STANDARDS: IAS 19



STANDARDS: IAS 19 | |

|EMPLOYEE BENEFITS |

|From the desk of M.Iftykhar Alam ..::: iftis. :::.. |

|HISTORY OF IAS 19 |

| |

|April 1980 |

|Exposure Draft E16, Accounting for Retirement Benefits in Financial Statements of Employers |

| |

|January 1983 |

|IAS 19, Accounting for Retirement Benefits in Financial Statements of Employers |

| |

|1 January 1985 |

|Effective Date of IAS 19 (1983) |

| |

|December 1992 |

|E47, Retirement Benefit Costs |

| |

|December 1993 |

|IAS 19, Retirement Benefit Costs (revised as part of the 'Comparability of Financial Statements' project |

|based on E32) |

| |

|1 January 1995 |

|Effective Date of IAS 19 (1993), Retirement Benefit Costs |

| |

|October 1996 |

|E54, Employee Benefits |

| |

|February 1998 |

|IAS 19 (1998), Employee Benefits |

| |

|1 January 1999 |

|Effective Date of IAS 19 (1998), Employee Benefits |

| |

|October 2000 |

|Limited Revisions to IAS 19 |

| |

|1 January 2001 |

|Effective Date of IAS 19 (2000), Employee Benefits |

| |

|May 2002 |

|'Asset Ceiling' amendment to IAS 19 (2000), Employee Benefits |

| |

|31 May 2002 |

|Effective Date of IAS 19 (2002), Employee Benefits |

| |

|5 December 2002 |

|Amendments to IAS 19.144-152 are proposed as part of the IASB's project on Share-Based Payment |

| |

|AMENDMENTS UNDER CONSIDERATION BY IASB |

| |

|· Convergence Topics |

|· Share-Based Payment |

| |

| |

|SUMMARY OF IAS 19 |

| |

|Objective of IAS 19 |

|The objective of IAS 19 (Revised 1998) is to prescribe the accounting and disclosure for employee |

|benefits (that is, all forms of consideration given by an enterprise in exchange for service rendered by |

|employees). The principle underlying all of the detailed requirements of the Standard is that the cost of|

|providing employee benefits should be recognised in the period in which the benefit is earned by the |

|employee, rather than when it is paid or payable. |

|Scope |

|IAS 19 applies to (among other kinds of employee benefits): |

|wages and salaries |

|compensated absences (paid vacation and sick leave) |

|profit sharing plans |

|bonuses |

|medical and life insurance benefits during employment |

|housing benefits |

|free or subsidised goods or services given to employees |

|pension benefits |

|post-employment medical and life insurance benefits |

|long-service or sabbatical leve |

|'jubilee' benefits |

|deferred compensation programmes |

|termination benefits |

|equity compensation benefits (disclosure only). |

|Basic Principle of IAS 19 |

|The cost of providing employee benefits should be recognised in the period in which the benefit is earned|

|by the employee, rather than when it is paid or payable. |

|Short-term Employee Benefits |

|For short-term employee benefits (those payable within 12 months after service is rendered, such as |

|wages, paid vacation and sick leave, bonuses, and nonmonetary benefits such as medical care and housing),|

|the undiscounted amount of the benefits expected to be paid in respect of service rendered by employees |

|in a period should be recognised in that period. [IAS 19.10] The expected cost of short-term compensated |

|absences should be recognised as the employees render service that increases their entitlement or, in the|

|case of non-accumulating absences, when the absences occur. [IAS 19.11] |

|Profit-sharing and Bonus Payments |

|The enterprise should recognise the expected cost of profit-sharing and bonus payments when, and only |

|when, it has a legal or constructive obligation to make such payments as a result of past events and a |

|reliable estimate of the expected cost can be made. [IAS 19.17] |

|Types of Post-employment Benefit Plans |

|The accounting treatment for a post-employment benefit plan will be determined according to whether the |

|plan is a defined contribution or a defined benefit plan: |

|Under a defined contribution plan, the enterprise pays fixed contributions into a fund but has no legal |

|or constructive obligation to make further payments if the fund does not have sufficient assets to pay |

|all of the employees' entitlements to post-employment benefits. |

|A defined benefit plan is a post-employment benefit plan other than a defined contribution plan. These |

|would include both formal plans and those informal practices that create a constructive obligation to the|

|enterprise's employees. |

|Defined Contribution Plans |

|For defined contribution plans (including multi-employer plans, state plans and insured schemes where the|

|obligations of the employer are similar to those arising in relation to defined contribution plans), the |

|cost to be recognised in the period is the contribution payable in exchange for service rendered by |

|employees during the period. [IAS 19.44] |

|If contributions to a defined contribution plan do not fall due within 12 months after the end of the |

|period in which the employee renders the service, they should be discounted to their present value. [IAS |

|19.45] |

|Defined Benefit Plans |

|For defined benefit plans, the amount recognised in the balance sheet should be the present value of the |

|defined benefit obligation (that is, the present value of expected future payments required to settle the|

|obligation resulting from employee service in the current and prior periods), as adjusted for |

|unrecognised actuarial gains and losses and unrecognised past service cost, and reduced by the fair value|

|of plan assets at the balance sheet date. [IAS 19.54] |

|The present value of the defined benefit obligation should be determined using the Projected Unit Credit |

|Method. [IAS 19.64] Valuations should be carried out with sufficient regularity such that the amounts |

|recognised in the financial statements do not differ materially from those that would be determined at |

|the balance sheet date. [IAS 19.56] The assumptions used for the purposes of such valuations should be |

|unbiased and mutually compatible. [IAS 19.72] The rate used to discount estimated cash flows should be |

|determined by reference to market yields at the balance sheet date on high quality corporate bonds. [IAS |

|19.78] |

|On an ongoing basis, actuarial gains and losses arise that comprise experience adjustments (the effects |

|of differences between the previous actuarial assumptions and what has actually occurred) and the effects|

|of changes in actuarial assumptions. In the long-term, actuarial gains and losses may offset one another |

|and, as a result, the enterprise is not required to recognise all such gains and losses immediately. The |

|Standard specifies that if the accumulated unrecognised actuarial gains and losses exceed 10% of the |

|greater of the defined benefit obligation or the fair value of plan assets, a portion of that net gain or|

|loss is required to be recognised immediately as income or expense. The portion recognised is the excess |

|divided by the expected average remaining working lives of the participating employees. Actuarial gains |

|and losses that do not breach the 10% limits described above (the 'corridor') need not be recognised - |

|although the enterprise may choose to do so. [IAS 19.92-93] |

|Over the life of the plan, changes in benefits under the plan will result in increases or decreases in |

|the enterprise's obligation. Past service cost is the term used to describe the change in the obligation |

|for employee service in prior periods, arising as a result of changes to plan arrangements in the current|

|period. Past service cost may be either positive (where benefits are introduced or improved) or negative |

|(where existing benefits are reduced). Past service cost should be recognised immediately to the extent |

|that it relates to former employees or to active employees already vested. Otherwise, it should be |

|amortised on a straight-line basis over the average period until the amended benefits become vested. |

|If the calculation of the balance sheet amount as set out above results in an asset, the amount |

|recognised should be limited to the net total of unrecognised actuarial losses and past service cost, |

|plus the present value of available refunds and reductions in future contributions to the plan. [IAS |

|19.58] |

|The charge to income recognised in a period in respect of a defined benefit plan will be made up of the |

|following components: [IAS 19.61] |

|current service cost (the actuarial estimate of benefits earned by employee service in the period); |

|interest cost (the increase in the present value of the obligation as a result of moving one period |

|closer to settlement); |

|expected return on plan assets; |

|actuarial gains and losses, to the extent recognised; |

|past service cost, to the extent recognised; and |

|the effect of any plan curtailments or settlements |

|IAS 19 took effect 1 January 1999. When IAS 19 (Revised 1998) was implemented, enterprises were required |

|to determine their 'transitional' liability -- the present value of its post-employment obligation at the|

|date of adoption minus the fair value, at the date of adoption, of plan assets minus any past service |

|cost to be recognised in later periods. If the transitional liability exceeded the liability that would |

|have been calculated under the enterprise's previous accounting policy, it could choose either: [IAS |

|19.154-155] |

|to recognise that increase immediately under the requirements of IAS 8; or |

|to amortise the increase on a straight-line basis over up to five years from the date of adoption (the |

|run-out period for this amortisation thus continues until 2003). |

|Other Long-term Benefits |

|IAS 19 (Revised 1998) requires a simplified application of the model described above for other long-term |

|employee benefits. This method differs from the accounting required for post-employment benefits in that:|

|[IAS 19.128-129] |

|actuarial gains and losses are recognised immediately and no 'corridor' (as discussed above for |

|post-employment benefits) is applied; and |

|all past service cost is recognised immediately. |

|Termination Benefits |

|For termination benefits, IAS 19 (Revised 1998) specifies that amounts payable should be recognised when,|

|and only when, the enterprise is demonstrably committed to either: [IAS 19.133] |

|terminate the employment of an employee or group of employees before the normal retirement date; or |

|provide termination benefits as a result of an offer made in order to encourage voluntary redundancy. |

|The enterprise will be demonstrably committed to a termination when, and only when, it has a detailed |

|formal plan for the termination and is without realistic possibility of withdrawal. Where termination |

|benefits fall due after more than 12 months after the balance sheet date, they should be discounted. [IAS|

|19.134] |

|Equity Compensation Benefits |

|IAS 19 (Revised 1998) also specifies extensive disclosure requirements for equity compensation benefits, |

|but it does not require recognition of compensation expense for equity compensation benefits such as |

|stock options or other equity securities issued to employees as compensation. Nor does it require |

|disclosure of the fair values of stock options or other share-based payment. [IAS 19.147] |

|FEE 2001 Study of Application of IAS 19 |

|In October 2001, the Federation of European Accountants (FEE) published a study of the experience of 47 |

|European companies (the majority of which are listed) in applying IAS 19 (revised 1998), Employee |

|Benefits, in their consolidated financial statements. It also includes a survey of national legislation |

|and standards regarding pension accounting in the countries concerned. |

|IAS 19 'Asset Ceiling' Revised in May 2002 |

|The IASB published the final 'asset ceiling' amendment to IAS 19 on 31 May 2002. The amendment prevents |

|the recognition of gains solely as a result of deferral of actuarial losses or past service cost, and |

|prohibits the recognition of losses solely as a result of deferral of actuarial gains. |

|This can happen if an entity has a surplus in a defined benefit plan and cannot, based on the current |

|terms of the plan, recover that surplus fully through refunds or reductions in future contributions. In |

|such cases, deferral of past service cost and actuarial losses that arise in the period will increase the|

|cumulative unrecognised net actuarial losses and past service cost. If that increase does not result in a|

|refund to the entity or a reduction in future contributions to the pension fund, a gain would have been |

|recognised under IAS 19 prior to this amendment. This amendment, however, prohibits recognising a gain in|

|these circumstances. The opposite effect arises with deferred actuarial gains that arise in the period. |

|This amendment prohibits recognising a loss in these circumstances. |

|The amendment takes effect for accounting periods ending on or after 31 May 2002. Earlier application is |

|encouraged. Click for IASB Press Release (PDF 12k). |

| |

| |

................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download