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 |
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|February 1998 |
|IAS 19 (1998), Employee Benefits |
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|1 January 1999 |
|Effective Date of IAS 19 (1998), Employee Benefits |
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|October 2000 |
|Limited Revisions to IAS 19 |
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|1 January 2001 |
|Effective Date of IAS 19 (2000), Employee Benefits |
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|May 2002 |
|'Asset Ceiling' amendment to IAS 19 (2000), Employee Benefits |
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|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). |
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