Disclosures for finance leases

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. 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]