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ANNUAL IFRS WEEK

• Employee Benefits ( IAS 19)

Objectives and scope

• Accounting and disclosure of

Short term Post employment

employee benefits benefits

Other long term Termination

employee benefits benefits
 The Objective of IAS 19
 The objective of this Standard is to prescribe:
(a) the accounting; and

(b) disclosure for employee benefits.

 The Standard requires an entity to recognise:

(a) a liability when an employee has provided service in

exchange for employee benefits to be paid in the future; and

(b) an expense when the entity consumes the economic benefit

arising from service provided by an employee in exchange for
employee benefits.
 The Scope of IAS 19
 Applied by an employer in accounting for all employee benefits, except
 those to which IFRS 2 Share-based Payment applies.

 An employee may provide services to an entity on a full time, part time,

permanent, casual or temporary basis. For the purpose of this Standard,
employees include directors and other management personnel (Para 6).

 The issuance of shares or rights to shares requires an increase in a

 component of equity. IFRS 2 requires the offsetting debit entry to be expensed
 when the payment for goods or services does not represent an asset.

 Employee benefits are all forms of consideration given by an entity in exchange

 for service rendered by employees.
 Employee benefits include:
(a) short-term employee benefits, such as wages, salaries and social security
contributions, paid annual leave and paid sick leave, profit-sharing and bonuses
(if payable within twelve months of the end of the period) and non-monetary
benefits (such as medical care, housing, cars and free or subsidised goods or
services) for current employees;

(b) post-employment benefits such as pensions, other retirement benefits, post-

employment life insurance and post-employment medical care;

(c) other long-term employee benefits, including long-service leave or

sabbatical leave, jubilee or other long-service benefits, long-term disability benefits
and, if they are not payable wholly within twelve months after the
end of the period, profit-sharing, bonuses and deferred compensation; and

(d) termination benefits: payable because of a decision to terminate an employee’s

employment before the normal retirement date or an employee’s decision to accept
voluntary redundancy in exchange for those benefits.
 Short term employee benefits

Examples

Definition Accounting treatment

 Recognition and measurement: All short-term employee
benefits

Short-term employee benefits are employee benefits (other than termination

benefits) which fall due wholly within twelve months after the end of the period in
which the employees render the related service.

When an employee has rendered service to an entity during an accounting period,

the entity shall recognise the undiscounted amount of short-term employee
benefits expected to be paid in exchange for that service:

(a) as a liability (accrued expense), after deducting any amount already paid. If the
amount already paid exceeds the undiscounted amount of the benefits, an entity
shall recognise that excess as an asset (prepaid expense) to the extent that the
prepayment will lead to, for example, a reduction in future payments or a cash
refund; and

(b) as an expense, unless another Standard requires or permits the inclusion of

the benefits in the cost of an asset (see, for example, IAS 2 Inventories and IAS
16 Property, Plant and Equipment).
Definitions

Accumulating

Short term
compensated
absences

Non-accumulating
Accumulating compensated absences

• Accumulating absences relate to, for example, paid holiday

allowances that can be carried over into the next accounting
year.

• These should be expensed in the years they are earned by

the employee and the expected cost of any unused amount
that has been accumulated at the balance sheet date should
be shown as a liability.
Non Accumulating compensated absences

• Non accumulating absences are things such as holiday that

employees can take during the year, but lose if they have not
taken it by the accounting year end, or to a compensated
sick leave allowance per year, where the employee has not
used the full allowance (and it cannot be carried over).
• These short term compensated allowances are expensed as
they arise, and no liability is created at the year end.
• Where, however, the company’s accounting year and benefit
year do not coincide, such that, at the accounting year end
employees can carry forward the leave, it is treated as
‘Accumulating absence’.
Profit sharing and bonus plans
• An entity shall recognise the cost of profit sharing and
bonus payments when a legal or constructive obligation
arises, and when a reliable estimate of the obligation can
be made.
• An obligation arises when the employer has no realistic
alternative to making the payments. Even if an entity has
no legal obligation to pay, if it has a history of such
payments it is under a constructive obligation to pay.
• Profit sharing and bonus payments which are not fully
payable within twelve months of the accounting year end
are treated as long term employee benefits

IAS 19 - EMPLOYEE BENEFITS

Expected cost of profit-sharing
and bonus payments
• A profit-sharing plan requires K Ltd. to pay a specified
proportion of its profit for the year to employees who serve
throughout the year. If no employees leave during the year,
the total profit-sharing payments for the year will be 3% of
profit. The entity estimates that staff turnover will reduce the
payments to 2.5% of profit.

• The entity recognises a liability and an expense of 2.5% of

profit.
 Post employment benefits

Defined Defined
contribution plans benefit plans
 Post employment benefits
Post employment benefits include pensions and any other post
employment benefits such as post employment life insurance and
post employment health care.

Post employment benefit plans are classed as either defined

benefit or defined contribution. Under defined contribution plans
the entity agrees to contribute to a fund that is separate from the
company (a rate usually specified in the scheme rules) and the
amount of post retirement benefits the employee receives is
determined by these contributions and the return made on them.
The employer must have no contractual or constructive obligation
to make further contributions to the fund. Risks, therefore, lie with
the employee, not the employer.
IAS 19 - EMPLOYEE BENEFITS
 Post employment benefits
Defined benefit plans are defined as post employment
plans other than defined contribution plans.

Under defined benefit plans, the employer is obliged to

provide the agreed benefits to current and former
employees. The risks lie with the entity, in particular the
risk that the benefits will cost more than the entity
expected. All unfunded post employment benefits are
‘defined benefit’.

IAS 19 - EMPLOYEE BENEFITS

Defined contribution plans
Accounting Treatment

Expense
when due Disclosure
Defined contribution plans
Accounting for defined contribution schemes is relatively
straight forward. An expense is recognised for the
contributions when due, and any unpaid expense shown
as a liability, any overpayment an asset.

The amount recognised as an expense for defined

contribution plans in the period should be disclosed, as
should, where required by IAS 24 ‘Related party
transactions’, information about contributions into a
defined contribution plan for key management personnel.

IAS 19 - EMPLOYEE BENEFITS

Post retirement benefits-defined benefit
plans

Value on balance sheet

FV of scheme assets X
PV of liabilities (X)
Actuarial gains/losses not
yet recognised (X)/X
Past service costs not
yet recognised X
X
Components of change in value accounted for separately
 Post retirement benefits-defined benefit
plans

• Under a defined benefit scheme the (net) surplus or deficit on

the pension fund is shown on the entity’s balance sheet. If
there is an excess of liabilities over assets a deficit is
recognised, vice versa a surplus.

• The carrying value of the surplus or deficit is the fair value of

the schemes’ assets, less the present value of the schemes’
liabilities, plus or minus the actuarial gains/losses and past
service costs not yet recognised. We will look at each of these
components separately.
IAS 19 - EMPLOYEE BENEFITS
Determining the value of plan assets

Fair value?

Market price if No market price?

available Use estimate
Benefits earned -
Projected Unit Credit Method

• Example
A new employee has current salary of Ksh. 50,000,
expected to increase at a rate of 4% per annum over the
next 5 years. The employee is a member of the firm’s
defined benefit scheme, and is entitled to a lump sum on
retirement (expected to be in 5 years) of 2% of final
salary for each year of service. A discount rate of 5% is
applied.
• Calculate the obligation at the end of each year
Calculations

Salary at end of year 5

Ksh. 50,000 x 1.045=Ksh. 60,833

Benefit attributable to each year

Ksh. 60,833 x 2%=Ksh.1,217
Calculations (continued)
• Benefits attributable to years 1-5

Year 1 2 3 4 5

Benefit attributed to

- Prior years 0 1217 2434 3651 4868

- Current year 1217 1217 1217 1217 1217

Current and prior years 1217 2434 3651 4868 6085

Calculations (continued)

Year 3 example
Present value of obligation at Ksh3,651 = Ksh.3,154
end of year 3 1.053

Present value of obligation at Ksh.2,434 = Ksh.2,208

1.052
end of year 2

Movement Ksh.946
Interest cost Ksh.110

Service cost (balance) Ksh.836

 Recognition in the income statement

• Current service cost

• Net Interest on the Net Defined Benefit Liability
(Asset)
• Past service costs
Other comprehensive income
• Actuarial gains and losses (to the extent they are
recognised)
Service cost

Current Past

Due to employee Due to change in

working extra year benefits
Net Interest on the Net Defined Benefit Liability
(Asset)

Interest cost Expected return

High yield High yield

interest rate interest rate
Actuarial gains and losses

• Experience adjustments

• Changes in assumptions

• Recognition
Disclosure for defined benefit schemes

• Accounting policy
• Description of plan
• Reconciliation of assets and liabilities in the balance
sheet
• Fair value of plan assets
• Reconciliation of movement in liabilities
• Breakdown of income statement expense
• Actual return on plan assets
• Actuarial assumptions
Multi-employer plans

• Defined benefit

• Defined contribution

• Disclosures
Other long term employee benefits

Recognition and
Examples measurement Disclosure
 Termination benefits
• Termination benefits are treated separately from other employee benefits,
as the obligation to pay them arises from an employee’s termination of
employment rather than service.
• Termination benefits should be recognised as an expense and a liability
when the entity is demonstrably committed to either terminating the
employment or providing termination benefits as a result of an offer made to
encourage voluntary redundancies. This demonstrable commitment is
evidenced by a detailed formal plan from which the entity has no realistic
option of withdrawing.
• If the benefits are to be paid more than twelve months after the balance
sheet date the liability should be discounted back using a discount rate
determined by reference to market yields on high quality bonds.
• Disclosure of termination benefits should be in accordance with IAS 1, 37
and 24.
 General Changes made by IAS 19 33

Full Recognition of Deficit (Surplus) on Balance Sheet -1/3

• Under IAS 19 some of the effect of actuarial gains and losses can be
excluded from the net defined benefit liability (asset) by using the
corridor approach and the effect of unvested past service costs is
recognized on the average vesting period.
• Under IAS 19 (Revised) all such items to be recognized immediately
(actuarial gains and losses in other comprehensive income for
retirement benefits and in profit or loss for other long term employee
benefit and past service cost in profit or loss within service cost)
• Therefore, the net defined benefit (liability) recognized on the balance
sheet will equal the actual deficit (surplus) in an entity’s defined benefit
plan.
 General Changes made by IAS 19 34

Full Recognition of Deficit (Surplus) on Balance Sheet – 2/3

• The application of IAS 19 (Revised) will impact the current equity
position and future profit or loss of entities currently using the corridor
approach
• Due to declining financial markets, decreasing discount rates and
changing mortality rates in recent years, in general most companies
using the corridor approach have disclosed unrecognized actuarial
losses. These entities therefore present smaller balance sheet liability
(or larger balance sheet asset) than the actual deficit or surplus in the
defined benefit plan
• On application of IAS 19 (revised), all cumulative unrecognized
actuarial gains and losses will be recognized in retained earnings
 General Changes made by IAS 19 35

Full Recognition of Deficit (Surplus) on Balance Sheet – 3/3

• If unrecognized actuarial losses are in place, application of IAS 19
(Revised) will decrease the equity position of the entity, leading to
possible knock on effects such as issues with loan covenants or
potential credit granting to the entity.
• Also, OCI and profit or loss will become more volatile due to immediate
recognition of actuarial gains and losses and past service cost when
compared to IAS 19.
 General Changes made by IAS 19 36

Introduction of Net Interest on the Net Defined Benefit Liability

(Asset) – 1/2
• Under IAS 19 the expected return on plan assets recognized in profit
or loss is determined based on the expected rate of return on
investment over the entire life of the underlying obligation.
• Under IAS 19 (Revised) the net interest income is introduced as the
equivalent of the expected return on the plan assets under IAS 19.
The net interest income is included in the net interest on the defined
benefit liability (asset) which is the counterpart under IAS 19 revised of
the interest cost and the expected return on plan assets (IAS 19)
• The expected return under IAS 19,depends on the actual investment
portfolio and is typically not equal to the discount rate applied for the
determination of scheme liabilities.
 General Changes made by IAS 19 37

Introduction of Net Interest on the Net Defined Benefit Liability

(Asset) – 2/2
• In addition, while under IAS 19 all administration costs were deducted
from expected return (in profit or loss), under IAS 19 (Revised) only the
(administration) costs relating to managing plan assets are deducted
from actual return in OCI and all other administration costs should be
recognized in profit or loss when they occur.
 General Changes made by IAS 19 38

Change in the Presentation of the Defined Benefit Cost – 1/2

• Under IAS 19, the pension expense recognized in profit or loss
consists of several components, such as current service cost, interest
cost and expected return on plan assets, as well as the recognition of
actuarial gains and losses.
• IAS 19 (Revised) is more prescriptive and introduces the term “defined
benefit cost”. The defined benefit cost comprises all cost (income)
during a reporting period that lead to the development of the net
defined liability (asset) excluding contributions paid.
 General Changes made by IAS 19 39

Change in the Presentation of the Defined Benefit Cost – 2/2

• Service cost (current and past service cost and gains and losses on
curtailments and settlements ) and net interests are recognized in
profit or loss
• Re-measurements (actuarial gains and losses, any changes in the
effect of the assets ceiling and difference between the expected net
interest income and the actual return) are recognized in other
comprehensive income for retirement benefits and in profit or loss for
other long term employee benefits.
 General Changes made by IAS 19 40

Introduction of More extensive disclosure requirements in

Financial Statements – 1/3
IAS 19 (Revised) reporting entities should disclose information that:
• Explains the characteristics of and risks associated with its defined
benefit plans;
• Identifies and explains the amounts in its financial statements arising
from its defined benefit plans; and
• Describes how its defined benefit plans may affect the amount, timing
and uncertainty of the entity’s future cash flows.
 General Changes made by IAS 19 41

Introduction of More extensive disclosure requirements in

Financial Statements – 2/3
The disclosure requirements are more extensive than the disclosure
requirements in IAS 19 and will provide additional insight into the
pension situation at the entity.
Narrative descriptions of e.g. the regulatory framework, funding
arrangements, potential (non-) financial risks and/or asset ceiling tests
should be included in the financial statements according to IAS 19
(revised)
 General Changes made by IAS 19 42

Introduction of More extensive disclosure requirements in

Financial Statements – 3/3
Examples of these more extensive disclosure requirements are:
• The disclosure of the nature of the benefits
• A description of the risks to which the employee benefit plan exposes the entity
• The results of a sensitivity analysis that indicates the influence of certain assumptions on
the outcome of the pension valuation
• A narrative description of funding arrangements
• Information about the maturity profile including the duration of the pension liabilities
• Entities that participate in a multi-employer defined benefit plan should for example disclose:
– The extent to which the entity is liable for other entities’ obligations;
– qualitative information about agreed deficit/ surplus allocation on wind –up or withdrawal.
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Q&A