Accounting Science

Analysis of IAS 19 Standard: Employee Benefits

Posted by

mariam elghandour

March 15, 2025

On February 17, 2025

IAS 19 Standard, “Employee Benefits,” is an important International Financial Reporting Standard (IFRS) that addresses how to account for and present the costs and benefits related to an entity’s employees. IAS 19 Standard covers all forms of benefits provided by an entity to its employees, whether short-term or long-term, including termination benefits and retirement plans. In this article, we will provide a comprehensive analysis of IAS 19 Standard, discussing its objectives, scope, and key requirements, focusing on the classification of employee benefits and how to recognize and measure various types, as well as highlighting the importance of this standard and its impact on financial statements.

What are Employee Benefits?

Employee benefits are all forms of consideration given by an entity in exchange for services rendered by employees. These benefits include:

Short-term Employee Benefits: Benefits (other than termination benefits) that are expected to be settled wholly within twelve months after the end of the period in which the employees render the related service, such as salaries and wages, social security contributions, paid annual leave, paid sick leave, profit-sharing, and bonuses.
Post-employment Benefits: Benefits (other than termination benefits) that are payable after the completion of employment, such as retirement pensions, post-employment life insurance, and post-employment medical care.
Other Long-term Employee Benefits: All employee benefits other than short-term employee benefits, post-employment benefits, and termination benefits, such as long-service leave, jubilee benefits, and long-term disability benefits.
Termination Benefits: Benefits payable as a result of either an entity’s decision to terminate an employee’s employment before the normal retirement date, or an employee’s decision to accept voluntary redundancy in exchange for those benefits.

What is IAS 19 Standard: Employee Benefits?

IAS 19 Standard is an international accounting standard that specifies how to account for and disclose employee benefits in the financial statements. The standard aims to ensure that liabilities related to employee benefits are recognized correctly, the cost of these benefits is measured reliably, and they are presented in the financial statements in a way that reflects their true impact on the entity’s financial position and financial performance.

Objectives of IAS 19 Standard:

Specify How to Account for Employee Benefits: IAS 19 Standard provides guidance on how to recognize, measure, present, and disclose various types of employee benefits.
Ensure Recognition of Liabilities Related to Employee Benefits: IAS 19 Standard requires entities to recognize liabilities related to employee benefits in their financial statements, providing a more complete picture of their financial position.
Measure the Cost of Employee Benefits Reliably: IAS 19 Standard specifies how to measure the cost of employee benefits, including the cost of pension plans, reliably.
Improve the Quality of Disclosures: IAS 19 Standard imposes specific disclosure requirements aimed at improving the transparency and reliability of information related to employee benefits in the financial statements.
Enhance Comparability: IAS 19 Standard contributes to improving the comparability of financial statements of companies that provide different benefits to their employees.

Scope of IAS 19 Standard:

IAS 19 Standard applies to all employee benefits, except those that fall within the scope of IFRS 2, “Share-based Payment.”

Classification of Employee Benefits:

IAS 19 Standard classifies employee benefits into four main types:

Short-term Employee Benefits: The benefits due to employees in exchange for their services during the period are recognized as an expense in the statement of profit or loss, unless another IFRS Standard permits or requires their inclusion in the cost of an asset (such as inventory or fixed assets).
Post-employment Benefits: Post-employment benefit plans are classified as either defined contribution plans or defined benefit plans.
- Defined Contribution Plans: Under these plans, the entity pays fixed contributions into a separate fund and has no legal or constructive obligation to pay further contributions. The entity’s contributions to defined contribution plans are recognized as an expense in the period to which the employee’s contribution relates.
- Defined Benefit Plans: All post-employment benefit plans other than defined contribution plans. Under these plans, the entity’s obligation is to provide the agreed benefits to current and former employees. Accounting for defined benefit plans requires the use of actuarial methods to measure the obligation and expense, and an actuarial valuation is performed periodically.
Other Long-term Employee Benefits: These benefits are recognized and measured in the same way as post-employment benefits under defined benefit plans, but they are not discounted.
Termination Benefits: Termination benefits are recognized as an expense and a liability at the earlier of the date the entity can no longer withdraw the offer of those benefits and the date the entity recognizes costs for a restructuring that is within the scope of IAS 37 and involves the payment of termination benefits.

Recognition and Measurement:

Short-term Employee Benefits: The undiscounted cost of short-term employee benefits expected to be paid in exchange for the service is recognized as an expense, unless another IFRS Standard permits or requires their inclusion in the cost of an asset.
Post-employment Benefits (Defined Contribution Plans): The entity’s contributions to a defined contribution plan are recognized as an expense in the period to which the employee’s contribution relates.
Post-employment Benefits (Defined Benefit Plans): Measuring the post-employment benefit obligation requires using the projected unit credit method, discounting future benefits using an appropriate discount rate, and allocating the cost of benefits over the employees’ service period.
Other Long-term Employee Benefits: The net present value of the long-term benefit obligation is recognized in the statement of financial position.
Termination Benefits: Termination benefits are recognized as an expense and a liability when the obligation arises.

Actuarial Valuation and the Projected Unit Credit Method:

Accounting for defined benefit plans and other long-term employee benefits requires using the projected unit credit method to measure the obligation and expense. This method involves:

Performing an Actuarial Valuation: An actuary estimates the present value of the defined benefit obligation using actuarial assumptions, such as mortality rates, employee turnover rates, salary increase rates, and the discount rate.
Determining the Discount Rate: The discount rate used should reflect the time value of money and should be determined by reference to market yields on high-quality corporate bonds, or government bonds if there is no deep market in corporate bonds.
Allocating the Cost of Benefits over the Employees’ Service Period: The cost of benefits is allocated over the employees’ service period using an appropriate method, such as the straight-line method or a constant rate of return method.

Disclosure Requirements under IAS 19 Standard:

IAS 19 Standard requires entities to disclose information about:

The characteristics of their defined benefit plans and any associated risks.
The accounting policies used for accounting for employee benefits.
The amounts of employee benefits recognized in the financial statements.
The key actuarial assumptions used in measuring defined benefit obligations.
A reconciliation of the opening and closing balances of the defined benefit obligation, showing the changes during the period.
A description of the post-employment benefit plan, including the nature of the benefits and the regulatory framework in which the plan operates.
Information about the assets designated to fund defined benefit plans (if any).
The impact of employee benefits on the entity’s future cash flows.
Sensitivity analysis for key actuarial assumptions.

Importance of IAS 19 Standard for Companies:

IAS 19 Standard is an important IFRS that helps companies to:

Comply with IFRS: IAS 19 Standard ensures that companies account for employee benefits consistently with IFRS.
Improve the Quality of Financial Reporting: Applying IAS 19 Standard leads to improved quality, relevance, and reliability of financial information related to employee benefits.
Enhance Investor Confidence: IAS 19 Standard helps build investor confidence by providing more accurate and transparent information about an entity’s obligations to its employees.
Better Manage Employee Benefit Costs: IAS 19 Standard provides a clear accounting framework for employee benefits, helping companies manage these costs more effectively.
Make Better Decisions: IAS 19 Standard helps management make better decisions about designing and managing employee benefit plans.

Challenges in Applying IAS 19 Standard:

Complexity of the Standard: IAS 19 Standard is a relatively complex standard, especially concerning accounting for defined benefit plans.
Actuarial Valuations: Accounting for defined benefit plans requires complex actuarial valuations, which can be challenging for companies that do not have the necessary expertise.
Actuarial Assumptions: Actuarial valuations rely on a set of assumptions about the future, such as mortality rates and investment return rates, which may be uncertain.
Need for Detailed Data: Applying IAS 19 Standard requires the availability of detailed data about employee benefit plans and the employees who benefit from them.
Changes in Accounting Standards: Companies must keep up with any changes or updates to IAS 19 Standard to ensure compliance with the latest requirements.

Role of Technology in Applying IAS 19 Standard:

Accounting software and Enterprise Resource Planning (ERP) systems help in applying IAS 19 Standard more efficiently and accurately through:

Automating complex calculations, such as calculating the present value of defined benefit obligations.
Managing data related to employee benefits.
Performing the analyses necessary to assess the impact of different actuarial assumptions.
Generating the reports necessary to comply with disclosure requirements.
Improving the accuracy and comprehensiveness of financial information related to employee benefits.

Practical Example of Applying IAS 19 Standard:

Scenario: Company “C” has a defined benefit plan for its employees. At the end of 2023, the actuary assessed the present value of the defined benefit obligation at 1,000,000 Riyals. The fair value of plan assets was 800,000 Riyals.

Accounting Treatment:

Recognize a Net Defined Benefit Liability: Company “C” will recognize a net defined benefit liability in the statement of financial position of 200,000 Riyals (1,000,000 – 800,000).
Recognize Current Service Cost: Company “C” will recognize the current service cost (the cost of employee benefits earned during the year) as an expense in the statement of profit or loss.
Recognize Net Interest on the Net Defined Benefit Liability: Company “C” will recognize net interest on the net defined benefit liability (calculated using the discount rate) as an expense or income in the statement of profit or loss.
Remeasurement of the Net Defined Benefit Liability: Company “C” will remeasure the net defined benefit liability at the end of each reporting period, and any changes in value (due to changes in actuarial assumptions or returns on plan assets) will be recognized in other comprehensive income.

Disclosure:

Company “C” will disclose the accounting policies used to account for the defined benefit plan.
The company will disclose the key actuarial assumptions used, such as the discount rate and mortality rates.
The company will provide a reconciliation of the opening and closing balances of the defined benefit obligation.

Conclusion:

IAS 19 Standard, “Employee Benefits,” is an important standard that affects many companies, especially those that offer pension plans or other long-term benefits to their employees. IAS 19 Standard provides a comprehensive framework for accounting for all forms of employee benefits, from salaries and wages to complex retirement plans.

Understanding IAS 19 Standard and applying it correctly is essential for accountants, auditors, investors, and anyone seeking to understand how employee benefits affect an entity’s financial position and financial performance. Given the complexities of IAS 19 Standard, particularly with regard to defined benefit plans, it is extremely important to prepare well for IAS 19 Standard to ensure that accurate and transparent financial reports are prepared that meet the needs of all stakeholders and effectively reflect the economic reality of the company.