Post-employment benefits are employee benefits (other than termination benefits and short-term employee benefits) that are payable after the completion of employment. These are retirement benefits (eg pensions and lump sum payments on retirement) and other post-employment benefits, such as post-employment life insurance and post-employment medical care.
Other long-term employee benefits are employee benefits (other than post-employment benefits and termination benefits) that are not due to be settled within twelve months after the end of the period in which the employees render the related service. These are: Post -employment benefits
- long-term paid absences such as long-service leave or sabbatical leave; Post-employment benefits
- jubilee or other long-service benefits; and Post-employment benefits
- long-term disability benefits. Post-employment benefits
- an entity’s decision to terminate an employee’s employment before the normal retirement date; or Post-employment benefits
- an employee’s decision to accept an offer of benefits in exchange for the termination of employment. Post-employment benefits
Employee benefits include benefits provided either to employees or to their dependants or beneficiaries and may be settled by payments (or the provision of goods or services) made either directly to the employees, to their spouses, children or other dependants or to others, such as insurance companies. Post-employment benefits
An employee may provide services to an entity on a full-time, part-time, permanent, casual or temporary basis. For the purpose of IAS 19, employees include directors and other management personnel. st-employment benefits
All post-employment benefits are accounted for under a single set of requirements. [IAS 19] Post-employment benefits
Defined benefit vs defined contribution plans
A post-employment plan is classified as a defined contribution plan if the entity pays fixed contributions into a separate entity (a fund) and will have no further obligation (legal or constructive) to pay further amounts if the fund has insufficient assets to pay all employee benefits relating to current and prior service. All other post-employment plans are defined benefit plans. [IAS 19 8]
Amounts that are payable on cessation of employment, regardless of the reason for the employee’s leaving, are post-employment benefits rather than termination benefits. The normal principles apply in determining whether such payments give rise to defined benefit or defined contribution plans. [IAS 19 164] Post-employment benefits
Minimum benefit guarantees
In certain cases, a plan that would otherwise be a defined contribution plan contains minimum benefit guarantees – e.g. the employer may guarantee a minimum return on the investment or contributions. IFRS does not contain specific guidance on such plans, except for certain guaranteed minimum returns on plan assets. Commonly, a minimum benefit guarantee causes a plan to be a defined benefit plan. Post-employment benefits
Multi-employer and multiple-employer plans
There are no specific requirements for the classification of multi-employer plans. Such plans are classified and accounted for in the same way as single-employer plan – i.e. as a defined contribution or a defined benefit plan – considering the characteristics of the scheme and the obligation of the employer, except as outlined below. [IAS 19 32]
If insufficient information is available for a multi-employer defined benefit plan to be accounted for in accordance with the requirements for defined benefit plans, then it is treated as a defined contribution plan except that: Post-employment benefits
- an asset or liability for any surplus or deficit is recognised if there is a contractual agreement that determines how a surplus in the plan would be distributed or a deficit in the plan funded; and Post-employment benefits
- additional disclosures are required. [IAS 19 34, IAS 19 37] Post-employment benefits
A liability that arises from the wind-up of a multi-employer defined benefit plan, or the entity’s withdrawal from a multi-employer defined benefit plan, is recognised and measured in accordance with the provisions standard (see Provisions and contingent liabilities). [IAS 19 39] Post-employment benefits
Plans that allow participating employers to pool their assets for investment purposes while maintaining separate accounts for the purposes of benefit payments (multiple-employer plans) do not share actuarial risks and therefore are not considered multi-employer plans. Therefore, each employer within the plan would account for the portion related to their employees as a defined contribution plan or a defined benefit plan based on the general requirements on classifying plans. For defined benefit plans, each employer accounts for its respective share of the assets and liabilities of the plan following the general principles for single-employer plans. [[IAS 19 8], IAS 19 38] Post-employment benefits
Defined benefit plans in which entities (sub-groups) under common control share risks are group plans rather than multi-employer plans. Group plans are classified as either a defined contribution plan or a defined benefit plan in accordance with the terms of the plan. The accounting for defined benefit group plans in subgroup financial statements depends on whether there is a contractual agreement or stated policy for charging the net defined benefit cost to individual group entities. [IAS 19 40–41] Post-employment benefits
Accounting for defined contribution plans
An entity accounts for its contributions to a defined contribution plan on an accrual basis. An asset or liability may result from advance payments or payments due, respectively, to a defined contribution fund. [IAS 19 51] Post-employment benefits
Accounting for defined benefit plans
Accounting for defined benefit plans involves the following steps. Post-employment benefits
- Determining the present value of the defined benefit obligation by applying an actuarial valuation method. Post-employment benefits
- Deducting the fair value of any plan assets. Post-employment benefits
- Adjusting the amount of the deficit or surplus for any effect of limiting a net defined benefit asset to the asset ceiling.
- Determining service costs (current, past and settlement) and net interest (to be recognised in profit or loss), and remeasurements of the net defined benefit liability (asset) to be recognised in OCI. [IAS 19 57]
The net defined benefit liability (asset) recognised in the statement of financial position is determined as follows. Post-employment benefits
- Step 1: Present value of the defined benefit obligation minus the fair value of any plan assets equals the deficit or surplus in the defined benefit plan.
- Step 2: Adjust for any effect of limiting a net defined benefit asset to the asset ceiling (see below). [[IAS 19 8], IAS 19 63–64]
Benefits are attributed to periods of service in accordance with the plan’s benefit formula unless that formula is back-end loaded, in which case straight-line attribution is used instead. [IAS 19 70]
Benefits are attributed from the date on which service by the employee first leads to benefits under the plan until the date from which further service by the employee will lead to no material amount of further benefits under the plan, other than from further salary increases. [IAS 19 70, IAS 19 73] Post-employment benefits
Actuarial valuation method
The projected unit credit method is used to determine the present value of the defined benefit obligation. [IAS 19 67]
Contribution-based promises are defined benefit plans with a promised return on actual or notional contributions that is based on either or both of the following features:
- a guaranteed return of a fixed amount or rate; and/or Post-employment benefits
- a benefit that depends on future asset returns. Post-employment benefits
Because these plans are defined benefit plans, the projected unit credit method generally applies to the measurement of the related defined benefit obligation. However, in our experience, in some jurisdictions entities predominantly apply a methodology under which benefits that depend on future asset returns are measured at the fair value of the related assets.
The actuarial assumptions represent the entity’s best estimates of the future variables that will determine the ultimate cost of settling the defined benefit obligation and are unbiased and mutually compatible. The financial assumptions are based on current market expectations of future events. Also, the assumptions take into account estimated future salary increases and include any future changes in state benefits that affect benefits payable under the plan and for which there is reliable evidence that the change will occur. [IAS 19 75–80, IAS 19 87]
The calculation takes into account not only the stated plan benefits, but also any constructive obligations. [IAS 19 87]
The obligation is discounted using a high-quality corporate bond rate, or a government bond rate if there is an insufficiently deep high-quality corporate bond market. The depth of the market for high-quality corporate bonds is assessed at the currency level. The currency and maturity of the bonds need to be consistent with the currency and maturity of the defined benefit obligation.
If bonds with a maturity that matches the maturity of the obligation are not available, then an appropriate discount rate is estimated by extrapolating interest rates on shorter-term bonds using the yield curve and considering any available evidence about likely longer-term interest rates. [IAS 19 83, IAS 19 86]
In practice, an entity often uses a single weighted-average discount rate to measure the defined benefit obligation, reflecting the estimated timing and amount of benefit payments and the currency in which the benefits are to be paid. In such cases, the entity also uses a single rate to calculate current service cost and interest cost.
However, commonly, in measuring the defined benefit obligation, current service cost and interest cost, an entity might instead use different weighted-average discount rates derived from the same yield curve for different categories of plan members (e.g. active members and pensioners) or separately for each member in the plan, in order to match more closely the expected timing of the benefit payments for each category. [IAS 19 85] Post-employment benefits
The net benefit liability (asset) is measured as at the reporting date. For practical reasons, the detailed valuation of the defined benefit obligation may be prepared before the end of the reporting period. In this case, the results of the valuation are updated for any material transactions and changes in circumstances up to the end of the reporting period. [IAS 19 58–59]
Taxes payable by the plan on contributions relating to service before the reporting date or on benefits resulting from that service are distinguished from all other taxes payable by the plan. An actuarial assumption is made about the first type of taxes, which are taken into account in measuring current service cost and the defined benefit obligation. All other taxes payable by the plan are included in the return on plan assets. [[IAS 19 8], IAS 19 76(b)(iv), IAS 19 130]
‘Plan assets’ comprise: Post-employment benefits
- assets held by a legally separate fund, which: Post-employment benefits
- can be used solely to pay or fund employee benefits; Post-employment benefits
- are not available to the employer’s creditors – even in the event of bankruptcy; and Post-employment benefits
- cannot be returned to the entity except as reimbursement for employee benefits paid or when the fund is in surplus; and
- qualifying insurance policies, which are insurance policies issued to the sponsor by an unrelated entity, the proceeds from which:
- can be used solely to pay or fund defined benefit obligations; Post-employment benefits
- are not available to the employer’s creditors – even in the case of bankruptcy; and
- cannot be returned to the entity except as reimbursement for employee benefits paid or when the proceeds are surplus to requirements. [[IAS 19 8]]
Commonly, plan assets also include insurance policies issued to the plan by the sponsor or a related party of the sponsor if the policies are transferable and the other criteria for treatment as assets held by a legally separate fund are met (see above). Post-employment benefits
Plan assets include transferable financial instruments issued by the reporting entity – including by its subsidiaries – if the criteria for treatment as plan assets are met (see above). Plan assets exclude contributions receivable from the reporting entity and other financial instruments issued by the reporting entity and held by the fund that cannot be transferred to third parties.
Commonly, if financial instruments issued by associates and joint ventures are not transferable, then we believe that an entity as an accounting policy choice can still treat them as plan assets because such investees are not part of the group. Other plan assets – i.e. those not issued by the reporting entity – are not required to be transferable. [[IAS 19 8], IAS 19 114, IAS 19 BC177]
If the timing and amount of payments under a qualifying insurance policy exactly match some or all of the benefits payable under a plan, then the present value of the related obligation is determined and is deemed to be the fair value of the insurance policy. Generally, the fair value of such insurance policies held by the fund is determined in the same way – i.e. matching that of the related obligation. [IAS 19 115] Post-employment benefits
The costs of managing plan assets reduce the return on plan assets. No specific requirements regarding the accounting for other administration costs are provided. However, an entity should recognise administration costs (except for the costs of handling medical claims) when the administration services are provided.
Therefore, the inclusion of such costs in the measurement of the defined benefit obligation is not allowed. Commonly, they should instead be recognised as an expense in profit or loss. [[IAS 19 8, IAS 19 76(b)(iii), IAS 19 130, IAS 19 BC125–127, IAS 1 88] Post-employment benefits
Defined benefit cost
The cost of defined benefit plans is made up of the following components (except to the extent that another standard requires or permits its inclusion in the cost of an asset):
- service cost, recognised in profit or loss, which comprises: Post-employment benefits
- current service cost; Post-employment benefits
- past service cost, resulting from plan amendments or curtailments; and Post-employment benefits
- the gain or loss on settlements; Post-employment benefits
- net interest on the net defined benefit liability (asset), recognised in profit or loss; and
- remeasurements of the net defined benefit liability (asset), recognised in OCI. [IAS 19 120]
Food for thought – The linkage between plan amendments, restructuring and termination benefits
The standard recognises that, in many cases, plan amendments that result in past service cost are economically linked to a restructuring transaction or other termination benefits and therefore requires those linked components to be recognised at the same time.
Current service cost
The ‘current service cost’ is the increase in the present value of the defined benefit obligation resulting from employee service in the current period. It is determined using the same actuarial methodology and assumptions as are used in determining the present value of the defined benefit obligation. [[IAS 19 8, IAS 19 67]
It is unclear where interest that accumulates on service cost should be presented in the financial statements. Commonly, it should be recognised in profit or loss and it would be appropriate for it to be classified as part of service cost. For a discussion of where service cost and net interest cost are presented, see below.
Past service cost
Past service cost is the change in the present value of the defined benefit obligation, in respect of prior periods’ service, resulting from a plan amendment (the introduction or withdrawal of, or changes to, a defined benefit plan) or a curtailment (see below). [[IAS 19 8, IAS 19 102, IAS 19 104]
Past service cost (positive or negative) as a result of a plan amendment is recognised in profit or loss immediately, at the earliest of the following:
- when the plan amendment occurs; Post-employment benefits
- when the related restructuring costs are recognised, if the plan amendment arises as part of a restructuring; and
- when the related termination benefits are recognised, if the plan amendment is linked to termination benefits. [[IAS 19 8, IAS 19 103, IAS 19 106]
Food for thought – Withdrawal of a plan is a plan amendment
The standard includes plan withdrawals and all plan changes except now more narrowly defined curtailments as part of plan amendments that give rise to past service cost. Amendments and curtailments are accounted for similarly and disclosed together as part of past service cost.
A ‘curtailment’ occurs when a significant reduction in the number of employees covered by the plan takes place. A curtailment may arise from an isolated event, such as the closing of a plant, discontinuance of an operation or termination or suspension of a plan. [IAS 19 105] Post-employment benefits
A curtailment gives rise to past service cost and is recognised at the earliest of the following: Post-employment benefits
- when the curtailment occurs; Post-employment benefits
- when the related restructuring costs are recognised, if the curtailment arises as part of a restructuring; and Post-employment benefits
- when the related termination benefits are recognised, if the curtailment is linked to termination benefits. [[IAS 19 8, IAS 19 103]
Gains or losses from curtailments are recognised in profit or loss. [IAS 19 103]
A ‘settlement’ is a transaction that eliminates all further legal or constructive obligations for part or all of the benefits provided under a defined benefit plan, other than a payment of benefits to, or on behalf of, employees that are set out in the terms of the plan and included in the actuarial assumptions. Post-employment benefits
Commonly, an increase or a decrease in contingent benefits – e.g. plan benefits contingent on the funding level of the plan – that does not arise from a plan amendment is not a plan settlement or past service cost, but rather a potential outcome that was contemplated as part of the original pension plan. Therefore, the change should be accounted for as a remeasurement (actuarial gain or loss).
A gain or loss on settlement is recognised in profit or loss, calculated as the difference between: Post-employment benefits
- the present value of the defined benefit obligation being settled, as determined on the date of settlement; and
- the settlement price, including any plan assets transferred and any payments made directly by the entity in connection with the settlement. [IAS 19 109]
There is no specific guidance in IFRS, but commonly, an entity should choose an accounting policy, to be applied consistently, on whether or not the ‘settlement price’ used in calculating the gain or loss on settlement would include the effect of limiting a net defined benefit asset to the asset ceiling that arises from remeasuring the net defined benefit asset before determining the gain or loss.
An entity remeasures the net benefit liability (asset) using the current fair value of plan assets and current actuarial assumptions – e.g. current market interest rates or current market prices – before determining the gain or loss on the plan amendment, curtailment or settlement. [IAS 19 99]
‘Net interest’ is the change during the period in the net defined benefit liability (asset) that arises from the passage of time.
It is determined by applying the discount rate used to measure the defined benefit obligation at the start of the annual period to the net defined benefit liability (asset) at the start of the annual period, taking into account any changes in the net defined benefit liability (asset) during the period as a result of contributions and benefit payments. [[IAS 19 8, IAS 19 123]
Remeasurements of the net defined benefit liability (asset) comprise: Post-employment benefits
- actuarial gains and losses, which arise on the defined benefit obligation; Post-employment benefits
- the return on plan assets, excluding amounts included in net interest on the net defined benefit liability (asset); and
- any change in the effect of the asset ceiling, excluding amounts included in net interest on the net defined benefit liability (asset). [[IAS 19 8, IAS 19 127]
Actuarial gains and losses arise from changes in the present value of the defined benefit obligation as a result of:
- experience adjustments – i.e. the effects of differences between the previous actuarial assumptions and the actual outcome; and
- the effects of changes in actuarial assumptions. [IAS 19 8, IAS 19 128] Post-employment benefits
The return on plan assets comprises interest, dividends and other income derived from the plan assets, as well as realised and unrealised gains or losses on the plan assets, less:
- any costs of managing plan assets; and Post-employment benefits
- any tax payable by the plan itself, other than tax included in the actuarial assumptions used to measure the present value of the defined benefit obligation. [IAS 19 8]
Remeasurements of the net defined benefit liability (asset) are recognised in full in OCI in the reporting period during which they arise and are not reclassified to profit or loss in a subsequent period. However, the entity may transfer cumulative amounts recognised through OCI to another component of equity. [IAS 19 122]
Presentation of service cost and net interest
The employee benefits standard does not specify where service cost and net interest on the net defined benefit liability (asset) are presented. It also does not specify whether an entity presents service cost and net interest separately or as components of a single item of income or expense. Post-employment benefits
An entity therefore chooses an approach, to be applied consistently, for the presentation of service cost and net interest on the net defined benefit liability (asset) in profit or loss. [IAS 19 134, IAS 19 BC201, IAS 1 45] Post-employment benefits
If a plan is in surplus, then the amount recognised as an asset in the statement of financial position is limited to the ‘asset ceiling’. This is the present value of any economic benefits available to the entity in the form of a refund from the plan or a reduction in future contributions to the plan. [IAS 19 8, IAS 19 64]
An economic benefit is available to an entity if, in accordance with the terms of the plan and applicable statutory requirements, it is realisable during the life of the plan or on settlement of the plan liabilities. [IFRIC 14 7–8] Post-employment benefits
The economic benefit available as a refund of a plan surplus is measured as the amount of the surplus at the reporting date less any associated costs, and is available only if an entity has an unconditional right to such a refund during the life of the plan, on gradual settlement of plan liabilities, or on plan wind-up. [IFRIC 14 11, IFRIC 14 13–14]
The economic benefit available as a reduction in future contributions is measured as follows. Post-employment benefits
- If there is no minimum funding requirement for contributions relating to future service, then as the present value of the future service cost to the entity for each year over the shorter of the expected life of the plan and the expected life of the entity.
- If there is a minimum funding requirement for contributions for future services, then as the sum of:
- any prepaid amount that reduces future minimum funding requirement contributions for future service; and
- the present value of the estimated future service cost to the entity in each year less the estimated minimum funding requirement contributions that would be required for future service in the given year if there were no prepayment of future minimum funding requirement contributions. This amount cannot be less than zero. [IAS 19 64, IFRIC 14 16, IFRIC 14 20, IFRIC 14 22]
A liability is recognised for contributions payable to fund an existing shortfall with respect to service already received under a minimum funding requirement if the contributions payable are not expected to be available as a refund or reduction in future contributions after they are paid into a plan. [IFRIC 14 23–24]
If employee benefits are insured, then the accounting treatment depends on the nature of the obligation retained by the employer. [IAS 19 46]
If an employer purchases an insurance policy from an unrelated third party and in so doing settles its legal and constructive obligations under a defined benefit plan, then the purchase of the insurance policy is treated as a settlement of some or all of the employer’s obligations. [IAS 19 46, IAS 19 49, IAS 19 112]
If the employer retains an indirect obligation – e.g. if actuarial risk will be transferred back to the employer by way of increased premiums, or the employer retains an obligation to pay the benefits through a plan – then the plan continues to be treated as a defined benefit plan. The insurance policy is treated as a plan asset or as a separate asset, depending on whether it is a qualifying insurance policy (see above). [IAS 19 48] Post-employment benefits
Current salary policies
An employer may purchase insurance policies each period to settle all of its defined benefit obligations. In this case, recognising as an expense the cost of the policies bought – in effect, defined contribution accounting – will have the same effect as applying defined benefit accounting and recognising a settlement gain or loss, although the disclosure requirements for defined benefit plans may still be relevant. [IAS 19 46]
However, an insurance policy may not cover all of the employer’s defined benefit obligations. If the employer has an obligation to make payments if the insurer does not pay all future employee benefits related to employee service in the current and prior periods, then commonly the resultant plan should be accounted for as a defined benefit plan, even if some of the obligations have been settled and are no longer recognised. [IAS 19 46]
If an entity will be reimbursed for expenditures required to settle a defined benefit obligation, but the reimbursement right does not give rise to a plan asset, then it is recognised as a separate asset when recovery is virtually certain. [IAS 19 116]
Reimbursement rights are measured at fair value and the changes in fair value are accounted for in the same way as the changes in the fair value of plan assets (see above). Remeasurements arising on reimbursement rights are recognised in OCI. [IAS 19 116]
Other long-term employee benefits
‘Other long-term employee benefits’ are all employee benefits other than short-term employee benefits, post-employment benefits and termination benefits.
Such benefits may include accumulating annual leave that can be carried forward and used more than 12 months after the end of the annual reporting period in which the employees render the related services, paid long-service leave, other long-service benefits (e.g. a bonus or extra salary after 20 years of service) and profit-sharing and other bonus schemes that are not expected to be settled wholly within 12 months of the end of the annual reporting period in which the employee services were received by the entity. [IAS 19 8, IAS 19 153]
Other long-term employee benefits that are defined benefit plans are accounted for in a manner similar to post-employment defined benefit plans, except that the components of the defined benefit cost are not disaggregated and are recognised in profit or loss. [IAS 19 155–156]
Deferred compensation contracts are accounted for in the same way as other long-term employee benefits. [IAS 19 153]
Reclassification of a short-term employee benefit as long-term need not occur if the entity’s expectations of the timing of settlement change temporarily. However, the benefit is reclassified if the entity’s expectations of the timing of settlement change other than temporarily, or the characteristics of the benefit change – e.g. from a non-accumulating to an accumulating benefit. [IAS 19 10]
‘Termination benefits’ are those benefits provided in exchange for termination of an employee’s employment as a result of either an entity’s decision to terminate that employment before the normal retirement date or an employee’s decision to accept an offer of benefits in exchange for termination (see Provisions and contingent liabilities). [IAS 19 8, IAS 19 159]
An obligation for termination benefits is regarded as arising from the termination and not from the employee’s service. An entity recognises a liability and an expense for termination benefits at the earlier of:
- when it recognises costs for a restructuring in the scope of the provisions standard that includes the payment of termination benefits; and
- when it can no longer withdraw the offer of those benefits. [IAS 19 165]
The entity can no longer withdraw the offer when it has communicated to the affected employees a plan of termination meeting all of the following criteria:
- actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made;
- the plan identifies:
- the number of employees whose employment is to be terminated;
- their job classifications or functions and their locations (although the plan need not identify these for individual employees); and
- the expected completion date; and
- the plan establishes the termination benefits that employees will receive in sufficient detail so that employees can determine the type and amount of benefits they will receive when their employment is terminated. [IAS 19 167]
If the termination benefits are payable as the result of an employee’s decision to accept an offer of benefits in exchange for the termination of employment – i.e. to take voluntary redundancy – then the entity can no longer withdraw the offer of termination benefits at the earlier of:
- when the employee accepts the offer; and
- when a restriction – such as a legal, regulatory or contractual requirement – on the entity’s ability to withdraw the offer takes effect. [IAS 19 166]
Under IFRS, if the benefit is conditional on future services being provided, then it is not a termination benefit. [IAS 19 162]
Benefits forming part of an ongoing arrangement or contractual termination arrangement are subject to the general requirements for the recognition of termination benefits.
For a discussion of the recognition of other costs associated with a restructuring, including voluntary redundancies, see Provisions and contingent liabilities).
The employee benefits standard does not specify where service cost and net interest on the net defined benefit liability (asset) are presented. It also does not specify whether an entity presents service cost and net interest separately or as components of a single item of income or expense. An entity therefore chooses an approach, to be applied consistently, for the presentation of service cost and net interest on the net defined benefit liability (asset) in profit or loss.
Employee benefit costs capitalised as part of the cost of assets such as inventories or property, plant and equipment include ‘the appropriate proportion’ of both service cost and net interest components. [IAS 19 120–121, IAS 19 134, IAS 19 BC201, IAS 1 45]