IAS/NAS 19: Employee Benefits

Employee benefits are all forms of consideration given by an entity in exchange for service provided by employees or for the termination of employment.

Types of Employee Benefits:

Other long-term employee benefits include items such as the following, if not expected to be settled wholly before twelve months after the end of the annual reporting period in which the employees render the related service:

1. long-term paid absences such as long service or sabbatical leave. [9 Weeks of fully paid leave every 10 years of service.]
2. jubilee or other long service benefits. [a 1 Kg 24 carat Gold Bar]
3. long-term disability benefits. [Receive 50% of salary for up to 5 years or until recovery or retirement age]
4. profit-sharing and bonuses.
5. and deferred remuneration.

The measurement of other long-term employee benefits is not usually subject to the same degree of uncertainty as the measurement of post-employment benefits. Unlike the accounting required for post-employment benefits, this method does not recognize remeasurements in other comprehensive income but rather in Statement of Profit/Loss.

The technique of calculation is not different than that of post-employment benefits, the only difference is that any remeasurement [actuarial gains or losses] are charged to SOPL rather than OCI.

One perfect example of this is Accumulating Vesting leaves

1. It needs actuarial calculation as it involves various assumptions like discount rate, mortality rate, ending salary etc.
2. However, for leaves, the actuarial gains/loss are charged to SOPL.

Short-term employee benefits:

When an employee has rendered service to an entity during an accounting period, the entity shall recognise the undiscounted amount of short-term employee benefits expected to be paid in exchange for that service:

Non-Accumulating Leaves:

Non-accumulating paid absences do not carry forward: they lapse if the current period’s entitlement is not used in full and do not entitle employees to a cash payment for unused entitlement on leaving the entity. An entity recognizes no liability or expense until the time of the absence, because employee service does not increase the amount of benefit.

Simply for Understanding:

For Non-Accumulating Leaves, expenses shall be booked as and when the absences occur. Since the leaves are not carried forward, there is no need to book any obligation as - if the obligations eventually are reversed in the same year the next effect is zero. Therefore, there is no logic behind it.

Example:

Mr. Rajesh has 2 non-accumulating leaves in the year 2024-25. His monthly salary is 45,000. He takes a 2-day leave in the month of February on the occasion of Valentine's day.

The expense for the month will be as:

Salary Expenses : 45,000/28*26 = 41,785.71
Leave Expenses : 45,000/28*2    = 3,214.29

Journal Entry:

Salary Expense A/c Dr.    41,785.71
Leave Expenses A/c Dr.    3,214.29
  To Staff payables          45,000.00

But for simplicity, we don’t segregate the expenses and just book the expense as salary expense.

Salary Expenses A/c Dr.    45,000.00
  To Salary Payables A/c          45,000.00

Profit-sharing and Bonus Plans:

An entity shall recognize the expected cost of profit-sharing and bonus payments when, and only when:

The entity has a present legal or constructive obligation to make such payments as a result of past events.

A reliable estimate of the obligation can be made.

i.e. The amount of obligation that exists can be estimated reliably.

Therefore, a present obligation exists when, and only when, the entity has no realistic alternative but to make the payments.

Post-employment benefits include items such as the following:

1. retirement benefits (e.g. pensions and lump sum payments on retirement); and
2. other post-employment benefits, such as post-employment life insurance and post-employment medical care.

Post Employee Benefits are of Two Types:

When an employee has rendered service to an entity during a period, the entity shall recognise the contribution payable to a defined contribution plan in exchange for that service.

1. as a liability {Unpaid Portion}
2. as an expense, unless capitalization is allowed as per NAS 16, NAS 40 etc.

E.g. Contributory Pension Plans:

Eva Giri works at Apsara Cosmetics Pvt. Ltd. She is entitled to 10% of salary from the firm that the firm deposits in the Provided Fund maintained by the State. She herself contributes 10% of the Salary to the fund [20% total] which is automatically deducted by the Firm. Eva’s Monthly Salary is 78,000.

Here, Monthly Contribution is 78,000*20% = 15,600.00

This Obligation rests on the firm until it makes this payment to the fund. After the payment is made to the fund , the fund is liable to make payment. i.e. the firm’s obligation is limited to the contribution unpaid to the fund.

Entry: [Relevant Portion]

Salary Expenses A/c Dr.  15,600
  To Contribution Payable A/c  15,600

Where such contribution is to be made at the end of Y2, PV of Obligation @ 12% : 12,436

Salary Expenses A/c Dr.  12,436
  To Contribution Payable A/c  12,436

Accounting for defined benefit plans is a bit more complex. Remember that the obligation rests with the firm. Defined benefit plans may be unfunded, or they may be wholly or partly funded by contributions by an entity, and sometimes its employees, into an entity, or fund, that is legally separate from the reporting entity and from which the employee benefits are paid.

Let’s understand it through an example.

Sisan Baniya works at Shrestha Multimedia with monthly salary of 34,000. The firm has a post-employment gratuity policy of cash payment equal to 3.5 times the monthly salary on retirement for every year worked given that the employee completes at least 3 years of service.

Let’s First Identify the complexities:

1. What will be his salary at the time of retirement?
2. Will the three years be complete?
3. At what age may the payment be required?
4. What’s the Life expectancy? Will he be alive till the compulsory retirement age of 65 Years?
5. What should be the discount rate?
6. And finally, how exactly to incorporate all these variables without making the estimated completely unreasonable and useless?

It seems like this calculation is not possible through normal means. Therefore, we need actuarial valuation by an actuary to record the obligation using projected unit credit Method.

Sample of the Actuarial Report:

Past Service Costs

Past service cost is the change in the present value of the defined benefit obligation resulting from a plan amendment or curtailment.

Plan Amendment

Entity introduces, or withdraws, a defined benefit plan or changes the benefits payable under an existing defined benefit plan. In case of reduction of benefit, the reduction is not caused by the reduction in the number of employees eligible for the benefits is not reduced rather by the benefit amount.

Where the benefit has been increased, the past service cost will be positive, signifying the increase in the benefit obligation of the firm. And In Cases where benefit has been decreased, the Past Service cost will be negative, signifying the decrease of Benefit Liability.

Curtailment

A curtailment occurs when an entity significantly reduces the number of employees covered by a plan. Generally, due to events like closing of a plan, disposing off a faculty, discontinuation of any part of businesses. Here, the number of employees are reduced rather than the extent of the benefit.

For accounting purposes, the effect of theses are not separated rather disclosed as “Past Service Costs”

Settlement of Plan Obligation

An entity shall recognize a gain or loss on the settlement of a defined benefit plan when the settlement occurs. Here, the settlement doesn’t mean settlement of employee account by payment of the required obligation.

This includes cases where benefit obligation is eliminated fully or partly and a payment is made against this settlement.

Sample Presentation

The rate used to discount post-employment benefit obligations (both funded by plan Asset and unfunded) shall be determined by reference to market yields at the end of the reporting period on high quality corporate bonds. For currencies for which there is no deep market in such high quality corporate bonds, the market yields (at the end of the reporting period) on government bonds denominated in that currency shall be used. The currency and term of the corporate bonds or government bonds shall be consistent with the currency and estimated term of the post-employment benefit obligations.

E.g. the actuary estimates that the term of the employee benefit is 20 Years. The applicable rate for discounting shall be:

1. AAA rated corporate bonds and if not available,
2. Government bonds denominated in the same currency [e.g. a 20 Year NPR 1000 Gov bond]

Plan assets comprise:

1. assets held by a long-term employee benefit fund.
2. and qualifying insurance policies.

Assets held by a long-term employee benefit fund are assets that:

• are held by an entity (like a fund) that is legally separate from the reporting entity and exists solely to pay or fund employee benefits; and
• are available to be used only to pay or fund employee benefits, are not available to the reporting entity’s own creditors (even in bankruptcy), and cannot be returned to the reporting entity, unless either:
  1. the remaining assets of the fund are sufficient to meet all the related employee benefit obligations of the plan or the reporting entity;
  2. or the assets are returned to the reporting entity to reimburse it for employee benefits already paid.

Simply, the asset can be used for payment of Employee benefits and cannot be utilized by the Entity for any other purpose unless any surplus remains after payment of all obligations in full by the fund or to reimburse the payments made by the Entity.

The conditions are Same in case for qualifying insurance policy provided the contributions are Insurance premiums.

Ceiling Limit on Plan Assets:

In case of surplus in the Net Defined Benefit, where such surplus cannot be used by the firm to reduce future payments or get a refund from the Fund, the Fair Value of Plan asset is the Fair value of future Obligation.