The IFRS for SMEs
Topic 3.1
Section 20 Leases
Section 21 Provisions and
Contingencies
Section 28 Employee Benefits
© 2011 IFRS Foundation
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The accounting requirements applicable to small and medium-sized entities
(SMEs) are set out in the International Financial Reporting Standard (IFRS)
for SMEs, which was issued by the IASB in July 2009.
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© 2011 IFRS Foundation
The IFRS for SMEs
Section 20 Leases
© 2011 IFRS Foundation
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Section 20 – scope
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A lease is an agreement whereby the
lessor conveys to the lessee in return for
payment or a series of payments the right
to use an asset for an agreed period of
time
• Section 20 covers accounting and
reporting for most leases (see paragraphs
20.1–20.3 for exceptions and inclusions)
© 2011 IFRS Foundation
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Section 20 – classification of leases
• A lease is classified
– a finance lease if it transfers substantially
all the risks & rewards incidental to
ownership
– an operating lease if it does not transfer
substantially all the risks & rewards
incidental to ownership
• Use judgement considering all facts &
circumstances to classify leases
– operating lease if lessor retains significant
risks & rewards of ownership
–substance of finance lease is similar to
the purchase of an asset on credit.
© 2011 IFRS Foundation
Section 20 – classification of leases continued
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• Situations that individually or in
combination normally indicate a finance
lease:
– lease transfers ownership of the asset to
lessee
– from inception lessee reasonably certain to
exercise bargain purchase option
– lease term is for the major part of asset’s
economic life
– at inception PV of MLPs = substantially all
asset’s fair value
– specialised asset (only lessee can use
without major modifications)
© 2011 IFRS Foundation
Section 20 – classification of leases continued
• Situations that individually or in
combination could indicate a finance
lease
– lessee can cancel the lease but
compensates the lessor’s for associated
losses
– gains or losses from the fluctuation in the
residual value of the leased asset accrue
to the lessee
– lessee can continue the lease for a
secondary period at a rent that is
substantially lower than market rent
© 2011 IFRS Foundation
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Section 20 – lease classification Ex
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Ex 1: On 1/1/20X1 enter into 5-yr
non-cancellable lease over a machine.
Machine’s cash cost = 100,000, economic
life = 10 yrs and residual value = 0.
Annual lease payments on 31/12: 4 ×
23,000 & 23,539 at end of yr 5 when
ownership transfers to the lessee.
The interest rate implicit in the lease is
5% p.a. which approximates lessee’s
incremental borrowing rate.
© 2011 IFRS Foundation
Section 20 – lease classification Ex
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• Ex 2: Same as Ex 1 except ownership of
the machine does not automatically
transfer to the lessee at the end of the
lease. Instead, the lessee has an option
to acquire the machine from the lessor
on 1/1/20X6 for CU1.
• Ex 3: Same as Ex 1 except economic life
of the machine is five years and
ownership of the machine does not
transfer to the lessee at the end of the
lease.
© 2011 IFRS Foundation
Section 20 – lease classification Ex
10
• Ex 4: Same as Ex 1 except ownership
does not transfers to lessee at the end of
the lease. Instead lessee has an option
to continue the lease asset for a further 5
years at a rent of CU1 per year.
• Ex 5: Same as Ex 1 except ownership
transfers to the lessee at the end of the
lease for a variable payment equal to the
asset’s then fair value (instead of 23,539).
© 2011 IFRS Foundation
Section 20 – lease classification Ex
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• Ex 6: Tripartite lease agreement.
– Lessor transfers substantially all risks
& rewards to 2 unrelated parties:
–the lessee obtains the right of use of the
leased asset for a period of time; and
–the other party contracts to acquire the
leased asset from the lessor at the end
of the lease term at a fixed price.
© 2011 IFRS Foundation
Section 20 – lease classification Ex
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• Ex 6 continued:
Lease classification:
– lessor = finance lease
– lessee = operating lease
– other party has firm commitment to acquire
asset
© 2011 IFRS Foundation
The IFRS for SMEs
Lessee
(finance lease & operating lease)
© 2011 IFRS Foundation
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Section 20 – lessee: finance lease
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• Initial recognition & measurement:
– recognise assets (rights) & liabilities
(obligations) at fair value of leased
property or, if lower, the present value of
the minimum lease payments
– add to asset the lessee’s incremental
costs that are directly attributable to
negotiating & arranging a lease
© 2011 IFRS Foundation
Section 20 – lessee: finance lease
continued
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• Subsequent measurement:
– apportion minimum lease payments
between finance charge & liability using
effective interest method
– depreciate asset in accordance with
relevant section (eg Section 17 PP&E)
© 2011 IFRS Foundation
Section 20 – lessee: finance lease Ex
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Ex 7: Same as Ex 1.
Finance lease obligation amortisation table:
1 Jan
Finance
cost
Payment
31 Dec
20X1
100,000
5,000
(23,000)
82,000
20X2
82,000
4,100
(23,000)
63,100
20X3
63,100
3,155
(23,000)
43,255
20X4
43,255
2,163
(23,000)
22,418
20X5
22,418
1,121
(23,539)
–
© 2011 IFRS Foundation
Section 20 – lessee: finance lease Ex
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Ex 7 continued:
1/1/20X1 (initial recognition) recognise:
– asset (PP&E) 100,000; and
– liability (finance lease obligation) 100,000
For the year ended 31/12/20X1 recognise:
– allocate payment of 23,000 (5,000 finance
cost in profit or loss & 18,000 repayment of
finance lease obligation)
– CU10,000 depreciation expense in profit or
loss and as a reduction to the asset
© 2011 IFRS Foundation
Section 20 – lessee: finance lease
continued
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Disclose:
• For each class of asset, the net carrying
amount at reporting date
• Total FMLPs on reporting date, showing
due (i) in < 1 year; (ii) > 1 year but < 5 yrs;
(iii) in > 5 years
• General description of significant leasing
arrangements
• Also see Sections 17, 18, 27 and 34.
© 2011 IFRS Foundation
Section 20 – lessee: operating lease
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• Recognition & measurement:
– expense lease payments on straight-line
basis unless:
– another systematic basis is more
representative of the user’s benefit; or
– payments are structured to increase in
line with expected general inflation
(based on published indexes or
statistics).
© 2011 IFRS Foundation
Section 20 – operating lease examples 20
• Ex 8: On 1/1/20X1 A entered into a 5-year
non-cancellable operating lease over a
building.
Rentals X1–X4 = 0. Rental X5 = 5,000.
• Ex 9: Same as Ex 8 except lessor agrees to
pay the lessee’s relocation costs (ie 500)
as an incentive to the lessee for entering
into the new lease
• Ex 10: Operating lease payments increase
by expected CPI (10% p.a.) to compensate
the lessor for expected inflation.
X1 = 1,000; X2 = 1,100; X3 = 1,210; etc
© 2011 IFRS Foundation
Section 20 – lessee: operating lease
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Disclose:
• Total FMLPs for non-cancellable operating
leases, showing due (i) in < 1 year;
(ii) > 1 year but < 5 years; (iii) in > 5 years
• lease payments recognised as an expense
• a general description of the lessee’s
significant leasing arrangements
– including for example, information about
contingent rent, renewal or purchase
options and escalation clauses, subleases,
and restrictions imposed by lease
arrangements
© 2011 IFRS Foundation
The IFRS for SMEs
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Lessor
(finance lease & operating lease)
© 2011 IFRS Foundation
Section 20 – lessor: finance lease
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• Initial recognition & measurement:
– recognise assets held under a finance
lease (a receivable) at an amount equal
to the net investment in the lease (ie
gross investment in the lease
discounted at the interest rate implicit in
the lease). The gross investment in the
lease is the aggregate of:
– (a) the minimum lease payments
receivable by the lessor under a
finance lease, and
– (b) any unguaranteed residual value
accruing to the lessor.
© 2011 IFRS Foundation
Section 20 – lessor: finance lease
• Subsequent measurement
– recognise finance income—constant
periodic rate of return on net investment in
lease
– apply lease payments against gross
investment in the lease to reduce both the
principal & the unearned finance income.
– if indication that estimated unguaranteed
residual value used in computing the
lessor’s gross investment in lease has
changed significantly, income allocation
over lease term is revised, & reduction in
respect of amounts accrued recognised
immediately in profit/loss
© 2011 IFRS Foundation
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Section 20 – lessor: finance lease
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Other issues:
• Manufacturer or dealer lessors have 2
types of income:
– profit or loss equivalent to the profit or loss
resulting from an outright sale of the asset
being leased, at normal selling prices,
reflecting any applicable volume or trade
discounts, and
– finance income over the lease term.
• Disclosures (see paragraph 20.23)
© 2011 IFRS Foundation
Section 20 – lessor: operating lease
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• Recognition & measurement
– lease payments as income on straightline basis unless:
– another systematic basis is more
representative of the user’s benefit; or
– payments are structured to increase in
line with expected general inflation
(based on published indexes or
statistics)
• recognise other costs incurred in
earning the lease income (eg
depreciation)
© 2011 IFRS Foundation
Section 20 – lessor: operating lease
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Examples
• Ex 11: On 1/1/20X1 A entered into a 5-yr
non-cancellable operating lease over a
building.
No rentals for 4 yrs. Rental for yr-5 =
5,000.
• Ex 12: Same as Ex 11 except lease
payments increase by expected CPI (10%
p.a.) to compensate the lessor for
expected inflation. X1 = 1,000; X2 =
1,100; X3 = 1,210; etc
© 2011 IFRS Foundation
The IFRS for SMEs
Sale and lease-back transactions
(finance lease & operating lease)
© 2011 IFRS Foundation
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Section 20 – sale and leaseback
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• A sale and leaseback transaction
involves the sale of an asset and the
leasing back of the same asset.
– the lease payment & the sale price are
usually interdependent because they are
negotiated as a package
– the accounting treatment of a sale and
leaseback transaction depends on the
type of lease (finance or operating).
© 2011 IFRS Foundation
Section 20 – finance leaseback
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• Recognition of sale & finance leaseback
– the seller-lessee defers recognition of
income (ie does not recognise any
excess of sales proceeds over the
carrying amount in profit or loss
immediately)
– Deferred income is recognised in profit or
loss over the lease term
© 2011 IFRS Foundation
Section 20 – operating leaseback
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• Recognition of sale & operating leaseback
by seller-lessee
– if at FV, recognise profit or loss
immediately
– if SP < FV & lease payments not adjusted,
recognise profit or loss immediately
– if SP < FV & lease payments are adjusted,
defer & amortise such loss in proportion to
the lease payments over the period for
which the asset is expected to be used.
– If SP > FV defer the excess over fair value
and amortise it over the period for which
the asset is expected to be used.
© 2011 IFRS Foundation
Section 20 – operating leaseback examples
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Ex 13: On 1/1/20X1 A sells a building (CA =
85,000) for 100,000 (fair value) & rents it
back under a 3-yr operating lease.
Lease rentals = 9,500 (payable yearly in
arrears).
On 31 January 20X1 the remaining
economic life of the building was 25 years
with nil residual value.
© 2011 IFRS Foundation
Section 20 – operating leaseback examples
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Ex 14: Same as Ex 13 except SP = 95,000
& rentals = 7,800.
Ex 15: Same as Ex 13 except SP = 80,000
& rentals = 2,800.
© 2011 IFRS Foundation
The IFRS for SMEs
Section 21
Provisions & Contingencies
© 2011 IFRS Foundation
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Section 21 – scope
• Section 21 applies to accounting &
reporting of provisions, contingent
liabilities & contingent assets
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except those provisions covered by
other sections including:
– leases (Section 20). However, Section 21
covers onerous operating leases
– construction contracts (Section 23)
– employee benefit obligations (Sec. 28)
– income tax (Section 29)
© 2011 IFRS Foundation
Section 21 – provisions
Provisions are liabilities of uncertain
timing or amount.
A liability is a present obligation…
A present obligation may be either
–legal (binding contract or statutory
requirement)
–constructive (derives from an entity’s
actions which the entity has no realistic
alternative to settling)
© 2011 IFRS Foundation
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Section 21 – examples provisions
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• Ex 1*: Waste from A’s factory
contaminated the groundwater. Lawsuit:
local community seek compensation for
damages to health from contamination.
A acknowledges wrongdoing. Court is
deciding extent of the compensation.
Lawyers expect ruling in +2 yrs &
compensation in the range of
CU1,000,000 to CU30,000,000.
* see example 1 in Module 21 of the IFRS Foundation training material
© 2011 IFRS Foundation
Section 21 – examples provisions
continued
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• Ex 2*: Waste from A’s factory
contaminated the groundwater. Required
by law to restore the environment.
Estimates restoration cost between
1,000,000 & 15,000,000. Unsure of period
to complete restoration.
• Ex 3*: A manufacturer gives warranties to
the purchasers of its goods. Warranty =
make good, by repair or replacement,
manufacturing defects that become
apparent within 3 years of sale.
*see example with the same number in Module 21 of the IFRS Foundation training material
© 2011 IFRS Foundation
Section 21 – examples not provisions
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• Ex 4*: ‘provision’ for self-insurance
• Ex 5*: Ski-resort operator operates in a
very cyclical business, with ‘good years’
and ‘bad years’ depending primarily on
the weather. To reduce earnings
volatility, it recognises ‘provisions’ in
‘good years’ to reverse in ‘bad years’.
• Ex a: ‘provision’ for depreciation
• Ex b: ‘provision’ for doubtful debts
* see example with the same number in Module 21 of the IFRS Foundation training material
© 2011 IFRS Foundation
Section 21 – example constructive
oblig.
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• Ex 12*: Waste from A’s factory
contaminated the groundwater. A is not
required by law to restore the
contaminated environment & there is no
court case. However, in the reporting
period the entity publicly announced that
it would restore the contaminated
environment within the next 12 months.
* see example 12 in Module 21 of the IFRS Foundation training material
© 2011 IFRS Foundation
Section 21 – recognition of provisions
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• Recognise a provision when:
– the entity has an obligation at the reporting
date as a result of a past event;
– it is probable (ie more likely than not) that
the entity will be required to transfer
economic benefits in settlement; &
– the amount of the obligation can be
estimated reliably.
Use of estimates is essential part of
preparing financial statements and does
not undermine their reliability.
© 2011 IFRS Foundation
Section 21 – measurement of
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provisions
• Measure provision at best estimate of the
amount required to settle the obligation
at the reporting date = amount an entity
would rationally pay to settle the
obligation at the end of the reporting
period or to transfer it to a third party at
that time.
• Review provisions at each reporting date
& adjust them to reflect the current best
estimate at that reporting date.
– unwinding of the discount is a finance cost
© 2011 IFRS Foundation
Section 21 – best estimate
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• If large population of items, best estimate
reflects probability weighting of all possible
outcomes.
• If single obligation, best estimate =
adjusted individual most likely outcome
• Present value using pre-tax discount rate/s
that reflect current market assessments of
the time value of money (& risks specific to
the liability if not already reflected in
estimated cash flows).
© 2011 IFRS Foundation
Section 21 – examples measurement
•
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Ex 14*: A has 1,000 units of a product sold with
active warranties (ie A will repair defects found
up to 6 months after sale).
Probabilities & repair cost: major defect = 5%
chance of CU400 repair; minor defect = 20%
chance of CU100 repair; 75% chance of no
defects.
• Best estimate (expected value) = CU40,000
Calculation: (75% x 1,000 units x nil) + (20% x 1,000
units x CU100) + (5% x 1,000 units x CU400)
* see example 14 in Module 21 of the IFRS Foundation training material
© 2011 IFRS Foundation
Section 21 – examples measurement
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• Ex 15*: Personal injury lawsuit brought by
customer. Lawyers estimate 30% chance
compensation = CU2,000,000 & 70% chance
= CU300,000. Ruling expected in 2 years.
Discount rate = 4% per year (ie 2-year
government bonds = 5% less 1% risks
specific to liability).
Individual most likely outcome = CU300,000.
Because only other possible outcome is higher, the
best estimate to settle the obligation at 31/12/20X1
will be higher than PV of the most likely outcome of
CU300,000, eg PV of CU810,000 at 4% =
±CU748,890
* see example 15 in Module 21 of the IFRS Foundation training material
© 2011 IFRS Foundation
Section 21 – example remeasurement
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• Ex 25*: Provision for a lawsuit = CU40,000 at
31/12/20X1 & remeasured to CU90,000 at
31/12/20X2. CU3,000 of the increase =
unwinding of the discount & the remainder is
for better information becoming available.
The increase of CU50,000 will be recognised as
an expense in the determination of the entity’s
profit or loss for the year ended 31/12/20X2
– CU3,000 = finance cost
– CU47,000 = change in estimate
* see example 25 in Module 21 of the IFRS Foundation training material
© 2011 IFRS Foundation
Section 21 – provision disclosure
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For each class of provision, no comparatives
– a reconciliation showing
–CA opening & closing
–additions, incl. measurement adjustments
–charged against provision in period
–unused amounts reversed in period
– nature, expected payments (amount &
timing)
– indication of uncertainties (amount or
timing)
– amount of any expected reimbursement &
amount recognised as an asset
© 2011 IFRS Foundation
Section 21 – contingent liabilities
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A contingent liability is either:
(i) a possible but uncertain obligation; or
(ii) a present obligation that is not
recognised because it fails the
recognition criteria in paragraph 21.4.
© 2011 IFRS Foundation
Section 21 – contingent liabilities
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Do not recognise a contingent liability as
a liability (except contingent liabilities of
an acquiree in a business combination).
Contingent liabilities are disclosed
unless the possibility of an outflow of
resources is remote.
When an entity is jointly and severally
liable for an obligation, the part of the
obligation that is expected to be met by
other parties is treated as a contingent
liability.
© 2011 IFRS Foundation
Section 21 – example contingent
liability
• Ex 29*: Community is seeking
compensation from A for damages to their
health as a result of contamination believed
to be caused by A’s plant.
It is doubtful whether A is the source of the
contamination because
–many entities operate in the same area
producing similar waste & it is unclear which
entity is the source of the leak
–A has taken precautions to avoid leaks & is
vigorously defending the case.
* see example 29 in Module 21 of the IFRS Foundation training material
© 2011 IFRS Foundation
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Section 21 – example contingent
liability
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• Ex 29 continued: However, it is not certain
that A did not cause the leak & the true
offender will only become known after
extensive testing has been performed.
A’s legal counsel expects a court ruling in
approximately 2 years. If A loses the
case, compensation is likely to be in the
range of CU1,000,000 to CU30,000,000.
© 2011 IFRS Foundation
Section 21 – example contingent
liability
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• Ex 29 continued:
It may be uncertain whether the entity has
a present obligation—this is the matter
being determined by the court.
– if taking account of all of the available
evidence, it is probable that the entity will
successfully defend the court case then
the entity has a possible obligation &
hence a contingent liability.
© 2011 IFRS Foundation
Section 21 – contingent liab disclosure 53
• For each class of contingent liability unless
the possibility of any outflow is remote,
disclose, a brief description of the nature of
the contingent liability and, when
practicable:
– estimate of its financial effect (measured
like a provision);
– indication of uncertainties of amount or
timing; &
– possibility of any reimbursement.
• If impracticable to make one or more of
these disclosures, that fact shall be stated.
© 2011 IFRS Foundation
Section 21 – contingent asset
Do not recognise a contingent asset as
an asset.
Disclose a contingent asset when an
inflow of economic benefits is probable.
However, when the flow is virtually
certain, then the related asset is not a
contingent asset, and its recognition is
appropriate.
© 2011 IFRS Foundation
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Section 21 – contingent asset
disclosure
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• If an inflow of economic benefits is probable
(more likely than not) but not virtually
certain, disclose:
– a description of the nature of the
contingent assets at the end of the
reporting period, and
– when practicable without undue cost or
effort, an estimate of their financial effect
(measured using the principles set out for
measuring provisions).
• If it is impracticable to make this disclosure,
that fact shall be stated.
© 2011 IFRS Foundation
Section 21 – prejudicial disclosures
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• In extremely rare cases, disclosure of some
or all of the information required by para’s
21.14–21.16 can be expected to prejudice
seriously the position of the entity in a dispute
with other parties on the subject matter of the
provision, C liab. or C asset.
• In such cases, need not disclose the
information, but must disclose the general
nature of the dispute, together with the fact
that, & reason why, the information has not
been disclosed.
• Note: no recognition & measurement
exemption for provisions.
© 2011 IFRS Foundation
The IFRS for SMEs
Section 28
Employee Benefits
© 2011 IFRS Foundation
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Section 28 – scope
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Employee benefits (EBs) are all forms of
consideration given by an entity in
exchange for service rendered by
employees, including directors and
management.
Section 28 applies to all EBs, except for
share-based payment transactions, which
are covered by Section 26 Share-based
Payment.
© 2011 IFRS Foundation
Section 28 – types of employee benefits
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• 4 types of EBs:
– short-term employee benefits
– post-employment benefits
– other long-term employee benefits
– termination benefits
And equity compensation (see Section 26)
© 2011 IFRS Foundation
Section 28 – general recognition
criteria
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• Recognise cost of EBs to which
employees have become entitled for
service rendered to entity in reporting
period
– liability, after deducting amounts that
have been paid. Asset if prepaid EB
expense
– expense, unless another section requires
cost included in asset (for example
inventories or PP&E)
© 2011 IFRS Foundation
Section 28 – short-term employee
benefits
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• Short-term employee benefits (S/TEBs)
are wholly due within 12 months after the
end of the period in which the employees
render the related service (hereafter 12
month limitation).
– but excludes termination benefits.
© 2011 IFRS Foundation
Section 28 – short-term employee
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benefits
• Examples of S/TEBs include:
– wages, salaries & social security contrib;
– S/T compensated absences (paid annual
leave & paid sick leave) for absences
expected to occur within 12 month
limitation;
– profit-sharing & bonuses payable within
12 month limitation; &
– non-monetary benefits (such as medical
care, housing, cars and free or
subsidised goods or services) for current
employees.
© 2011 IFRS Foundation
Section 28 – measurement of S/TEBs
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• Measure S/TEBs that meet general
recognition criteria (above)
– at the undiscounted amount expected to
be paid
© 2011 IFRS Foundation
Section 28 – examples S/TEBs
64
• Ex 10*: An employee is entitled to 5 days
paid sick leave a year. Unused sick leave is
carried forward for 1 calendar year. It is
allocated on a FIFO basis. No sick leave is
expected to lapse.
Employee 1 earns 400 per working day.
Sick leave record: 4.5 days accumulated at
1/1/20X1; 2 days taken in 20X1. Salary
increase = 5% effective 1/1/20X2.
31/12/20X1 liability = CU2,100 (ie CU400 wage
rate × 1.05 increase × 5 (max) days due at
31/12/20X1 & expected to be taken in 20X2.
* see example 10 in Module 28 of the IFRS Foundation training material
© 2011 IFRS Foundation
Section 28 – examples S/TEBs
65
• Ex 13*: Same as Ex 10 except sick leave
cannot be carried forward to the next
calendar year & does not vest (ie is not paid
out in cash).
No liability at 31/12/20X1 (no obligation).
• Ex 10a: Similar to Ex 10 and Ex 13 except
sick leave is paid out in cash in January
20X2 payroll at 20X1 salary rate.
31/12/20X1 liability = CU1,200 (ie CU400
wage rate × 3 (5 earned less 2 taken) days
due at 31/12/20X1 & paid out in 20X2.
* see example 13 in Module 28 of the IFRS Foundation training material
© 2011 IFRS Foundation
Section 28 – examples S/TEBs
• Ex 17*: A pays 3% of year’s profit (before
profit sharing) to employees who serve
throughout the current year & who will
continue to serve throughout the following
year. A expects to save 10% through staff
turnover. The bonus will be paid on
31/12/20X2.
Profit for 20X1 before profit sharing =
CU1,000,000.
Liability at 31/12/20X1 & expense =
CU27,000 (ie 3% × CU1,000,000 × 90%)
* see example 17 in Module 28 of the IFRS Foundation training material
© 2011 IFRS Foundation
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Section 28 – post-employment benefits
• Post-employment benefits (PEBs) are
employee benefits (other than
termination benefits) that are payable
after the completion of employment
• Examples of PEBs include
– retirement benefits, such as pension
– other PEBs, such as post-employment
life insurance and post-employment
medical care
© 2011 IFRS Foundation
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Section 28 – post-employment benefits
68
• Arrangements whereby an entity
provides PEBs are PEB plans.
• 2 types of PEB plans:
– defined contribution plans (entity pays
fixed contributions into a separate entity
(a fund) and has no further obligations, ie
all risks with employee).
– defined benefit plans (actuarial &
investment risk (if funded) with entity).
© 2011 IFRS Foundation
Section 28 – PEBs defined contribution
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• Recognise the contribution payable for a
period as an expense, unless another
section requires the cost to be recognised
as part of the cost of an asset (eg
inventories or PP&E).
• Ex 18*: On 8/1/20X2 a retailer paid 100
contribution to a defined contribution plan
in part exchange for services performed by
the entity’s employees in December 20X1.
At 31/12/20X1 recognise CU100 liability
(accrual of PEBs) & CU100 expense in profit or
loss.
* modified from example 18 in Module 28 of the IFRS Foundation training material
© 2011 IFRS Foundation
Section 28 – PEBs defined benefit plans
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• Apply general recognition principle,
recognise:
– a liability for its obligations under defined
benefit plans net of plan assets—its
‘defined benefit liability’ (see
paragraphs 28.15–28.23).
– the net change in that liability during the
period as the cost of its defined benefit
plans during the period (see paragraphs
28.24–28.27).
© 2011 IFRS Foundation
Section 28 – defined benefit liability
71
• Measure defined benefit liability at net of:
– PV of defined benefit obligation (DBO)
– FV of plan assets (if any) out of which
the obligations are to be settled
directly
– paragraphs 11.27–11.32 provide
guidance on fair value measurement).
• If PV of DBO < FV of plan assets, plan has
a surplus. Recognise surplus as asset only
to extent recoverable through reduced
future contributions or through refunds from
the plan.
© 2011 IFRS Foundation
Section 28 – defined benefit obligation (DBO)
• PV of DBO reflects estimated amount of
benefit that employees have earned in
return for their service in the current &
prior periods
– including benefits that are not yet vested
– including the effects of benefit formulas
that give employees greater benefits for
later years of service (eg final salary).
• Significant judgements in measuring
DBO include actuarial assumptions.
© 2011 IFRS Foundation
72
Section 28 – DBO actuarial assumptions 73
• Actuarial assumptions comprise:
– demographic assumptions, eg: (i)
mortality during & after employment; (ii)
employee turnover, disability & early
retirement; (iii) proportion of plan
members with dependants who will be
eligible for benefits; & (iv) claim rates
under medical plans;
– financial assumptions, eg: (i) discount
rate; (ii) future salary & benefit levels; (iii)
for medical benefits—future medical
costs, including cost of administering
claims and benefit payments.
© 2011 IFRS Foundation
Section 28 – DBO valuation method
74
• Measure DBO using projected unit credit
method (PUC). However, if undue cost
or effort use simplified calculation.
• Under simplified calculation:
– ignore estimated future salary increases;
– ignore future service of current
employees (ie assume closure of the plan
for existing as well as any new
employees); &
– ignore possible in-service mortality of
current employees (however, consider
mortality after service (ie life
expectancy)).
© 2011 IFRS Foundation
Section 28 – DBO PUC valuation method
75
• Ex 30*: Lump sum benefit payable on
retirement = 1% of final salary for each year
of service. Salary in Y1 = 10,000 (increase
at 7% pa). Discount rate = 10% pa.
Employee expected to retire at end of Y5.
• Shows how the obligation builds up:
– assuming that there are no changes in
actuarial assumptions.
– for simplicity, this example assumes
employee will stay until end of Y5.
* see example 30 in Module 28 of the IFRS Foundation training material
© 2011 IFRS Foundation
Section 28 – DBO PUC valuation method
Year
1
2
3
4
5
-
131
262
393
524
– current year (1% of
final salary)
131
131
131
131
131
– current and prior years
131
262
393
524
655
Opening obligation
-
89
196
324
476
Interest at 10%
-
9
20
33
48
Current service cost
89
98
108
119
131
Closing obligation
89
196
324
476
655
Attributed to:
– prior years
© 2011 IFRS Foundation
76
Section 28 – DBO PUC valuation method
77
• Notes on PUC calculations:
Current service cost is the present value of
benefit attributed to the current year eg Y1—
CU131 × 1/(1.1)4 = CU131 ÷ 0.683013 =
CU89.47
The closing obligation is the present value
of benefit attributed to current and prior
years.
© 2011 IFRS Foundation
Section 28 – DBO simplified method
• Ex 33*: Same as Ex 30, except use
simplified method of calculation.
* see example 33 in Module 28 of the IFRS Foundation training material
© 2011 IFRS Foundation
78
Section 28 – DBO simplified method
Year
79
1
2
3
4
5
1% of current salary
(increase at 7% per year)
100
107
114
123
131
Years service at end of year
1
100
2
214
3
343
4
490
5
655
0.6830 0.7513
0.8264
0.9091
1
FV of obligation
Discount factor (10%)
PV of obligation
68
161
284
445
655
Opening obligation
–
–
68
68
7
80
161
16
95
284
28
111
445
45
131
–
5
12
22
34
68
161
284
445
655
Interest (10%)
Current service cost
Actuarial gain or loss
(balancing figure)
Closing obligation
© 2011 IFRS Foundation
Section 28 – DBO simplified method
80
• Notes on simplified method calculations
Current service cost = PV of benefit
attributed to the current year
– Calculation Y1: CU100 salary × 1/(1.1)4
= CU68.30
Closing obligation = PV of benefit attributed
to current & prior years
– Calculation Y1: CU100 × 1 year’s service
÷ 1/(1.1)4 = CU68.30
© 2011 IFRS Foundation
Section 28 – defined benefit expense
81
• Recognise net change in defined benefit
liability in the period (other than benefits
paid to employees or contributions from the
employer) as the cost of its defined benefit
plans during the period.
• Recognise cost either (accounting policy)
– entirely in profit or loss as an expense, or
– partly in profit or loss & partly as an item
of OCI (only actuarial gains & losses can
be in OCI)
unless part of the cost of an asset (eg see
Section 17 PP&E).
© 2011 IFRS Foundation
Section 28 – defined benefit expense Ex 82
• Ex 39*: A recognises actuarial gains &
losses in profit or loss. Employees
promised a pension of 0.2% of final
salary for each year of service. The
pension is payable from the age of 65.
The plan is unfunded.
At 31/12/20X1 CA of the plan obligation =
CU1,000 (20X0: CU900).
In 20X1 A paid pensions of CU40 to its
past employees.
* see example 39 in Module 28 of the IFRS Foundation training material
© 2011 IFRS Foundation
Section 28 – defined benefit expense Ex
83
Defined benefit plan obligation (liability) account
1/1/20X1
20X1
Pension
paid
Closing
31/12/20X1
balance
Opening
balance
900
Profit or
loss
140
40
1,000 20X1
1,040
1,040
1/1/20X2
© 2011 IFRS Foundation
Opening
balance
1,000
Section 28 – defined benefit expense Ex
84
• Ex 42*: Same as Ex 39 except recognises
all actuarial gains & losses in OCI.
CU50 of the cost of the defined benefit
plan for 20X1 is attributable to actuarial
losses.
• Recognise CU140 expense for 20X1 as
follows:
– CU50 in OCI (ie actuarial gains & losses)
– CU90 (the remainder) in profit or loss.
* see example 42 in Module 28 of the IFRS Foundation training material
© 2011 IFRS Foundation
Section 28 – defined benefit expense Ex
85
• Ex 40*: Same as Ex 39 except plan is
funded
– in 20X1 fund paid pensions of CU40 to
past employees & entity contributed
CU110 to the fund.
– at 31/12/20X1 FV of plan assets =
CU980 (20X0: CU890).
* see example 40 in Module 28 of the IFRS Foundation training material
© 2011 IFRS Foundation
Section 28 – defined benefit expense Ex
86
Funded defined benefit plan (liability) account
20X1
Increase
funding
110
31/12/20X1
Closing
balance
20(b)
1/1/20X1
Opening
balance
10(a)
20X1
Profit or
loss
120(c)
130
130
1/1/20X2
(a)
CU900 obligation less CU890 plan assets
(b)
CU1,000 obligation less CU980 plan assets
(c)
balancing figure
© 2011 IFRS Foundation
Opening
balance
20
Section 28 – other long-term employee
benefits
87
• Other long-term employee benefits
(OL/TEBs) are employee benefits (other
than post-employment benefits &
termination benefits) that are not wholly
due within 12 months after the end of the
period in which the employees render
the related service.
© 2011 IFRS Foundation
Section 28 – OL/TEBs
88
• Examples of OL/TEBs include:
– long-term compensated absences, eg
long-service or sabbatical leave
– long-service benefits
– long-term disability benefits
– profit-sharing & bonuses payable + 12
months after the end of the period in
which the employees render the related
service
– deferred compensation paid + 12 months
after the end of the period in which it is
earned
© 2011 IFRS Foundation
Section 28 – OL/TEBs
89
• Recognise a liability for OL/TEBs
measured at the net of:
– PV of the benefit obligation
– FV of plan assets (if any) out of which the
obligations are to be settled directly.
• Expense recognition is same as postemployment defined benefit plan
– can choose to recognise actuarial gains
& losses in OCI)
© 2011 IFRS Foundation
Section 28 – termination benefits
90
• Termination benefits are employee
benefits payable as a result of either:
– an entity’s 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.
© 2011 IFRS Foundation
Section 28 – termination benefits
91
• Termination benefits include
commitments by legislation, by
contractual or other agreements with
employees or their representatives or by
a constructive obligation based on
business practice, custom or a desire to
act equitably, to make payments (or
provide other benefits) to employees
when it terminates their employment.
© 2011 IFRS Foundation
Section 28 – recognition & measurement 92
• Recognise termination benefits as a
liability & an expense only when the
entity is demonstrably committed either:
– to terminate the employment of an
employee before the normal retirement
date, or
– to provide termination benefits as a result
of a firm voluntary redundancy offer.
• measure at best estimate of expenditure
that would be required to settle the
obligation at reporting date (PV if > 12
months).
© 2011 IFRS Foundation
Section 28 – EBs disclosures
93
• PEBs have extensive disclosures.
• S/TEBs Section 28 does not specify
disclosures
• For each category OL/TEBs &
termination benefits: the nature of the
benefit, the amount of its obligation and
the extent of funding at the reporting
date.
© 2011 IFRS Foundation