Indian Accounting Standard 19, Employee Benefits
The objective of Ind AS 19 is to prescribe the accounting and disclosure for employee benefits.
The Standard requires an entity to recognise:
(a) a liability when an employee has provided service in exchange for employee benefits to be paid in the future; and
(b) an expense when the entity consumes the economic benefit arising from service provided by an employee in exchange for employee benefits.
Employee benefits are all forms of considerations given by an entity in exchange for service rendered by employees or for the termination of employment.
Employee benefits include:
- Short-term employee benefits
- Post-employment benefits
- Other long-term employee benefits
- Termination benefits
Short-term employee benefits
Short-term employee benefits are employee benefits (other than termination benefits) that are expected to be settled wholly before twelve months after the end of the annual reporting period in which the employees render the related service.
Short-term employee benefits include items such as the following, if expected to be settled wholly before twelve months after the end of the annual reporting period in which the employees render the related services:
a) wages, salaries and social security contributions;
b) paid annual leave and paid sick leave;
c) profit-sharing and bonuses; and
d) non-monetary benefits (such as medical care, housing, cars and free or subsidised goods or services) for current employees.
When an employee has rendered service to an entity during an accounting period, the entity should recognise the undiscounted amount of short-term employee benefits expected to be paid in exchange for that service:
a) as a liability (accrued expense), after deducting any amount already paid. If the amount already paid exceeds the undiscounted amount of the benefits, an entity should recognise that excess as an asset (prepaid expense) to the extent that the prepayment will lead to, for example, a reduction in future payments or cash refund.
b) as an expense, unless another Ind AS requires or permits the inclusion of the benefits in the cost of an asset.
Post-employment benefits are employee benefits (other than termination benefits and short-term employee benefits) that are payable after the completion of employment.
Post-employment benefits include items such as the following:
(a) retirement benefits (eg pensions and lump sum payments on retirement); and
(b) other post-employment benefits, such as post-employment life insurance and post-employment medical care.
Defined contribution plan
Defined contribution plans are post-employment benefit plans under which an entity pays fixed contributions into a separate entity (a fund) and will have no legal or constructive obligation to pay further contributions if the fund does not hold sufficient assets to pay all employee benefits relating to employee service in the current and prior periods.
Under defined contribution plans the entity’s legal or constructive obligation is limited to the amount that it agrees to contribute to the fund. The amount of the post-employment benefits received by the employee is determined by the amount of contributions paid by an entity (and perhaps also the employee) to a post-employment benefit plan or to an insurance company, together with investment returns arising from the contributions. In consequence, actuarial risk (that benefits will be less than expected) and investment risk (that assets invested will be insufficient to meet expected benefits) fall, in substance, on the employee.
When an employee has rendered service to an entity during a period, the entity should recognise the contribution payable to a defined contribution plan in exchange for that service:
(a) as a liability (accrued expense), after deducting any contribution already paid. If the contribution already paid exceeds the contribution due for service before the end of the reporting period, an entity should recognise that excess as an asset (prepaid expense) to the extent that the prepayment will lead to, for example, a reduction in future payments or cash refund.
(b) as an expense, unless another Ind AS requires or permits the inclusion of the contribution in the cost of an asset.
Defined benefits plan
Defined benefit plans are post-employment benefit plans other than defined contribution plans.
Under defined benefit plans:
a) the entity’s obligation is to provide the agreed benefits to current and former employees; and
b) actuarial risk (that benefits will cost more than expected) and investment risk fall, in substance, on the entity. If actuarial or investment experience are worse than expected, the entity’s obligation may be increased.
Accounting by an entity for defined benefit plans involves the following steps:
a) determining the deficit or surplus. This involves:
i. using an actuarial technique to make a reliable estimate of the ultimate cost to the entity of the benefit that employees have earned in return for their service in the current and prior periods.
ii. discounting that benefit to determine the present value of the defined benefit obligation and the current service cost.
iii. deducting the fair value of any plan assets from the present value of the defined benefit obligation.
b) determining the amount of the net defined benefit liability (asset) as the amount of the deficit or surplus adjusted for any effect of limiting a net defined benefit asset to the asset ceiling.
c) determining amounts to be recognised in profit or loss:
i. current service cost.
ii. any past service cost and gain or loss on settlement.
iii. net interest on the net defined benefit liability (asset).
d) determining the remeasurements of the net defined benefit liability (asset), to be recognised in other comprehensive income, comprising:
i. actuarial gains and losses;
ii. return on plan assets, excluding amounts included in net interest on the net defined benefit liability (asset); and
iii. any change in the effect of the asset ceiling, excluding amounts included in net interest on the net defined benefit liability (asset).
An entity shall determine the net defined benefit liability (asset) with sufficient regularity that the amounts recognised in the financial statements do not differ materially from the amounts that would be determined at the end of the reporting period.
Accounting for constructive obligation
An entity shall account not only for its legal obligation under the formal terms of a defined benefit plan, but also for any constructive obligation that arises from the entity’s informal practices. Informal practices give rise to a constructive obligation where the entity has no realistic alternative but to pay employee benefits. An example of a constructive obligation is where a change in the entity’s informal practices would cause unacceptable damage to its relationship with employees.
Multi-employer plans are defined contribution plans (other than state plans) or defined benefit plans (other than state plans) that:
(a) pool the assets contributed by various entities that are not under common control; and
(b) use those assets to provide benefits to employees of more than one entity, on the basis that contribution and benefit levels are determined without regard to the identity of the entity that employs the employees.
An entity should classify a multi-employer plan as a defined contribution plan or a defined benefit plan under the terms of the plan (including any constructive obligation that goes beyond the formal terms).
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.
Other long-term employee benefits include items such as the following, if not expected to be settled wholly before twelve months after the end of the annual reporting period in which the employees render the related service:
a) long-term paid absences such as long-service or sabbatical leave;
b) jubilee or other long-service benefits;
c) long-term disability benefits;
d) profit-sharing and bonuses; and
e) deferred remuneration.
The Standard does not require the measurement of other long-term employee benefits to the same degree of uncertainty as the measurement of post-employment benefits. The Standard requires a simplified method of accounting for other long-term employee benefits. Unlike the accounting required for post-employment benefits, this method does not recognise re-measurements in other comprehensive income.
Termination benefits are employee benefits provided in exchange for the termination of an employee’s employment as a result of either:
(a) an entity’s decision to terminate an employee’s employment before the normal retirement date; or
(b) an employee’s decision to accept an offer of benefits in exchange for the termination of employment.
An entity should recognise a liability and expense for termination benefits at the earlier of the following dates:
a) when the entity can no longer withdraw the offer of those benefits; and
b) when the entity recognises costs for a restructuring that is within the scope of Ind AS 37 and involves the payment of termination benefits.
An entity should measure termination benefits on initial recognition, and should measure and recognise subsequent changes, in accordance with the nature of the employee benefit, provided that if the termination benefits are an enhancement to post-employment benefits, the entity should apply the requirements for post-employment benefits. Otherwise:
a) if the termination benefits are expected to be settled wholly before twelve months after the end of the annual reporting period in which the termination benefit is recognised, the entity should apply the requirements for short-term employee benefits.
b) if the termination benefits are not expected to be settled wholly before twelve months after the end of the annual reporting period, the entity should apply the requirements for other long-term employee benefits.