EMPOYEE BENEFITS

IAS 19

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and Finance, CoBE, AAU. Permission must be obtained from

Definition

Employee benefits are all forms of consideration given

by an entity in exchange for service rendered by
employees or for the termination of employment.

Scope

This Standard sets out the accounting and disclosure by

employers for employee benefits.
The Standard identifies four main categories of
employee benefit:
(1) Short-term employee benefits
(2) Postemployment benefits
(3) Termination benefits,
(4) Other long-term employee benefits
Postemployment benefits are categorized as either
defined contribution plans or defined benefit plans.

(1)

Short-term employee benefits, such as wages,

salaries, vocational holiday benefit, sick pay, profit
sharing or bonus plans paid within 12 months of the end
of the period, and nonmonetary benefits, such as
medical care and so on, for current employees.
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 the employees render the related
service.

(2)

Postemployment benefits, such as pensions,

postemployment
medical
benefits,
and
postemployment life insurance.
are
employee
benefits
(other
than
termination
benefits
and
short-term
employee benefits) that are payable after the
completion of employment.

3) Termination benefits, such as severance(job

loss) pay.
4) Other long-term employee benefits including
long service leave or sabbatical leave.
are all employee benefits other than short-term
employee benefits, post-employment benefits
and termination benefits.
Postemployment benefits are categorized as
either defined contribution plans or defined
benefit plans.
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an entity pays a fixed contribution into a separate

entity (fund) and will have no legal or constructive
obligation to pay further contributions if the fund does not
have sufficient assets to pay employee benefits relating
to employee service in the current and prior periods.

An entity should recognize contributions to a defined

contribution plan where an employee has rendered
service in exchange for those contributions.

Contd

Under a defined contribution plan, payments or benefits

provided to employees may be simply a distribution of
total fund assets or a third partyfor example, an
insurance entitymay assume the obligation to provide
the agreed level of payments or benefits to the
employees.
The employer is not required to make up any shortfall in
the funds assets.

Defined Benefit Plan

With these plans, the size of the postemployment benefits is determined in advance,
ie the benefits are 'defined'. The employer (and
possibly current employees too) pay contributions
into the plan, and the contributions are invested. The
size of the contributions is set at an amount that is
expected to earn enough investment returns to meet
the obligation to pay the post-employment benefits
If, however, it becomes apparent that the assets in
the fund are insufficient, the employer will be
required to make additional contributions into the
plan to make up the expected shortfall
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Contrasting Defined Benefit

And Defined Contribution

Under the defined benefits scheme, the benefits payable

to the employees are not based solely on the amount of
the contributions, as in a defined contribution scheme;
rather, they are determined by the terms of the defined
benefit plan.
This means that the risks remain with the employer,
and the employers obligation is to provide the agreed
amount of benefits to current and former employees.
The benefits normally are based on such factors as age,
length of service, and compensation.
The employer retains the investment and actual risks
of the plan. The accounting for defined benefit plans is
more complex than defined contributions plans.
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Exercises
For each of the following, choose one of: 1) short-term;

2) termination; 3) post-employment defined-benefit; 4)

post-employment defined-contribution; 5) other longterm; 6) equity-settled share-based payment; 7) cashsettled share-based payment; or 8) other (specify).

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An entitys contracts of employment provide each employee

with:
20 days paid sick leave per year. Carry forward 1 year,
thereafter forfeit(give up) if unused.
25 days holiday leave per year. Carry forward 2 years,
thereafter forfeit if unused.
60 days paid maternity/paternity leave per child. Forfeit if
not taken within 24 months of the birth of a child.
A performance bonus equal to 100 cash share
appreciation rights, on condition that the employee
remains in its uninterrupted employment for five years
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Contd

For each year of service, a pension equal to 2% of

final annual salary.

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Recognition and
Measurement
Accounting for employee benefit costs
IAS 19 is intended to prescribe the following.
(a) When the cost of employee benefits should be
recognized as a liability or an expense
(b) The amount of the liability or expense that should be
recognized

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Contd
As a basic rule, the standard states the following.
A liability should be recognized when an employee has
provided a service in exchange for benefits to be received
by the employee at some time in the future.

An expense should be recognized when the entity consumes

the economic benefits from a service provided by an
employee in exchange for employee benefits.
The basic problem is therefore fairly straightforward. An entity
will often enjoy the economic benefits from the services
provided by its employees in advance of the employees
receiving all the employment benefits from the work they have
done, for example they will not receive pension benefits until
after they retire.
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Short-term
benefits

employee

Accounting for short-term employee benefits is

fairly straightforward, because there are no
actuarial assumptions to be made, and there is
no requirement to discount future benefits
(because they are all, by definition, payable no
later than 12 months after the end of the
accounting period).

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Contd

The rules for short-term benefits are essentially an

application of basic accounting principles and
practice.
Unpaid short-term employee benefits as at the
end of an accounting period should be recognized as
an accrued expense. Any short-term benefits paid
in advance should be recognized as a prepayment
(to the extent that it will lead to, eg a reduction in
future payments or a cash refund).
The cost of short-term employee benefits should be
recognized as an expense in the period when the
economic benefit is given, as employment costs
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Short-term paid absences

There may be short-term accumulating paid

absences.
These are absences for which an employee is paid, and if
the employee's entitlement has not been used up at the
end of the period, they are carried forward to the next
period.
An example is paid holiday leave, where any unused
holidays in one year are carried forward to the next year.
The cost of the benefits of such absences should be
charged as an expense as the employees render
service that increases their entitlement to future
compensated absences.
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Contd

There may be short-term non-accumulating

paid absences. These are absences for which an
employee is paid when they occur, but an
entitlement to the absences does not
accumulate.
The employee can be absent, and be paid, but
only if and when the circumstances arise.
Examples are maternity/paternity pay, (in most
cases) sick pay, and paid absence for jury service.

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contd

The cost of accumulating paid absences should be

measured as the additional amount that the entity
expects to pay as a result of the unused entitlement
that has accumulated at the end of the reporting period.

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Example: Unused holiday

leave

A company gives its employees an annual

entitlement to paid holiday leave. If there is
any unused leave at the end of the year,
employees are entitled to carry forward the
unused leave for up to 12 months. At the
end of 20X9, the company's employees
carried forward in total 50 days of unused
holiday leave. Employees are paid birr100
per day.
Required State the required accounting
for the unused holiday carried forward.
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Answer
The
short-term
accumulating
paid
absences should be recognized as a cost
in the year when the entitlement arises, ie
in 20X9.

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Profit sharing or bonus

plans

Profit shares or bonuses payable within 12 months after

the end of the accounting period should be recognized
as an expected cost when the entity has a present
obligation to pay it, I,e when the employer has no real
option but to pay it. This will usually be when the
employer recognizes the profit or other performance
achievement to which the profit share or bonus relates.
The measurement of the constructive obligation reflects
the possibility that some employees may leave without
receiving a bonus.

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Example: Profit sharing

plan

XYZ Co runs a profit sharing plan under which it pays 3%

of its net profit for the year to its employees if none have
left during the year. XYZ Co estimates that this will be
reduced by staff turnover to 2.5% in20X9.
Required
Which costs should be recognized by XYZ Co for the
profit share?
Solution
XYZ Co should recognize a liability and an expense of
2.5% of net profit

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Post-employment benefits

There are two types of post-employment benefit plan:

Defined contribution plans :are simple to account for as
the benefits are defined by the contributions made.
are 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.
Defined benefit plans: are much more difficult to deal
with as the benefits are promised, they define the
contributions to be made. are post-employment benefit
plans other than defined contribution plans.
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Accounting Treatments
defined contribution plans
Accounting for payments into defined contribution
plans is straightforward.
The obligation is measured by the amounts
to be contributed for that period.
There are no actuarial assumptions to make.
If the obligation is settled in the current period
(or at least no later than 12 months after the end
of the current period there is no requirement
for discounting.

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Contd

IAS 19 requires the following.

Contributions to a defined contribution plan should
be recognised as an expense in the period they
are payable (except to the extent that labour costs
may be included within the cost of assets).
Any liability for unpaid contributions that are
due as at the end of the period should be
recognised as a liability (accrued expense).
Any excess contributions paid should be
recognized as an asset (prepaid expense), but
only to the extent that the prepayment will lead to,
eg a reduction in future payments or a cash refund
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Disclosure requirements

A description of the plan

The amount recognized as an expense in the
period

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Defined benefit Plans

Are all other postemployment benefit plans other than

defined contribution plans.
IAS 19 requires an entity to account not only for its legal
obligation to defined benefit plans but also for any
constructive obligation that arises.

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IAS 19 defines the following key terms to do with

defined benefit plans.
The net defined benefit liability (asset) is the deficit
or surplus, adjusted for any effect of limiting a net
defined benefit asset to the asset ceiling.
The deficit or surplus is:
(a) The present value of the defined benefit obligation
less
(b) The fair value of plan assets (if any).
Accounting for defined benefit plans is much more
complex. The complexity of accounting for defined
benefit plans stems largely from the following factors.

Defined benefit Plans:

Recognition AND
Measurement

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Contd

The future benefits (arising from employee service in

the current or prior years) cannot be measured exactly,
but whatever they are, the fund (kept solvent by 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.
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.
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 THE

END

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