IAS 19 – Employees benefits


IAS 19 – Employees benefits applies to all employee benefits, except for those covered by IFRS 2 – Share-based Payment, and this standard does not apply to reporting for the Employee Welfare Fund.

As a basic rule, the standard states the following:

(a) A liability should be recognized when an employee has provided a service in exchange for benefits to be received by the employee sometime in the future.

(b) An expense should be recognized when the entity consumes the economic benefits from a service provided by an employee in exchange for employee benefits.

Employee benefits are all forms of consideration given by an entity in exchange for service rendered by the employees or for the termination of employment, including:

(a) short-term employee benefits are expected to be paid wholly before 12 months after the end of the annual reporting period in which the employee render the related services for the entity such as:

(i) wages and salaries, social security;

(ii) annual leave and sick leave;

(iii) profit distribution and bonus; and

(iv) non-monetary benefits (such as medical care, housing, cars, and free or subsidized goods or services) to current employees;

(b) post-employment benefits, such as:

(i) retirement benefits (e.g. pension and lump sum payments in retirement); and

(ii) other post-employment benefits, such as life insurance and post-employment medical care;

(c) other long-term benefits, such as:

(i) long-term paid leave, such as seniority leave or paid leave for research;

(ii) holidays and other long-term benefits;

(iii) long-term disability benefits; and

(d) benefits after resignation

Conversion issues



IAS 19 – Employees benefits


The objective of IAS 19 is to prescribe the accounting and disclosure for employee benefits, requiring an entity to recognize a liability where an employee has provided service and an expense when the entity consumes the economic benefits of employee service.

Short-term employee’s benefits

1. Recognition:

When employees have worked for the entity for an accounting period, the entity must recognize the undiscounted amount of short-term employee benefits that it expects to pay:

(a) liabilities (accrued expenses), after deducting amounts paid. If the amount paid exceeds the undiscounted value of the benefits, the entity will recognize the excess payment as an asset (prepayment) until this prepayment is gradually deducted by future payments or refunded in cash.

(b) expenses, unless another Standard requires or allows the recognition of benefits to the cost of assets (e.g. IAS 2 Inventories and IAS 16 Tangible fixed assets).

2. Short-term paid leave

An entity recognizes the expected cost of short-term employee benefits as follows:

(a) in the case of accumulated paid leave, when the paid leave of employees increases according to the works they perform.

(b) in the case of non-accumulated paid leave, the entity recognizes when the employee takes leave.

3. Bonus and profit distribution

An entity will recognize an expected cost of bonus and profit distribution only if:

(a) the entity has a legal or implicit obligation to make payments for these benefits, arising as a result of past events; and

(b) The obligation is based on reliable estimation. A current obligation occurs only if the entity has no other option but to pay.

Post-employment benefits

IAS 19 requires the entity to classify them into 2 categories, depending on its terms:

1. Defined Contribution Plan:

- An entity's legal or implicit obligation is limited to the amount it agrees to contribute to the fund. Therefore, the post-employment benefits received by the employee are determined by the amount of the contribution of the entity (and possibly from the employee) to the post-employment benefits fund or to an insurance company, as well as investment returns from such contributions. Therefore, the statistical model risk (when the return is lower than expected) and the investment risk (the investment assets will not be enough to meet the expected benefits) in nature belong to the employees.

- When an employee has worked for an entity for a period, the entity recognizes a contribution payable to a defined contribution fund in exchange for their services:

(a) liabilities (accrued expenses), after deducting contributions paid. If the amount paid exceeds the required contribution before the end of the reporting period, the entity will recognize the difference as an asset (prepayment) until this prepayment is deducted by future payments or refunded in cash.

(b) expenses, unless another Standard requires or allows the recognition of benefits to the cost of assets (e.g. IAS 2 Inventories and IAS 16 Tangible fixed assets).

- When contributions to a defined contribution plan are not expected to be paid in whole for a period of twelve months following the end of the annual reporting period in which the employee works, the amounts are discounted at the statutory discount rate.

2. Defined Benefit Plan

- A defined benefit fund may not be contributed, or maybe contributed in whole or in part by an entity, and sometimes by employees to a legal entity segregated with the reporting entity and separately from other employee benefits have been paid. The payment of contributed benefits when due depends not only on the financial position and performance of the investment but also on the ability and willingness of the entity's finances to cover any deficit in assets. As a result, the entity is inherently insured against the statistical model risks and the fund's investment risks. Therefore, expenses recognized for a defined benefit plan are not necessarily the amount contributed during the period.

- The following procedures are included in the entity's accounting for a defined benefit plan:

(a) determine a deficit or surplus. Consists of:

(i) use a statistical model, the unit estimate statistical method, to get a reliable estimate of the cost of benefits that employees get from working in the current and previous periods. This necessitates the entity determining the benefit distribution for the current and previous periods, as well as estimating (based on statistical models) variables related to the number of employees (e.g., employee turnover and mortality) and financial variables (e.g., wage increases and medical expenses) that will affect the cost of employee benefits.

(ii) discount the benefits to determine the present value of the defined benefit obligation and the current cost of service.

(iii) subtract the fair value of all fund assets from the present value of the defined benefit obligation.

(b) estimate the value of the net welfare liability (asset) determined as the amount of the deficit or surplus identified in (a), then adjusts for the effects of capping net welfare assets at the asset ceiling.

(c) determine the amount recognized in the Statement of Profit or Loss:

(i) current service costs

(ii) any past servicing costs and profit or loss on settlement

(iii) defined net interest on benefit liabilities (assets)

(d) redetermination of a defined net benefit liability (asset), which is recorded in other comprehensive income, including:

(i) difference from the calculation based on the statistical model

(ii) interest on the fund assets, except what is included in the net profit from the defined net benefit liabilities (assets); and

(iii) any changes resulting from the effect of the asset ceiling, excluding those included in the net profit from the defined net benefit liabilities (assets).

When an entity manages multiple defined benefit funds, these recognition procedures are applied to each material fund separately.

Discount rate

The interest rate used to discount post-employment benefit obligations (both sponsored and unsponsored) will be determined by reference to the market yield of high-quality corporate bonds at the end of the reporting period. In the absence of an active market for high-quality corporate bonds, the market yield (at the end of the reporting period) of government bonds is used. The currency and term of the corporate or government bond must match the currency and the estimated term of the post-employment benefit obligation.


The entity must disclose the following information:

(a) explain the characteristics of the entity's defined benefit funds and the risks associated with those funds,

(b) identify and explain the financial statement items that arise from the entity's defined benefit funds, and

(c) describes the effect of the entity's defined benefit funds by factors such as the value, timing, and uncertainty of the entity's future cash flows.

What must be done?

  • Identify all legal obligations of benefit arrangements under IAS 19
  • Determine the impact of IAS 19 on the financial statements and the figures and data that need to be collected and tracked to recognize net benefit (assets) liabilities
  • If the entity has a defined benefit fund, it should pay special attention to defining obligations, measuring (statistical modeling and discounted cash flow), and recording related items.
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