Disclosures for operating leases

Chapter 17 – Employee Benefits Page 224 3 Objectives, Scope and Definitions of IAS 19 IAS 19 should be applied by all entities in accounting for the provision of all employee benefits, except those to which IFRS 2 applies. The standard applies regardless of whether the benefits have been provided as part of a formal contract. [IAS 19.1] Employee benefits are all forms of consideration, for example cash bonuses, retirement benefits and private health care, given to an employee by an entity in exchange for the employee’s services. [IAS 19.7] A number of accounting issues arise due to:  the valuation problems linked to some forms of employee benefits; and  the timing of benefits, which may not always be provided in the same period as the one in which the employee’s services are provided. IAS 19 is structured according to the different forms of employee benefits as follows:  short-term employee benefits;  post-employment benefits;  other long-term employee benefits; and  termination benefits. 4 Short-term Employee Benefits

4.1 All short-term benefits

Short-term employee benefits are employee benefits other than termination benefits that fall due within twelve months from the end of the period in which the employees provide their services. [IAS 19.7] Short-term employee benefits include:  wages, salaries and social security contributions;  short-term absences where the employee continues to be paid, for example paid annual vacation, paid sick leave and paid maternitypaternity leave. To fall within the definition, the absences should be expected to occur within twelve months of the end of the period in which the employee services were provided;  profit-sharing and bonuses payable within twelve months of the end of the period; and  non-monetary benefits, for example private medical care and company cars. As set out in IAS 1 Presentation of financial statements, financial statements should be prepared by applying the accrual concept. The application of the accrual concept in relation to liabilities means that an entity should recognise a liability when it becomes payable rather than when it is actually paid. A short-term benefit should therefore be recognised as an employee provides the services to the entity by reference to which the benefits are payable. The benefit will normally be treated as an expense, and a liability should be recognised for any unpaid balance at the end of the reporting period. [IAS 19.10] Chapter 17 – Employee Benefits Page 225

4.2 Short-term compensated absences

Compensated absences are periods of absence from work for which the employee receives some form of payment, for example paid annual vacation and paid sick leave. These benefits fall into two categories:  accumulating absences. These are benefits, such as paid annual vacation, that accrue over an employee’s period of service and can be potentially carried forward and used in future periods; and  non-accumulating absences. These are benefits that an employee is entitled to, but that are not normally capable of being carried forward to the following period if they are unused during the period, for example paid sick leave. The cost of providing compensation for accumulating absences should be recognised as an expense as the employee provides the services by reference to which the entitlement to such benefits accrues. Where an employee has an unused entitlement at the end of the reporting period and the entity expects to provide the benefit, a liability should be created. [IAS 19.11, 19.14] The cost of providing compensation for non-accumulating absences should be expensed as the absences occur. [IAS 19.11] Illustration 1 An entity has 5 employees and each is entitled to 20 days paid vacation per year, at a rate of CU50 per day. Unused vacation is carried forward to the following year. All 5 employees work for the entity throughout the year and are therefore entitled to their 20 days of vacation. An expense should be recognised in profit or loss for: 5 employees x 20 days x CU50 = CU5,000 4 of the employees use their complete entitlement for the year and the other, having used 16 days, is permitted to carry forward the remaining 4 days to the following period. A liability will be recognised at the end of the reporting period for: 1 employee x 4 days x CU50 = CU200

4.3 Profit-sharing and bonus plans

An entity should recognise an expense and a corresponding liability for the cost of providing profit-sharing arrangements and bonus payments when: [IAS 19.17]  the entity has a present legal or constructive obligation i.e. payment is part of an employee’s employment contract, or the entity has a history of paying bonuses to make such payments as the result of a past event; and  a reliable estimate of the obligation can be made. Chapter 17 – Employee Benefits Page 226 Illustration 2 An entity has a contractual agreement to pay 4 of its net profit each year as a bonus. The bonus is divided between those who are employees of the entity at the end of the reporting period. The following data is relevant: Net profit: CU120,000 Average employees 5 Employees at start of year 6 Employees at end of year 4 An expense should be recognised in profit or loss for the year in which the profits were made and therefore the employees’ services were provided, for: CU120,000 x 4 = CU4,800 Each of the 4 employees remaining with the entity at the end of the reporting period is entitled to CU1,200. A liability should be recognised if the bonuses remain unpaid at the end of the reporting period. 5 Post-Employment Benefits – Overview Post-employment benefits are employee benefits other than termination benefits which are payable after the completion of employment. Such benefits include post employment benefit plans set up under formal or informal arrangements. [IAS 19.7] Post-employment benefits include pensions and other post-employment benefits, such as continued private medical care. There are two main types of post-employment benefit plan: 1 defined contribution plans. These are post-employment plans under which payments into the plan are fixed. Subsequent payments out of the plan to retired members are based on the size of the ‘pot’. The ‘pot’ represents contributions that have been made into the scheme and investment returns on scheme assets. The risk of the plan not providing adequate payments to retired members lies with the members; and [IAS 19.7] 2 defined benefit plans. These are defined as all plans other than defined contribution plans. These plans define the amount that retired members will receive from the plans during retirement, by reference to factors such as length of service and salary levels. Contributions are paid into the scheme based on an estimate of what will have to be paid out under it. Typically, an employer retains an obligation to make up any shortfall in a plan, thereby bearing the risk of the plan under-performing. [IAS 19.7]