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Employee Benefits: IAS 19

Employee Benefits: IAS 19. KHALID AZIZ. COMMERCE COACH. 0322-3385752 0336-8099762 R-1173, AL-NOOR SOCIETY, BLOCK 19, F.B.AREA, KARACHI. COMMERCE COACH. PIPFA. PIPFA STUDENTS INTERMEDIATE FINANCIAL ACCOUNTING PERFORMANCE MEASUREMENT COMPLETION OF SYLLABUS IN 1 MONTH

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Employee Benefits: IAS 19

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  1. Employee Benefits: IAS 19

  2. KHALID AZIZ COMMERCE COACH 0322-3385752 0336-8099762 R-1173, AL-NOOR SOCIETY, BLOCK 19, F.B.AREA, KARACHI.

  3. COMMERCE COACH

  4. PIPFA • PIPFA STUDENTS • INTERMEDIATE • FINANCIAL ACCOUNTING • PERFORMANCE MEASUREMENT • COMPLETION OF SYLLABUS IN 1 MONTH • JOIN KHALID AZIZ • 0322*3385752 • R1173-ALNOOR SOCIETY BLOCK 19 F.B.AREA-KARACHI.

  5. ICAP • ICAP STUDENTS • MODULE B FINANCIAL ACCOUNTING • BUSINESS ECONOMICS • MODULE D COST ACCOUNTING • COMPLETION OF SYLLABUS IN 3 MONTHS • JOIN KHALID AZIZ • 0322*3385752 • R1173, ALNOOR SOCIETY, BLOCK 19. F.B.AREA, KARACHI.

  6. MA-ECONOMICSEXTERNAL • PREVIOUS • MICRO ECONOMICS & STATISTICS • FINAL • MACRO ECONOMICS

  7. B.COM REGULAR & PRIVATE • PART 1 ACCOUNTING, STATISTICS & ECONOMICS. • PART 2 ADVANCED & COST ACCOUNTING, BUSINESS LAW, AUDITING & TAX.

  8. INTER COMMERCE • 1ST YEAR ACCOUNTING, BUSINESS MATHS & ECONOMICS. • 2ND YEAR ACCOUNTING & STATISTICS.

  9. O/A LEVELS • ACCOUNTING, ECONOMICS, BUSINESS STUDIES, URDU & PAK STUDIES.

  10. KHALID AZIZ • COMMERCE COACH • 0322-3385752 • 0336-8099762 • R-1173, AL-NOOR SOCIETY, BLOCK 19, F.B.AREA, KARACHI.

  11. Employee Benefits • Related standards • IAS 19 • Current GAAP comparisons • Looking ahead • End-of-chapter practice

  12. Related Standards • IFRS 2 Share-based payment • IAS 24 Related party disclosures

  13. IAS 19 – Overview • Objective and scope • Short-term employee benefits • Post-employment benefit plans • Post-employment benefits: defined contribution plans • Post-employment benefits: defined benefit plans • Other long-term employee benefits • Termination benefits

  14. IAS 19 – Objective and Scope • Accounting and disclosure requirements for employee benefits: all forms of consideration given by an entity in exchange for employee services rendered • Short-term employee benefits • Post-employment benefits • Other long-term employee benefits • Termination benefits

  15. IAS 19 – Short-term Employee Benefit • Short-term employee benefits – benefits other than termination benefits that are due to be settled within 12 months after the end of the period in which the related service is rendered • Example: • Salaries, wages, social security contributions • Short-term compensated absences such as paid annual and sickness leaves • Profit-sharing and bonuses • Non-monetary benefits such as medical care, housing, etc.

  16. IAS 19 – Short-term Employee Benefit • Short-term compensated absences: • Recognize a cost and liability = the undiscounted amount of benefits expected to be paid • Some benefits accumulate • Accrue as employee provides services (e.g., paid vacation leave) • Some do not accrue (e.g., parental leave) • Recognize cost and liability when event occurs that obligates the entity to provide the benefit

  17. IAS 19 – Short-term Employee Benefits • Profit-sharing and bonus plans: • Recognize cost and liability only when • a legal or constructive obligation exists, and • amount can be reasonably estimated • To reasonably estimate, must have one of the following: • plan has formal terms including a formula • amount is known before F/S are authorized for release • past practice provides clear evidence of amount

  18. IAS 19 – Post-employment Benefit Plans • Post-employment benefit plans – formal or informal arrangements to provide benefits after employment, such as pension benefits and post-employment medical care • Two types of plan: • defined contribution plan: employer makes specific contributions, employee benefits = whatever has accumulated • defined benefit plan: employer promises to pay a post-employment benefit, if not enough funds have accumulated, employer is responsible for the difference

  19. IAS 19 – Post-employment Benefit Plans

  20. IAS 19 – Post-employment Benefits: Defined Contribution Plans •  - Relatively straightforward •  - Liability is recognized only for contributions unpaid at the end of the period •  - Expense recognized in same period as services are rendered

  21. IAS 19 – Post-employment Benefits: Defined Benefit Plans • - Complex • - Accounting measures depend on actuarial assumptions far into the future • - Obligations are settled many years after service is provided by employees – need to take time value of money into account • - Many plans are funded and rely on investment returns to grow • - Employer underwrites actuarial and investment risks

  22. IAS 19 – Post-employment Benefits: Defined Benefit Plans •  Accounting building blocks • Present value of a defined benefit obligation – the discounted present value of the expected future payments required to settle an entity’s obligation resulting from employee service accumulated to date • Plan assets – assets held by the long-term employee benefit fund that exists solely to pay employee benefits as they fall due.

  23. IAS 19 – Post-employment Benefits: Defined Benefit Plans • Changes in the PV of the defined benefit obligation (DBO) – based on projected salaries: Present value of the obligation, beginning of period + Current period’s service cost + Interest cost on the outstanding obligation for the period +/- Past service costs from plan amendments in the period - - Benefits paid under the plan in the period +/- +/- Actuarial gains (-) and losses (+) in the period_______________ = = Present value of the obligation, end of period________________

  24. IAS 19 – Post-employment Benefits: Defined Benefit Plans • PV of the defined benefit obligation depends on: • actuarial assumptions (mortality rates, employee turnover, dependants) • financial assumptions (discount rate, future salary levels, future medical costs) • Discount/interest rate = end-of-period market yield on high-quality corporate bonds with terms that correspond to obligation

  25. IAS 19 – Post-employment Benefits: Defined Benefit Plans • Current service cost = PV of benefits earned for service in current period • Past service cost (PSC) = change in PV of DBO from introducing plan that includes benefits for past service or from a change in the benefits payable related to past service under existing plan • Actuarial gains/losses = effects of changes in actuarial assumptions and experience adjustments for difference between previous estimates and what actually occurred.

  26. IAS 19 – Post-employment Benefits: Defined Benefit Plans •  Changes in the FV of plan assets: Fair value of plan assets, beginning of period + Contributions from employer/employees in the period +/- Actual return on plan assets in the period -Benefits paid under the plan in the period__________ = Fair value of plan assets, end of period____________

  27. IAS 19 – Post-employment Benefits: Defined Benefit Plans • Actual return on plan assets = interest, dividends, other income and realized and unrealized gains and losses on assets held in plan • Expected return on plan assets = return used by actuary in determining funding requirements

  28. IAS 19 – Post-employment Benefits: Defined Benefit Plans •  Benefit cost to recognize each period Current service cost for the period + Interest cost for the period - Expected return on plan assets for the period +/- Actuarial gain (-) or loss(+) amortized in the period +/- Past service cost recognized in the period = Post-employment benefit cost to profit or loss

  29. IAS 19 – Post-employment Benefits: Defined Benefit Plans • Benefit cost variables taken from • PV of PBO, and • Fund assets • Information in working papers for actuarial gain/loss and PSC • Amortization of actuarial gain/loss – use corridor method • PSC • for vested benefits, expense in period • for unvested benefits, amortize to expense on straight-line basis over average period until vested

  30. IAS 19 – Post-employment Benefits: Defined Benefit Plans • Actuarial gains/losses: 2 options • recognize all actuarial gains/losses in OCI when they occur, and then directly to retained earnings – not through P&L • do not recognize/amortize unless accumulated net actuarial gain/loss is significant*; if significant, amortize excess amount to expense over average working lives of employees in plan • *significant: if at the first of the period, it is more than 10% of the larger of the beginning of the period PV of PBO and the fund assets

  31. IAS 19 – Post-employment Benefits: Defined Benefit Plans • Entries: Dr. Employee benefit expense $X Cr. Defined benefit liability $X To record expense and recognize liability. Dr. Defined benefit liability $Y Cr. Cash $Y To record contribution to plan assets.

  32. IAS 19 – Post-employment Benefits: Defined Benefit Plans • Balance in Defined Benefit Liability on balance sheet can be reconciled to building blocks: Present value of the defined benefit obligation - Fair value of the plan assets = Funded status of the plan +/- Net unrecognized actuarial gains (+) or losses (-) - Unrecognized past service costs = Defined benefit liability

  33. IAS 19 – Post-employment Benefits: Defined Benefit Plans •  Extensive disclosures required • Description of plans and accounting policies • Reconciliation of changes in PV of PBO and fund assets • Reconciliation of B/S account to funded status • Components of and total expense • Information about plan assets and actuarial assumptions, sensitivity analysis, historical data • Best estimate of expected contribution to plan in year after B/S date

  34. IAS 19 – Other Long-term Employee Benefits •  Examples: • long-term disability benefits, long-service or sabbatical leaves, deferred compensation (>12 months) • similar to post-employment benefits, but with less measurement uncertainty • all aspects recognized in expense in year; no defer and amortize

  35. IAS 19 – Other Long-term Employee Benefits

  36. IAS 19 – Termination Benefits • Termination benefits – benefits payable as a result of: • ending an employee’s employment before normal retirement date, or • employee accepts voluntary termination in exchange for benefits • Recognize liability and expense only when entity is demonstrably committed to plan. Plan sets out: • location, function and approximate number of employees being terminated; • termination benefits to be provided for each job classification or function; and • when the plan will be implemented • Entire cost is expensed when entity is committed to plan

  37. Looking Ahead • IAS 19 on IASB current agenda • Goal - issue interim standard with significant improvements by 2011 • March 2008 Discussion Paper (DP) issued – limited scope • Exposure Draft expected in late 2009 • After DP issues resolved, second phase of project will begin

  38. Looking Ahead • Tentative decisions made by IAS Board • All changes in plan assets and benefit obligation should be recognized when incurred • No need to separately recognize expected return on plan assets • All past service cost should be recognized in expense when plan amended • Variety of presentation approaches for components of defined benefit expense – IASB seeking input • New definitions needed for post-employment benefits and defined benefit plans

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