Employee benefits (IAS 19) - Short-term and defined contribu...

Learning Outcomes

After reading this article, you will be able to identify and explain the accounting requirements for short-term employee benefits and defined contribution plans in accordance with IAS 19. You will be able to recognise how these plans are measured and presented in financial statements, differentiate the treatment from defined benefit schemes, and understand key points relevant to the ACCA Financial Reporting (FR) exam.

ACCA Financial Reporting (FR) Syllabus

For ACCA Financial Reporting (FR), you are required to understand and apply the requirements of IAS 19 Employee Benefits for certain types of employee benefit arrangements. In particular, this article focuses on:

• The scope and objectives of IAS 19 Employee Benefits
• Recognition and measurement of short-term employee benefits (including wages, paid leave, and profit-sharing)
• Recognition and measurement of defined contribution plans (including pensions)
• Disclosure requirements in financial statements for these benefit types
• Distinguishing short-term and defined contribution plans from more complex defined benefit schemes

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which of the following is NOT a short-term employee benefit under IAS 19?
   1. Wages and salaries
   2. Accrued annual leave
   3. Post-employment pension under a defined benefit scheme
   4. Short-term profit-sharing bonus
2. When must an employer recognise the cost of a defined contribution plan?
   1. When a contribution becomes payable
   2. Over the service life of employees
   3. Only at retirement
   4. Only when the payment is made

3. True or false? Under a defined contribution plan, all actuarial and investment risks remain with the employer.

4. Briefly explain when an accrual for paid annual leave should be recognised in the statement of financial position.

Introduction

Employee benefits are an important part of financial reporting for most entities. IAS 19 Employee Benefits sets out the accounting and disclosure requirements for various types of benefits provided to employees in exchange for their service. This article focuses on two main categories: short-term employee benefits and defined contribution plans, both commonly encountered in accrual-based accounting and frequently tested in the ACCA FR exam.

Key Term: employee benefits
All forms of consideration given by an entity in exchange for service rendered by employees or for the termination of employment.

Short-term Employee Benefits

Short-term employee benefits are those expected to be settled wholly within twelve months after the end of the reporting period in which the employees render the related service. IAS 19 requires that these benefits be recognised as an expense as the employee provides service, and any unpaid amounts should be shown as a liability at the reporting date.

Key Term: short-term employee benefits
Employee benefits expected to be settled within twelve months after the end of the reporting period in which employees render the related service.

Examples of Short-term Employee Benefits

• Wages and salaries (including overtime)
• Social security contributions
• Paid annual leave and paid sick leave
• Bonuses and profit-sharing payable within 12 months
• Non-monetary benefits (e.g., medical care, subsidised goods)

Recognition and Measurement

Short-term employee benefits must be recognised as an expense in profit or loss when the service is provided. If the employer has an obligation at the reporting date (e.g. accrued but unpaid wages or holiday pay), a liability must be recognised.

Key Term: accrual
The recognition of an expense and corresponding liability for employee services rendered but not yet paid at the period end.

Worked Example 1.1

Latham Ltd closes its financial year on 31 December. At year-end, staff have accumulated $9,500 of untaken paid annual leave which is expected to be used in the following year. How should this be treated?

Answer:
Latham Ltd must recognise an expense for $9,500 in the year the service giving rise to the entitlement is provided (the current year) and a corresponding accrual (liability) in the statement of financial position at 31 December.

Profit-sharing and Bonus Plans

If the entity has a constructive or legal obligation as a result of past service, and a reliable estimate can be made, it should recognise an expense and a liability for the amount expected to be paid under the plan. If these are payable within 12 months, they are treated as short-term employee benefits.

Defined Contribution Plans

Defined contribution plans are post-employment benefit plans under which an entity pays fixed contributions into a separate fund, with no legal or constructive obligation to pay further amounts. The employee bears the risk regarding the future benefits, not the employer.

Key Term: defined contribution plan
A post-employment plan under which an entity pays fixed contributions to a fund and has no obligation to pay further amounts if the fund does not hold sufficient assets to pay benefits.

• Employer contributions are recognised as an expense as employees render service.
• A liability is recognised for any unpaid contributions at the reporting date.

Worked Example 1.2

An employer has a defined contribution pension scheme for its staff. It must pay 5% of pensionable salaries into the fund each month. At year-end, $12,000 is owed but not yet paid. What are the accounting entries?

Answer:
The employer recognises a pension expense for the total contributions relating to current service in the year, and at year-end records a liability for the unpaid $12,000.

Distinctions from Defined Benefit Schemes

Defined contribution plans:

• Are simple: only the agreed contributions are recognised as expense.
• Do not require actuarial calculations or complex estimates.
• No asset or liability (other than accruals for unpaid contributions) is recognised after the contribution is made.

Defined benefit schemes (excluded from this article’s scope):

• Require complex calculations of future obligations.
• Entity may have to recognise significant assets or liabilities depending on actuarial valuations.

Exam Warning

Mistaking a defined contribution plan for a defined benefit plan is a frequent exam error. Only record the contributions due for defined contribution plans; do not attempt to calculate pension assets or liabilities for ACCA FR scope.

Disclosures and Presentation

For both short-term employee benefits and defined contribution plans, the entity must:

• Present accrued amounts as liabilities in the statement of financial position if unpaid at period-end.
• Disclose the total amount expensed for these benefits during the period, where material.

Summary

IAS 19 requires entities to account for short-term employee benefits and defined contribution plans on an accrual basis, recognising expenses and liabilities as employee service is provided. Measurement is straightforward: present obligations for cash payments or unpaid contributions appear as liabilities, and expenses are recognised in the period of service.

Key Point Checklist

This article has covered the following key knowledge points:

• Describe the scope of IAS 19 relating to employee benefits
• Identify and recognise short-term employee benefits under the accrual method
• Account for paid absences and bonuses as short-term benefits
• Record expenses and obligations for defined contribution plans
• Distinguish defined contribution plans from defined benefit schemes
• Present and disclose these benefits accurately in financial statements

Key Terms and Concepts

• employee benefits
• short-term employee benefits
• accrual
• defined contribution plan