EMPLOYEE

BENEFITS (IAS
19)
Corporate Reporting II
Lecture 8
Outline
 PENSION ACCOUNTING
 PENSION EXERCISES
 SHORT TERM BENEFITS
 CURTAILMENT
 ASSET CEILING
Introduction
 Employee benefits is about pension scheme.
 There are two forms of Pension;
 Defined Contribution scheme, and
 Defined Benefit
Pension accounting
 1. Defined contribution pension scheme
 These are very simple. The company simply
agrees to pay an amount into the pension of an
employee each year and then does it.
 The risk is with the employee.
 Accounting
 The cash simply goes into operating costs in the
P/L and that’s it.
Pension accounting
 2. Defined benefit pension scheme
 This much more complicated deal is much less common.

 It involves making an employee a promise to give the

employee a certain amount of money when they retire.
This then generates an obligation and hence a liability.
 A portfolio of investments that is built up over the years to
pay them and hence the scheme also generates an asset.
 The risk is with the employer.
Pension accounting
 Accounting
 So, we end up accounting for an asset and a
liability. By the way, a change to IAS19 in June
2011 resulted in the use of the discount rate
for both unwinding the liability and the
expected return on the plan assets. Further, this
change in IAS19 resulted in the removal of the
corridor method.
Question 1: Contact Details PLC
 The following information is given about a funded
defined benefit plan given to employees by the
above company who operate in the dating agency
industry. To keep the computations simple, all
transactions are assumed to occur at the year end.
The present value of the obligation was $990 million
and the market value of the plan assets was $1,000
million at 1 January year one. Actuarial gains and
losses are to be recognised as they occur outside
the profit and loss in other comprehensive income.
Question 1: Contact Details PLC
 Year One Two Three
 $m $m $m
 Current service cost 130 140 150
 Benefits paid 150 180 190
 Contributions paid 90 100 110
 Present value of
 obligations at 31 Dec. 1,100 1,380 1,408
Question 1: Contact Details PLC
 Market value of plan
 assets at 31 Dec 1,190 1,372 1,188
 Discount rate at start of year 10% 9% 8%
 Expected rate of return on
 plan assets at start of year (ignore this!!)
 12% 11% 10%
 Required:
 Financial statement effects for all three years.
Question 2: Glossary
 The following information is given about a funded defined
benefit plan. To keep the
 computations simple, all transactions are assumed to occur at
the year-end.
 Present value of obligations at year start $400m
 Market value of plan assets at year start $390m
 Discount rate at start of year 10%
 Current service cost $14m
 Benefits paid $26m
 Contributions paid $34m
Question 2: Glossary
 Present value of obligations at year end $530m
 Market value of plan assets at year end $370m
 There was a variation in the benefit terms during
the year, which resulted in a past service cost of
$100m.
 Required
 (a) Financial statement effects for the year.
Share Based
Payments
Obligations (SBP)
Lecture 9
Share based payment obligation
(IFRS2)
 Fair Value
 This is the fair value of the rights given to the
employees. It’s not the intrinsic value of the
options, nor is it the fair value of the shares.
 However, the recognition depends on the type of
share based payment.
 There are two types, options and share
appreciation rights. They are almost identical.
The fair value is recognised as follows:
Share based payment obligation
(IFRS2)
 This is based on an equation:
 Obligation = number of rights
 expected to vest x fair value x timing
ratio
 Timing Ratio
 This is simply the position of the year end within
the contract. Timing ratio = Year end
 Vesting period
Share based payment obligation
(IFRS2)
 Fair Value
 Settlement Name Fair Value
 Settled in Equity Options Grant FV
 Settled in Cash SAR Current FV
 Number of rights expected to vest
 This is simply a guess at the current year end of
the number of rights expected to vest on the
vesting date.
Question 1: Benign
 Benign offered directors an option scheme based
on a three year period of service.
 The number of rights taken up by directors at the
inception of the scheme was 100 million. The
options were exercisable shortly after the end
of the third year. The fair value of the options
and the number of rights expected to vest
were at each relevant point:-
Question 1: Benign
 Year Rights exp to vest FV of the option
0 97m 40c
1 90m 45c
2 93m 37c
3 94m 56c
 Required:
 Financial statement effects.
Question 2: Bilberry
 Bilberry offered a three year share based payment scheme to its
directors. The volume granted was 20m.
 Year Rights expected to vest Fair value of the option
 0 17m 20c
 1 18m 27c
 2 15m 33c
 3 16m 29c
 Required:
 FS effects over 3 yrs, assuming that the share based payment used:
 (i) Options.
 (ii) Share appreciation rights.
Question 3: Beth
 Beth granted 200 share options to each of its 10,000 employees
on 1 December 2006. The shares vest if the employees work for the
Group for the next two years.
 On 1 December 2006, Beth estimated that there wouldbe 1,000 eligible
employees leaving in each year up to the vesting date. At
30November 2007, 600 eligible employees had left the company.
The estimate of the number of employees leaving in the year to 30
November 2008 was 500 at 30 November 2007. The fair value of each
share option at the grant date (1 December 2006) was $10. The
share options have not been accounted for in the financial statements.
 Required:
 Financial statements effects for the year ended 30 November 2007.
Question 4
A company grants 750 share options to each of
its six directors on 1 May 20X7.
 The options vest on 30 April 20X9. The fair value of
each option on 1 May 20X7 is $15 and their intrinsic
value is $10 per share. Itis anticipated that all of the
share options will vest on 30 April 20X9.
 Required:
 Show how this transaction will be dealt with in
the financial statements for year ended 30 April 20X8.