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 leave
• 'jubilee' benefits
• deferred compensation programmes
• termination benefits.

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

• 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.

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. Click for: FEE Press Release (PDF 41k) or Download the IAS 19 Study (PDF 143k).

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 took effect for accounting periods ending on or after 31 May 2002. Click for IASB Press Release (PDF 12k).

December 2004: Amendment to IAS 19 Concerning Reporting Actuarial Gains and Losses

In December 2004, the IASB finalised an amendment to IAS 19 to allow the option of recognising actuarial gains and losses in full in the period in which they occur, outside profit or loss, in a statement of recognised income and expense. This option is similar to the requirements of the UK standard, FRS 17 Retirement Benefits. The Board concluded that, pending further work on post-employment benefits and on reporting comprehensive income, the approach in FRS 17 should be available as an option to preparers of financial statements using IFRSs. The amendment also provides guidance on allocating the cost of a a group defined benefit plan to the entities in the group.