IAS 19 – Employee Benefits
Objective: To prescribe the accounting and disclosure for employee benefits, including:
Short-term benefits are: Wages, Annual leave, Sick leave, Annual profit-sharing, Non-monetary benefits
Long-term benefits are: Long service leave, Disability, Deferred compensation, Long term profit sharing and bonuses.
Post-employment benefits are: pension employment, Life insurance, Medical benefit.
Recognition, the cost providing employee benefits should be recognized in the period in which the benefit is earned by the employee rather than when it is paid.
Short-term benefits are payable within 12 months and should be recognized as an expense in the period in which the employee renders the service.
Post-employment benefits plans such as: pension, life insurance, medical benefits, are recognized as "defined benefit plans" or "defined contribution plans" and expenses are recognized in the period when the contribution payable.
"Defined Benefit Plan" under defined benefits plans liability is recognized in the balance sheet, equal to the.
1) Net present value of expected future payments required to settle the obligation.
2) Deferred actuarial gains and loss costs.
3) The fair value of any plan assets includes assets held by long term employee benefit fund and qualifying as insurance policies.
A defined benefit plan promises a specified monthly benefit at retirement. Also defined benefit plan does not require employees to make investment decisions. The employer is responsible for making decisions and managing investments for the plan. Likewise, the employer assumes all investment risk. The assets of a benefit plan are held collectively, rather than in individual employee accounts. The employer is responsible for funding the plan as required, even during periods when the company fails to earn a profit.
"Defined Contribution Plan" A defined contribution plan, on the other hand, does not promise a specific amount of benefits at retirement. A defined contribution plans is company retirement plan, in which the employee elects to defer some amount of his/her salary into the plan and bears the investment risk. In these plans, the employee or the employer (or both) contribute to the employee's individual account under the plan, sometimes at a set rate, such as 5 percent of earnings annually. These contributions generally are invested on the employee's behalf. The employee will ultimately receive the balance in their account, which is based on contributions plus or minus investment gains or losses. The value of the account will fluctuate due to the changes in the value of the investments.
Profit-sharing and Bonuses-payment, are to be recognized only when the entity pay them and the cost can be estimated.
Long term benefits long term employee benefits should be recognize in the period when the contribution payable and measured.
1) Present value of expected future payment.
2) The fair value of any plane assets.
3) Deferred actuarial gain or losses costs are prohibited.
Termination of benefit termination of benefit should recognized when the entity terminate one or more employees.
The Differences and Similarities between US GAAP Law and IFRS
Similarities: In both US GAAP and IFRS liabilities for employee benefits are recognized on the basis of legal or constructive obligation, and liabilities and expenses for employee benefits generally are recognized in the period in which the services are rendered rather than paid. In IFRS like US GAAP a defined contribution plan is post-employment benefit plan under which the employer pays specified contribution into separate entity or entities and has no further obligation, and all other post-employment plans are defined benefit plans. In both IFRS and US GAAP multi-employer plans are pension plans that pool the assets contributed by various entities to provide benefits to employee of more than one entity. Also in both IFRS and US GAAP contribution to a defined contribution plan are expensed as the obligation to make the payments is incurred. When also in both IFRS and US GAAP a liability is recognized for an employer's obligation under a defined benefit plan and liability and expenses are measured actuarially using the projected unit credit method.
The measurement of the defined benefit obligation in both IFRS and US GAAP includes estimated future salary increases, and future changes in state benefits if there is reliable evidence that the change occur. At last in both IFRS and US GAAP the fair value of qualifying plan assets is offset against the defined benefit obligation. And the actuarial gains and losses of defined benefit plans are recognized either in profit or loss, or immediately in equity. Amount recognized directly in equity are not recycled to profit or loss.
Significant Differences:
IFRS | US Law GAAP | |
Plan is accounted for as either a defined contribution plan or defined benefit plan However If insufficient information is available to permit defined benefit accounting, then a plan is accounted for as a defined contribution plan. Multi-employer plans are pension plans that pool the assets contributed by various entities to provide benefits to employee of more than one entity. | Unlike IFRS such plans are accounted for like defined contribution plans. Multi-employer plans are pension plans that pool the assets contributed by various entities to provide benefits to employee of more than one entity. | Multi-employer plans |
All benefits provided after termination of employment both before and during retirement. Post-employment benefits are: pension employment, Life insurance, Medical benefit. Post-employment plans in which participating employers pool their assets for investment purposes, but maintain separate account for payment purposes, are classified as "defined contribution plans" or "defined benefit plans" IFRS | Unlike IFRS post-employment benefits are divided into: 1) postretirement benefits Provided during retirement. 2) Other post-employment benefit provided after termination of employment but before retirement. Post-employment benefits are: pension employment, Life insurance, Medical benefit. Unlike IFRS Post-employment plans in which participating employers pool their assets for investment purposes, but maintain separate account for payment purposes, are classified as "defined benefit plans." US GAAP | Post-employment benefits |
Must recognized a liability in the balance sheet equal to the present value of the defined benefit obligation plus or minus any actuarial gains or losses not yet recognized, minus unrecognized prior service costs, minus the fair value of any plane assets. Note: if this amount is negative, the access asset is subject to a "ceiling test" | Must recognize in balance sheet the difference between the fair value of plan asset and the benefit obligation. Benefit obligation is: 1) The pension plan obligation 2) Accumulated pension plan obligation for other postretirement plants No portion of a plan asset can be classified as current, current portion is the amount expected to be paid in 12 months Post-employment benefits are: pension employment, Life insurance, Medical benefit. | Recognition of plan assets or liability in the balance sheet. |
On defined benefit plan a "corridor" calculated and the amount is 10 % of the grater: 1) The obligation at the beginning of the period. 2) The fair value of plan asses at the beginning of the period. If actuarial gains and losses of a defined benefit plan are recognized in profit and loss, then gains and losses that exceed the "corridor" generally are required to be recognized over the average remaining working lives of employees in the plan, faster recognition in profit or loss is permitted. IFRS | On defined benefit plan a "corridor" calculated and the amount is 10 % of the grater: 1) The obligation at the beginning of the period. 2) The market related value at the beginning of the period. Like IFRS if actuarial gains and losses of a defined benefit plan are recognized in profit and loss, then gains and losses that exceed the "corridor" generally are required to be recognized over the average remaining working lives of employees in the plan, faster recognition in profit or loss is permitted. US GAAP | Actuarial gains and losses |
If plan assets exceed the defined benefit obligation, then the amount of net asset is recognized only: 1) The amount of net asset that is limited to available future benefit from the plan. 2) To the amount of unrecognized actuarial losses in the past. | Unlike IFRS the recognition of net asset is not restricted. | Plan Assets |
The expense for long term employee benefit is accrued over the service period. | Like IFRS the expense for long term employee benefit is accrued over the service period. | Expense for Long-term employee benefit |
Termination benefits should recognized when the entity terminate one or more employees. | Unlike IFRS there is no recognition of termination benefit, and the timing of recognition depends on whether the cost will be paid. | Termination of Benefit |
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