Objective: IAS 19 prescribes the accounting and disclosure for employee benefits, requiring an entity to recognize a liability for an employee's service in exchange for benefits, and an expense when the entity consumes the economic benefits.
- Applies to all employee benefits provided to employees
- Includes benefits provided under formal plans and informal practices
- Covers short-term, post-employment, other long-term, and termination benefits
Short-term Employee Benefits: Benefits expected to be settled wholly before 12 months after the end of the annual reporting period.
Wages and Salaries: Monthly salary of $5,000 paid to employees
Paid Absences: 20 days of annual leave entitlement
Profit-sharing Bonuses: Annual bonus based on 10% of company profits
Non-monetary Benefits: Company car, health insurance, subsidized meals
Post-employment Benefits: Benefits payable after completion of employment (e.g., pensions, post-employment medical care).
Pension Plans: Monthly retirement payment of 60% of final salary
Retirement Healthcare: Medical insurance coverage after retirement
Lump-sum Payments: One-time payment upon retirement based on years of service
Other Long-term Benefits: All employee benefits other than short-term, post-employment, and termination benefits.
Long-service Leave: 3 months paid leave after 10 years of service
Disability Benefits: Continued salary payment during long-term disability
Deferred Compensation: Bonuses payable 3 years after award date
Sabbatical Leave: Paid leave for professional development every 5 years
Termination Benefits: Benefits payable as a result of either an entity's decision to terminate an employee's employment or an employee's decision to accept voluntary redundancy.
Severance Pay: One month salary for each year of service
Enhanced Pension Benefits: Early retirement with full pension benefits
Outplacement Services: Career counseling and job search assistance
Voluntary Separation Packages: Incentives for early retirement or resignation
Recognition and measurement requirements:
| Benefit Type | Accounting Treatment |
|---|---|
| Wages, salaries, and social security | Recognize as expense when employee renders service |
| Paid absences | Recognize when employee renders service that increases entitlement |
| Profit-sharing and bonuses | Recognize when entity has a legal or constructive obligation |
Note: Short-term benefits are measured at undiscounted amounts.
Defined Contribution Plans: It is a post-employment benefit plan where the benefits depend on the level of contributions made.
The entity pays a fixed contribution amount, which is recognized as an expense in the Statement of Profit or Loss under operating expenses.
The entity has no further responsibility for the plan, as all obligations are transferred to a third party.
Defined Benefit Plans: It is a post-employment benefit plan where the benefits depend on the employee's final salary.
Contributions to a defined benefit plan are recognized as a pension liability or pension asset in the Financial Statements.
The defined benefit plan relies on actuarial estimates, and all responsibility and risk remain with the entity.
| Aspect | Defined Contribution Plans | Defined Benefit Plans |
|---|---|---|
| Definition | A post-employment benefit plan where the benefits depend on the level of contributions made. | A post-employment benefit plan where the benefits depend on the employee's final salary. |
| Accounting Treatment | The entity pays a fixed contribution amount, which is recognized as an expense in the Statement of Profit or Loss under operating expenses. | Contributions to a defined benefit plan are recognized as a pension liability or pension asset in the Financial Statements. |
| Entity Responsibility | The entity has no further responsibility for the plan, as all obligations are transferred to a third party. | The defined benefit plan relies on actuarial estimates, and all responsibility and risk remain with the entity. |
| Risk Allocation | Investment risk is borne by the employee/plan participant. | Investment risk and longevity risk are borne by the employer/entity. |
| Actuarial Involvement | No actuarial calculations are required. | Requires regular actuarial valuations and estimates. |
| Predictability of Costs | Employer costs are fixed and predictable. | Employer costs can vary based on investment performance and actuarial assumptions |
Plan Formula: 2% × years of service × final annual salary
Employee Data: 20 years service, final salary $80,000
Annual Pension: 2% × 20 × $80,000 = $32,000
Actuarial Present Value: $32,000 × annuity factor = $400,000
Plan Assets: $350,000 → Net liability: $50,000
- Projected Unit Credit Method: Used to measure present value of defined benefit obligations
- Net Defined Benefit Liability/Asset: Present value of defined benefit obligation minus fair value of plan assets
- Service Cost: Change in present value of defined benefit obligation resulting from employee service
- Net Interest: Change in present value of defined benefit obligation and fair value of plan assets from passage of time
- Remeasurements: Actuarial gains/losses and return on plan assets excluding amounts in net interest
| Situation | Recognition Timing |
|---|---|
| Entity's decision to terminate | When entity is demonstrably committed to termination |
| Employee accepts voluntary redundancy | When employee accepts the offer |
Measurement: Termination benefits are measured at fair value and recognized immediately in profit or loss.
Situation: Company restructuring - 50 employees offered voluntary redundancy
Package: 2 months salary + $10,000 for each employee
Average Salary: $6,000/month × 2 months = $12,000 + $10,000 = $22,000 per employee
Total Provision: 50 employees × $22,000 = $1,100,000
Accounting: Recognize $1,100,000 expense when employees accept offer
- Description of various benefit plans
- Accounting policy for recognizing actuarial gains/losses
- Reconciliation of opening and closing balances of defined benefit obligation
- Reconciliation of opening and closing balances of fair value of plan assets
- Expense recognized in profit or loss
- Principal actuarial assumptions
- Sensitivity analysis for significant assumptions
- Description of any asset-liability matching strategies
Example Calculation
Pension Plan Basics
Concept Description Defined Benefit Plan Obligation cannot be measured exactly but employer must pay all benefits Pension Formula 2% of last year's salary × years of service (example shows 20 years service → 192,000 total benefit) Current Cost of Service (Year 1) 80,000 ÷ 40 years = 2,000/year Year 1 Accounting
Journal Entries
Dr/Cr Account Amount Dr Pension Expense 2,000 Cr Pension Obligation (2,000) Recognition of service cost for employee benefits (value of service to be paid as pension)
Dr/Cr Account Amount Dr Pension Assets - Separate Bank Account 1,500 Cr Bank (1,500) Employer contribution to the pension fund (separate legal entity from the company)
Dr/Cr Account Amount Dr Pension Obligation (2,000) Cr Pension Assets - Separate Bank Account 1,500 Net Liability (Balance Sheet) (500) Net presentation on the balance sheet
Financial Statement Presentation (Year 1)
Financial Statement Item Amount Income Statement Pension Expense (2,000) Balance Sheet Pension Obligation (2,000) Pension Assets 1,500 Balance Sheet (Net) Net Pension Liability (500) Year 2 Accounting
Pension Obligation Movement Beginning Balance (2,000) (+) (Offset) Interest Expense (P&L) (200) (+) Current Service Cost (P&L) (2,100) (+) Past Service Cost (P&L) (300) (-) Benefits Paid -- (+) (Offset) Actuarial Loss 400 (-) (Offset) Actuarial Gain -- Ending Balance (5,000)
Plan Assets Movement Beginning Balance 1,500 (+) (Offset) Return on Asset (P&L) 150 (+) Contribution 1,000 (-) Benefits Paid -- (+) (Offset) FV Adjustment Gain 500 (-) (Offset) FV Adjustment Loss -- Ending Balance 3,150 Journal Entries (Year 2)
Dr/Cr Account Amount Dr Interest Expense (P&L) 200 Cr Pension Obligation (200) Interest on pension obligation
Dr/Cr Account Amount Dr Pension Expense (P&L) 2,100 Cr Pension Obligation (2,100) Current service cost recognition
Dr/Cr Account Amount Dr Pension Expense (P&L) 300 Cr Pension Obligation (300) Past service cost recognition (benefit formula changed to pay 2% for each 5 years after 10 years)
Dr/Cr Account Amount Dr OCI 400 Cr Pension Assets (400) Unrealized losses. We will not know whether they were realized or not until many years later.
Dr/Cr Account Amount Dr Pension Assets 150 Cr Return on Plan Assets (P&L) (150) Return on plan assets
Dr/Cr Account Amount Dr Pension Assets 1,000 Cr Bank (1,000) Employer contribution to pension fund
Dr/Cr Account Amount Dr Pension Assets 700 Cr OCI - Remeasurement Gain (700) Fair value adjustment gain on plan assets
Financial Statement Presentation (Year 2)
Financial Statement Item Amount Income Statement Pension Expense (200+2,100+300) (2,600) Income Statement Return on Plan Assets 150 Other Comprehensive Income Remeasurement Gain 700 Balance Sheet Pension Obligation (5,000) Pension Assets 3,150 Balance Sheet (Net) Net Pension Liability (1,850) Multiple Pension Plans Presentation
Plan Plan Assets Plan Obligation Net Position A 3,000 (2,000) 1,000 (Asset) B 1,500 (3,000) (1,500) (Liability) C 4,000 (6,000) (2,000) (Liability) Note: No offsetting between plans unless legally permitted and intended
Asset Ceiling
Limit on defined benefit asset to present value of economic benefits from refunds/reduced contributions