3 6
Past service cost
–
– – –
1 – –
– – –
1 –
Net interest
expense
2
– 1 3
3 3 1
1 1 6
4 5
Administration
costs
3
1 1 –
1 1 –
– – 3
2 2
Operating profit
before
exceptional items
5
3 7 4
6 5 1
1 1 10
10 13
Exceptional
items:
Settlement
cost
6
147 – –
– – –
– – 6
147 –
11
150 7 4
6 5 1
1 1 16
157 13
[...]
The settlement cost in 2013 resulted from the buy-in transaction described on the previous page and comprised a
past service cost of $5m relating to additional benefits secured by the transaction, the $137m difference between the
cost of the insurance policy and the accounting value of the liabilities secured and transaction costs of $5m. As the
policy was structured to enable the plan to move to a buy-out and the intention was to proceed on that basis, the
buy-in transaction was accounted for as a settlement with the loss arising recorded in the income statement. The full
buy-out was completed on 31 October 2014.
2816 Chapter 31
10.3 Net interest on the net defined benefit liability (asset)
Net interest on the net defined benefit liability (asset) is the change during the period in
the net defined benefit liability (asset) that arises from the passage of time. [IAS 19.8]. It is
determined by multiplying the net defined benefit liability (asset) by the discount rate
(see 7.6 above) taking into account any changes in the net defined benefit liability (asset)
during the period resulting from contributions or benefit payments. [IAS 19.123, 123A].
Unless there are certain plan changes in the period, the discount rate used for the whole
period is that determined at the start of the reporting period. However, if the net defined
benefit liability (asset) is remeasured to determine a past service cost, or a gain or loss
on settlement the net interest for the remainder of the reporting period is determined
using: [IAS 19.123A]
(a) the net defined benefit liability (asset) reflecting the benefits offered after the plan
amendment, curtailment or settlement; and
(b) the discount rate used to remeasure the net defined benefit liability (asset)
Accounting for defined benefit schemes in interim financial statements is discussed in
Chapter 37 at 9.3.3.
As the net item in the statement of financial position is comprised of up to three separate
components (the defined benefit obligation, plan assets and the asset ceiling), the net
interest is made up of interest unwinding on each of these components in the manner
described above. [IAS 19.124]. Although, computationally, the net interest is so composed,
for the purposes of presentation in profit or loss it is a single net amount.
Interest on plan assets calculated as described above will not, other than by coincidence,
be the same as the actual return on plan assets. The difference is a remeasurement
recognised in other comprehensive income (see 10.4.2 below). If the net plan liability
(asset) is remeasured as a result of a plan amendment, curtailment or settlement the
entity shall determine interest income for the remainder of the annual reporting period
after the plan amendment, curtailment or settlement using the plan assets used to
remeasure the net defined benefit liability (asset). In performing this calculation the
entity shall also take into account any changes in the plan assets held during the period
resulting from contributions or benefit payments. [IAS 19.125].
Similarly, the difference in the asset ceiling between the start and end of the period is
unlikely to equal the interest on this component described above. An entity shall
determine the effect of the asset ceiling at the start of the annual reporting period.
However, if an entity remeasures the net defined benefit liability (asset) as a result of a
plan amendment, curtailment or settlement, the entity shall determine interest on the
effect of the asset ceiling for the remainder of the annual reporting period after the plan
amendment, curtailment or settlement taking into account any change in the effect of
the asset ceiling as discussed in 10.2 above. The difference between the total change in
the effect of the asset ceiling and the interest effect is accounted for as a remeasurement
in other comprehensive income. [IAS 19.126].
Employee
benefits
2817
10.4 Remeasurements
Remeasurements of the net defined benefit liability (asset) comprise:
(a) actuarial gains and losses;
(b) the return on plan assets, excluding amounts included in net interest on the net
defined benefit liability (asset); and
(c) any change in the effect of the asset ceiling (see 8.2 above), excluding amounts
included in net interest on the net defined benefit liability (asset). [IAS 19.8, 127].
10.4.1
Actuarial gains and losses
Actuarial gains and losses are changes in the present value of the defined benefit
obligation resulting from: experience adjustments (the effects of differences between
the previous actuarial assumptions and what has actually occurred); and the effects of
changes in actuarial assumptions. [IAS 19.8]. These can result, for example, from:
(a) unexpectedly high or low rates of: employee turnover, early retirement, mortality,
increases in salaries or benefits, or medical costs (if the formal or constructive
terms of the plan provide for inflationary benefits);
(b) the effect of changes to assumptions concerning benefit payment options;
(c) the effect of changes in estimates of: future employee turnover, early retirement
or mortality or of increases in salaries, benefits (if the formal or constructive terms
of the plan provide for inflationary benefit increases) or medical costs; and
(d) the effect of changes in the discount rate. [IAS 19.128].
Actuarial gains and losses do not include changes in the present value of the defined
benefit obligation because of the introduction, amendment, curtailment or settlement
of the defined benefit plan, or changes to the benefits payable under the defined benefit
plan. Such changes result in past service cost or gains or losses on settlement (see 10.2.1
and 10.2.2 above). [IAS 19.129].
10.4.2
The return on plan assets, excluding amounts included in net interest
on the net defined benefit liability (asset)
The return on plan assets is interest, dividends and other income derived from the plan
assets, together with realised and unrealised gains on the assets, less
• any costs of managing plan assets; and
• 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.
Other administ
ration costs are not deducted from the return on plan assets, as discussed
further at 11 below. [IAS 19.130].
2818 Chapter 31
11
DEFINED BENEFIT PLANS – COSTS OF ADMINISTERING
EMPLOYEE BENEFIT PLANS
Some employee benefit plans incur costs as part of delivering employee benefits. The
costs are generally more significant for post-retirement benefits such as pensions.
Examples of costs include actuarial valuations, audits and the costs of managing any
plan assets.
IAS 19 deals with some costs, as discussed below, but is silent on others.
The following costs are required to be factored into the measurement of the defined
benefit obligation as part of the actuarial assumptions (see 7.5 above):
• in the case of medical benefits, future medical costs, including claim handling costs
(i.e. the costs that will be incurred in processing and resolving claims, including
legal and adjuster’s fees); and
• taxes payable by the plan on contributions relating to service before the reporting
date or on benefits resulting from that service. [IAS 19.76(b)].
The following costs (and no others) are deducted from the return on plan assets
(see 10.4.2 above):
• the costs of managing the plan assets; and
• any tax payable by the plan itself, other than tax included in the actuarial
assumptions used to measure the defined benefit obligation. [IAS 19.130].
As discussed at 10.3 above, net interest on the net liability or asset is reported in the
income statement. This is a wholly computed amount which is uninfluenced by actual
asset returns; the difference between actual asset returns and the credit element of
the net interest amount forms part of remeasurements reported in other
comprehensive income.
So, although not expressed in these terms, costs of administering plan assets and the tax
mentioned above are reported in other comprehensive income.
The standard is silent on the treatment of any other costs of administering employee
benefit plans. However, the Basis for Conclusions on IAS 19 contains the following: ‘the
Board decided that an entity should recognise administration costs when the
administration services are provided. This practical expedient avoids the need to
attribute costs between current and past service and future service’. [IAS 19.BC127]. The
Board may well have taken that decision, however it did not include such a requirement
in the standard.
In our view, such an approach is certainly an acceptable way to account for costs not
dealt with in the standard; however other approaches could be acceptable, for example,
in relation to closed schemes as discussed below. Entities need, in compliance with
IAS 8, to develop an accounting policy in light of the standard not dealing with these
costs. However, IAS 1 is clear that such costs would not be reported in other
comprehensive income. [IAS 1.88].
One alternative to simple accruals accounting as costs are incurred could be relevant to
closed plans, where employees are no longer exchanging services for defined benefits.
In this situation, it is clear that any and all future costs of administering the plan relate
Employee
benefits
2819
to past periods and no attribution is necessary. An entity with such an arrangement may
select a policy of full provision of all costs of ‘running-off’ the plan (apart from those
specifically dealt with by the standard).
12
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. [IAS 19.8].
The standard states that reclassification is not necessary if an entity’s expectation of the
timing of settlement changes temporarily. However, if the characteristics of the benefit
change (such as a change from a non-accumulating benefit to an accumulating benefit)
or if a change in expectations of the timing of settlement is not temporary, then the
entity considers whether the benefit still meets the definition of short-term employee
benefits. [IAS 19.10].
They can include:
• wages, salaries and social security contributions;
• paid annual leave and paid sick leave;
• profit-sharing and bonuses; and
• non-monetary benefits (such as medical care, housing, cars and free or subsidised
goods or services) for current employees. [IAS 19.9].
12.1 General recognition criteria for short-term employee benefits
An entity should recognise the undiscounted amount of short-term benefits attributable to
services that have been rendered in the period as an expense, unless another IFRS requires
or permits the benefits to be included in the cost of an asset. This may particularly be the
case under IAS 2 (see Chapter 22 at 3.1) and IAS 16 (see Chapter 18 at 4). Any difference
between the amount of cost recognised and cash payments made should be treated as a
liability or prepayment as appropriate. [IAS 19.11]. There are further requirements in respect
of short-term paid absences and profit-sharing and bonus plans as detailed below. Cost is
not defined in IAS 19 and therefore the accounting for such benefits may vary depending
on any other standards involved in the recognition of the transaction.
12.2 Short-term paid absences
These include absences for vacation (holiday), sickness and short-term disability,
maternity or paternity leave, jury service and military service. These can either be
accumulating or non-accumulating absences. [IAS 19.14]. Accumulating absences are
those that can be carried forward and used in future periods if the entitlement in the
current period is not used in full. They can be either vesting entitlements (which entitle
employees to a cash payment in lieu of absences not taken on leaving the entity) or non-
vesting entitlements (where no cash compensation is payable). Non-accumulating
absences are those where there is no entitlement to carry forward unused days. An
obligation arises as employees render service that increases their entitlement to future
paid absences. [IAS 19.15].
2820 Chapter 31
12.2.1 Accumulating
absences
The cost of accumulating paid absences should be recognised when employees render
the service that increases their entitlement to future paid absences. No distinction
should be made between the recognition of vesting and non-vesting entitlements
(see 12.2 above), on the basis that the liability arises as services are rendered in both
cases. However, the measurement of non-vesting entitlements should take into account
the possibility of employees leaving before receiving them. [IAS 19.15].
The cost of accumulating paid absences should be measured as the additional amount
that the entity expects to pay as a result of the unused entitlement that has accumulated
at the end of the reporting period. [IAS 19.16]. In the case of unused paid sick leave,
provision should be made only to the extent that it is expected that employees will use
the sick leave in subsequent periods. The standard observes th
at in many cases, it may
not be necessary to make detailed computations to estimate that there is no material
obligation for unused paid absences. For example, IAS 19 considers it unlikely that a sick
leave obligation will be material unless if there is a formal or informal understanding
that unused paid sick leave may be taken as paid vacation. [IAS 19.17].
The standard provides an example to illustrate the requirements for accumulating paid
absences upon which the following is based: [IAS 19.17]
Example 31.8: Accumulating paid absences
An entity has 100 employees, who are each entitled to five working days of paid sick leave for each year.
Unused sick leave may be carried forward for one calendar year. Sick leave is taken first out of the current
year’s entitlement and then out of any balance brought forward from the previous year (a LIFO basis). At
31 December 2015, the average unused entitlement is two days per employee. The entity expects, based on
past experience which is expected to continue, that 92 employees will take no more than five days of paid
sick leave in 2016 and that the remaining eight employees will take an average of six and a half days each.
The entity expects that it will pay an additional 12 days of sick pay as a result of the unused entitlement that
has accumulated at 31 December 2015 (one and a half days each, for eight employees). Therefore, the entity
recognises a liability equal to 12 days of sick pay.
12.2.2
Non-accumulating paid absences
The cost of non-accumulating absences should be recognised as and when they arise,
on the basis that the entitlement is not directly linked to the service rendered by
employees in the period. This is commonly the case for sick pay (to the extent that
unused past entitlement cannot be carried forward), maternity or paternity leave and
paid absences for jury service or military service. [IAS 19.13(b), 18].
12.3 Profit-sharing and bonus plans
An entity should recognise the expected cost of profit-sharing and bonus payments
when and only when:
• the entity has a present legal or constructive obligation to make such payments as
a result of past events; and
• a reliable estimate of the obligation can be made. [IAS 19.19].
The above are discussed in turn at 12.3.1 and 12.3.2 below. Statutory profit-sharing
arrangements based on taxable profit are discussed at 12.3.3.
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 562