in accordance with IAS 1 will depend on the
function of the employees

*** Sometimes, other expenses may include employee benefits such as termination benefits
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Example Limited
Statement of changes in equity for the year ended on ………..

Share capital Revaluation Retained

Surplus earnings

R R R
Balance at beginning of the year
Total comprehensive income for
the year
Profit for the year
Other comprehensive income for
the year

Balance at end of the year

5. Structure of IAS 19

IAS 19 deals with four types of employee benefits within the following structure:

Background and scope Paras 1 -7

Definitions Para 8

Short-term employee benefits, including Paras 9 – 25

- Leave Paras 13 – 18
- Profit-sharing and bonuses Paras 19 -24

Post-employment benefits, including Paras 26 – 152

- Defined contribution plans Paras 50 -54
- Defined benefit plans (Recognition and Paras 55 – 152
measurement is excluded from the SAICA syllabus)

Other long-term employee benefits (Excluded from the Paras 153 – 158
SAICA syllabus)

Termination benefits Paras 159 – 171

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6. Short-term employee benefits

 Identification of short-term employee benefits

Refer to the definition of short-term employee benefits in IAS 19.8 and to the examples in
IAS 19.5 and 9. Note specifically the settlement period in these paragraphs (i.e.: wholly before
twelve months after the end of the annual reporting period in which the employee rendered the
service).

Class example 1 – identification of short-term employee benefits

The following employee benefits of W Limited are outstanding on 30 June 20X2 (reporting
date):

(i) A total of R120 000 for once-off bonuses for all employees that worked overtime during
December 20X1. These bonuses are payable on 30 June 20X3.

(ii) Bonuses of R250 000 for services rendered during the year ended 30 June 20X2. Half of
this amount is payable on 30 June 20X3 whilst the other half is payable on 30 June 20X4.

These bonuses will be paid out regardless of whether the employees remain in the entity’s
employ until payment date or if they resign before these dates (the bonuses are unconditionally
payable).

REQUIRED:

Discuss, using the definition in IAS 19, Employee Benefits, whether each of the bonus amounts
are short-term employee benefits.

SUGGESTED SOLUTION:

Short-term employee benefits are employee benefits (other than termination benefits) that are
expected to be settled wholly before twelve months after the end of the annual reporting period
in which employees render the related service.

(i) The once-off bonus of R120 000 relates to services rendered by employees during the
20X2 reporting period. This reporting period ended on 30 June 20X2. Since the bonuses
are payable wholly by 30 June 20X3, these bonuses thus meet the criteria of settlement
wholly before twelve months after the end of the annual reporting period in which
employees render the related service. The whole amount of R120 000 will thus be short-
term employee benefits on 30 June 20X2.

(ii) The bonuses relate to services rendered during the 20X2 reporting period. The reporting
period ended on 30 June 20X2. Since only half of the bonuses are payable on
30 June 20X3, the total bonus amount of R250 000 will not be settled wholly before twelve
months after the end of the annual reporting period in which employees render the related
service. The whole amount of R250 000 will thus not be short-term employee benefits on
30 June 20X2.

These bonuses will be treated as other long-term employee benefits. Other long-term
employee benefits are not included in the SAICA syllabus.
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6. Short-term employee benefits (continued)

 Reclassification of short-term employee benefits

Note that the definition of short-term employee benefits depends on the expected
settlement date (IAS 19.8). An expected settlement date can change. Reclassification of
short-term employee benefits is only permitted if the expected settlement date is a
permanent change (IAS 19.10).

 Recognition and measurement of short-term employee benefits

The general rule for recognition and measurement of short-term employee benefits is set
out in IAS 19.11. An important matter to be noted here is that short-term employee benefits
are not discounted.

Class example 2 – basic short-term employee benefits

You are provided with the following information relating to the remuneration of Mr X for a
month:
R
Gross salary 10 000
Provident fund employee contributions (8% of gross salary) ( 800)
Medical aid employee contributions ( 200)
SITE/PAYE (5 000)
Net salary 4 000

The company contributes the following on a monthly basis on behalf of Mr X:

- to Provident fund (defined contribution plan) : 4% of gross salary

- to Medical aid fund : same as employee contribution

REQUIRED:

Prepare the payroll journal entries (cash transactions included) for the month for Mr X’s
remuneration in accordance with International Financial Reporting Standards (IFRS).

Note:  Journal narrations are not required.

 Ignore all tax implications.

SUGGESTED SOLUTION
Dr Cr
R R
Employee benefits expense (P/L) 10 000
Creditor – Provident fund (SFP) 800
Creditor – Medical aid fund (SFP) 200
Creditor – PAYE (SFP) 5 000
Bank (SFP) 4 000
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Dr Cr
R R
Employee benefits expense (P/L) 400
Creditor – Provident fund (SFP) 400
Employee benefits expense (P/L) 200
Creditor – Medical aid fund (SFP) 200
Creditor – Provident fund (SFP) 1 200
Creditor – Medical aid fund (SFP) 400
Creditor – PAYE (SFP) 5 000
Bank (SFP) 6 600

6. Short-term employee benefits (continued)

 Recognition and measurement of short-term employee benefits

In addition to the general recognition and measurement requirements, IAS 19 also sets
out how these requirements will be applied to short-term leave and bonuses/profit-
sharing.

 Recognition and measurement of leave

An entity can grant different types of leave, examples of which are provided in IAS 19.14.
These different types of leave are explained in IAS 19.14, .15 and 18 and they are
summarised below:

Short-term paid leave

Accumulating Non-accumulating
(can be carried over to another leave cycle) (cannot be carried over to
another leave cycle)

Vesting Non-vesting
(can take or be (can only take)
paid out in cash)

- Accumulating leave accumulates as the employee renders service that entitles

him/her to this leave and thus it is recognised as an expense as the services are
rendered (IAS 19.13). Accumulating leave is measured at the additional amount that
the entity expects to pay based on the unused leave days at the reporting date
(IAS 19.16).

- Non-accumulating leave does not accumulate as service is rendered by the

employee and therefore an expense is recognised when the leave is actually taken
(IAS 19.13). Effectively, this expense is the salary that the employee still earns without
rendering service during the leave period (still being paid whilst on leave). No separate
expense is recognised for the non-accumulating leave.
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Class example 3 – accumulating and non-accumulating leave

EMPLOYEE A earns a gross salary of R360 000 per year which is also the cost to company.
Employee A is entitled to 20 days of paid sick leave per year which cannot be carried forward
to a following year. Assume that there are 250 working days in a year. During the year ended
31 December 20X1, Employee A took 10 days of paid sick leave. The leave cycle is the
same as the financial year and no increases were approved for the year ended
31 December 20X2.

REQUIRED:

(a) Journalise the transactions (cash transactions included) for the year ended
31 December 20X1 in accordance with IAS 19, Employee Benefits.

(b) Assume now that the unused paid sick leave days can be carried forward for 12
months before they expire. On 31 December 20X1, it is expected that Employee A
will take 60% of all the accumulated paid sick leave as well as all of the paid sick leave
days during the following year that he is entitled to during the year ended
31 December 20X2.

Journalise the transactions (cash transactions included) for the year ended
31 December 20X1 to account for the above information in accordance with IAS 19,
Employee Benefits.

Note for (a) and (b):  Journal narrations are not required.
 Ignore all tax implications.

SUGGESTED SOLUTION

Part a - Journal entry for year ended 31 December 20X1:

Dr Cr
R R
Employee benefits expense(P/L) 360 000
Bank (SFP) 360 000

In this case, the paid sick leave was not accumulating. The cost of the paid sick leave is
reflected in the amount that the employee was actually paid whilst he was on paid sick leave
and was not working, thus it already is part of the R360 000.
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Part b - Journal entries for year ended 31 December 20X1:

Dr Cr
R R

Employee benefits expense (P/L) 360 000

Bank (SFP) 360 000

Employee benefits expense (P/L) 8 640

Accrued sick leave obligation (SFP) 8 640
[(R360 000/250 days) x (20 days entitlement
– 10 days taken) in 20X1 x 60% probability)]
for unused paid sick leave days entitled to in
20X1 that can be carried forward to 20X2

The fact that the paid sick leave can be carried forward for one year before it is forfeited
makes this an accumulating non-vesting leave benefit, but still a short-term one. Note that
the probability of the leave being taken in the following period is taken into account in the
measurement of the obligation.

6. Short-term employee benefits (continued)

 Recognition and measurement (continued)

Accumulating leave is measured at the additional amount that an entity expects to

pay based on the unused accumulated leave days at the reporting date (IAS 19.16).

- The additional amount represents only those expenses to be incurred due to the fact
that the leave accumulates and must be calculated on a last-in, first-out basis
(IAS 19.17 and BC26 – 27).

- The additional amount differs for vesting and non-vesting accumulated leave.

With non-vesting leave, the employee can only physically take the leave whilst still
in the employ of the employer. When the employee physically takes the leave, the
employer will continue to make its share of any contributions to medical, provident
and other funds. Therefore, the rate used to measure non-vesting leave is based on
the cost to company (gross salary of employee plus employer contributions). This
rate is then applied to the number of accumulated unused days at the reporting date
that the employer expects the employee to physically take in the future.

Vesting leave consists of two elements, namely, the days that the employee will
physically take as leave in the future and the number of days that the employee will
require to be paid for in cash in the future. When a cash payment is made, the
employer will not include company contributions in the calculation of the rate to be
applied to the number of days. This means that the rate to be used will be calculated
based on the gross salary of the employee only (i.e. no company contributions will
be taken into account). Any days that the employee will physically take in the future
will be valued using a rate based on the cost to company of the employee.
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- The additional amount is based on an expectation in the future. Thus, any salary
increases that an entity has a legal or constructive obligation for, will be taken into
account in the measurement of the leave obligation.

Class example 4 – last-in, first-out basis

Employee B is entitled to 20 days of paid annual leave per year that can be carried forward
to a following year. Any leave that is not used within 12 months of the end of the leave cycle
is forfeited. During the year ended 31 December 20X1, employee B took 10 days of paid
annual leave. The leave cycle is the same as the financial year.

REQUIRED:

Calculate the number of days that must be included in the leave pay accrual on
31 December 20X1 in accordance with IAS 19, Employee Benefits, if

(a) it is expected that employee B will take 25 days of paid annual leave during the year
ended 31 December 20X2.

(b) it is expected that employee B will take 15 days of paid annual leave during the year
ended 31 December 20X2.

SUGGESTED SOLUTION:

(a) The leave pay accrual will be calculated using 5 days. Last-in, first-out means that
employee B will first take leave days for 20X2 out of the entitlement for 20X2 which is
20 days, before the unused days for 20X1 will be used. The other 5 days (25 – 20)
will be taken out of the 10 days unused on 31 December 20X1. This is the accrual
amount on 31 December 20X1.

(b) The leave pay accrual will be calculated using 0 days. Last-in, first-out means that
employee B will first take leave days for 20X2 out of the entitlement for 20X2 which is
20 days before the unused days for 20X1 will be used. Employee B is entitled to 20
days for 20X2 and it is expected that only 15 of these 20 days will be taken in 20X2,
so no days will be taken from the unused days on 31 December 20X1. This means
that no leave pay accrual will be required on 31 December 20X1.

Class example 5 – vesting and non-vesting accumulated leave

EMPLOYEE B earns a gross salary of R480 000 per year. Her employer contributes R24 000
per year to a medical aid fund on her behalf. She is entitled to 20 days of paid annual leave
per year. Assume that there are 250 working days in a year. On 31 December 20X2, she
has 10 days of unused paid annual leave (31 December 20X1: no days). The leave cycle is
the same as the financial year and there were no salary increases approved for the next
financial year.

On 31 December 20X2, it is expected that Employee B will take 80% of her accumulated
leave days for 20X2 by 30 June 20X3.
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REQUIRED:

(a) Assume that it is the employer’s policy that all unused paid annual leave days at any
financial year end will be forfeited after 30 June of the following year. Prepare the journal
entries (cash transactions included) for the year ended 31 December 20X2 in terms of
IAS 19, Employee Benefits.

(b) Assume that it is the employer’s policy that all unused paid annual leave days at any
financial year end that are not taken before 30 June of the following year, will be paid
out in cash on 30 June of that following year. Prepare the journal entries (cash
transactions included) for the year ended 31 December 20X2 in terms of IAS 19,
Employee Benefits.

(c) Discuss briefly, how your answer for (b) would be affected if all unused paid annual
leave days could be carried forward without any limitation and be paid out in cash on
resignation. Calculations are not required. Your answer must be in accordance with
IAS 19, Employee Benefits.

Note for (a) and (b):  Journal narrations are not required.
 Ignore all tax implications.

SUGGESTED SOLUTION

Part a
Dr Cr
R R

Employee benefits expense (P/L) 504 000

Bank (SFP) 504 000
(R480 000 gross salary + R24 000 company contributions)

Employee benefits expense (P/L) 16 128

Accrued leave obligation (SFP) 16 128
[(R480 000 + R24 000) total cost to company/250 days x 10
days unused x 80% probability of leave that will actually be
taken]

The leave is accumulating but not vesting as there is no cash payment for any unused days
of leave not taken. The accrued leave obligation thus creates an obligation that includes the
employer’s contributions as the employee will need to take this leave whilst still in the employ
of the company (by 30 June of the following year). The probability of how many days leave
will be taken before 30 June of the following year is taken into account to measure this
obligation.
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Part b

Dr Cr
R R

Employee benefits expense (P/L) 504 000

Bank (SFP) 504 000
(R480 000 gross salary + R24 000 company contributions)

Employee benefits expense (P/L) 16 128

Accrued leave pay obligation (SFP) 16 128
[(R480 000 + R24 000) total cost to company/250 days x 10
days unused on 31/12/X2 x 80% probability of leave that will
actually be taken before 30/6/X3]

Employee benefits expense (P/L) 3 840

Accrued leave pay obligation (SFP) 3 840
(R480 000 gross salary only / 250 days x 10 days unused
on 31/12/X2 x 20% probability that leave days not taken by
30/6/X3 will be paid out in cash)

The leave is accumulating and vesting but remains short-term as cash payment will be made
within 12 months after the financial year end. The accrued leave obligation thus creates an
obligation that includes employer’s contributions for the number of days unused leave that it
is expected that the employee will actually take before 30 June of the next year. It also
creates an obligation that excludes employer contributions for the number of days that it is
expected that the employee will be paid out in cash for on 30 June.

Part c

When the leave can be carried forward indefinitely, this no longer represents a short-term
employee benefit since it is not payable within 12 months of the reporting date. Therefore,
the obligation for accrued leave would need to be treated as a long-term employee benefit.

6. Short-term employee benefits (continued)

 Recognition and measurement (continued)

Movement in the leave pay accrual

If an entity has a leave pay accrual at the beginning and at the end of the financial year,
only the net movement in this accrual would be recognised in profit or loss.

Class example 5.1

Use the same information provided in Class Example 5. In the year ended 31 December
20X3, Employee B used 7 days of the unused leave days from 20X2 (by 30 June 20X3) as
well as all of the paid annual leave for the 20X3 year.
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REQUIRED
(a) Assume that it is the employer’s policy that all unused paid annual leave days at any
financial year end will be forfeited after 30 June of the following year. Prepare the journal
entries (cash transactions included) for the year ended 31 December 20X3 in terms of
IAS 19, Employee Benefits.

(b) Assume that it is the employer’s policy that all unused paid annual leave days at any
financial year end that are not taken before 30 June of the following year, will be paid
out in cash on 30 June of that following year. Prepare the journal entries (cash
transactions included) for the year ended 31 December 20X3 in terms of IAS 19,
Employee Benefits.

SUGGESTED SOLUTION

Part A
Dr Cr
R R

Employee benefits expense (P/L) 504 000

Bank (SFP) 504 000
(R480 000 gross salary + R24 000 company contributions)

Calculation: Leave pay accrual

Opening balance 16 128
Closing balance (504 000 / 250) x 0 days (0)
Movement in P/L 16 128

Dr Cr
R R

Accrued leave obligation (SFP) 16 128

Employee benefit expense (P/L) 16 128

Therefore impact on the F/S:

20X3 20X2
R R
Employee benefit expense (P/L) 487 872 520 128
(20X2: 504 000 + 16 128)
(20X3: 504 000 – 16 128)
Accrued leave obligation 0 16 128
(20X3: 16 128 opening balance – 16 128 journal)
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Part B Dr Cr
R R

Employee benefits expense (P/L) 504 000

Bank (SFP) 504 000
(R480 000 gross salary + R24 000 company contributions)
Calculation: Leave pay accrual
Opening balance (16 128 + 3 840) 19 968
Cash payment (480 000 / 250 x 3 days) (5 760)
Closing balance (504 000 / 250) x 0 days 0
Movement in P/L 14 208

Alternative 1:
Accrued leave pay obligation (SFP) 5 760
Bank (SFP) 5 760

Accrued leave pay obligation (SFP) 14 208

Employee benefits expense (P/L) 14 208

Therefore impact on the F/S:

20X3 20X2
R R
Employee benefit expense (P/L) 489 792 523 968
(20X2: 504 000 + 16 128 + 3 840)
(20X3: 504 000 – 14 208)
Accrued leave obligation 0 19 968
(20X2: 16 128 + 3 840)
(20X3: 19 968 – 5 760 – 14 208)

Alternative 2:
Accrued leave pay obligation (SFP) 3 840
Employee benefits expense (P/L) 1 920
(5 760 – 3840)
Bank (SFP) 5 760

Accrued leave pay obligation (SFP) 16 128

Employee benefits expense (P/L) 16 128
0 - (19 968 – 3840)

Therefore impact on the F/S:

20X3 20X2
R R
Employee benefit expense (P/L) 489 792 523 968
(20X2: 504 000 + 16 128 + 3 840)
(20X3: 504 000 + 1 920 – 16 128)
Accrued leave obligation 0 19 968
(20X2: 16 128 + 3 840)
(20X3: 19 968 – 3 840 – 16 128)
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What is the implication of a leave cycle that does not coincide with the financial
year?

Non-accumulating leave is defined with reference to the leave cycle. When the financial
year and the leave cycle do coincide (as in the previous examples), no problem arises
in identifying the unused leave days. The limitation on the transfer of non-accumulating
leave days is applied at the reporting date.

When the financial year and the leave cycle do not coincide, the limitation on the transfer
of non-accumulating leave days cannot be determined at the reporting date. In such
cases, the entity has an obligation to grant the unused leave days until the expiration of
the leave cycle.

Reporting date
1 January 30 June 31 December
Leave cycle

On 30 June, the employees still have six months to take any unused leave days before
the expiration of the leave cycle, at which point any unused days will be forfeited. If the
leave days increase during the leave cycle as the employees render service (for
example, from no days to 20 days), and the entity expects that its employees will take
these unused leave days by 31 December, a leave pay accrual must be recognised. This
principle is explained in the following example.

Class example 6 - leave cycle not the same as financial year

EMPLOYEE C earns a gross salary of R420 000 per year which is also the total cost to
company. He is entitled to 20 days of paid annual leave per year. Assume that there are 250
working days in a year. At the end of the 20X1 financial year, employee C has 10 days of
unused paid annual leave (20X0: no days). The maximum number of days that can be carried
forward to the next leave cycle is 8 days. Any unused days not taken within 6 months of the
end of the leave cycle, will be forfeited.
On the date of approval of the annual financial statements, it is expected that employee C
will take 75% of the unused leave days that can be carried forward at the end of the 20X1
financial year by 30 June 20X2. No salary increases have been approved.
REQUIRED:
(a) Assume that the company’s financial year end is 30 June 20X1 and that the leave cycle
is the same as the financial year. Prepare journal entries (cash transactions included)
for the year ended 30 June 20X1 in accordance with International Financial Reporting
Standards (IFRS).
(b) Assume that the company’s financial year end is 30 June 20X1 and that the leave cycle
is the calendar year (i.e. it runs from 1 January to 31 December of each year). Prepare
journal entries (cash transactions included) for the year ended 30 June 20X1 in
accordance with International Financial Reporting Standards (IFRS).
Note for (a) and (b):  Journal narrations are not required.
 Ignore all tax implications.
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SUGGESTED SOLUTION
Part a (financial year and leave cycle same)
Dr Cr
R R

Employee benefits expense (P/L) 420 000

Bank (SFP) 420 000

Employee benefits expense (P/L) 10 080

Accrued leave pay obligation (SFP) 10 080
(R420 000 cost to company / 250 days x 8 days that can be
accumulated x 75% probability of utilisation of these days
before 30/6/X2)

The leave cycle ends on 30 June 20X1 and only 8 days can be carried forward to the next
leave cycle – the accumulated leave days for this employee is thus limited. If the leave was
vesting, an additional accrual would have been required for the remaining 8 days x 25%
using the gross salary of R420 000, but not for the 2 (10 – 8) days that the employee forfeited
by not taking his leave.

Part b (financial year and leave cycle not same)

Dr Cr
R R

Employee benefits expense (P/L) 420 000

Bank 420 000

Employee benefits expense (P/L) 12 600

Accrued leave pay obligation (SFP) 12 600
(R420 000 cost to company / 250 days x 10 days unused x
75%)

In this case, the leave cycle ends on 31 December 20X1 and the limitation on the transfer of
the days to the following cycle is only applicable on this date. On 30 June 20X1, the company
still has an obligation for the leave days since the employee can still take the 10 days in the
following six months before the limitation is applied. It still remains a short-term obligation
since the expiry date of six months after the end of the leave cycle (30 June 20X2) is still
within 12 months of the reporting date (30 June 20X1).
This type of situation is one that often occurs in practice, since leave cycles generally follow
a calendar year and not a financial year.

6. Short-term employee benefits (continued)

 Recognition and measurement of bonuses and profit-sharing

IAS 19.19 provides that the expected costs of bonuses and profit-sharing can only be
recognised if the entity has a present obligation to pay the bonus or profit-share and the
 19

amount can be measured reliably (IAS 19.20 - 22) This present obligation can be legal or
constructive (IAS 19.21). The expected bonus cost is recognised in profit or loss (IAS 19.23)
and must be short-term in order to apply the short-term benefits rules (AS 19.24)

Class example 7 – bonus obligation

A Limited has 20 employees, each of whom earn an annual basic salary of R360 000. It is
anticipated that bonuses will be paid within 12 months of the reporting date. The profit before
tax for the year ended 31 December 20X1 is R8,4 million.
Scenario 1

Each employee is entitled to a thirteenth cheque in terms of the employment contract. If an

employee is appointed during a year, the bonus is reduced to a pro-rata share of the total
bonus to which the employee would have been entitled based on the number of months that
the employee rendered service. Of the 20 employees, 2 employees were appointed on
1 July 20X1. All of the remaining employees were appointed prior to 1 January 20X1.
Scenario 2

Employees are contractually entitled to a performance bonus. An amount of R700 000 was
approved by the directors before the annual financial statements were issued.
Scenario 3

Based on the entity’s practice in the past ten years, employees are entitled to a performance
bonus. An amount of R800 000 was presented by management to the directors for approval,
but this was not approved before the annual financial statements were authorised for issue.
Past experience indicates that the directors have on average approved bonuses presented
to them but at an amount that is 10% lower than that suggested by management.

Scenario 4

Based on the entity’s practice in the past ten years, employees are entitled to a performance
bonus. An amount of R800 000 was presented by management to the directors for approval,
but this was not approved before the annual financial statements were authorised for issue.
Past experience indicates that the directors have on average adjusted bonuses presented
to them by 100% in both directions. No predictable factors can be attributed to the decisions
taken by the directors.
Scenario 5

Employees are entitled to a bonus based on a formal contract with the trade union. The
formula provides that a bonus pool of 5% of the profit before tax must be shared between
the employees. Bonuses are only paid to employees if they are still in the employ of the
company six months after the reporting date. It is expected that 10% of the employees will
resign before 30 June 20X2. Individual bonuses are limited to what they would have been
had there been no resignations.
 20

REQUIRED:
Calculate the total bonuses that A Limited must accrue for as at 31 December 20X1 in
accordance with IAS 19, Employee Benefits for each of the above scenarios.
R
Scenario 1 – contractual bonus
18 employees for full year x (R360 000/12 months) 540 000
2 employees x 6/12 months x (R360 000/12 months) 30 000
570 000

Scenario 2 – already approved

Amount approved by directors 700 000

R
Scenario 3 – established practice and reliable measurement
R800 000 x 90% 720 000

Scenario 4 – established practice but not reliably measured

No reliable measurement, thus no accrual can be recognised Nil

Scenario 5 – formula based on contractual agreement and taking

expected resignations into account
R8,4 million profit before tax x 5% bonus pool x 90% after taking into
account expected resignations 378 000

6. Short-term employee benefits (continued)

 Disclosure
IAS 19 does not have specific disclosure requirements in respect of short-term employee
benefits. IAS 1 requires the disclosure of employee benefits expense (IAS 19.25).
 Income tax implications
Generally, employee benefits are deductible for tax purposes in terms of Section 11(a) of the
Income Tax Act at the earliest of cash payment or accrual. This means that the accounting
and tax treatments are in agreement and thus no adjustments to accounting profit before tax
are required when calculating the taxable profit. Further, no temporary differences arise for
deferred tax purposes and thus no deferred tax is recognised.
Bonus and leave obligations are usually only deductible for tax purposes when they are paid
in cash, since for tax purposes, they are viewed as provisions. This means that the
accounting expense will have to be added back to the accounting profit before tax to
calculate the taxable profit on which the calculation of current tax is based. A temporary
difference will also arise which will result in deferred tax.
Some contractual bonuses are deductible for tax purposes even if they have not yet been
paid in cash. On FRK300 level, a question will indicate if this is the situation to be used.
Otherwise, it will always be assumed that bonuses can only be deductible when paid in cash.
 21

7. Post-employment benefits (general)

 Identification of post-employment benefits

Refer to the definition of post-employment benefits in IAS 19.8 and the examples in
IAS 19.5 and 26.

An employer provides all post-employment benefits in terms of post-employment benefit

plans (IAS 19.26). Refer to the definition of post-employment benefit plans in IAS 19.8.

 Classification of post-employment benefit plans

IAS 19 distinguishes between two types of post-employment benefit plans that are
defined in IAS 19.8:

- Defined contribution plans

- Defined benefit plans

Note that a defined contribution plan must always be in a separate entity whilst this is
not the case for a defined benefit plan.

The distinction between these two types of plans is very important as the
recognition and measurement of each is very different.

- The difference between the defined contribution plan and the defined benefit plan is
discussed in more detail in IAS 19.27 – 30.

- Important characteristics of defined contribution plans and defined benefits plans are
summarised below:

Defined contribution plans Defined benefit plans

Must be a separate entity Is not always a separate entity
Employer has an obligation to make Employer has an obligation to provide
fixed contributions to the plan agreed upon benefits

Employee bears risk that the assets
of plan will be insufficient to provide
benefits
Employee bears risk that the post-
employment benefits will be
insufficient
Always has allocated assets
Employees have claims against their
individual accounts
Employer bears risk that the assets of
plan will be insufficient to provide
benefits
Employer “guarantees” the amount of
the post-employment benefit
Can be funded or unfunded
Employees have claims against the
fund as a whole
 22

- In practice, a provident fund (where the employee effectively “saves” for retirement)
would be a defined contribution plan. In contrast, a pension fund (where the fund
pays a pension to the employee when retirement is reached and this pension is
guaranteed by the employer) would be a defined benefit plan.

- Note that post-employment benefit plans are classified depending on the economic
substance of the plan based on its principal terms and condition (IAS 19.27). Thus,
even if a fund is a provident fund in legal terms, the employer can still have a
constructive obligation to provide post-employment benefits (refer to IAS 19.29 for
examples). In such cases, the post-employment benefit plan will be accounted for as
a defined benefit plan.

8. Post-employment benefits (defined contribution plans)

 Recognition and measurement

The accounting requirements of a defined contribution plan are similar to those for short-
term employee benefits.

The contributions to a defined contribution plan represent the expense to the employer
and any outstanding contributions are an obligation of the employer (IAS 19.51). This
expense and obligation are not normally discounted (IAS 19.50). Where the
contributions are not expected to be settled wholly before 12 months after the end of the
reporting period in which the employees rendered the service, they shall be discounted
(IAS 19.52).

 Disclosure

IAS 19 requires that the entity discloses the amount of the defined contribution plan
expense (IAS 19.53). The interpretation of this for purposes of FRK 300 is that this is the
sum of both the contribution made by the employee and the employer.

Class example 8 – defined contribution plan

DCP Limited’s standard employment contract requires that its employees must become
members of the company’s provident fund (a defined contribution plan). Employees
contribute 6% of their monthly gross salary to the provident fund and DCP Limited will
contribute a further 8% of the employee’s gross monthly salary.

The total gross salaries of employees for the year ended 30 June 20X6 amounted to
R96 million (20X5: R90 million) which were earned evenly during the year. The contributions
to the provident fund are paid 5 days after the month end.

REQUIRED:

(a) Prepare the journal entries (cash transactions included) of DCP Limited for the year
ended 30 June 20X6 in accordance with International Financial Reporting Standards
(IFRS).

Note:  Journal narrations are not required.

 Ignore all tax implications.
 23

(b) Disclose the above information in the “Profit before tax” note of DCP Limited for the year
ended 30 June 20X6 in accordance with International Financial Reporting Standards
(IFRS).

SUGGESTED SOLUTION:

Part a – journal entries

Dr Cr
R R
Provident fund creditor (SFP) 1 050 000
Bank (SFP) 1 050 000
[R90 million/12 months x (6% + 8%)]
Employee benefits expense (P/L) 96 000 000
Provident fund creditor (SFP) 5 760 000
[R96 million x 6%]
Bank (SFP) 90 240 000
Employee benefits expense (P/L) 7 680 000
Provident fund creditor (SFP) 7 680 000
[R96 million x 8%]
Provident fund creditor (SFP) 12 320 000
Bank (SFP) 12 320 000
[R96 million x 11/12 months x (6% + 8%)] or
[(R5 760 000 + R7 680 000) x 11/12]
The balance on the provident fund creditor’s account will be presented as part of the “Trade
and other payables” amount on the face of the statement of financial position. On
30 June 20X6, this amount will be R1 120 000 (R5 670 000 + R7 680 000 – R12 320 000)
or ([R5 760 000 +R7 680 000] x 1/12 months).

Part b - disclosure
DCP Limited
Notes for the year ended 30 June 20X6

26. Profit before tax

Profit before tax is stated after the following items have been taken into account:
20X6 20X5
Expenses R R
Employee benefits expense 103 680 000 97 200 000
Short-term employee benefits
20X6: [R96 million x (100% - 6%)] 90 240 000 84 600 000
20X5: [R90 million x (100% - 6%)]
Contributions to defined contribution plan 13 440 000 12 600 000
20X6: [R5 760 000 + R7 680 000) (part a)
20X5: [R90 million x (6% + 8%)]
 24

9. Post-employment benefits (defined benefit plans)

 Background discussion

In terms of a defined benefit plan, an entity undertakes to pay certain post-employment

benefits to its employees. The employer (and sometimes also its employees) will make
contributions to this defined benefit plan to “save” for the benefits that will be paid out.

It is the benefits that are the entity’s expense under a defined benefit plan and not the
contributions made to the plan.

The recognition and measurement of defined benefit plans is excluded from the SAICA
syllabus.

10. Termination benefits

 Identification

- Refer to the definition of termination benefits in IAS 19.8.

- Note that termination benefits are not benefits paid to an employee where the
employee has taken the first step to terminate service (IAS 19.160).

- Termination benefits are not necessarily once-off payments (IAS 19.161).

- Termination benefits are distinguished from other employee benefits as these are
benefits that are paid because of termination of service rather than the rendering of
service (IAS 19.159). It is sometimes difficult to make this distinction. IAS 19.162 –
164 discusses those situations where employee benefits relate to the rendering of
service and thus the benefits are not termination benefits.

 Recognition

- Termination benefits are recognised at the earlier of (IAS 19.165):

 the date on which the entity can no longer withdraw its offer of benefits; and

IAS 19.166-167 explains when an entity can no longer withdraw its offer of
termination benefits. Note that the date is not the same for when the ultimate
decision can be made by the employee (IAS 19.166) and the employer
(IAS 19.167).

 the date on which an entity will be required to recognise a restructuring provision

in terms of IAS 37, where termination benefits may be payable because of the
restructuring.

 Measurement (IAS19.169 – 170)

- Measurement of termination benefits is based on the nature of the benefit, namely:

 25

 post-employment benefits;

 short-term benefits (if expected to be settled wholly before twelve months after
the end of the annual reporting period in which termination recognised); or

 other long-term benefits (if not expected to be settled wholly before twelve
months after the end of the annual reporting period in which termination
recognised).

 Disclosure

IAS 19 does not have any specific disclosure requirements relating to termination
benefits. Other standards, such as IAS 1, require disclosure of employee benefits
expense (IAS 19.171).

 Income tax implications

Normally termination benefits would be deductible at the earliest of cash payment or

accrual [Section 11(a) of Income Tax Act]. This is so since termination benefits are
normally payable because of contracts. In such cases, there is no difference in the
accounting and income tax treatment and no temporary differences arise.

Sometimes, termination benefits are not tax deductible mainly because they are still
outstanding at the reporting date and are thus estimated (i.e. are a “provision”). In such
cases, the income tax deduction will be delayed until the amounts are actually paid in
cash or become payable in terms of a contract.

On FRK300 level, a question will always indicate when the termination benefits are
deductible for income tax purposes. In the absence of being specifically told, assume
always that the tax deduction will be when the amount is actually paid in cash.

Class example 9 - termination benefits

On 31 December 20X6, X LIMITED decided to close its factory in Cape Town due to a
decline in the demand for the products manufactured in this factory. As part of this forced
retrenchment, X Limited is required to pay a retrenchment package to each of the 100
employees affected of 3 months of the employee’s basic salary as a lump sum payment.

The retrenchment will take place on 30 April 20X7. In order to finalise the closing of the
factory, X Limited has asked 10 of these employees to stay on until 30 June 20X7 in
exchange for an additional lump sum payment calculated at 6 months of their basic salary.
Irrespective of whether they stay on or not, they will get the general retrenchment package
of 3 months of their basic salary.

The total basic salary of the 100 employees amounts to R2 million per month. The 10
employees that were asked to stay on each earn a basic salary of R25 000 per month.

On 31 January 20X7 (the reporting date), X Limited expects that 8 of the 10 employees that
were asked to stay on will do so. The financial statements for the year ended
31 January 20X7 were authorised for issue on 28 February 20X7.
 26

On 30 April 20X7, 9 of the 10 employees that were asked to stay on elected to stay on and
received all of their benefits on 30 June 20X7.
On 31 January 20X7, you must assume that X Limited cannot withdraw from the offer made
to its employees.
Assume an appropriate discount rate is 12% per year before tax and that the time value of
money is insignificant.

Ignore all tax implications.

REQUIRED:

(a) Calculate the termination benefits obligation that X Limited must recognise on
31 January 20X7 in accordance with IAS 19, Employee Benefits
.
(b) Prepare the journal entries (cash transactions included) in the books of X Limited to
account for the termination packages for the year ended 31 January 20X7 in
accordance with International Financial Reporting Standards (IFRS).

Note:  Journals must be dated.

 Journal narrations are not required.
(c) Prepare the journal entries (cash transactions included) in the books of X Limited to
account for the employee benefits for the year ended 31 January 20X8 in accordance
with International Financial Reporting Standards (IFRS).

Note:  Journals must be dated.

 Journal narrations are not required.

SUGGESTED SOLUTION
Part a- calculation of termination benefit obligation
R
Obligation for 90 employees 5 250 000
([R2 000 000 – {R25 000 x 10 employees}] x 3 months)
Obligation for 10 employees requested to stay on for longer 750 000
(R25 000 x 10 employees x 3 months)
6 000 000

OR
R
Obligation for 100 employees 6 000 000
(R2 000 000 x 3 months)

The entity initiated this retrenchment and as a result of this, the employees are obliged to
accept the termination benefits. Since the entity can no longer withdraw from the offer it
made to its employees on 31 January 20X7, an expense and related obligation must be
recognised on this date. These benefits are payable wholly before 12 months after the end
 27

of the annual reporting period in which the termination benefit is recognised, thus they are
short-term employee benefits and no discounting is required.
Note that the obligation to pay another six months of salary to 10 employees is contingent
upon their rendering of future service (for May and June 20X7) and is therefore not a
termination benefit. No provision is recognised for these benefits on 31 January 20X7 as
there is no present obligation. See part C for the accounting for these benefits in the following
financial year.

Part B – Journal entries 20X7

Dr Cr
31 January 20X7 R R
Employee benefit expense (P/L) 6 000 000
Termination benefit obligation (SFP) 6 000 000

Part C – Journal Entries 20X8

Dr Cr
30 April 20X7 R R
Termination benefits obligation (SFP) 5 325 000
Bank (SFP) 5 325 000
(R6 000 000 – [R25 000 x 9* employees x 3 months])
* is the 9 of the 10 employees that chose to take the
additional package and will therefore be paid on 30 June
20X7
31 May 20X7
Employee benefits expense (P/L) 675 000
Short term employee benefits obligation (SFP) 675 000
(R25 000 x 9 employees x 6 months)/2 [employees will be
required to provide service for May and June to earn the
additional benefit, thus accrue for May]

30 June 20X7
Employee benefits expense (P/L) 675 000
Short term employee benefits obligation (SFP) 675 000
(R25 000 x 9 employees x 6 months)/2 [employees will be
required to provide service for May and June to earn the
additional benefit, thus accrue for June]
Termination benefits obligation (SFP) 675 000
(R25 000 x 9 employees x 3 months)
Short term employee benefits obligation (SFP) 1 350 000
(R25 000 x 9 employees x 6 months)
Bank (SFP) 2 025 000
 28

Note: The portion of the benefits that are contingent upon future service (May and June
20X7) would be recognised on a month by month basis as the employees render the service
that entitles them to the benefit. These benefits meet the definition of short term employee
benefits because they are not termination benefits and they will be settled wholly within 12
months of the reporting date.