12. Related standards
IAS 19
Current GAAP comparisons
Looking ahead
End-of-chapter practice
12
13. IFRS 2 Share-based payment
IAS 24 Related party disclosures
13
14. Objective and scope
Short-term employee benefits
Post-employment benefit plans
Post-employment benefits: defined
contribution plans
Post-employment benefits: defined benefit
plans
Other long-term employee benefits
Termination benefits
14
15. Accounting and disclosure requirements for
employee benefits: all forms of consideration
given by an entity in exchange for employee
services rendered
◦ Short-term employee benefits
◦ Post-employment benefits
◦ Other long-term employee benefits
◦ Termination benefits
15
16. Short-term employee benefits – benefits other than
termination benefits that are due to be settled within
12 months after the end of the period in which the
related service is rendered
Example:
◦ Salaries, wages, social security contributions
◦ Short-term compensated absences such as paid
annual and sickness leaves
◦ Profit-sharing and bonuses
◦ Non-monetary benefits such as medical care,
housing, etc.
16
17. Short-term compensated absences:
◦ Recognize a cost and liability = the undiscounted amount of
benefits expected to be paid
Some benefits accumulate
◦ Accrue as employee provides services (e.g., paid vacation
leave)
Some do not accrue (e.g., parental leave)
◦ Recognize cost and liability when event occurs that obligates
the entity to provide the benefit
17
18. Profit-sharing and bonus plans:
◦ Recognize cost and liability only when
a legal or constructive obligation exists, and
amount can be reasonably estimated
To reasonably estimate, must have one of the
following:
◦ plan has formal terms including a formula
◦ amount is known before F/S are authorized for
release
◦ past practice provides clear evidence of amount
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19. Post-employment benefit plans – formal or
informal arrangements to provide benefits after
employment, such as pension benefits and post-
employment medical care
Two types of plan:
◦ defined contribution plan: employer makes
specific contributions, employee benefits =
whatever has accumulated
◦ defined benefit plan: employer promises to pay
a post-employment benefit, if not enough funds
have accumulated, employer is responsible for
the difference
19
21. - Relatively straightforward
- Liability is recognized only for contributions
unpaid at the end of the period
- Expense recognized in same period as
services are rendered
21
22. - Complex
- Accounting measures depend on actuarial
assumptions far into the future
- Obligations are settled many years after
service is provided by employees – need to take
time value of money into account
- Many plans are funded and rely on
investment returns to grow
- Employer underwrites actuarial and
investment risks
22
23. Accounting building blocks
◦ Present value of a defined benefit obligation – the
discounted present value of the expected future
payments required to settle an entity’s obligation
resulting from employee service accumulated to
date
◦ Plan assets – assets held by the long-term
employee benefit fund that exists solely to pay
employee benefits as they fall due.
23
24. Changes in the PV of the defined benefit obligation (DBO) – based on
projected salaries:
Present value of the obligation, beginning of period
+ Current period’s service cost
+ Interest cost on the outstanding obligation for the
period
+/- Past service costs from plan amendments in the period
- - Benefits paid under the plan in the period
+/- +/- Actuarial gains (-) and losses (+) in the
period_______________
= = Present value of the obligation, end of
period________________
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25. PV of the defined benefit obligation depends
on:
◦ actuarial assumptions (mortality rates, employee
turnover, dependants)
◦ financial assumptions (discount rate, future salary
levels, future medical costs)
Discount/interest rate = end-of-period
market yield on high-quality corporate bonds
with terms that correspond to obligation
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26. Current service cost = PV of benefits earned for
service in current period
Past service cost (PSC) = change in PV of DBO from
introducing plan that includes benefits for past
service or from a change in the benefits payable
related to past service under existing plan
Actuarial gains/losses = effects of changes in
actuarial assumptions and experience adjustments
for difference between previous estimates and what
actually occurred.
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27. Changes in the FV of plan assets:
Fair value of plan assets, beginning of period
+ Contributions from employer/employees in the
period
+/- Actual return on plan assets in the period
- Benefits paid under the plan in the period__________
= Fair value of plan assets, end of period____________
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28. Actual return on plan assets = interest,
dividends, other income and realized and
unrealized gains and losses on assets held in
plan
Expected return on plan assets = return used
by actuary in determining funding requirements
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29. Benefit cost to recognize each period
Current service cost for the period
+ Interest cost for the period
- Expected return on plan assets for the period
+/- Actuarial gain (-) or loss(+) amortized in the period
+/- Past service cost recognized in the period
= Post-employment benefit cost to profit or loss
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30. Benefit cost variables taken from
◦ PV of PBO, and
◦ Fund assets
◦ Information in working papers for actuarial gain/loss
and PSC
Amortization of actuarial gain/loss – use corridor method
PSC
for vested benefits, expense in period
for unvested benefits, amortize to expense on straight-
line basis over average period until vested
30
31. Actuarial gains/losses: 2 options
1. recognize all actuarial gains/losses in OCI when they
occur, and then directly to retained earnings – not
through P&L
2. do not recognize/amortize unless accumulated net
actuarial gain/loss is significant*; if significant,
amortize excess amount to expense over average
working lives of employees in plan
*significant: if at the first of the period, it is
more than 10% of the larger of the beginning of
the period PV of PBO and the fund assets
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32. Entries:
Dr. Employee benefit expense $X
Cr. Defined benefit liability $X
To record expense and recognize liability.
Dr. Defined benefit liability $Y
Cr. Cash $Y
To record contribution to plan assets.
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33. Balance in Defined Benefit Liability on balance sheet can be
reconciled to building blocks:
Present value of the defined benefit obligation
- Fair value of the plan assets
= Funded status of the plan
+/- Net unrecognized actuarial gains (+) or losses (-)
- Unrecognized past service costs
= Defined benefit liability
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34. Extensive disclosures required
◦ Description of plans and accounting policies
◦ Reconciliation of changes in PV of PBO and fund
assets
◦ Reconciliation of B/S account to funded status
◦ Components of and total expense
◦ Information about plan assets and actuarial
assumptions, sensitivity analysis, historical data
◦ Best estimate of expected contribution to plan in year
after B/S date
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35. Examples:
◦ long-term disability benefits, long-service or
sabbatical leaves, deferred compensation (>12
months)
◦ similar to post-employment benefits, but with less
measurement uncertainty
◦ all aspects recognized in expense in year; no defer
and amortize
35
37. Termination benefits – benefits payable as a result of:
◦ ending an employee’s employment before normal
retirement date, or
◦ employee accepts voluntary termination in exchange for
benefits
Recognize liability and expense only when entity is
demonstrably committed to plan. Plan sets out:
a) location, function and approximate number of employees being
terminated;
b) termination benefits to be provided for each job classification or
function; and
c) when the plan will be implemented
Entire cost is expensed when entity is committed to plan
37
38. IAS 19 on IASB current agenda
Goal - issue interim standard with significant
improvements by 2011
March 2008 Discussion Paper (DP) issued –
limited scope
Exposure Draft expected in late 2009
After DP issues resolved, second phase of
project will begin
38
39. Tentative decisions made by IAS Board
◦ All changes in plan assets and benefit obligation should be
recognized when incurred
◦ No need to separately recognize expected return on
plan assets
◦ All past service cost should be recognized in expense
when plan amended
◦ Variety of presentation approaches for components
of defined benefit expense – IASB seeking input
◦ New definitions needed for post-employment
benefits and defined benefit plans
39
