IAS 19 – Employee Benefits

Overview: IAS 19 – Employee Benefits prescribes the accounting and disclosure requirements for employee benefits, including short-term benefits, post-employment benefits, other long-term benefits, and termination benefits. The standard ensures that financial statements reflect an entity’s obligations and the cost of providing employee benefits in the period they are earned, rather than when paid.

Definition and Scope

Employee benefits are all forms of consideration given by an entity in exchange for services rendered by employees or for the termination of employment. IAS 19 applies to all such benefits except those covered under other standards (e.g., share-based payments under IFRS 2).

• Short-term employee benefits: Benefits expected to be settled wholly within 12 months (e.g., wages, bonuses, paid leave).
• Post-employment benefits: Benefits payable after completion of employment (e.g., pensions, gratuities).
• Other long-term employee benefits: Benefits not due wholly within 12 months (e.g., long-service leave, sabbatical leave).
• Termination benefits: Benefits payable due to termination before the normal retirement date.

Post-Employment Benefits

IAS 19 divides post-employment benefits into two main types: Defined Contribution Plans and Defined Benefit Plans.

Defined Contribution Plans

Under a defined contribution plan, the employer’s obligation is limited to the amount it agrees to contribute to a fund. The employee bears the actuarial and investment risks. Contributions are recognized as an expense when employees render service.

Journal Entry:

Defined Benefit Plans

Under a defined benefit plan, the employer bears the actuarial and investment risks. The cost of providing these benefits is determined using the projected unit credit method, which attributes benefit to periods of service and requires actuarial assumptions about discount rates, salary growth, mortality, etc.

Actuarial Gains and Losses

Actuarial gains and losses arise from changes in actuarial assumptions or experience adjustments. These are recognized in Other Comprehensive Income (OCI) and are not reclassified to profit or loss in subsequent periods.

Example:

Journal Entries:

Disclosures under IAS 19

• The characteristics of defined benefit plans and risks associated with them.
• Reconciliation of opening and closing balances of defined benefit obligations and plan assets.
• The fair value of plan assets and their composition.
• Amount recognized in profit or loss and OCI.

Exam Practice Questions

Question 1 – Theory (10 marks)

Required: Explain the key differences between defined contribution and defined benefit plans, and discuss how each is recognized and measured in the financial statements.

Solution:
Defined contribution plans involve fixed contributions and no future obligation. Expense is recognized when incurred. Defined benefit plans require actuarial valuation of obligations using the projected unit credit method. The cost includes current service cost, interest cost, and actuarial gains/losses recognized in OCI.

Question 2 – Calculation (15 marks)

Scenario: At 1 January 20X4, the defined benefit obligation of XYZ Ltd was GHS 400,000. Current service cost for the year was GHS 80,000, interest cost 10%, benefits paid GHS 50,000, and actuarial gain of GHS 20,000. Compute the closing obligation and record the journal entries.

Journal Entries:

Internal and External Links

Also read our detailed guides on related IFRS topics:

• IAS 2 – Inventories
• IAS 7 – Statement of Cash Flows
• IAS 16 – Property, Plant and Equipment

For official guidance, visit the IFRS Foundation.