IAS 19 EMPLOYEE BENEFITS
Objective of IAS 19
The objective of IAS 19 is to prescribe the accounting and disclosure for employee benefits (that is, all forms of consideration given by an entity in exchange for service rendered by employees). The principle underlying all of the detailed requirements of the Standard is that the cost of providing employee benefits should be recognised in the period in which the benefit is earned by the employee, rather than when it is paid or payable.
IAS 19 applies to (among other kinds of employee benefits):
- wages and salaries
- compensated absences (paid vacation and sick leave)
- profit sharing plans
- medical and life insurance benefits during employment
- housing benefits
- free or subsidised goods or services given to employees
- pension benefits
- post-employment medical and life insurance benefits
- long-service or sabbatical leave
- ‘jubilee’ benefits
- deferred compensation programmes
- termination benefits.
Basic Principle of IAS 19
The cost of providing employee benefits should be recognised in the period in which the benefit is earned by the employee, rather than when it is paid or payable.
Short-term Employee Benefits
For short-term employee benefits (those payable within 12 months after service is rendered, such as wages, paid vacation and sick leave, bonuses, and nonmonetary benefits such as medical care and housing), the undiscounted amount of the benefits expected to be paid in respect of service rendered by employees in a period should be recognised in that period. [IAS 19.10] The expected cost of short-term compensated absences should be recognised as the employees render service that increases their entitlement or, in the case of non-accumulating absences, when the absences occur. [IAS 19.11]
Profit-sharing and Bonus Payments
The entity should recognise the expected cost of profit-sharing and bonus payments when, and only when, it has a legal or constructive obligation to make such payments as a result of past events and a reliable estimate of the expected cost can be made. [IAS 19.17]
Types of Post-employment Benefit Plans
The accounting treatment for a post-employment benefit plan will be determined according to whether the plan is a defined contribution or a defined benefit plan:
- Under a defined contribution plan, the entity pays fixed contributions into a fund but has no legal or constructive obligation to make further payments if the fund does not have sufficient assets to pay all of the employees’ entitlements to post-employment benefits.
- A defined benefit plan is a post-employment benefit plan other than a defined contribution plan. These would include both formal plans and those informal practices that create a constructive obligation to the entity’s employees.
Defined Contribution Plans
For defined contribution plans, the cost to be recognised in the period is the contribution payable in exchange for service rendered by employees during the period. [IAS 19.44]
If contributions to a defined contribution plan do not fall due within 12 months after the end of the period in which the employee renders the service, they should be discounted to their present value. [IAS 19.45]
Defined Benefit Plans
For defined benefit plans, the amount recognised in the balance sheet should be the present value of the defined benefit obligation (that is, the present value of expected future payments required to settle the obligation resulting from employee service in the current and prior periods), as adjusted for unrecognised actuarial gains and losses and unrecognised past service cost, and reduced by the fair value of plan assets at the balance sheet date. [IAS 19.54]
The present value of the defined benefit obligation should be determined using the Projected Unit Credit Method. [IAS 19.64] Valuations should be carried out with sufficient regularity such that the amounts recognised in the financial statements do not differ materially from those that would be determined at the balance sheet date. [IAS 19.56] The assumptions used for the purposes of such valuations should be unbiased and mutually compatible. [IAS 19.72] The rate used to discount estimated cash flows should be determined by reference to market yields at the balance sheet date on high quality corporate bonds. [IAS 19.78]
On an ongoing basis, actuarial gains and losses arise that comprise experience adjustments (the effects of differences between the previous actuarial assumptions and what has actually occurred) and the effects of changes in actuarial assumptions. In the long-term, actuarial gains and losses may offset one another and, as a result, the entity is not required to recognise all such gains and losses in profit or loss immediately. IAS 19 specifies that if the accumulated unrecognised actuarial gains and losses exceed 10% of the greater of the defined benefit obligation or the fair value of plan assets, a portion of that net gain or loss is required to be recognised immediately as income or expense. The portion recognised is the excess divided by the expected average remaining working lives of the participating employees. Actuarial gains and losses that do not breach the 10% limits described above (the ‘corridor’) need not be recognised – although the entity may choose to do so. [IAS 19.92-93]
In December 2004, the IASB issued amendments to IAS 19 to allow the option of recognising actuarial gains and losses in full in the period in which they occur, outside profit or loss, in a statement of comprehensive income. This option is similar to the requirements of the UK standard, FRS 17 Retirement Benefits. The Board concluded that, pending further work on post-employment benefits and on reporting comprehensive income, the approach in FRS 17 should be available as an option to preparers of financial statements using IFRSs. [IAS 19.93A]
Over the life of the plan, changes in benefits under the plan will result in increases or decreases in the entity’s obligation.
Past service cost is the term used to describe the change in the obligation for employee service in prior periods, arising as a result of changes to plan arrangements in the current period. Past service cost may be either positive (where benefits are introduced or improved) or negative (where existing benefits are reduced). Past service cost should be recognised immediately to the extent that it relates to former employees or to active employees already vested. Otherwise, it should be amortised on a straight-line basis over the average period until the amended benefits become vested. [IAS 19.96]
Plan curtailments or settlements: Gains or losses resulting from curtailments or settlements of a plan are recognised when the curtailment or settlement occurs. Curtailments are reductions in scope of employees covered or in benefits.
If the calculation of the balance sheet amount as set out above results in an asset, the amount recognised should be limited to the net total of unrecognised actuarial losses and past service cost, plus the present value of available refunds and reductions in future contributions to the plan. [IAS 19.58]
The IASB issued the final ‘asset ceiling’ amendment to IAS 19 in May 2002. The amendment prevents the recognition of gains solely as a result of deferral of actuarial losses or past service cost, and prohibits the recognition of losses solely as a result of deferral of actuarial gains. [IAS 19.58A]
The charge to income recognised in a period in respect of a defined benefit plan will be made up of the following components: [IAS 19.61]
- current service cost (the actuarial estimate of benefits earned by employee service in the period)
- interest cost (the increase in the present value of the obligation as a result of moving one period closer to settlement)
- expected return on plan assets*
- actuarial gains and losses, to the extent recognised
- past service cost, to the extent recognised
- the effect of any plan curtailments or settlements
*The return on plan assets is interest, dividends and other revenue derived from the plan assets, together with realised and unrealised gains or losses on the plan assets, less any costs of administering the plan (other than those included in the actuarial assumptions used to measure the defined benefit obligation) and less any tax payable by the plan itself. [IAS 19.7]
IAS 19 contains detailed disclosure requirements for defined benefit plans. [IAS 19.120-125]
IAS 19 also provides guidance on allocating the cost in:
- a multi-employer plan to the individual entities-employers [IAS 19.29-33]
- a group defined benefit plan to the entities in the group [IAS 19.34-34B]
- a state plan to participating entities [IAS 19.36-38].
Other Long-term Benefits
IAS 19 requires a simplified application of the model described above for other long-term employee benefits. This method differs from the accounting required for post-employment benefits in that: [IAS 19.128-129]
- actuarial gains and losses are recognised immediately and no ‘corridor’ (as discussed above for post-employment benefits) is applied; and
- all past service costs are recognised immediately.
For termination benefits, IAS 19 specifies that amounts payable should be recognised when, and only when, the entity is demonstrably committed to either: [IAS 19.133]
- terminate the employment of an employee or group of employees before the normal retirement date; or
- provide termination benefits as a result of an offer made in order to encourage voluntary redundancy.
The entity will be demonstrably committed to a termination when, and only when, it has a detailed formal plan for the termination and is without realistic possibility of withdrawal. [IAS 19.134] Where termination benefits fall due after more than 12 months after the balance sheet date, they should be discounted. [IAS 19.139]
August 2009: ED on employee benefits discount rate
On 20 August 2009, the IASB published for public comment proposals to amend the discount rate for measuring employee benefits. IAS 19 requires an entity to determine the rate used to discount employee benefits with reference to market yields on high quality corporate bonds. However, when there is no deep market in corporate bonds, an entity is required to use market yields on government bonds instead. The global financial crisis has led to a widening of the spread between yields on corporate bonds and yields on government bonds. As a result, entities with similar employee benefit obligations may report them at very different amounts. To address the issue expeditiously, the IASB proposes to eliminate the requirement to use yields on government bonds. Instead, entities would estimate the yield on high quality corporate bonds. If adopted, the amendments would ensure that the comparability of financial statements is maintained across jurisdictions, regardless of whether there is a deep market for high quality corporate bonds.
In view of the urgency of the issue and the limited scope of the proposals the IASB has set a shortened period for comments on the exposure draft – comments are due by 30 September 2009. The IASB intends to permit entities to adopt the amendments that arise from this exposure draft in their December 2009 financial statements.
October 2009: Board decides not to finalise ED on employee benefits discount rate
At its October 2009 meeting, the Board received a staff analysis of comments received on its proposed amendment of IAS 19 Discount Rate for Employee Benefits (ED/2009/10). It also redeliberated its conclusions in that exposure draft (ED – see immediately above). The staff noted that 100 comment letters were received; in addition, there had been correspondence with constituents since the staff papers for this meeting had been released.
The staff said that the comments were polarised: those who were in favour of the change were strongly so; those against were equally strong in their opposition. In addition, it was apparent that the exposure process had highlighted a number of areas in which the proposal would create problems of which the staff were previously unaware. The Board’s proposals could lead to greater diversity in practice rather than less. As a result, the staff presented three alternatives:
- Require government bond rates to be used when it is difficult to estimate a high quality corporate bond rate, rather than when there is no deep market in high quality corporate bonds. The staff would consider further what is meant by ‘difficult’ if the Board decides to proceed on this option;
- Continue with the ED proposal to eliminate the requirement to use a government bond rate; or
- Keep the existing requirement to refer to a government bond rate when there is no deep market in high quality corporate bonds � in other words, stop the project.
Board members engaged in a vigorous debate. Some challenged that staff analysis as simplistic and disingenuous. Others noted that the proposed amendment illustrated the danger of forcing an entity to use a measurement input that matched neither the currency nor duration of its defined benefit obligation.
Board members expressed dissatisfaction with all three alternatives. However, ultimately there was not sufficient support among Board members to ratify the amendments. Consequently, the requirement in IAS 19 paragraph 78 to use the government bond rate in the absence of a high-quality corporate bond rate would remain in force.
On 29 April 2010, the IASB published for public comment an exposure draft (ED) of proposed amendments to IAS 19 Employee Benefits. The proposals would amend the accounting for defined benefit plans through which some employers provide long-term employee benefits, such as pensions and post-employment medical care. In defined benefit plans, employers bear the risk of increases in costs and of possible poor investment performance. The ED proposes improvements to the recognition, presentation, and disclosure of defined benefit plans. The ED does not address measurement of defined benefit plans or the accounting for contribution-based benefit promises.