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IAS 19 – EMPLOYEE BENEFITS

SCOPE

➢ Covers all employee benefits except Share Based Payments (IFRS 2). Most benefits are straightforward to account for (e.g. wages, holiday leave ) but the more difficult aspects relate to post-employment benefits (). PENSIONS

➢ Generally, there are two types of scheme: Defined Contribution (DC) and Defined Benefit (DB).

➢ In DC, the employer only has an obligation to make contributions to an employee’s pension scheme. Therefore, the is quite simple:

Dr SPL – Contributions X Cr / X

➢ In DB, the employer has an obligation to make both contributions and defined pension payments to employees. This is far more complicated and requires the involvement of an actuary. An illustration demonstrating the typical accounting for a DB scheme is shown below.

ILLUSTRATION OF DB ACCOUNTING TABLE

Item Liability Net Balance P/L Effect OCI Cash Note Effect Effect Opening X (X) X/(X) - - - 2 Balances Service Cost - (X) (X) X - - 3 Interest X (X) X/(X) X/(X) - - 4 Contributions X - X - - (X) 5 Benefits (X) X - - - - 6 Total before X (X) X/(X) - - - 7 remeasurement Remeasurement X (X) X/(X) - X/(X) - 7 Closing X (X) X/(X) - - - 8 Balances Notes:

1) Debits are positive figures, Credits are negative figures. 2) Opening balances represent the scheme’s and the present value of the entire expected pensions liability. 3) Service cost is the actuary-determined annual expense of the scheme. 4) Interest is the second amount that affects profit or loss. It is calculated by multiplying the opening balances by a discount rate determined at the end of the last period (start of the current period). 5) In DB schemes, contributions are just a cashflow. The service cost and interest figures capture the true scheme expense. 6) Benefits paid to pensioners are a “net-zero” transaction as they will reduce scheme assets but also reduce the scheme’s liability. 7) When the actuary determines the closing balances, it may not equal the total before remeasurement. This may be due to, for example, changes in expectations around mortality rates. Remeasurement adjustments are recognised in OCI and will appear in under a DB Reserve, not Retained Earnings. 8) The entire net balance is presented as non-current in the Statement of Financial Position.

OTHER POINTS

➢ Plan curtailments or amendments, including past service costs, are typically accounted for as follows:

Cr Cash X (Any cash settlement made with employees) Dr/Cr Net pension obligation X (Net increase/decrease in obligation from curtailment/amendment) Dr/Cr SPL – Pension Cost X (The balancing debit/credit is a an (loss)/gain shown in profit or loss)