IAS 19 Employee Benefits

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Let’s look at the issues…

Key Areas

Short-term

benefits

Terminationbenefits

Post-employment

benefits

Otherlong-term benefits

Short-term employee benefits

Benefits due within 12 months such as– Wages, salaries and social security contributions

– Vacation and sick leave

– Profit sharing and bonus

– non-monetary benefits (such as medical care, housing, cars and free or subsidised goods or services)

Termination benefits

• Obligating event is termination, not service

• Only recognise when demonstrably committed to

– Terminate specific individual(s)/group of individuals; or

– Provide termination benefits to encourage voluntary redundancy

• Discount if due in more than 12 months

Other long-term employee benefits

Benefits due in more than 12 months for

– Compensated absences (such as sabbatical leave)

– Long service awards

– Disability benefits

• Immediate recognition of:

– Actuarial gains and losses - No ‘corridor’ is applied

– Past service cost

Post-employment benefit plans

Defined contribution plans

– Obligation limited to the amount of contributions paid to a fund

Defined benefit plans

– All other plans

– Recognise legal and constructive obligation

Defined Contribution Schemes

• Defined contribution = contribution linked

– Recognise cost based on monthly obligation

– Actuarial and investment risk rest with employee

Defined contributionplans

• Expense recognised = contribution paid and payable

• Accrue cost as service rendered

• Shortfall / excess of contribution payable over amount paid is recognised as liability / asset

• Disclose amount recognised as expense

Defined Benefit Scheme

• Defined benefit = performance linked

– Recognise cost based on pension payment obligation: x% of Final Salary

– Actuarial and investment risks rest with employer

Why is the accounting for defined benefit plansmuch more complicated?

Accounting complexity in

defined benefit plans

• Demographic assumptions, mainly based on past experience

e.g.:

– Mortality rates

– Rate of employee turnover, disability, early retirement

• Financial assumptions, based on market expectation

e.g.:– Discount rate and Expected Rate of Return on assets

– Future salary and benefit levels

Defined benefit plans

• Defined benefit obligation determined using actuarial techniques and discounting

• Plan assets valued at fair value

• Determine past service costs, if any

• Determine actuarial gains/losses to be recognised, if any

2011 amendments to Defined Benefit Plan Accounting

• Recognition — the elimination of the option to defer the recognition of gains and losses resulting from defined benefit plans (the corridor approach).

• Presentation — the elimination of options for the presentation of gains and losses relating to those plans.

• Disclosures — the improvement of disclosure requirements that will better reflect the characteristics of defined benefit plans and the risks arising from those plans.

IAS 19: Old Approach

IAS 19: New (Revised) Approach

IAS 19 (Revised)

Under the new requirements, the change in the net defined benefit liability or asset is disaggregated into the following components:

• Service cost — the additional liability that arises from employees providing service during the period.

• Net interest — the interest expense on the net defined benefit liability or interest income on the net defined benefit asset.

• Re-measurements — other changes in the value of the defined benefit obligation, such as changes in estimates and other changes in the value of plan assets.

Illustration of New Components

Presentation

• Service cost and finance cost components are presented in accordance with the requirements of IAS 1 Presentation of Financial Statements, like other similar items.

• Remeasurements are presented under Other Comprehensive Income.

Disclosure

The disclosures required will make it easier for users to assess matters such as:

• The characteristics of a company’s defined benefit plans.

• The amounts recognised in the financial statements.

• Risks arising from defined benefit plans.

• Participation in multi-employer plans.

Effective Date & Transition

• Amendments are effective for periods beginning

on or after 1 January 2013

• Early adoption allowed

• Application is fully retrospective

LATEST AMENDMENT!

Background

• IASB issued this amendment as a result of some concerns about the complexity of the requirements when applied to simple contributory plans.

• The IASB has amended the requirements in IAS 19 for contributions from employees or third parties that are linked to service to simplify the requirements for such plans.

Amendment

• If the amount of the contributions is independent of the number of years of service, an entity is permitted to recognise such contributions as a reduction in the service cost in the period in which the related service is rendered, instead of attributing the contributions to the periods of service.

Amendment

• Examples of contributions that are independent of the number of years of service include:

– those that are a fixed percentage of the employee’s salary,

– a fixed amount throughout the service period or

– dependent on the employee’s age.

Amendment

• If the amount of the contributions is dependent on the number of years of service, an entity is required to attribute those contributions to periods of service using the same attribution method required for the gross benefit (ie either using the plan’s contribution formula or on a straight-line basis).

Amendment - Summary

Effective date

• Amendment is applicable for share-based payments where the grant date is on or after 1 July 2014

• Earlier application is permitted

• Disclosure of early adoption of amendments required

Disclaimer

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