IAS 19 Employee Benefits
Last update: July 2023
Standard IAS 19 Employee Benefits prescribes rules for recognition and presentation of various types of benefits that employers provide to their employees.
Have you ever read about employee benefits that the best employer in the world—Google provides to its employees? Just to name a few of them (besides great salaries): Free haircuts, gourmet food, high-tech cleansing toilets, on-site medical care, travel insurance, fun stuff around the office, paid maternity leave…
Well, Google even introduced “death benefit”—so if a Google employee dies during his employment, his spouse continues to receive 50% of employee’s annual salary for the next decade.
But now, look at it as a CFO. No problem to account for the benefits such as salaries or free haircuts. But what about that death benefit? The issue here is that the benefit is not paid while the employee is in service… only after it. And Google really does not know when the employees die and thus the liability becomes payable.
So that’s where IAS 19 plays its crucial role. It tells us how to account for various kinds of employee benefits and how to present them in the financial statements.
Why IAS 19?
The main objective of IAS 19 is to prescribe the accounting and disclosure for employee benefits. IAS 19 requires and entity to recognize:
- a liability when an employee has provided service in exchange for employee benefits to be paid in the future; and
- an expense when the entity consumes the economic benefit arising from service provided by an employee in exchange for employee benefits.
That’s the clear demonstration of matching principle—to recognize an expense in the period when matching revenue is recognized.
So, Google should recognize the liability for its death benefit when the employee actually works (and not when he dies); and the expense when the results of employee’s work are consumed.
Classification of Employee Benefits
IAS 19 classifies employee benefits into 4 main categories:
- Short-term employee benefits= 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.
- Post-employment benefits= employee benefits (other than termination benefits and short-term employee benefits) that are payable after the completion of employment.
- Other long-term benefits= all employee benefits other than short-term employee benefits, post-employment benefits and termination benefits.
- Termination benefits= employee benefits provided in exchange for the termination of an employee’s employment as a result of either:
- (a) an entity’s decision to terminate an employee’s employment before the normal retirement date; or
- (b) an employee’s decision to accept an offer of benefits in exchange for the termination of employment.
Now, what do you think—in which category does the Google’s death benefit fall? 🙂 Go on reading and you’ll see!
Short-term Employee Benefits
Short-term employee benefits include all the following items (if payable within 12 months after the end of the reporting period):
- wages, salaries and social security contributions;
- paid annual leave and paid sick leave;
- profit-sharing and bonuses; and
- non-monetary benefits (such as medical care, housing, cars and free or subsidized goods for current employees). Well, all Google’s expenses for free haircuts or gourmet food probably belong to this category.
How to account for short-term benefits
The entity shall recognize short-term employee benefits as an expense to profit or loss (unless another IFRS requires or permits the inclusion of the benefits in the cost of an asset).
The expense shall be recognized in the undiscounted amount of short-term employee benefits expected to be paid in exchange for employee’s service rendered during an accounting period.
The accounting entry is as follows:
Short-term paid absences: Expected cost of short-term paid absences shall be recognized when the employees render service that increases their entitlement to future paid absences (in the case of accumulating paid absences); or when the absences occur (in the case of non-accumulating paid absences).
Profit sharing and bonuses: An entity shall recognize the expected cost of profit-sharing and bonus payments when the entity has a present legal or constructive obligation to make such payments as a result of past events; and a reliable estimate of the obligation can be made. A present obligation exists when, and only when, the entity has no realistic alternative but to make the payments.
Post-Employment Benefits
Post-employment benefits include items such as various pensions, retirement benefits, post-employment life insurance and post-employment medical care.
There are 2 basic types of post-employment benefits:
- Defined contribution plans
- Defined benefit plans
It is absolutely crucial to know the difference between the two and to classify your post-employment benefit correctly, as the accounting treatment is totally different for each of them.
Defined Contribution Plans
Defined contribution plans 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.
How to account for defined contribution plans
The employer shall recognize contributions payable to a defined contribution plan as an expense to profit or loss (unless another IFRS requires or permits the inclusion of the benefits in the cost of an asset).
When the contributions are not expected to be settled wholly before twelve months after the end of the reporting period, they shall be discounted.
The accounting entry is as follows:
Defined Benefit Plans
Defined benefit plans are post-employment benefit plans other than defined contribution plans. Under defined benefit plan, the employer has the obligation to pay specified amount of benefits according to the plan to the employee and all investment and actuarial risk thus fall on the entity.
And here we come to an answer to the Google question: without having any further details on the benefit, I would classify Google’s death benefit as defined benefit plan in line with IAS 19, because:
- It is paid out after the completion of employment (after employee dies, remember?)
- Google’s obligation is not limited to the contributions to some fund; instead, Google’s obligation depends on the future salary levels and thus actuarial risk falls on Google.
Accounting for defined benefit plans is probably one of the most complex issues in IFRS because it involves incorporating actuarial assumptions into measurement of the obligation and the expenses. Therefore, actuarial gain and losses arise. Also, obligations are measured on a discounted basis, because they might be settled many years after the employees render the related services.
How to account for defined benefit plans
The employers shall perform the following steps in order to account for the defined benefit plan:
Step 1: Determine Deficit or Surplus
Deficit or surplus is a difference between the present value of defined benefit obligation and fair value of plan assets as at the end of the reporting period. In order to determine it, the entity must:
- Estimate the ultimate cost of a benefit.
The entity must use projected unit credit method to estimate how much the employees have earned for their work in the current and prior periods, to attribute the benefit to the periods of service and to incorporate estimates about demographic and financial variables (“actuarial assumptions”) into calculations. - Discount the benefit in order to determine the present value of the defined benefit obligation and the current service cost.
- Deduct the fair value of any plan assets from the present value of the defined benefit obligation.
For simple illustration of projected unit credit method, please watch the following video:
Step 2: Determine amount in the statement of financial position
Although there is quite enough numbers involved in accounting for defined benefit plan, IAS 19 requires to present them as 1 single amount in the statement of financial position – the net defined benefit liability (asset), which is basically deficit or surplus calculated in the step 1, but adjusted for the effect of asset ceiling.
Asset ceiling is the present value of any economic benefits available in the form of refunds from the plan or reductions in the future contributions to the plan.
Step 3: Determine amount in the profit or loss
The entity shall present the following amounts to profit or loss:
- Current service cost = the increase in the present value of the defined benefit obligation resulting from employee service in the current period;
- Any past service cost = the change in the present value of the defined benefit obligation for employee service in prior periods, resulting from a plan amendment or a curtailment
- Any gain or loss on settlement
- Net interest on the net defined benefit liability (asset) = the change in the net defined benefit liability (asset) during the period due to passage of time (“unwinding the discount”)
Step 4: Determine remeasurements in other comprehensive income
The entity shall present the following remeasurements to other comprehensive income:
- Actuarial gains and losses = the changes in the present value of the defined benefit obligation resulting from experience adjustments or the effects of changes in actuarial assumptions
- Return on plan assets, excluding amounts included in net interest on the net defined benefit liability (asset)
- Any change in the effect of the asset ceiling.
Other long-term benefits
Other long-term benefits include the following items (if not expected to be settled within 12 months after the end of the period in which the employee renders the related service):
- long-term paid absences such as long-service or sabbatical leave;
- jubilee or other long-service benefits;
- long-term disability benefits;
- profit-sharing and bonuses; and
- deferred remuneration.
How to account for other long-term benefits
As other long-term benefits are not subject to so much uncertainty as defined benefit plans, the accounting treatment is a bit easier.
However, the entity should perform the same steps as I have described at defined benefit plans. The only difference is that all items such as service cost, net interest on the net defined benefit liability (asset) and remeasurements of the net defined benefit liability (asset) are presented in the profit or loss – so nothing goes to other comprehensive income.
Termination benefits
Termination benefits represent quite a different cup of tea than the previous 3 categories. Why? Because they are not provided in exchange for the service of the employee; instead, they are provided in exchange for the termination of employment.
However, be careful here, because the termination benefit sometimes includes the benefit for BOTH the termination of employment AND the service of employee at the same time.
For example, a company closes one of its production plants and offers the bonus of 1 000 USD to all employees who will be laid off. But because this company needs qualified people to perform the closure, it offers the bonus of 3 000 USD to each employee who stays with the company until the closure is completed.
In this small example, the bonus of 1 000 USD paid to all fired employees represents termination benefit and additional 2 000 USD paid to all employees who stay until the closure is completed represents the benefit for the employee’s service, mostly classified as other long-term benefit in line with IAS 19.
How to account for termination benefits
The primary question here is WHEN to recognize the liability and expense for termination benefits. It is at the earlier of:
- when the company can no longer withdraw the offer of those benefits (either the termination plan exists or employee accepts the offer of benefits) and
- when the company recognizes cost for a restructuring (IAS 37) and involves the payment of termination benefits.
The next question is HOW to recognize termination benefits. This depends on the specific terms of the benefits:
- if the termination benefits are expected to be settled wholly before 12 months after the end of the reporting period, then we should apply the requirements for short-term employee benefits (so recognize it as an expense to profit or loss on undiscounted basis)
- if the termination benefits are not expected to be settled wholly before 12 months after the end of the reporting period, then we should apply the requirements for other long-term employee benefits (so recognize it as an expense to profit or loss on discounted basis)
Please watch the following video summarizing IAS 19:
Related posts
- How to Account for Employee Loans – if you provide interest-free or below-market-rate loans to your employees, then you effectively provide employee benefits. Learn here how to account for them.
- Top Excel Formulas for IFRS —learn several Excel formulas for dealing with your own benefits + download the Excel file!
- How to Extrapolate Along Yield Curve—this helps you to set your discount rate for discounting the benefits
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128 Comments
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Hey Silvia,
Is actuarial gain or loss on accumulate leave encashment routed through profit or loss or other comprehensive income?
Hello Silvia,
I have a question. If a company launches a voluntary retirement scheme and pays a total amount of 10 million compensation for the same, where should it charge the amount in the financial statements? Can you please give me the accounting entry for the same? Is it okay to charge it under wages and salary account?
Hi,
Is actuarial valuation compulsory to be taken by companies. say for companies where the number of employee is less than 50.
Our company has introduced Car Buyback scheme with two options:
a) 1000cc car is given to employee with option to Buy back 1000cc car after three years at book value that is calculated on the basis of diminishing balance method.
b) 1300cc car is given to employee. Price differential of 1300cc and 1000cc car is paid by employee. Option is given to employee to Buy back 1300cc car after three years at book value that is calculated on the basis of diminishing balance method. This Buy back value is further adjusted for his share already paid in the form of price differential of 1300cc and 1000cc car.
In books straight line method of depreciation is used. How should I account for considering the two buy back options explained above.
Hi Silvia,
Many thanks for your explanation.
I have one quick question related to short-term employee benefits.
Which of below short-term employee benefits should be charged to cost of production?
– wages, salaries and social security contributions;
– paid annual leave and paid sick leave;
– non-monetary benefits (such as medical care, housing, cars and free or subsidised goods or services) for current employees.
I think that wages, salaries and social security payments should be included as a direct cost of production as we are getting a return from this payment.
But paid annual and sick leave should not be included in cost of production because during this period employee is not at work and is not addicting any contribution to the cost of production.
Thanks in advance
Hi Silvia,
In United Arab Emirates, the legislation mandates payment of gratuity (end of service benefit) to all the employees irrespective of resignation or termination. However, the amount of gratuity for employee that resigns before completing 5 years of service is lower than if the employee is terminated.
As per IAS 19, on a yearly basis, do we calculate gratuity (full) based on assumption that employees will not be separated from the company until terminated or we should accrue assuming employees will resign (lower accrual)?
I heard that acturial valuation is necessary as per IAS 19 for EOSB. Is that correct?
Regards,
Pratik
Hi Silvia
Thank you very much for the detail on IAS 19 this is truly helpful.
I had a question related to one of the above statements related to short term benefits. You reference that profit sharing and bonuses costs should be recognized when the entity has a present legal or constructive obligation to make such payments as a result of past events. In practice, if the work being performed by the employees is related to a capitalizable project would these profit bonuses still be expensed or would they be capitalized?
Dear Silvia M.
I would like to ask you about the method of calculation mortality and turn over that related with present value of DBP, if this section clear in your kit, I would like to buy this section if applicable.
regards
Dear Silvia,
I just have seen your vidio with excel example of employee’ paid vacation and annual bonuses where you explained that bonuses expenses are accrued in the the year 2XX1. But I dont understand your point about each employee account. Is this accruals attributes to each employee with related taxes recognized or in total sum like provisions.
What the difference between provisions under IAS 37 and liability recognized according to Profit-sharing and bonus plans IAS 19?
Hi Olena,
in practice yes, you should calculate the exact amount of bonus accrual to each employee.
Profit sharing – here, the problem is that the profit distribution can be attributed only to shareholders, not employees. Therefore, yes, you can say that 10% of the net profit is paid out to the employees as per agreed contracts, but you still need to account for it as for an expense.
And, you should recognize that expense in the period when:
1. you have a legal or constructive obligation to make such payments as a result of past events: this happens only when shareholders approve the profit distribution and profit sharing. So, if you pay out the profit sharing on profit for 20X1, but shareholders approve your closing and profit distribution in 20X2, it’s the time to recognize an expense.
2. you can make reliable estimate of the amount – that’s clear.
Hi dear Silvia.
Usually every year on 30 of April my company pays bonuses to managers and sales management on the basis of sales and profit for the previous year. These are typical short-term benefits, that were earned in previous year and must be paid in next year. But the calculation of benefit (precise sum) we perform on 1 of April depends on fact of cash received from buyers (incl. payments from 1 January to 31 March next year). Can we recognize provision at the year-end date?
What the difference between provisions under IAS 37 and liability recognized according to Profit-sharing and bonus plans IAS 19 (art. 19-20).
My auditor says that this is not a provision. I must not recognize any provision or liability at the year end, only after calculation and approval of bonuses on 1 of April. It will be expenses of the next, not previous year.
Yes, I agree, this is not provision, but I think that this is expenses of previous year and therefore at the year- end I should present liability (IAS 19) at the balance sheet.
Please, give your professional advice.
Just responded below your newer question. Basically, I agree with your auditor.
Difference between bonuses and profit sharing is that bonuses are stated in the contract as a part of remuneration and as such they do not need to be approved by shareholders on the general assembly after the year-end. That’s why the obligation to pay them arose when the contract was signed (at profit sharing, the obligation arose after the approval by shareholders).
Diff. between provision under IAS 37 and bonuses/profit sharing: the only difference is that IAS 37 deals with almost everything EXCEPT for employee benefits, but the rules for provisioning / booking expenses are pretty similar. S.
Hello madam, how to determine current service cost for post employees benefits when discount rate is not given. Only employees turn over information is available in a question.
Siliva,
How to pass adjustment if eosb liability is showing less then independent valuer report and vise versa
Effect is 10%
Dear Siliva,
Could you please explain on my confusion about the defined benefit plan? The sum is mentioned below.
On 31 August 2008 the director decided to close a business segment which did not fit into future strategy. The closure commenve on 5 Oct 2008 and was due to be completed on 31 Dec 2008.
The pendion plan will make a lump sum payment $ 8 mil to the employees who accept voluntary redundancy for the terminayion of their rights under plan.Entity will pay this amont into the plan on 31 Jan 2009. ( what i concept on this $8 mil is plan assest but one more thing is this amount has’t paid yet to the pension fund up to business closure completed date, 31 Dec 2008, that’s why, it is liab) The actuaries have
advised that the accumulated pension rights that this payment will extinguish have present value of $7 mil. (What i concept on this $7 mil is PVof defined obligation). Kindly explain me what i concept is right or wrong.
I’d like to requedt you to explain some more example to be clear understanding all.
Hi Siliva, thanks very much for your support
I have a question;
how do you treat this according to IAS19,
On 1st June 2012, Mango Ltd revised the terms of the scheme and this revision resulted in an additional obligation of CU 1080,000. The actuary has estimated that the existing employees have an average of 8 years’ pension earning employment. the interest rate of return on central bank 91 days bills is 12%. hw do you treat that ( it’s additional information of a question)
Dear Edmand,
is this some homework question? It looks like 🙂 You know you should do your homework yourself 🙂 To give you a hint – these are the typical past service costs 🙂 S.
Dear siliva, its not homework, just trying out some revision questions, thanks for hint, hw abt the employees 8 years’ of earning employment, is it used any wea in the solution.
please help me out
wow . thanks a lot maam….i will capitalize on this sorts of intellects of you…I hope i pass the CPA board exam on MAy2017
Hi Silvia,
Thank you for the illustration, which is easy to understand.
I would also like to know about how to account for the conversion between the DBP and DCP.
It is normal practice for entities to engage an actuary to perform the
actuarial valuation needed to calculate its defined benefit obligation.
However, the IFRS for SMEs does not require an actuary to be engaged.
The defined benefit obligation is recorded at present values, taking into
account future salary increases and using a discount rate derived from the
yield on high-quality corporate bonds with a maturity consistent with the
expected maturity of the obligations. In countries where no deep market in
high-quality corporate bonds exists, the yield on government bonds is used.
Kindly comment
Dear Silvia,
Thanks for the summary
I do not know i talking nonsense 🙂 .I have one doubt that How to treat the expenses/loss incurred due to negligence of employee in a company.like suppose in a construction company , company made a loss due to wrong measurement taken by employee for some Materials purchased.
Hi Albi,
normally, this is an expense incurred by the company. If you have signed certain personal responsibility or liability with your employees, then you can claim this amount from him – but you should not account for a compensation unless it is certain (e.g. court approved it, etc.). S.
Dear Silvia,
Thank you very much. rocking answer !!!!
Hi Silvia,
Thanks for a really thorough and practical guide to IAS19. As much as I like to refer to the actual text, sometimes the lack of concrete examples just does not help.
Wondered what your thoughts are about treatment of a bonus?
This is an incentive for employees to stay in a job.
e.g. if they stay in a job for 6 years, they can claim a bonus of say £6,000.
I have seen a company start accruing the cost two years before as the rational is that people will stay another two years to get the bonus.
e.g. year 4 = £6,000 x 4/6
year 5 = £6,000 x 5/6 less year 4
year 6 = employee can claim the bonus.
It seems reasonable to me that the accrual starts in Year 5, as IAS19 mentions that short term bonus is one that will be claimed within 12 months after Year-5 (i.e. Year 6)
But I am still confused about accruing in Year 4, as technically this makes it a ‘long term’ bonus benefit (as the employee can only claim in Year 6) but it is a known value that will be paid at Year 6, rather than having the actuarial problems mentioned here for Defined Benefits.
So it would be great to know your thoughts in how it should be treated in the accounts.
e.g. Would the Year 4 value be a normal accrual: Dr Expense Cr Accrual?
Or should the accrual only really start in Year 5?
I am not sure it’s a provision for instance, because it is a known value (reliable estimate) and the date of payment is known.
Thanks in advance!
Dear Flick,
for me, this bonus appears as defined benefit plan. In fact, it’s provided in return for the employee’s service during these 6 years and therefore, the obligation shall not be attributed to 2 last years only, but spread all over 6 years.
Of course, this involves discounting and other actuarial stuff, too – you do not simply book the accrual as you described above.
As this benefit is dependent upon the completion of 6 years and will not be paid if an employee leaves earlier, you should take the probability of staying in employment for 6 years into account when estimating the obligation.
To sum up – there are actuarial calculations involved and yes, you need to follow defined benefit plan accounting under IAS 19 rather than the approach you described in your question. S.
Hi…I am going to sit for p7 acca advanced audit in june .was a bit desperate about those ias..but i came across yr ifrsbox .oh Jesus,you tremendously help n am confident again…thanks again..beautiful inside out…cheers
Salam silvie,
Sadly I came to know about your videos very late but still they are very helpful.
I just wanted to know that are you a social worker? If not then how come some one provide everyone with that much load of material and very well explained videos of standards in free.
That surely would have taken so much hard work to do all the stuff and that in free.
I really appreciate you from the bottom of my heart. You are an angel.☺cheers
Dear Asad,
no, I’m not a social worker, but I’m strong believer that any good you give to the world gets back to you one day. Plus, I love teaching others! 🙂 Thank you for the comment! S.
Hi!
Silvia you did an excellent job for us thanks alot for this. please upload some videos and notes about gratuity treatment and its disclosure…!!!
Silvia I love you..!! 🙂 You really make it simple to grab the concept… Thanks!
Dear Silvia,
Thank you for your great job! Your summaries are really the easiest Briefing of IFRSs I ever seen. I will recommend to my colleagues!
Hi Ms. Silvia,
Thank you for this.
May I ask if the company does not accrue for the retirement benefit obligation, then, suddenly an employee retires for the year. In effect the company recorded an expense and still there is no accrual of retirement benefit obligation {RBO} for the employees. Come next year, the company opt to accrue for the RBO, will the company restate its prior year financial statements to make it comparative and to recognize the past service cost?
If yes, how will the company computes for the past service cost?
Thanks a lot.
Regards,
Leo
Thanks for explaining IAS 19 in simple way.
Hi Silvia,
Thank you so much for giving us such a resourceful knowledge on IFRS. If you don’t mind, I would like to request your kind help to clarify on the following queries:
(1) Normally actuarial valuation reports on the employee defined benefit liabilities do not segregate liabilities into current and non-current. However, our auditors have been insisting on the segregation requirement as per IAS 1. Is it really necessary for the segregation in this particular case?
(2) Our company has a benefit of a paid leave of 40 days each year. An employee can avail the leave each year or can encash 30 days for a month’s salary each year. Remaining unavailed leaves can be accrued and cash equivalent to number of accrued leave at the time of retirement is paid to the employee. Under which class of employee benefit will this benefit fall? Will the liability required to be valued actuarially?
Thanks Siliva
Hi,
(1) Yes, your auditors are right. It should not be a problem to estimate how much you are going to pay within the next 12 months after the end of the reporting period – this amount should be undiscounted and included in total liability.
(2) IMO, it falls under short-term employee benefits, more specifically short-term compensated accumulating absences. The reason is that the benefit has already been earned in the particular year. However, if it’s paid beyond 12 months after the end of the reporting period, then it is other long-term benefit – but you should assess the probability of paying that benefit long time after the end of your reporting period based on past data etc.
Thank you so much for the kind help
IFRS19 – 118
Current/non-current distinction
118 Some entities distinguish current assets and liabilities from non-current assets and liabilities. This Standard does not specify whether an entity should distinguish current and non-current portions of assets and liabilities arising from post-employment benefits.
Defined benefit plans—presentation of assets and
liabilities
BC200 IASC decided not to specify whether an entity should distinguish current
and non-current portions of assets and liabilities arising from post-employment benefits, because such a distinction may sometimes be arbitrary.
Doesn’t that mean an argument can be made for not distinguishing between the two?
Thanks for the wonderful articles in your website, I could not find the answer for the below question in your articles related to employee benefit,
If an interest free loan is given to an employee for five yours, Say 100,000
The amortized cost will be at a 10% discount rate is 62,092 and employee benefit is 37,908, this employee benefit to be recognized immediately in the current your P&L or should be changed over the period of five yours.
Please advise,
Hi Sylvia
Thank you immensely for a lovely summary of IAS19 , I have always previously tried running away from it but I know am confident about IAS 19.
I have on question that is bothering me, we have an entity that has a post retirement plan for 5 of its directors. That they will after retirement until death provide for medical benefits for them.
What I want to know is each director has a different life span so we can get an actuary to do a caluclation based on the life span of the directors and calculate the obligation. However my concern is how much of this needs to be recognised now “currently”. Surely we dont provide for all our future expenses 20 , maybe 30 years later. So I would like to know what portion must we recognise now, what does IAS19 say?
Hi Firdaus,
your actuary should estimate the present value of medical benefits at the time of their retirement (e.g. estimate their life span, total cost, their structure over retirement period and discount them to present value – but not to present value today, but to present value at the date when they retire). I know – lots of estimates and judgements.
Once you have that amount from actuary, this is the expected value of the benefit, or the “ultimate cost of benefit” and you apply projected unit credit method to this cost – it means that you attribute this cost over the time when the director is in service and apply actuarial method. Hope it’s clearer now. I solve similar example in the IFRS Kit in a detail. Have a nice day!
S.
Dear Silvia,
I have some doubts regarding presentation of the change in reserves (employee benefits) caused by a one-time, extremely non-standard and unpredictable materialization of actuarial assumptions. For example (theoretical), the explosion has occurred in the company and it has resulted in a certain percentage of deaths and disabilities among employees. If the company is not involved in a type of activity burdened with such risk (eg. the explosion has been caused by a bomb) and because of that increased rates of mortality / disability were not foreseen in actuarial assumptions (in the case of high-risk employers should rather have appropriate insurance), then extremely unusual materialization of the assumptions should not be regarded as actuarial gains&losses ex post, in my opinion, especially when the results of explosion may be accurately separated from the disabilities and deaths due to natural causes, whom actuarial assumptions related to. It seems that in the described case the injured workers will generate high positive past service costs relating to death benefits and disability benefits and negative PSC regarding other benefits. But it does not clear result from IAS 19. Maybe the ways of presentation of such unusual phenomena are mentioned in some other IASes.
I would appreciate very much your opinion in the above matter.
Thank you and best regards
Iwona
Hi Iwona,
I get your point, however, in my opinion, this issue does not relate to past service cost – PSC are in question only when you introduce new plan, or benefits, amend new plan etc. So if you had “death benefit”, you should have accrued for the liability gradually over the years of service, taking into account regular mortality rates expected in the company.
Yes, I understand, that this one-off event would totally mess up with your obligation and in my opinion, this could result in actuarial losses.
Unfortunately, IFRS do not describe anything like “exceptional” item, however, you should describe significant movements in a defined benefit obligation in the notes to the financial statements.S.
Dear Silvia,
Thank you very much for your response which as usual was very helpful. I have written to you as I try to find some general definition of PSC and AGL (for better understanding). Up to now I thought that everything random/uncertain but somehow predictable is reflected in a form of actuarial assumptions and materializes as AGL ex post at the end of period. And everything off, unpredictable (and therefore impossible and even forbidden to reflect in actuarial assumptions) results in PSC (it was not fully consistent with the definition of PSC but it seemed logical). But now, after your answer, there is a quite different picture. It seems that everything random/volatile, no matter if predictable or not and therefore reflected or not in actuarial assumptions, creates AGL ex post if materialized within the current period and everything intentionally made by a company in relation to benefits but unprecedented /not regular (and then not predictable) and in the same time connected with a change of company policy (but not accounting policy) results in PSC.
There were also other reasons of my doubts:
1. I understood a “curtailment” as significant reduction of number of employees. That is true the reduction caused by the described explosion is something different and gives totally different result than restructuring but the latter refers to the rate of employee rotation in the same way as the first to mortality and disability (as restructuring is non-standard, unpredictable materialization of rotation rate which is one of the actuarial assumptions).
2. It would be very helpful to know an intention of IAS 19 as to recognizing PSC in profit and loss account and AGL in other comprehensive income in case of post-employment benefits. One of the reasons is significant postponing the benefits in time because such approach does not concern other long-term benefits. Taking this into account I was not sure whether an effect of high current obligations/payments (paid one-off and not as annuities) that appeared during the period should be reflected in OCI.
In general it seems more logical to present AGL ex post in P&L and recognition in OCI only the results of changes in actuarial assumptions, the latter mainly due to the volatility of the discount rate. First of all, AGL ex post reflects materialization of the actuarial assumptions in the current period and then recognition of this item in the income statement would be fully justified (it is not postponed in time at all). Secondly, AGL ex post very often includes changes in reserves which have nothing to do with actuarial assumptions (change of an actuary or improvements of an actuarial model, corrections of small errors in a data base etc.) so the more they should not be recognized in OCI in my opinion. Maybe changes of IAS 19 will go in this direction in the future.
Once again thank you for the clarification and the opportunity to exchange thoughts.
Best regards
Iwona
Dear Silivia,
Could you please tell me whether we have to show the following expenses under employee costs as per IFRS
1) Training costs
2) Recruitment costs
3) Overtime
4) Overtime premium
5) Commission to Sales executives for Selling goods
6) Commission to employees for Collecting payments from customers
7) Special bonus paid to direct employees for completing a Job means completing the job taking less hours than Standard number of hours allotted .
Thanks for your kind consideration. I am stuck here.:)
Hi Sumitha,
employee costs are in fact employee benefits in return for their service. So what I suggest:
1+2 – NO, as they are not benefit in return for employee’s service, but payment for increasing employee’s work capacity (but it depends on the type of training, whether it’s work related or not), and recruitment cost are paid to agencies for finding employees, not to employees
3+4+7 – yes
5+6 – yes, they are employee benefits (are sales executives employees?), too, so you must disclose it somewhere in the notes, but in fact, these payments are tied to specific company’s activity. E.g. commissions might be better to show within marketing&sales expenses. It depends on what is more relevant and reliable.
Hello,
First off, thank you for summarizing this IAS. It definitely helps in trying to understand the concepts.
Second, for the defined benefit plan, what kind of journal entries would you record if an employee retires and gets post-employment benefits (for both sides for a defined benefit liability and defined benefit asset)
If it’s a liability, would it be debit defined benefit liability and credit cash?
I’m not too sure what the journal entry would be if it’s an asset.
Thank you.
Dear Trini,
it would be the same entry. You need to realize that the net defined benefit asset or liability consists of defined benefit liability, and plan assets, and usually, in the accounting records, this is monitored separately. Just in the presentation, you net it off.
S.
i sent some question today but now i cant see that what has happened to that question
Dear Nayana, all comments must be approved by me before posted and I do it once per 1-2 days, so you need to patient. I approve every single comment if it’s not spam. Thank you! S.
Well my question is this we prepared our financial statements according to the IFRS (this is the first time we adopt IFRS) but due to some reason we were not able to comply with IAS 19 employee benefit so we calculate the liability of post benefit plan as per pervious standard actually we calculate liability as Gratuity act (One month salary for every year of service to employees on retirement has been provided) we didn’t use projected unit credit method or actuary valuation.
In this case can we say we prepare our financial statement according to IFRS and then if we disclose this non compliance in our financial statement is it ok
Hi nayana,
No, you CANNOT mark your financial statements as compliant with IFRS unless you comply with ALL the requirements (see IAS 1, paragraph 16). Even if you disclose the non-compliance, this is not a remedy to the situation. It is the requirement of IAS 1, paragraph 18, to be more precise.
So I’m sorry, but you absolutely need to use projected unit credit method and actuarial valuation, as IAS 19 does not give you any exception with this regard. S.
Thank you very much for your clear answer it is very valuable
Hi Silvia,
Thanks for this article.I have one doubt .as per the standards All non monetray expenses are considered as employee benefits like A Car provided to employees.Should we include Car running costs in Employee benefits? Cars are used by Sales/Marketing people or used by genereal manager etc.Vehcile related expenses Fuel, Repairing , Depreciation , Insurance ,etc
please advise.
Dear chacko,
in my opinion, it depends on the actual usage of these cars. Are sales/marketing people using the cars for private purposes? In such a case, I would say every related expenses are employee benefits, including car’s depreciation, repairs…
However, if these cars are used in connection with making a business, visiting clients, etc. – then these expenses are regular business expenses, not employee benefits.
If it’s a partial use, like 50% private and 50% business – then you should split. You should really set these guidelines in some internal regulation. S.
Hi,
Thank you very much for your straight answer. If we allocate Depreciation in Employee costs as part of personal use, how to present it in IFRS Profit & Loss statement .Depreciation amount for personal use will go to employee benefits in statements .But there is a separate line for depreciation in Profit & loss statement.Shall we show only business related depreciation under P&L line- Depreciation and Amortisation.
Please help, How to account for insurance claims received but later on paid to an employee for his/her to buy and replace the stolen assets.
Dear Silvia,
After receiving your reply I familiarized myself a bit with IAS 8 and I refer back to point 1. In majority cases (90%) the ‘late’ first reserve calculation is caused by small value of reserves at the beginning of activity (a young company with small number of employees). In reality it is not changing of accounting policy then but just a voice of reason as cost of actuarial calculation can be sometimes comparable to level of reserves. Do not you think that in such cases the past service cost could be better approach (I assume the past service cost charges current year) as is more simple? IAS 8 par. 16 point b does not treat changes of rules regarding not material transactions as changing of accounting policy.
The mature company is another case and you are right, the whole reserve cannot create the cost of current year. But still I cannot imagine restatement of several dozen years retrospectively. There were other people employed in the past, a lot of benefits already paid according to previous accounting policy etc. Then I would apply par. 24 (MSR 8) and split current reserves into current service cost, current interest and service costs charging the past years (a present value of latter as at beginning of period) taking into account benefits paid within the period. The approach can be also applied to young companies (is universal) but the solution involving past service costs in such cases does not violate rules of IAS 8, I think.
I would appreciate your confirmation of above or your point of view.
Thank you very much for your help, best regards
Iwona
Hi Iwona,
OK, if the transfer to IAS 19 is not that material, I would agree not to apply it retrospectively – but I would not call it “past service cost” either, because it is not.
In “mature” company: you don’t need to restate several years retrospectively. Not at all. Here’s the paragraph 22 of IAS 8:
“Retrospective application means adjusting the opening balance of each affected component of equity for the earliest prior period presented and the other comparative amounts disclosed for each prior period presented as if the new accounting policy had always been applied.”
In practice, if you’re changing accounting policy (applying IAS 19) in 2014, then you restate numbers as at 1/1/2013 (opening balance for the earliest period presented). IAS 8 also states in para 24 and 25 some exceptions – so please refer to there.
S.
Hi Silvia,
If you agree not to apply it retrospectively so how to present it then if not as PSC? After all it IS service cost and concerns past period longer than one year.
Treating the small reserves calculated for the first time as PSC causes only that they charge current year which seems to be proper in case we do not want to apply retrospective treatment (because of they not material amount).
Thank you very much for explanation of retrospective application. It has been very helpful.
Kind regards
Iwona
Iwona,
I would rather present it as effect of change in accounting policy in line with IAS 8 rather than past service cost, because it is simply NOT past service cost. In understand your thoughts, but believe me, I have gone through many financial statements where the change in accounting policy is simply NOT the same as past service cost or any other item.
Sorry, I can’t really explain the details of para 89 and 108 here in the comments, because that would be too long, but my opinion simply is that these paragraphs do not contracting the fact that past service cost does not result from changes in accounting policy, but from the plan amendment or curtailment as strictly defined in para 102.
S.
Hi Silvia,
Thank you very much for your response and your explanation. OK I accept, the first calculation resulting in not material amount of reserve cannot be treated as the PSC.
If the reserve (first calculation) is material and we restate opening balances how should I show it in my actuarial report? Should the opening balance in reconciliation be 0 (plus the item: “correction of opening balance arising out of change of accounting policy”) or rather equal to the restated value of OB = retrospective reserve as at opening date? Or is it indifferent and both ways are proper?
If the reserve is not material and we agreed not to treat it retrospectively how to show it in reconciliation then? As a current service cost (because not the past service cost as you have said)? Or just to select the part concerning the past periods and show it as the additional item separate from current service cost and interest (but charging the current year as being not material)?
From my side the most convenient approach would be to show the opening balance as 0 in any case (no matter if the first reserve is material or not) and present the part concerning the past periods as separate item leaving the decision about treatment (retrospectively or not) to the entity that ordered calculations. But I am not sure if I may do something like that. Par. 141 of IAS 19 does not provide additional items (but maybe other IASes provide).
And by the way, I assume all the time the past service cost charges current period. But I would like to be sure of that. Could you please confirm it? I have already asked about it.
Thank you very much, best regards
Iwona
Hi Silvia,
It is really great there is a place in internet where someone may ask questions concerning IAS 19. And I have several of them.
How should a reconciliation from the opening balance to the closing balance look like in case of existing benefit plan when an entity decides to start reflecting liabilites for the first time? Should whole reserve amount at the end of accounting period be shown as a past service cost or some kind of restatement for the beginnig of period should be calculated with the same actuarial assumptions?
It happens the entity changes the actuary. Each actuary uses his own model and results differ a bit. The best way to recognize the discrepancy arising out of models is to recalculate the opening balance once again in the new one. IAS 19 does not mention about such cases and majority of actuaries put the difference into actuarial gains and losses (well, sometimes the data base as at the beginning of period is not available). How should this difference be reflected in books and shown in the reconciliantion? And similar question concerns amendments of errors in data base (between OB and CB) or mistakes in reflecting conditions of benefit program in actuarial model.
According to our domestic standard the reconciliation from the opening balance to the closing balance focuses only on future liabilites (explanation in the financial statements) and then the benefits due within the accounting period are shown as the position described in par.141 point (g) (irrespective of that if they were paid or not). Current liabilities (benefits due but not paid before closing date) are treated separately because of their different nature. It seems, in a case of IAS 19, the opening and close balances include both future and current liabilites in the reconciliation. Am I right?
Thanks and regards
Iwona
Hi Iwona,
OK, you raised lots of questions, but let me try to reply them shortly:
1) When you adopt IAS 19 for the first time, it’s a change in accounting policy so no, you don’t treat it as past service cost, but you need to restate opening balances as IAS 19 would have always been applied.
2) Unfortunately, IAS 19 does not say anything about change in actuary and yes, it is a part of actuarial gains and losses. When there were some mistakes, then you maybe need to assess whether the mistakes were material and if yes, then apply IAS 8 and correct accounting errors retrospectively.
3)Yes. But you should show their current portion in the current liabilities in the B/S.
S.
Hi Silvia,
I am very glad that thanks to you we have an opportunity to exchange opinions and ask questions regarding IAS 19. I also thank you very much for your response and your explanations to my questions and doubts. But it is still not fully clear for me (I am sorry, I am an actuary and not an expert in accounting, in addition I am not very familiar with accounting language, particularly English ).
With respect to point 1: what does exactly the past services cost mean then? And more precisely: is it cost that in reality charges current or past periods?
You used the plural: “opening balances” in your answer. Does it mean I should calculate service cost and interest for all years back up to the earliest date of employment existing in current data base (“as IAS 19 would have always been applied”)?
Regarding point 2 I would like to reassure myself: does „retrospectively” mean „to restate opening balances”? I will revert to the problem of changing actuarial model later on as it needs some more explanation.
And thank you for your confirmation as to point 3.
Kind regards
Iwona
Hi Iwona,
1) past service cost: when a company introduces new benefit during the year, but the benefit relates also to some past years of service – simply said. E.g. when a company promises bonus of 10 000 per year of employment in 2014 valid for all years of service and repayable at retirement date, then past service cost is a cost of benefits for the years 2013, 2012…
2)Retrospectively means restating opening balances – exactly. It simply shows the numbers as you would have always applied the new accounting policies.
S.
Hi Silvia,
Thank you for your answer once again. Yes, in general the definition of PSC is given by art. 102 of IAS 19. However, in my opinion, the past service cost is not limited only to changes of benefit plan or curtailment. If it was so then art. 89 and art. 108 would not be necessary. It seems any change of reserves that does not violate art. 89 and art. 108 and concerns past periods can be treated as PSC. Changes of reserves caused by cases mentioned in art. 102 are huge in general and therefore needed clear definition of treatment particularly that they concern past periods. Other changes not being actuarial gains/losses and of not material level do not have to be treated retrospectively. And because they ARE changes of service cost the past service cost seems to be a good solution for their presentation as it charges current year but clearly points that concerns past periods (periods before change).
Well, it is my understanding of IAS 19 but I am not an expert and then I appreciate very much a possibility to exchange opinions.
Best regards
Iwona
Hi Silvia
Your articles are really awesome. I love it but unfortunately I am unable to watch your videos as youtube is banned in Pakistan. Kindly upload your videos on other sites as well. Waiting for your positive reply
Thanks and Regards
Salman Sohail
Dear Salman, thanks a lot for your feedback and advice. Yes, I know about this problem in Pakistan. I promise to do something about it in the future. Regards! S.
Hi Silvia,
In fact I am performing the audit of the first year accounts of a merged government entity. All the assets and liabilities were taken over including the retained earnings of the different merged entities by the Newly formed entity.
I want to reassure myself if the taken over pension benefit obligation at time of merging had to be restated at the restated value shown in the actuarial report and any increase or decrease in the pension benefit obligation/asset should be adjusted in the retained earnings transferred to the new entity to reflect the revised requirements of IAS 19.
Thank you.
Naseem
Naseem, there are 2 things to differentiate:
1) FV of pension obligation: did your actuary change its value as of the same date? Due to what reasons?
2) FV of pension obligation did not change at the same date, but you started to apply revised requirements of IAS 19.
If n.2 is true, then this is the change in accounting policy and in line with IAS 8, you should apply it retrospectively – i.e. restate opening balances (recognize the impact in retained earnings).
Hope it helps S.
Hi Silvia.
Thanks. I think it should be applied retrospectively in line with IAS 8.
Naseem
Hi Silvia,
Let me explain. In fact, I am actually performing the audit of a merged government entity. I want to reassure myself about the accounting treatment in line with IAS 19 as the accounts did not properly reflect the required treatment as per IAS 19.
So, according to the actuarial report for the period ending 31 December 2013, the pension obligation/assets showed the restated value in accordance with the revised IAS 19 requirements for the start of the accounting period i.e the take over date. However, at time of take over the the pension obligation was valued using the previous method of IAS 19 (with the corridor approach).
So, while preparing the accounts for year ended 31 December 2013, do we have to show the increase/decrease in pension obligation in the retained earnings which were also taken over at the start of the accounting period.
Thanks
Naseem
Hi Silvia,
Do we have to restate the comparative figures of the pension obligation/asset in the financial statement for the period ending 31 December 2013 in accordance with IAS 19.
If yes, how do we account for the changes in the restated figures.
Thanks
Hi Naseem, what’s the reason for the restatement? S.
Hi Silvia,
Could you please tell me whether we have to adjust for the Retirement benefit obligations of different entities being merged at time of merger in the first year of accounts or is it correct to simply account for the actuarial valuation report figures to be accounted in the Profit/loss, statement of other comprehensive income and statement of financial position.
Hi Naseem, measurement of retirement benefit obligations remains under IAS 19 even after merger. This is an exception from “fair value” rule under IFRS 3. So you simply account for it under IAS 19 as before. S.
Thanks Silvia.
Slivia you lectures are very helpful .Thanks for sharing such usefull ,easy stuff………..
Thanks for your brilliant videos, they helped me immensely, please do a video on the re-measurements, with the concept of asset ceiling explained in the question!! Thanks 🙂
Thank you! I will consider this idea for sure! Silvia
This is really helpful and you have made things so simple, reading feels like story and connects us with the concept very intuitively.. You are doing a great job and we all are really grateful to you…
Hello, thank you very much – I am happy to help 😉 S.
Simple and easy to understand and appreciating work
i am wondering if the accounting entry for the employees end of service benefits should be written every month or only at the end of each year ??
Why the remeasurement gain or loss is transferred to OCI
If the company signed a contract with high managment and this contract stated if the high management achieve cumulative 90% of the target net income for next three years the company will pay 20m for each year but if they don’t achieve 90% of the target in any years they will not deserve the rewards “20m”, so what is the accounting treatment if the company achieved the target in the first year and through business plan they will achieve it for next two years?
thnaks alot for four support
I have never seen IAS19 in such simple and understandable form.
Thanks for your lessons and i was share this articles with my friends.your commitment great.
This course is really helping me. I’m gratful. Thank you.