When a company or other entity employs a new worker, that worker will be offered a package of pay and benefits. Some of these will be short-term and the employee will receive the benefit at about the same time as he or she earns it, for example basic pay, overtime etc. Other employee benefits are deferred, however, the main example being retirement benefits (i.e. a pension).
The cost of these deferred employee benefits to the employer can be viewed in various ways. They could be described as deferred salary to the employee. Alternatively, they are a deduction from the employee’s true gross salary, used as a tax efficient means of saving. In some countries, tax efficiency arises on retirement benefit contributions because they are not taxed on the employee, but they are allowed as a deduction from taxable profits of the employer.
3.3.1 Accounting for employee benefit costs
Accounting for short-term employee benefit costs tends to be quite straightforward, because they are simply recognised an expense in the employer’s financial statements of the current period.
Accounting for the cost of deferred employee benefits is much more difficult. This is because of the large amounts involved, as well as the long time scale, complicated estimates and uncertainties.
In the past, entities accounted for these benefits accounted for these benefits simply by charging the income statements of the employing entity on the basis of actual payments made. This led to substantial variations in reported profits of these entities and disclosure of information on these costs was usually sparse.
IAS 19 Employee benefits
IAS 19 is intended to prescribe the following:
• When the cost of employee benefits should be recognised as a liability or an expense.
• The amount of the liability or expense that should be recognised.
As a basic rule, the standard states the following:
1. A liability should be recognised when an employee has provided a service in exchange for benefits to be received by the employee at some time in the future.
STUDYTEXT 2. An expense should be recognised when the entity enjoys the economic benefits from
a service provided by an employee regardless of when the employee received or will receive the benefits from providing the service.
The basic problem is therefore fairly straightforward. An entity will often enjoy the economic benefits from the services provided by its employees in advance of the employees receiving all the employment benefits from the work they have done, for example they will not receive pension benefits until after they retire.
3.3.2 Categories of employee benefits
The standard recognises five categories of employee benefits, and proposals a different accounting treatment for each. These four categories are as follows:
a) Short-term benefits including:
a. Wages and salaries
b. Social security contributions c. Paid annual leave
d. Paid sick leave
e. Paid maternity/Paternity leave
f. Profit shares and bonuses paid within 12 months of the year end g. Paid jury service
h. Paid military service
i. Non-monetary benefits, e.g. medical care, cars, free goods.
b) Post-employment benefits,
E.g. Pensions and post employment medical care c) Other long-term benefits
e.g. profit shares, bonuses or deferred compensation payable later than 12months after the year end, sabbatical leave, long-service benefits.
d) Termination benefits
e.g. early retirement payments and redundancy payments.
Benefits may be paid to the employees themselves, to their dependants (spouses, children, etc) or to third parties.
Definitions
IAS 19 has several important definitions. They are grouped together here, but you should refer back to them where necessary.
STUDYTEXT
Employee benefits are all forms of consideration given by an entity in exchange for service rendered by employees.
Short –term employee benefits are employee benefits (other than termination benefits) which fall due wholly within twelve months after the end of the period in which the employees render the related service.
Post-employment benefits are formal or informal arrangements under which an entity provides post employment benefits for one or more employees.
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.
Defined benefit plans are post-employment benefit plans other than defined contribution plans.
Multi – employer plans are defined contribution plans (other than state plans) or defined benefit plans (other than state plans) that:
a. Pool the assets contributed by various entities that are not under common control, and
b. Use those assets to provide benefits to employees of more than one entity, on the basis that contribution and benefit levels are determined without regard to the identity of the entity that employs the employees concerned.
Other long-term employee benefits are employee benefits (other than post employment benefits and termination benefits) which do not fall due wholly within twelve months after the end of the period in which the employees render the related service.
Termination benefits are employee benefits payable 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 voluntary redundancy in exchange for those benefits.
Vested employee benefits are employee benefits that are not conditional on future employment.
The present value of a defined benefit obligation is the present value, without deducting any plan assets, of expected future payments required to settle the obligation resulting from employee service in the current and prior periods.
STUDYTEXT Current service cost is the increase in the present value of the defined benefit obligation
resulting from employee service in the current period.
Interest cost is the increase during a period in the present value of a defined benefit obligation which arises because the benefits are one period closer to settlement.
Plan assets comprise:
a) Assets held by a long-term employee benefit fund; and b) Qualifying insurance policies
Assets held by a long-term employee benefit fund are assets (other than non-transferable financial instruments issued by the reporting entity) that:
a) Are held by an entity (a fund) that is legally separates from the reporting entity and exists solely to pay or fund employee benefits; and
b) Are available to be used only to pay or fund employee benefits, are not available to the reporting entity’s own creditors (even in bankruptcy), and cannot be returned to the reporting entity, unless either:
i) The remaining assets of the fund are sufficient to meet all the related employee benefit obligations of the plan or the reporting entity; or
ii) The assets are returned to the reporting entity to reimburse it for employee benefits already paid
A qualifying insurance policy is an insurance policy issued by an insurer that is not a related policy (as defined in IAS 24) of the reporting entity, if the process of the policy:
a) Can be used only to pay or fund employee benefits under a defined benefit plan: or b) Are not available to the reporting entity’s own creditor’s (even in bankruptcy) and cannot
be paid to the reporting entity, unless either:
i) The proceeds represent surplus assets that are not needed for the policy to meet all the related employee benefit obligations of the plan or the reporting entity; or ii) The assets are returned to the reporting entity to reimburse it for employee
benefits already paid.
The return of 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 cost of administering the plan and loess any tax payable by the plan itself.
STUDYTEXT
Actuarial gains and losses comprise:
a) Experience adjustments (the effects of differences between the previous actuarial assumptions and what has actually occurred), and
b) The effects of changes in actuarial assumptions.
Past service cost is the increase in the present value of the defined benefit obligation for employee service in prior periods, resulting from the current periods, resulting in the current period from the introduction of, or changes to, post-employment benefits or other long-term employee benefits.
Past service cost may be either positive (where benefits are introduced or improved) or negative (where existing benefits are reduced).