IAS 19 Employee Benefits
ACCA Director 
IAS 19 Employee Benefits
IAS 19 Employee Benefits
Types of Employee Benefits
Common monetary and non-monetary benefits: Monetary benefit:
Non-monetary salary:
Accounting treatment: Dr Staff costs Cr Cash/Liability |
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Termination payments: This can be in the form of restructuring expense and if there is any payment exceeding 1 year, discounting is needed. IAS 37 Provisions, contingent liabilities and contingent assets standard could be referred to. |
Post-employment benefit (Pensions):
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Paid leave
- The paid leave can be either accumulated - can be carried forward to the next year or
- Not accumulated - cannot be carried forward to the next year. If the unused paid leave days can’t be accumulated, no accounting treatment is needed at the year end.
Example: Employee A has 10 paid leave days (compensating absence) and during the year, he has used 8 days already with 2 days being carried forward to the next year. The annual salary for employee A is $250,000 and there are 250 available working days during the year. Required： Accounting treatment for the unused paid leave days. Answer: As at the year-end: Dr Staff costs $2,000 Cr Accrued expense ($250,000/250days x 2) $2,000 The use of 8 days as paid leave should also be accounted for by Dr Staff costs Cr Accrued expense Next year: Dr Accrued expense $2,000 Cr Bank $2,000 |
Exam standard question – paid leave The salaried employees of Ashanti are entitled to 25 days paid leave each year. The entitlement accrues evenly over the year and unused leave may be carried forward for one year. The holiday year is the same as the financial year. At 30 April 2014, Ashanti has 900 salaried employees and the average unused holiday entitlement is three days per employee. 5% of employees leave without taking their entitlement and there is no cash payment when an employee leaves in respect of holiday entitlement. There are 255 working days in the year and the total annual salary cost is $19 million. No adjustment has been made in the financial statements for the above and there was no opening accrual required for holiday entitlement. Required: Accounting Treatment. Answer: Dr Staff costs $0.21m Cr Payables * $0.21m * Total cost = $19m
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Pension schemes
1. Defined contribution scheme:
- Payments to retired employees are not guaranteed by the employer.
- Employer and employee invest in the scheme in each period, ie each month, which is operated by the trustee.
- Retired employees are not paid when the scheme runs a deficit, whilst they are paid if the scheme runs a surplus.
- Employer has no further obligations when payments are invested into the scheme at each period.
- Risks are therefore transferred to employees when the scheme is invested. Therefore, no pension assets or liabilities are recognised in employer’s account.
Accounting treatment (by employer):
Dr Staff costs
Cr Accrued expense/Bank
2. Defined benefit scheme:
- Payments to retired employees are guaranteed by the employer. The payment is usually based on the salary of employee at retirement and the number of years served in the business.
- Employer and employee invest in the scheme in each period, ie each month, which is operated by the trustee.
- Retired employees are paid irrespective whether the scheme runs a deficit or a surplus. If the scheme runs a deficit, employer is required to make additional payments to make up the deficit and this is a common situation.
- If the scheme runs a surplus, no further action is required from the employer.
- Risks are not transferred to trustee or employees when the scheme is invested and hence pension assets and liabilities are recognised in employer’s account. This is according to the substance over form concept, ie the substance of the transaction is where employers are still bearing risks and rewards of the pension scheme while the form is where the scheme is transferred to the trustee.
- A detailed reconciliation of defined benefits pension assets and liabilities are required.
The sensitivity analysis description of how the defined benefit scheme may affect the timing and uncertainty of the entity’s future cash flows should also be disclosed, for example, sensitivity of one year increase in life expectancy may increase the staff costs and pension liability by $65 million.
Example of reconciliation:
Pension asset |
Pension liability |
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Opening balance |
Opening balance |
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Return on pension asset |
Interest cost |
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Contributions in |
Service cost |
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Benefits paid |
Benefits paid |
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Actuarial gains/losses |
Actuarial gains/losses |
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Closing balance |
Closing balance |
Accounting entries:
Pension asset |
Accounting entries |
Notes |
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Opening balance |
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Return on pension asset |
Dr Pension asset |
Cr P/L |
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Contributions in |
Dr Pension asset |
Cr Bank |
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Benefits paid |
Dr Pension liability |
Cr Pension asset |
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Expected closing balance |
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Actuarial gains/losses** |
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Closing balance |
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Pension liability |
Accounting entries |
Notes |
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Opening balance |
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Interest cost |
Dr P/L |
Cr Pension liability |
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Service costs* |
Dr P/L |
Cr Pension liability |
Include:
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Benefits paid |
Dr Pension liability |
Cr Pension asset |
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Expected closing balance |
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Actuarial gains/losses** |
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Closing balance |
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*Service costs components:
- 1. Current service cost – increase in present value of obligation from employee service in the current period.
- 2. Past service cost – change in the present value of obligation from employee service in prior periods due to a change in plan or curtailment (reduce the number of employees).
- 3. A gain or loss on settlement – employer agrees to settle its obligation by paying compensation. Settlement gain (Dr Pension asset Cr P/L) and settlement loss (Dr P/L Cr Pension liability)
**Remeasurement components:
Net actuarial gain:
Dr Pension asset
Cr Other comprehensive income (OCI)
Net actuarial loss:
Dr Other comprehensive income (OCI)
Cr Pension liability
The asset ceiling:
- Most defined benefit pension plans usually run deficits whilst some of them may run surpluses.
- If there is a surplus in the defined benefit pension plan, the maximum pension asset to be recognised should not exceed the total of the present value of any economic benefits available in the form of refunds from the scheme or reductions in future contributions to the scheme.
- This is according to the prudence concept in the conceptual framework.
Example – Defined contribution scheme Employer makes contributions to the pension fund of employees at a rate of 10% of gross salary. The gross salary total is $3m for the year. Total contributions made by the employer is $200,000. Required: Accounting treatment. Answer: Dr Staff costs (10% x $3m) $300,000 Cr Bank $200,000 Cr Accrued expense $100,000 |
Example – Introductory question (Defined benefit scheme)
The employer runs another defined contribution scheme in which it pays $30m each year end. Required: Accounting treatments for the above schemes. Answer: 1. Defined benefit scheme: Reconciliation:
Journal entries:
Presentation in the Financial Statements: Statement of profit or loss and other comprehensive income:
Statement of financial position:
2. Defined contribution scheme: Dr P/L $300m Cr Bank $300m |
Example – Asset ceiling A surplus defined benefit plan information is as follows:
The reduction in future contribution in the plan is only $20m. Required: Accounting treatment. Answer: The net pension asset is $100m-$30m=$70m which should be written down to the asset ceiling of $20m. Therefore: Dr P/L $50m Cr Pension asset $50m |
Exam standard question - Mal Mal, a public limited company, is a leading support services company which focuses on the Human Resource Management industry. The company would like advice on how to treat certain items under IAS 19 Employee benefits. The company operates the Mal Pension Plan B which commenced on 1 November 2012 and the Mal Pension Plan A, which was closed to new entrants from 31 October 2012, but which was open to future service accrual for the employees already in the scheme. The assets of the schemes are held separately from those of the company in funds under the control of trustees. The following information relates to the two schemes. Mal Pension Plan A The terms of the plan are as follows. (i) Employees contribute 6% of their salaries to the plan. (ii) Mal contributes, currently, the same amount to the plan for the benefit of the employees. (iii) On retirement, employees are guaranteed a pension which is based upon the number of years’ service with the company and their final salary. The following details relate to the plan in the year to 31 October 2013:
Mal Pension Plan B Under the terms of the plan, Mal does not guarantee any return on the contributions paid into the fund. The company’s legal and constructive obligation is limited to the amount that is contributed to the fund. The following details relate to this scheme:
The discount rate at the year start for Plan A is 5%. The Mal Pension Plan A is wound up at the year end. The market value of the plan assets is unchanged by the curtailment. But the liability is affected. The employees departing the scheme agree to receive the plan assets in full plus a further payment of $16m. The cash was paid just before the year end. 1 year later, Mal has a new defined benefit pension scheme with new employees. This scheme is in surplus with an asset value of $100m and a liability value of $85m. And because the asset exceeds the liability, it is expected that in the future it will be possible to reduce contributions into the scheme. The present value of the reductions in future contributions is only $10m. Required:
Answer: (a) Nature: 1. Defined contribution scheme:
2. Defined Benefit Scheme:
Difference: 1. Risks: The risks associated with defined contribution plan are with the employees. The risks associated with defined benefit plan are with the employers. 2. Amounts: The future amounts paid by employer in the defined contribution scheme is not fixed but in the defined benefit scheme is fixed. Reference: 1. Mal Plan A:
2. Mal Plan B:
(b) Mal Pension A: Reconciliation:
Presentation in the Financial Statements: Statement of profit or loss and other comprehensive income:
Statement of financial position:
Mal Pension B: $10m goes into staff costs. Dr P/L $10m Cr Bank $10m (C) Curtailment and settlement:
(d)
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Categories: : Strategic Business Reporting (SBR)