Employee Benefits: IAS 19
Wiecek and Young
IFRS Primer
Chapter 25
Employee Benefits
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Related standards
IAS 19
Current GAAP comparisons
Looking ahead
End-of-chapter practice
Related Standards
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IFRS 2 Share-based payment
IAS 24 Related party disclosures
Related Standards
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FAS 87 Employers’ accounting for pensions
FAS 88 Employers’ accounting for
settlements and curtailments
FAS 106 Employers’ accounting for
postretirement benefits other than pensions
FAS 112 Employers’ accounting for
postemployment benefits
FAS 158 Employers’ accounting for defined
benefit pension and other postretirement
plans
IAS 19 – Overview
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Objective and scope
Short-term employee benefits
Post-employment benefit plans
Post-employment benefits: defined
contribution plans
Post-employment benefits: defined benefit
plans
Other long-term employee benefits
Termination benefits
IAS 19 – Objective and Scope
Accounting and disclosure requirements for
employee benefits: all forms of consideration
given by an entity in exchange for employee
services rendered
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Short-term employee benefits
Post-employment benefits
Other long-term employee benefits
Termination benefits
IAS 19 – Short-term Employee
Benefit
Short-term employee benefits – benefits other than
termination benefits that are due to be settled within 12
months after the end of the period in which the related
service is rendered
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Example:
Salaries, wages, social security contributions
Short-term compensated absences such as paid
annual and sickness leaves
Profit-sharing and bonuses
Non-monetary benefits such as medical care,
housing, etc.
IAS 19 – Short-term Employee
Benefit
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Short-term compensated absences:
Recognize a cost and liability = the undiscounted amount of
benefits expected to be paid
Some benefits accumulate
Accrue as employee provides services (e.g., paid vacation
leave)
Some do not accrue (e.g., parental leave)
Recognize cost and liability when event occurs that obligates
the entity to provide the benefit
IAS 19 – Short-term Employee
Benefits
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Profit-sharing and bonus plans:
Recognize cost and liability only when
 a legal or constructive obligation exists, and
 amount can be reasonably estimated
To reasonably estimate, must have one of the
following:
– plan has formal terms including a formula
– amount is known before F/S are authorized for
release
– past practice provides clear evidence of amount
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IAS 19 – Post-employment Benefit Plans
Post-employment benefit plans – formal or
informal arrangements to provide benefits after
employment, such as pension benefits and postemployment medical care
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Two types of plan:
defined contribution plan: employer makes
specific contributions, employee benefits =
whatever has accumulated
defined benefit plan: employer promises to pay
a post-employment benefit, if not enough
funds have accumulated, employer is
responsible for the difference
IAS 19 – Post-employment Benefit Plans
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IAS 19 – Post-employment Benefits:
Defined Contribution Plans
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- Relatively straightforward
- Liability is recognized only for contributions
unpaid at the end of the period
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- Expense recognized in same period as
services are rendered
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IAS 19 – Post-employment Benefits:
Defined Benefit Plans
- Complex
 - Accounting measures depend on actuarial
assumptions far into the future
 - Obligations are settled many years after
service is provided by employees – need to
take time value of money into account
 - Many plans are funded and rely on
investment returns to grow
 - Employer underwrites actuarial and
13 investment risks
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IAS 19 – Post-employment
Benefits: Defined Benefit Plans
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Accounting building blocks
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Present value of a defined benefit obligation – the
discounted present value of the expected future
payments required to settle an entity’s obligation
resulting from employee service accumulated to
date
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Plan assets – assets held by the long-term
employee benefit fund that exists solely to pay
employee benefits as they fall due.
IAS 19 – Post-employment
Benefits: Defined Benefit Plans
Changes in the PV of the defined benefit obligation (DBO) – based on
projected salaries:
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Present value of the obligation, beginning of period
+
Current period’s service cost
+
Interest cost on the outstanding obligation for the period
+/Past service costs from plan amendments in the period
Benefits paid under the plan in the period
+/+/Actuarial gains (-) and losses (+) in the
period_______________
=
=
Present value of the obligation, end of
period________________
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IAS 19 – Post-employment
Benefits: Defined Benefit Plans
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PV of the defined benefit obligation depends
on:
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actuarial assumptions (mortality rates, employee
turnover, dependants)
financial assumptions (discount rate, future salary
levels, future medical costs)
Discount/interest rate = end-of-period market
yield on high-quality corporate bonds with
terms that correspond to obligation
IAS 19 – Post-employment
Benefits: Defined Benefit Plans
Current service cost = PV of benefits earned for
service in current period
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Past service cost (PSC) = change in PV of DBO from
introducing plan that includes benefits for past service
or from a change in the benefits payable related to past
service under existing plan
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Actuarial gains/losses = effects of changes in
actuarial assumptions and experience adjustments for
difference between previous estimates and what
actually occurred.
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IAS 19 – Post-employment
Benefits: Defined Benefit Plans
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Changes in the FV of plan assets:
Fair value of plan assets, beginning of period
+
+/-
=
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Contributions from employer/employees in the period
Actual return on plan assets in the period
Benefits paid under the plan in the period__________
Fair value of plan assets, end of period____________
IAS 19 – Post-employment
Benefits: Defined Benefit Plans
Actual return on plan assets = interest,
dividends, other income and realized and
unrealized gains and losses on assets held in
plan
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Expected return on plan assets = return used
by actuary in determining funding requirements
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IAS 19 – Post-employment
Benefits: Defined Benefit Plans
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Benefit cost to recognize each period
Current service cost for the period
+ Interest cost for the period
Expected return on plan assets for the period
+/- Actuarial gain (-) or loss(+) amortized in the period
+/- Past service cost recognized in the period
= Post-employment benefit cost to profit or loss
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IAS 19 – Post-employment
Benefits: Defined Benefit Plans
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Benefit cost variables taken from
PV of PBO, and
Fund assets
Information in working papers for actuarial gain/loss
and PSC
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Amortization of actuarial gain/loss – use corridor method
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PSC
– for vested benefits, expense in period
– for unvested benefits, amortize to expense on straightline basis over average period until vested
IAS 19 – Post-employment
Benefits: Defined Benefit Plans
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Actuarial gains/losses: 2 options
1.
2.
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recognize all actuarial gains/losses in OCI when they
occur, and then directly to retained earnings – not through
P&L
do not recognize/amortize unless accumulated net
actuarial gain/loss is significant*; if significant, amortize
excess amount to expense over average working lives of
employees in plan
*significant: if at the first of the period, it is more than
10% of the larger of the beginning of the period PV
of PBO and the fund assets
IAS 19 – Post-employment
Benefits: Defined Benefit Plans
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Entries:
Dr. Employee benefit expense
Cr. Defined benefit liability
To record expense and recognize liability.
$X
Dr. Defined benefit liability
Cr. Cash
To record contribution to plan assets.
$Y
$X
$Y
IAS 19 – Post-employment
Benefits: Defined Benefit Plans
Balance in Defined Benefit Liability on balance sheet can be
reconciled to building blocks:
Present value of the defined benefit obligation
Fair value of the plan assets
=
Funded status of the plan
+/Net unrecognized actuarial gains (+) or losses (-)
Unrecognized past service costs
=
Defined benefit liability
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IAS 19 – Post-employment
Benefits: Defined Benefit Plans
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Extensive disclosures required
Description of plans and accounting policies
Reconciliation of changes in PV of PBO and fund
assets
Reconciliation of B/S account to funded status
Components of and total expense
Information about plan assets and actuarial
assumptions, sensitivity analysis, historical data
Best estimate of expected contribution to plan in
year after B/S date
IAS 19 – Other Long-term
Employee Benefits
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Examples:
long-term disability benefits, long-service or
sabbatical leaves, deferred compensation (>12
months)
similar to post-employment benefits, but with less
measurement uncertainty
all aspects recognized in expense in year; no defer
and amortize
IAS 19 – Other Long-term
Employee Benefits
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IAS 19 – Termination Benefits
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Termination benefits – benefits payable as a result of:
ending an employee’s employment before normal retirement
date, or
employee accepts voluntary termination in exchange for
benefits
Recognize liability and expense only when entity is
demonstrably committed to plan. Plan sets out:
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location, function and approximate number of employees being
terminated;
b) termination benefits to be provided for each job classification or
function; and
c) when the plan will be implemented
a)
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Entire cost is expensed when entity is committed to plan
Current GAAP Comparisons
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Pages 37 to 38 of 49 of
http://www.ey.com/Global/assets.nsf/International/IFRS_US_GAAP_
vs_IFRS/$file/US_GAAP_vs_IFRS.pdf
 Pages 110 to 115 of 164 of
http://www.kpmg.co.uk/pubs/IFRScomparedtoU.S.GAAPAnOverview(2008).
pdf
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Looking Ahead
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IAS 19 on IASB current agenda
Goal - issue interim standard with significant
improvements by 2011
March 2008 Discussion Paper (DP) issued –
limited scope
Exposure Draft expected in late 2009
After DP issues resolved, second phase of
project will begin
Looking Ahead
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All changes in plan assets and benefit obligation should be
recognized when incurred
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No need to separately recognize expected return on
plan assets
All past service cost should be recognized in
expense when plan amended
Variety of presentation approaches for components
of defined benefit expense – IASB seeking input
New definitions needed for post-employment
benefits and defined benefit plans
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Tentative decisions made by IAS Board
End-of-Chapter Practice
25-1 IAS 19 applies to employee benefits including
short-term employee benefits, post-employment
benefits, other long-term employee benefits, and
termination benefits.
Instructions
(a) What
differentiates each type of employee benefit that IAS
19 applies to?
(b) Identify the general principles evident in IAS 19 that underlie
accounting for employee benefits.
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End-of-Chapter Practice
25-2 Quayot Corp. (QC) is provided with the following information related to its defined benefit
pension plan for the current year.
$
Defined benefit obligation, Jan. 1
80
Plan assets, Jan. 1
64
Contribution to the plan assets
11
Current service cost
9
Actual return on plan assets
2
Expected return on plan assets
6
Past service cost recognized (amortized)
5
Pension benefits paid
4
Discount rate
10%
Net actuarial losses in current year, benefit obligation
1
Net actuarial losses in current year, plan assets
4
QC follows a policy of amortizing (i.e. ,recognizing) the minimum amount of actuarial gains and
losses allowed under IAS 19 in determining pension benefit expense. There were no accumulated
actuarial gains or losses at the beginning of the current year. The cost of past service benefits
granted early in the current year was $8, of which $5 is recognized. To simplify, assume all other
transactions and events affecting the obligation and plan assets take place at the end of the period.
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End-of-Chapter Practice
25-2 Instructions
(a) Prepare a reconciliation of the opening to closing balances for
the current year for the pension benefit obligation and for the
plan assets.
(b) Determine pension benefit expense for the current year.
(c) If the balance in the pension benefit liability account is $16 at
the beginning of the year, what is its ending balance?
(d) If QC had chosen different, but acceptable, GAAP policies for
calculating its pension expense and liability, what pension
expense would have been reported?
(e) If the changes proposed in the IASB Discussion Paper issued in
2008 are accepted and IAS 19 is amended, identify how your
answers to (a) and (b) above would differ.
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End-of-Chapter Practice
25-3 In this chapter, flag icons identify areas where
there are GAAP differences between IFRS
requirements and national standards.
Instructions
Access the website(s) identified on the inside back
cover of this book, and prepare a concise summary
of the differences that are flagged throughout the
chapter material.
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