IAS 19 EMPLOYEE BENEFIT

Ø  WHAT DOES IAS 19 IS ALL ABOUT?

IAS 19 prescribes when the cost of employee benefit should be recognised as an expense or liability and the amount of liability or expense to be recognised.

1.       A LIABILITY should be recognised when an employee has provided service in exchange for benefits to be received by the employee at some time in future.

2.       An EXPENSE should be recognised when entity consumes the economic benefits from a service provided by an employee in exchange for economic benefits.

Ø  WHAT ARE CATEGORIES OF EMPLOYEE BENEFIT?

1.       Short-term employee benefits

Short-term employee benefits are those which are expected to be settled wholly before twelve months after the end of the annual reporting period.

a)      Wages & Salaries

b)       Profit-sharing

c)       Bonuses

d)      Non-monetary benefits paid to current employees

e)      Social security contribution

f)       Paid Annual Leave

g)      Paid sick Leave

h)      Paid Maternity/ Paternity Leave

i)        Paid jury Service

j)        Paid military Service

 

2.       Post-employment benefit plans

Post-employment benefit plans are informal or formal arrangement where an entity provides post-employment benefits to one or more employees, e.g. retirement benefits, life insurance and medical care.

3.       Other Long Term Benefit

Eg: profit shares, bonuses or deferred compensation payable later than 12 months after the year end, sabbatical leave, long service benefit and long term disability benefit.

4.       Termination Benefit

Eg: Early retirement payment and redundancy payment

 

Ø  WHAT IS ACCOUNTING TREATMENT FOR SHORT TERM EMPLOYEE BENEFIT?

1.       The cost of short term employee benefit should be recognised AS AN EXPENSE.

2.       Unpaid short term employee benefit should be recognised as an ACCURED EXPENSE. Any short term benefits paid in advance should be recognised as PREPAYMENT.

  

Ø  WHAT IS ACCOUNTING TREATMENT OF POST EMPLOYEE BENEFIT?

The post employee benefit are classified into DEFINED CONTRIBUTION PLAN and DEFINED BENEFIT PLANS

1.       Defined Contribution Plans

Under  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. The entity obligation is therefore effectively limited to the amount it agrees to contribute to the fund and effectively place actuarial and investment risk on the employee.

 

IAS 19 Requires Following Treatment:

a)      CONTRIBUTION to defined contribution plan should be recognised as an EXPENSE in the period they are payable.

b)      Any Liability for UNPAID CONTRIBUTIONS that are due as at the end of period should be recognised as a LIABILITY.

c)       Any Excess Contribution paid should be recognised as an asset, but only to extent that are prepayment will lead to reduction in future liability.

2.       Defined benefit plans

These are post-employment benefit plan other than a defined contribution plans. It creates an obligation on the entity to provide agreed benefits to current and past employees and effectively places actuarial and investment risk on the entity.

ACCOUNTING OF DEFINED BENEFIT PLAN

a)      The future benefits cannot be measured exactly, to measure these future obligation, it is necessary to use ACTUARIAL ASSUMPTIONS.

b)      The obligation payable in future years should be valued  by discounting on PRESENT VALUE Basis.

c)       If actuarial assumption change, the amount of required contribution to the will change, and there may be ACTUARIAL GAINS OR LOSSES.

STEP 1 : MEASURE DEFICIT OR SURPLUS

a)      An actuarial technique (the Projected Unit Credit Method) should be used to make a reliable estimate of the amount of the amount of future benefits employees have earned from service in relation to the current and prior years.

b)      The benefit should be discounted to arrive at the Present Value of the Defined Benefit Obligation and the Current Service Cost.

c)       The fair value of any Plan Asset should be deducted from the Present Value of Defined Benefit Obligation

  STEP 2:  The surplus or deficit measured in Step 1 may have to be adjusted if a net benefit asset has to be restricted by asset ceiling

STEP 3: Determine the amount to be recognised in profit or loss:

a)      Current Service Cost

b)      Any past Service Cost and gain or loss on settlement

c)       Net Interest on the Net Defined Benefit Liability (asset)

STEP 4: Determine the re-measurements of net defined benefit liability (asset), to be  recognised in Other Comprehensive Income

a)      Actuarial gains and losses.

b)      Return on Plan Assets

c)       Any change in effect of Asset Ceiling. 

Ø  HOW DEFINED BENEFIT ARE DISCLOSED IN FINANCIAL STATEMENTS?    

The amount recognised as Defined Benefit Liability should be following:

a)      The present value of defined benefit obligation at the year end, minus

b)      The fair value of assets of the plan at the year end. 

Ø  WHAT ARE PLAN ASSETS?

Plan Assets are :

a)      Assets such as stock and shares, held by a fund that is legally separate from reporting entity, which exists solely to pay employee benefit

b)      Insurance policies , issued by an insurer that is not a related party, the proceeds of which can only be used to pay employee benefits.

          IAS 19 includes the following specific requirements:

a)      The plan asset should exclude any contributions due from employer but not yet paid.

b)      Plan Assets are reduced by any liabilities of the fund that do not relate to employee benefit such as trade and other payable.

COMPONENT	RECOGNISED IN
SERVICE COST	P&L
NET INTEREST ON NET DEFINED LIABILITY	P&L
REMEASUREMENT OF THE NET DEFINED BENEFIT LIABILITY	OTHER COMPREHENSIVE INCOME

 

Ø  WHAT ARE OTHER LONG TERM BENEFITS?

AS 19 (2011) prescribes a modified application of the post-employment benefit model described above for other long-term employee benefits:

the recognition and measurement of a surplus or deficit in other long-term employee benefit plan is consistent with the requirements outlined above service cost, net interest and remeasurements are all recognised in profit or loss (unless recognised in the cost of an asset under another IFRS), i.e. when compared to accounting for defined benefit plans, the effects of remeasurements are not recognised in other comprehensive income.

COMPILED BY

CA.HARSIMRAN KAUR