IAS 19
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Overview
IAS 19: Employee Benefits is an international financial reporting standard issued by the International Accounting Standards Board (IASB) that prescribes the accounting and disclosure for all types of employee benefits.[1] Under the standard, "employee benefits" encompass all forms of consideration given by an entity in exchange for service rendered by employees or for the termination of employment.[2] These benefits include short-term items such as wages and salaries, as well as post-employment benefits like pensions and life insurance.[3] The standard requires an entity to recognize a liability when an employee has provided service in exchange for benefits to be paid in the future.[4]
Post-employment Benefits
Post-employment benefit plans are classified as either defined contribution plans or defined benefit plans, depending on the economic substance of the plan.[5] In a defined benefit plan, the entity’s obligation is to provide the agreed benefits to current and former employees, and actuarial risk rests with the entity.[6] These plans often calculate pensions based on variables such as age, years of service, and compensation.[7] Many defined benefit plans are funded by the entity through contributions to a separate legal entity or fund.[8]
Accounting for Defined Benefit Plans
Accounting for defined benefit plans is complex because actuarial assumptions are required to measure the obligation and the expense.[9] The measurement process involves the following key requirements:
- An entity must use the Projected Unit Credit Method to determine the present value of its defined benefit obligations.[10]
- Actuarial assumptions used for measurement must be unbiased and mutually compatible.[11]
- Financial assumptions must be based on market expectations at the end of the reporting period for the period over which the obligations are to be settled.[12]
- The discount rate is determined by reference to market yields on high quality corporate bonds at the end of the reporting period.[13]
Remeasurements of the net defined benefit liability, including actuarial gains and losses, are recognized immediately in Other Comprehensive Income (OCI).[14] These remeasurements are not reclassified to profit or loss in subsequent periods.[15] Past service costs, which result from plan amendments or curtailments, must be recognized as an expense at the earlier of when the plan amendment occurs or when the entity recognizes related restructuring costs.[16] If a plan has a surplus, the recognized asset is limited to the lower of the surplus in the plan and the "asset ceiling."[17]
Accounting Examples for IAS 19
The following examples illustrate the journal entries for different categories of employee benefits as defined by IAS 19.
1. Short-term Employee Benefits
Short-term benefits are recognized as an expense when the service is rendered, with a corresponding liability for any unpaid amounts.[18]
Scenario: An entity's employees earn wages of $50,000 for December. As of December 31, $45,000 has been paid, and $5,000 remains outstanding.
| Event | Debit | Credit | Rationale |
|---|---|---|---|
| Recognition of wages | Wages and Salaries Expense (P&L) | Cash / Accrued Liabilities | Recognition of the cost in exchange for service rendered.[19] |
2. Defined Benefit Plan: Service Cost and Contributions
For defined benefit plans, the service cost (increase in the present value of the obligation) is recognized in profit or loss.[20]
Scenario: A company determines the current service cost for the year to be $10,000. During the same period, the company contributes $8,000 in cash to the pension fund assets.
| Event | Debit | Credit | Rationale |
|---|---|---|---|
| Current service cost | Pension Expense (P&L) | Net Defined Benefit Liability | Recognition of the cost of benefits earned by employees during the current period.[21] |
| Employer contribution | Net Defined Benefit Liability (or Plan Assets) | Cash | Reduction of the net liability through the funding of the plan.[22] |
3. Remeasurements (Actuarial Gains and Losses)
Remeasurements, such as changes in actuarial assumptions, must be recognized immediately in Other Comprehensive Income (OCI).[23]
Scenario: At the end of the year, the discount rate decreases, causing the present value of the pension obligation to increase by $2,000 (an actuarial loss).
| Event | Debit | Credit | Rationale |
|---|---|---|---|
| Actuarial loss | Other Comprehensive Income (OCI) | Net Defined Benefit Liability | Immediate recognition of the loss outside of profit or loss.[24] |
4. Net Interest on the Net Defined Benefit Liability
Net interest is calculated by multiplying the net defined benefit liability (or asset) by the discount rate used to measure the obligation.[25]
| Event | Debit | Credit | Rationale |
|---|---|---|---|
| Net interest expense | Finance Cost (P&L) | Net Defined Benefit Liability | Reflecting the increase in the liability due to the passage of time.[26] |
References
- ^ IASB. IAS 19, Paragraph 1.
- ^ IASB. IAS 19, Paragraph 8.
- ^ Deloitte. IAS 19 — Employee Benefits Summary.
- ^ IASB. IAS 19, Paragraph 2.
- ^ IASB. IAS 19, Paragraph 27.
- ^ Deloitte. IAS 19 — Defined benefit plans.
- ^ IASB. IAS 19, Paragraph 30.
- ^ IASB. IAS 19, Paragraph 8.
- ^ IASB. IAS 19, Paragraph 55.
- ^ IASB. IAS 19, Paragraph 67.
- ^ Deloitte. IAS 19 — Actuarial assumptions.
- ^ IASB. IAS 19, Paragraph 75.
- ^ IASB. IAS 19, Paragraph 83.
- ^ IASB. IAS 19, Paragraph 120(c).
- ^ Deloitte. IAS 19 — Recognition of remeasurements.
- ^ IASB. IAS 19, Paragraph 103.
- ^ IASB. IAS 19, Paragraph 64.
- ^ IASB. IAS 19, Paragraph 11.
- ^ Deloitte. IAS 19 — Short-term benefits treatment.
- ^ IASB. IAS 19, Paragraph 120(a).
- ^ IASB. IAS 19, Paragraph 122.
- ^ Deloitte. IAS 19 — Funding and contributions.
- ^ IASB. IAS 19, Paragraph 120(c).
- ^ IASB. IAS 19, Paragraph 127.
- ^ IASB. IAS 19, Paragraph 123.
- ^ Deloitte. IAS 19 — Interest component.