Actuarial method Methods of allocating finance charges

Chapter 17 – Employee Benefits Page 223 Chapter 17 EMPLOYEE BENEFITS 1 Business Context One of the key business problems in recent years has concerned the funding by entities of their employee pension schemes. With falling equity values, pension funds have watched their investments significantly decrease in value, leading to many schemes having a deficit. Although pension plans are generally operated by independent trustees, they are set up for the benefit of the employing entity’s employees, with the employing entity often retaining some of the obligations under the plans. In some cases pension plans may in substance be assets and liabilities of the employing entity itself. To ensure that all pension plans are accounted for and presented in a consistent manner, IAS 19 Employee benefits sets out the accounting requirements. Employees generally receive a number of different benefits as part of their complete remuneration package, and these are also addressed in IAS 19. The provision of shares and share options has long been a popular remuneration tool for management but the dot.com boom saw the widespread use of such benefits for all employees and as payment to suppliers. Newly set-up entities with limited cash resources used the promise of share growth as a way to attract and retain high calibre individuals. Before the publication of IFRS 2 Share-based payment, the provision of, say, a share option was not recognised in the employing entity’s performance statement. This led to significant employee benefits provided by an entity not being recognised in its financial statements. 2 Chapter Objectives This chapter deals with the accounting and disclosure requirements for various forms of employee remuneration and post-retirement benefits. On completion of this chapter you should be able to:  distinguish between the different forms of remuneration that make up employee benefits;  demonstrate a knowledge of the distinction between short and long-term benefits;  for each of the benefit types, understand the recognition and measurement rules;  understand the difference between a defined contribution plan and a defined benefit plan, and hence the different accounting treatments required for each ; and  understand the implications of share-based payment transactions as a form of employee benefit.