IAS 19: Employee benefits
Short-term benefits, defined contribution and defined benefit pension plans: service cost, net interest and remeasurements in OCI.
ACCA exams this helps with: FR Financial Reporting SBR Strategic Business Reporting See the ACCA map
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What it is: How a company accounts for everything it gives employees for their work: wages, holiday pay, bonuses and, the hard part, pensions.
The key idea: with a defined contribution plan the company just expenses what it pays in. With a defined benefit plan it has promised a pension, so it shows the deficit (promised pensions less the fund’s assets) as a liability, and splits the yearly change between profit or loss and OCI.
Example. The present value of promised pensions is £1,150 and the fund’s assets are worth £870. The company shows a net pension liability of £280.
Key words
- Defined contribution plan
- The employer pays fixed contributions into a fund and has no further obligation. The employee bears the risk.Example: Employer pays 5% of salary into each worker’s pension pot.
- Defined benefit plan
- Any post-employment plan that isn’t defined contribution. The employer promises a level of pension and bears the investment and actuarial risk.Example: A final-salary pension of 1/60 of salary per year worked.
- Defined benefit obligation (DBO)
- The present value of the pensions earned by employees so far, worked out by an actuary using the projected unit credit method.Example: DBO £1,150 at the year end.
- Net interest
- The discount rate × the opening net defined benefit liability (or asset). It goes to profit or loss.Example: 5% × (1,000 − 800) = 10.
- Remeasurements
- Actuarial gains and losses, and the return on plan assets above or below the interest amount. They go to OCI and are never reclassified.Example: The actuary increases the life expectancy assumption: a loss in OCI.
Learn
Short-term benefits
Wages, salaries, paid holidays, sick pay and bonuses due within 12 months: expense them as the employee works, with an accrual for anything unpaid. Unused holiday that carries forward (accumulating absences) is accrued at the year end at the amount the company expects to pay.
Defined contribution vs defined benefit
| Defined contribution | Defined benefit | |
|---|---|---|
| Who bears the risk? | Employee | Employer |
| Expense | Contributions payable for the period | Service cost + net interest |
| In the SoFP | Only unpaid (or prepaid) contributions | Net defined benefit liability (or asset) |
| OCI | Nothing | Remeasurements |
Defined benefit: the numbers
Net defined benefit liability = present value of the DBO − fair value of plan assets. (A net asset is capped at the asset ceiling.) The discount rate is the market yield on high-quality corporate bonds.
| Component | Where it goes |
|---|---|
| Service cost: current service cost, past service cost (plan changes), gains or losses on settlement | Profit or loss |
| Net interest on the net liability (or asset), at the discount rate | Profit or loss |
| Remeasurements: actuarial gains and losses on the DBO, and the return on plan assets excluding the interest amount | OCI (not reclassified) |
- Contributions paid into the plan: Dr Plan assets, Cr Cash.
- Benefits paid to pensioners: reduce both the DBO and the plan assets (no effect on the net figure).
- Past service cost from a plan change is recognised immediately in profit or loss.
Tip. Do two columns, obligation and assets. Roll each forward with interest, service cost, contributions and benefits paid. The difference from the actuary’s closing figure is the remeasurement.
Worked example
At 1 January the DBO is £1,000k and plan assets are £800k. The discount rate is 5%. Current service cost is £120k, contributions paid in £100k, benefits paid out £90k. At 31 December the actuary values the DBO at £1,150k and the assets at £870k. (Assume all cash flows happen at the year end.)
| £000 | Obligation | Plan assets |
|---|---|---|
| At 1 January | 1,000 | 800 |
| Interest at 5% | 50 | 40 |
| Current service cost | 120 | — |
| Contributions paid in | — | 100 |
| Benefits paid out | (90) | (90) |
| Expected at 31 December | 1,080 | 850 |
| Remeasurement (balancing figure) | 70 loss | 20 gain |
| Actual at 31 December | 1,150 | 870 |
| Where it goes | £000 |
|---|---|
| Profit or loss: service cost 120 + net interest (50 − 40) 10 | 130 |
| OCI: actuarial loss 70 − gain on assets 20 | 50 loss |
| Net liability: 1,150 − 870 | 280 |
Check: opening net liability 200 + 130 + 50 − contributions 100 = 280. ✓
Practice questions
Type or choose your answers, then press Check answer. Questions with a New numbers button can be repeated with different figures.