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 recognized 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.
The salaries of employees include the following:
(a) short-term for active employees, such as salaries, wages and social security
contributions, paid sick leave and for other reasons, participation in profits and incentives By:
(if paid within twelve months after the end of the year) and non-monetary rewards (such
as medical care, enjoyment of houses, cars and goods or services provided subsidized
(b) post-employment benefits such as pensions, other retirement benefits, life insurance
post-employment and post-employment medical care;
(c) other long-term employee benefits, including paid leave after long periods of service
(sabbaticals), special benefits after a long period of service, incapacity benefits and, if
paid within twelve months or more after the end of the year, profit sharing, incentive and
other compensation deferred salary; and
(d) termination of the contract.
Because each category listed in paragraphs (a) to (d) have different characteristics, this
Standard establishes requirements for each of them.
Ø The employee benefits include both those provided to the workers themselves, as the
people who depend on them, and can be met by payments (or providing goods and
services previously committed) made directly to employees or their spouses, children or
other dependents of those, or others previously designated, such as insurance
Ø Employees can provide their services in the business full time or part-time, permanent,
temporary or casual. For purposes of this Standard, the term "employees" includes the
managers and staff linked to management.
Basic principle of IAS 19
The cost of providing employee benefits should be recognized in the period in which the benefit is earned by the employee, rather than when it is paid or payable.
1. 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 non-monetary 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 recognized in that period. [IAS 19.10] The expected cost of short-term compensated absences should be recognized as the employees render service that increases their entitlement or, in the case of non-accumulating absences, when the absences occur. [IAS 19.11]
2. 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:
o 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.
o 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.
ª 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]
ª Defined benefit plans
For defined benefit plans, the amount recognized 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.
ª 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]
ª 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 unrecognized 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]
o actuarial gains and losses are recognised immediately and no 'corridor' (as discussed above for post-employment benefits) is applied; and
o 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]
o terminate the employment of an employee or group of employees before the normal retirement date; or
o 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]
The amendments proposed to IAS 19 are:
· Immediate recognition of all estimated changes in the cost of providing defined benefits and all changes in the value of plan assets. This would eliminate the various methods currently in IAS 19, including the 'corridor' method, that allows deferral of some of those gains or losses.
· A new presentation approach that would clearly distinguish between different types of gains and losses arising from defined benefit plans. Specifically, the ED proposes that the following changes in benefit costs should be presented separately:
o service cost – in profit or loss
o finance cost (ie, net interest on the net defined benefit liability) – as part of finance costs in profit or loss
o remeasurement – in other comprehensive income
The effect of presenting these items separately is to remove from IAS 19 the option for entities to recognise in profit or loss all changes in defined benefit obligations and in the fair value of plan assets.
· Improved disclosures about matters such as:
o the characteristics of the company's defined benefit plans.
o the amounts recognised in the financial statements.
o risks arising from defined benefit plans.
o participation in multi-employer plans.
. The actuarial assumptions
must be unbiased and mutually compatible.
.The actuarial assumptions represent the best estimates that the company owns on the
variables that will determine the final cost of providing post-employment benefits. Among
the actuarial assumptions include the following two types:
(a) demographic assumptions about the characteristics of the employees past and
present (as well as their beneficiaries) that they can receive benefits. These
assumptions relate to matters such as:
(i) mortality, both during the activity period and beyond;
(ii) turnover rates among employees, disability and premature withdrawals;
(iii) the proportion of participants in the plan to recipients who are entitled to
(iv) the types of demands for attention, in plans for medical assistance.
(b) financial assumptions, which are related to the following:
(i) the discount rate (see paragraphs 78 to 82),
(ii) future levels of salaries and benefits (see paragraphs 83 to 87);
(iii) in the case of benefits for health care, the future costs of it, including whether
they were important, the administration costs of claims and payments of benefits
(see paragraphs 88 to 91); and
(iv) the expected rate of return on plan assets (see paragraphs 105 to 107).
.The actuarial assumptions were considered unbiased if they are neither reckless nor too
.The actuarial assumptions will be compatible with each other when they reflect the
economic relations between factors such as inflation, rates of increase in salaries, return
on assets and discount rates. For example, all scenarios that are dependent on a certain
level of inflation in a future period (such as those related to interest rates and increases
in wages and benefits), will handle the same kind of price increase in this period.
Separating demographic and financial assumptions
Entities will now be required under IAS 19R to segregate and
disclose the impact of actuarial gains or losses resulting from
changes in demographic assumptions from those relating to
Demographic assumptions are defined in paragraph 76(a) of
IAS 19R as those that deal with future characteristics of
employees. These would include estimates of future mortality
rates, staff turnover, early retirement and the proportion of plan
members who will select lump sum payments instead of annuities.
Conversely, financial assumptions would encompass items such
as discount rates and benefit levels (inclusive of future salary