IAS 19 Employee benefits 02

INTRODUCTION |1

TYPES OF EMPLOYEE BENEFITS

Employee benefits are all forms of consideration given by an entity in exchange for service
rendered by employees.
Short-term are employee benefits (other than termination benefits) that are due to
employee be settled within twelve months after the end of the period in which the
benefits employees render the related service.
Post-employment are employee benefits (other than termination benefits) which are
benefits payable after the completion of employment.
Termination are employee benefits payable as a result of either:
benefits (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.
Other long-term are employee benefits (other than post-employment benefits and
employee termination benefits) that are not due to be settled within twelve
benefits months after the end of the period in which the employees render the
related service.
Share based Covered in IFRS 2
payments

SHORT TERM EMPLOYEE BENEFITS

EXAMPLES  Wages, salaries and social security contributions
 Short-term absences where the employee continues to be paid,
for example paid annual vacation, paid sick leave and paid
maternity/paternity leave. To fall within the definition, the
absences should be expected to occur within 12 months of the
end of the period in which the employee services were
provided;
 Profit-sharing and bonuses payable within 12 months of the end
of the period: and
 Non-monetary benefits, for example private medical care,
company cars and housing.
Accounting The short term employee benefits should be recognised as an
treatment employee provides the services to the entity by reference to which the
benefits are payable (i.e. in accordance with accrual concept). A
liability should be recognised for any unpaid amount at year-end.
Short-term Compensated absences are periods of absence from work for which
compensated the employee receives some form of payment and which are expected
absences to occur within 12 months of the end of the period in which the
employee renders the services. Examples of short-term compensated
absences are paid annual vacation and paid sick leave. The leaves /
absences can be accumulating or non-accumulating.
 ICMAP S1 AFA&CR

QUESTION 01
Mr. X is employee of AB Limited. His annual salary is Rs. 900,000 and he is allowed 30 paid
leaves during the year in which working days are 300. Unused vacation is carried forward to
the following year. During the year 2011, Mr. X used only 10 of his leaves. During 2012, Mr.
X used all the 50 vacations.

2| Required:
How should the expense be recognised in the financial statements of year 2011 and 2012?

PROFIT SHARING AND BONUS PLANS

An entity should recognise an expense and a corresponding liability for the cost of providing
profit-sharing arrangements and bonus payments when:
(i) The entity has a present legal or constructive obligation..
(ii) A reliable estimate of the obligation can be made.
Legal The legal obligation arises when payment is part of an employee's
obligation employment contract.
Constructive The constructive obligation arises where past performance has led to the
obligation expectation that benefits will be payable in the current period
Reliable IAS 19 sets out that a reliable estimate for bonus or profit-sharing
estimate arrangements can be made only when:
 There are formal terms setting out determination of the amount of the
benefit:
 The amount payable is determined by the entity before the financial
statements are authorised for issue; or
 Past practice provides clear evidence of the amount of a constructive
obligation.
Conditions Conditions may be attached to such bonus payments; commonly, the
and employee must still be in the entity's employment when the bonus becomes
Estimates payable. An estimate should be made based on the expectation of the level
of bonuses that will ultimately be paid.

QUESTION 02
An entity has a contractual agreement to pay a total of 4% of its net profit each year as a
bonus. The bonus is divided between the employees who are with the entity at its year end.
The following data is relevant:
Net profit Rs.120,000
Average employees 5
Employees at start of year 6
Employees at end of year 4

Required:
How should the expense be recognised?

QUESTION 03
An entity with a 30 June year end has a past practice of paying an annual bonus to
employees, although it has no contractual obligation to do so. Its practice is to appropriate
4% of its pre-tax profits, before charging the bonus, to a bonus pool and pay it to those
employees who remain in employment on the following 30 September. The total bonus is
allocated to employees in proportion to their 30 June salaries, and amounts due to those
leaving over the next three months are retrieved from the bonus pool for the benefit of the
entity. Past experience is that employees with salaries representing 8% of annual salaries
leave employment by 30 September. The entity's pre-tax profits for the year ended 30 June
2005 were Rs.4 million.
Required:
How should the bonus be recognised in the financial statements?

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 Class Notes

POST EMPLOYMENT BENEFITS PLANS

Post-employment benefits plan are of two types:
Defined contribution plans Defined benefit plans
Under which an entity pays fixed
contributions into a separate entity
(a fund) and will have no legal or |3
constructive obligation to pay further All post employment benefits plans
Definition contributions if the fund does not other than defined contribution plans
hold sufficient assets to pay all are considered defined benefit plans.
employees benefits relating to
employee service in the current and
prior periods.
The cost of providing pensions is not
certain and varies from year to year.
An actuary is usually appointed who
calculates the amounts to be paid to
The amount of expense is the fund each year. The calculation
Expense
reasonably predictable. is based on various estimates and
assumptions including life
expectancy, discount rate,
investment returns, wage inflation,
etc.
Contribution
by employer Fixed Not fixed
to fund
Fixed e.g. month pension equal to
Benefits to Not fixed (in case there is any deficit
50% x avg. salary x (service yrs / 30
employees in the fund)
yrs)
Linked to the benefits payable to
Liability of Restricted – to the amount of fixed
employee. In fact, the liability of the
employer contribution.
fund is liability of employer.
Risk Lies with employees Lies with employer
Presentation
No liability unless contribution is The net liability (or net assets) of
in financial
unpaid fund are shown as liability (or asset).
statements

QUESTION 04
Max Limited has a retirement plan, under which the pension amount payable to its
employees is payable at 2% of last salary drawn for each year of completed service.
Min Limited has a retirement plan for its employees. Its liability is restricted to giving each
year 3% of the salary for all employees in service.

Required:
Identify the type of plan.

ACCOUNTING – DEFINED CONTRIBUTION PLANS

Expense The entity should charge the agreed pension contribution to profit or loss as an
employment expense in each period.
Accrual As asset or liability for pensions only arises if the cash paid does not equal the
amount of contributions paid.
Disclosure IAS 19 requires disclosure of the amount recognised as an expense in the
period.

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 ICMAP S1 AFA&CR

QUESTION 05
A company makes contributions to the pension fund of employees at a rate of 5% of gross
salary and is not liable to pay any further amounts. The contributions made are Rs.10,000
per month for convenience with the balance being contributed in the first month of the
following accounting year.

4| The wages and salaries for 2006 are Rs.2.7 million.

Required:
Calculate the pension expense for 2006, and the accrual / prepayment at the end of the
year.

ACCOUNTING – DEFINED BENEFITS PLANS

The net liability (or net assets) of the fund are in fact liability (or asset) of the
Basic rule entity. Therefore, the amounts are calculated in the context of the fund but
recognized in financial statements of the entity (employer).
The plan liability is measured at present value of the defined benefit
obligation, using the Project Unit Credit Method. This is an actuarial
valuation method.
Plan liability
Discounting is necessary because the liability will be settled many years in
the future. The discount rate used should be determined by market yields
on high quality corporate bonds at the reporting date.
These are measured at fair value.

Plan assets Valuations should be carried out with sufficient regularity to ensure that the
amounts recognised in the financial statements do not materially differ from
actual fair values at reporting date.
Any unpaid contributions by the entity to the plan are not included in plan
Unpaid
assets as receivable. However, unpaid contributions are treated as ordinary
contributions
liability in SFP of the entity separately.
IMPORTANT TERMS
SERVICE COST COMPONENT (charged to PROFIT or LOSS)
is the increase in actuarial liability (present value Increase in
Current service
of defined benefit obligation) resulting from expense
costs
employee service in current period. Increase in liability
is the increase in the actuarial liability relating to
employee service in the previous period but only
arising in the current period. Past service costs Increase in
Past service
usually arise because there has been an expense
costs
improvement in the benefits being provided Increase in liability
under the plan.
(see below for further details)
Gain decreases
Gain or losses on Gain (loss) =
the expense and
curtailment and Reduction in PV of obligation – FV of assets paid
loss increases the
settlements out
expense.
NET INTEREST COMPONENT (charged or credited to PROFIT OR LOSS)
is the increase in the pension liability arising from Increase in
Interest costs the unwinding of discount as the liability is one expense
period nearer to being settled. Increase in liability
is the expected return earned from the pension Increase in asset
Return on assets scheme assets. Decrease in
expense

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 Class Notes

REMEASUREMENT COMPONENT (charged or credited to OTHER COMPREHENSIVE

INCOME)
are increases/decreases in the pension assets/
liability that occur either because the actuarial Calculated as
assumptions have changed or differences balancing figure
Actuarial gain or
between the previous actuarial assumptions and (these are not
losses
actual results e.g. interest is more than expected. reclassified to profit |5
The impact of asset ceiling is also charged in or loss)
OCI (see later)
CASH FLOWS OF FUND
The amount paid by the fund to the employees. Decrease in liability
Benefits paid
Decrease in asset
Contributions The amount paid by the entity to the fund Increase in assets

QUESTION 06
Gold Limited (GL) is operating a defined benefit plan. All transactions are assumed to occur
at the year-end. The present value of the obligation and the fair value of the plan assets
were both Rs.1,000 at 1 January 2011. The relevant data for three years is as follows:
2011 2012 2013
Discount rate at start of year 12% 10% 10%
Current service costs (Rs.) 130 220 150
Past service costs (Rs.) 40 - 110
Benefits paid (Rs.) 150 180 190
Contributions to the fund (Rs.) 90 100 110
Present value of obligation at 31 December (Rs.) – 1,248 1,392 1,450
Actuarial
Fair value of plan assets at 31 December (Rs.) – 1,092 1,109 1,093
Actuarial

Required:
(a) Determine the amount of actuarial gains or losses for the period.
(b) Calculate the amount of liability as to be presented in statement of financial position
(c) Calculate the charge to profit or loss and other comprehensive income
(d) Prepare the movement in net liability recognised

QUESTION 07 PE 501 Jun 2011 4a

ABC Limited has a defined benefit plan for their employees. The present value of the defined
benefit obligation and the fair value of the plan assets on January 01, 2010 were
Rs.1,000,000 each.

Following information is relevant:

(Rs. 000)
2010 2011
Discount rate at start of year 12.0 % 11.0 %
Current service cost (Rs.) 140 235
Benefits paid (Rs.) 155 190
Contributions received (Rs.) 95 105
Present value of obligation at 31 December (Rs.) 1,250 1,275
Fair value of plan assets at 31 December (Rs.) 1,125 1,210

All actuarial gains and losses are recognised immediately in other comprehensive income for
the year. All transactions are assumed to occur at the year-end.

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 ICMAP S1 AFA&CR

Required:
(i) Determine the amounts of the actuarial gains or losses for the period. (10)
(ii) Calculate the amounts of liability to be shown in the statement of financial position as
at December 31, 2010-11. (02)
(iii) Calculate the amounts of expenses to be charged to the income statement for the
years ended December 31, 2010-11 (05)
6|
QUESTION 08 PE 501 Nov 2011 4b
Following information is relevant to a defined benefit pension plan of Alfalah Company for
the year 2010:
Plan Assets: Rs. (Million)
Balance at January 01, 2010 600
Expected return on plan assets 61
Contribution received 49
Benefits paid (40)
Actuarial gain (balancing figure) 15
685
Plan Liabilities:
Balance at January 01, 2010 640
Interest cost 52
Current service cost 21
Benefits paid (40)
Actuarial loss (balancing figure) 42
715

Required:
Calculate:
(i) Pension expense to be recognised in profit or loss for the year ended December 31,
2010.
(ii) Net liabilities to be shown in the Statement of Financial Position as at December 31,
2010.
(11)

QUESTION 09 PE 501 Sep 2012 4

Following data pertains to the post employment defined benefit compensation scheme of
ABC Company:
Discount rate for each year 14%
Present value of obligation on January 1, 2010 Rs. 1,100,000
Fair value of plan assets on January 1, 2010 Rs. 1,000,000

(In Rupees)
Other relevant information: 2010 2011
Current service cost 170,000 130,000
Benefits paid out 120,000 280,000
Contributions paid by the entity 110,000 120,000
Present value of obligation at year end 1,400,000 1,650,000
Fair value of plan assets at year end 1,525,000 1,850,000

On December 31, 2011 a division of company was sold resulting in large number of
employees of that division opting to transfer their accumulated pension entitlement to their
new employer's plan. The actuary has calculated reduction in ABC Company's defined
benefit liability by Rs.50,000 and plan assets with a fair value of Rs.45,000 were transferred
to the new employer’s plan. The year end valuations given here-in above were carried out
before this transfer was recorded. Assume all transactions to occur at the year end.

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 Class Notes

Required:
Compute the amounts:
(i) Of liabilities / assets to be shown in the statement of financial position for the years
2010 and 2011. (03)
(ii) to be recognised in the profit and loss account. (04)
(iii) to be recognised in the other comprehensive income. (13)
|7
QUESTION 10 IAS 19 PE Aug 2013 Q6b
Ahad Limited introduced a defined benefit pension scheme in the year to December 31,
2012 and following facts are relevant to the scheme for the year:
Rs. in million
Cash contribution by the company 560.00
Current service cost 615.00
Interest on obligations 120.00
Interest on plan assets 65.00
Present value of obligation (December 31, 2012) 725.00
Present market value of plan assets (December 31, 2012) 695.00

Required:
Pass a journal entry to record the above transactions. (Workings are to be shown)(08)

QUESTION 11 IAS 19 PE Mod 2013 Q3b

Following data pertains to the post-employment defined benefit compensation scheme of
SBM Company:
Discount rate for each year 12.50%
Present value of obligation on January 1, 2011 Rs. 1,200,000
Fair value of plan assets on January 1, 2011 Rs. 1,075,000

Other relevant information

2011 2012
(Rs.) (Rs.)
Current service cost 150,000 225,000
Benefits paid out 160,000 240,000
Contributions paid by the entity 110,000 120,000
Present value of obligation at year end 1,350,000 1,600,000
Fair value of plan assets at year end 1,164,000 1,250,000
Required:
Calculate the amounts to be presented in the statement of financial position, statement of
profit or loss and statement of other comprehensive income for the year ended Dec 31st
2011 and 2012. (15)
ASSET CEILING
Surplus It is possible that a defined benefit plan is in surplus i.e. fair value of plan assets
is greater than present value of obligation under the plan.
Asset Applying the ‘asset ceiling’ means that a surplus can only be recognised to the
ceiling extent that it will be recoverable in the form of refunds or reduced contributions
in future
QUESTION 12
The following information relates to a defined benefit plan:
Rs.
Fair value of plan assets 950,000
Present value of pension liability 800,000
Present value of future refunds and reductions in future contributions 70,000
What is the amount of the asset that is recognised in the financial statements?

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 ICMAP S1 AFA&CR

QUESTION 13 PE 501 Feb 2013 5a

Honey Company operates a defined benefit plan and following information is related to its
plan as on June 30, 2012:
Amount is Rs.
Fair value of plan assets as on June 30, 2011 6,800,000
Present value of pension liability as on June 30, 2011 6,500,000
8|
Current service cost 750,000
Benefit paid 500,000
Contribution to plan assets 800,000
Re-measurement component in obligation (loss) 100,000
Re-measurement component in assets (gain) 420,000
Present value of pension liability as on June 30,2012 ?
Fair value of plan assets as on June 30, 2012 ?

The total present value of economic benefits available in the form of refunds from the plan or
reduction in future contributions to the plan is Rs. 300,000 as on June 30, 2011 and 2012.
The company uses the discount rate of 10%.

Required:
Calculate the amount of asset / liability to be presented in Statement of Financial Positions
on June 30, 2012. (10)

ACCOUNTING FOR OTHER EMPLOYEE BENEFITS

Other long-term employment benefits
There may be other long-term employment benefits, in addition to post-employment benefits.
These include bonuses and profits shares payables 12 months or more after the reporting
date, and long-term sabbatical leave. The standard requires these benefits to be accounted
for in the same way as post-employment defined benefits.
Termination benefits
Termination benefits are benefits to employees arising as a consequence of termination of
their employment. An example is the payment of a lump sum to an employee who volunteers
for early retirement.

The standard requires that these costs should be recognized in full as a liability and an
expense in the financial period when the entity recognizes a demonstrable obligation to pay
those benefits at some time in future. Evidence of a demonstrable obligation would be a
formal plan (e.g a plan for voluntary redundancy) drawn up and communicated to the people
affected.

If the termination is to take place more than 12 months after the reporting date, the
termination benefits should be discounted. The discount rate should be found as detailed
elsewhere in the standard.

Where an offer is made to encourage voluntary redundancy, the calculation should be based
on the number of employees expected to accept.

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