Workbook on IAS 19 Employee benefits
IAS 19 Employee Benefits - Simplified Workbook
What is IAS 19?
IAS 19 tells companies how to account for money they pay to employees - not just wages, but all types of benefits. Think of it as the rulebook for recording employee costs properly.
Main Goal: Record a liability when employees earn benefits, and record an expense when the company gets the benefit of their work.
The Four Types of Employee Benefits
IAS 19 splits employee benefits into four simple categories:
1. Short-term Benefits (paid within 12 months)
- Salaries and wages
- Paid vacation days
- Sick leave
- Bonuses (if paid within a year)
- Company car, free meals, etc.
2. Post-employment Benefits (after retirement)
- Pensions
- Retirement medical care
- Life insurance after retirement
3. Other Long-term Benefits (more than 12 months away)
- Long-service leave (sabbaticals)
- Long-term disability benefits
- Bonuses paid more than a year later
4. Termination Benefits
- Redundancy payments
- Early retirement packages
1. SHORT-TERM EMPLOYEE BENEFITS
Rule: Record the cost when employees do the work, even if you pay them later.
Basic Example - Monthly Salaries
Your employees earn $100,000 in January, paid in February.
January Entry:
Dr. Salary Expense $100,000
Cr. Salaries Payable $100,000
February Entry (when paid):
Dr. Salaries Payable $100,000
Cr. Cash $100,000
Paid Vacation Days
There are two types:
Accumulating - Unused days carry forward Non-accumulating - Use it or lose it
Example - Accumulating Vacation
Your company gives 20 vacation days per year. If employees don't use them, they can cash them out or carry them forward.
Each month, accrue for vacation earned:
Dr. Vacation Expense $5,000
Cr. Vacation Payable $5,000
Example - Non-accumulating Vacation
Employees get 5 sick days per year. If unused, they're lost - no payout.
No entry until they actually take the sick day.
Bonus Plans
Example - Annual Bonus
Your company promises to pay 5% of profits as bonuses. This year's profit is $2 million.
Bonus = $2,000,000 Γ 5% = $100,000
Dr. Bonus Expense $100,000
Cr. Bonus Payable $100,000
Key Point: Only record if you have a real obligation (legal or you always do it) and can estimate the amount reliably.
2. POST-EMPLOYMENT BENEFITS
These come in two flavors: Defined Contribution and Defined Benefit plans.
Defined Contribution Plans (Simple)
What it is: Company pays a fixed amount into a pension fund. Whatever the investment returns, that's what the employee gets. Company's obligation ends when they pay the contribution.
Example
Company contributes 10% of salary to employee pension funds. Employee salary: $50,000 Company contribution: $5,000
Dr. Pension Expense $5,000
Cr. Cash $5,000
That's it! No future obligation.
Defined Benefit Plans (Complex)
What it is: Company promises specific benefits (like "60% of final salary as pension"). Company bears all the risk - if investments perform poorly, company must make up the difference.
Simple Example
Company promises to pay $1,000/month pension for life after retirement.
The company must:
- Calculate the present value of this promise
- Record a liability for this amount
- Adjust it every year as employees work longer and get closer to retirement
Dr. Pension Expense $50,000
Cr. Pension Liability $50,000
Note: Real calculations require actuaries (specialists who calculate these complex amounts).
Key Differences Summary
| Defined Contribution | Defined Benefit |
|---|---|
| Company pays fixed % | Company promises specific benefit |
| Employee takes investment risk | Company takes investment risk |
| Simple accounting | Complex accounting |
| No future obligation | Ongoing obligation |
3. OTHER LONG-TERM EMPLOYEE BENEFITS
These are benefits paid more than 12 months after the work is done.
Example - Long-service Leave
After 10 years of service, employees get 3 months paid sabbatical.
If an employee has worked 5 years, they've earned half the benefit:
Dr. Long-service Leave Expense $15,000
Cr. Long-service Leave Liability $15,000
Example - Long-term Disability
Company provides disability insurance. If the benefit depends on years of service, accrue each year. If it's the same for everyone regardless of service, only record when someone becomes disabled.
4. TERMINATION BENEFITS
Key Point: These arise from termination, not from working. Only record when you're committed to terminate.
Example 1 - Voluntary Redundancy Program
Company closes a factory and offers $20,000 to anyone who accepts voluntary redundancy. 100 employees are expected to accept out of 200 total.
Dr. Redundancy Expense $2,000,000
Cr. Redundancy Provision $2,000,000
(100 employees Γ $20,000)
If only 80 accept, adjust:
Dr. Redundancy Provision $400,000
Cr. Redundancy Expense $400,000
(20 fewer Γ $20,000)
Example 2 - Compulsory Redundancy
Company must close a division. 50 employees will be made redundant with $30,000 each. This is unavoidable.
Dr. Termination Benefits $1,500,000
Cr. Termination Benefits Payable $1,500,000
Example 3 - Mixed Voluntary and Compulsory
Company offers voluntary redundancy first, then compulsory for remainder.
- 60 voluntary at $25,000 each
- 10 compulsory at $20,000 each (lower amount)
Dr. Termination Benefits $1,700,000
Cr. Termination Benefits Payable $1,700,000
(60 Γ $25,000 + 10 Γ $20,000)
Example 4 - Enhanced Pension Benefits
Company offers early retirement with enhanced pension benefits.
- Normal pension value: $15,000
- Enhanced pension value: $25,000
- Enhancement (termination benefit): $10,000
Dr. Post-employment Benefits $15,000
Dr. Termination Benefits $10,000
Cr. Pension Liability $25,000
Example 5 - Salary During Notice Period
Employee terminated but paid 6 months salary without working. Salary: $8,000/month
Dr. Termination Benefits $48,000
Cr. Salary Accrual $48,000
Example 6 - Termination More Than 12 Months Away
Company announces plant closure in 18 months. Termination payments total $5 million. Present value (discounted): $4.6 million
Dr. Termination Benefits $4,600,000
Cr. Termination Benefits Payable $4,600,000
Example 7 - Uncertain Commitment (No Recording Yet)
Board decides factory will either be sold in 6 months or staff numbers cut. No provision made - not demonstrably committed yet.
Once committed to specific action:
Dr. Termination Benefits $XXX,XXX
Cr. Termination Benefits Payable $XXX,XXX
Example 8 - Termination with Pension Reduction
Employee agrees to termination bonus of $100,000 but pension reduced by $30,000.
Dr. Termination Benefits $100,000
Cr. Cash $100,000
Dr. Pension Liability $30,000
Cr. Post-employment Benefits $30,000
Example 9 - Mass Redundancy with Different Packages
Company closes three departments:
- Department A: 20 employees Γ $15,000 = $300,000
- Department B: 30 employees Γ $20,000 = $600,000
- Department C: 15 employees Γ $25,000 = $375,000 Total: $1,275,000
Dr. Termination Benefits $1,275,000
Cr. Termination Benefits Payable $1,275,000
Example 10 - Constructive vs. Legal Obligation
Legal Obligation: Contract requires 3 months notice pay = $15,000 Constructive Obligation: Company always pays 6 months in practice = $30,000
Record the constructive obligation:
Dr. Termination Benefits $30,000
Cr. Termination Benefits Payable $30,000
What Makes You "Committed"?
You must have a detailed plan showing:
- How many people will be terminated
- Which jobs/locations
- How much they'll be paid
- When it will happen
- No realistic way to back out
PRACTICAL TIPS
1. Timing is Everything
- Short-term: Record when work is done
- Termination: Record when committed to terminate
- Long-term: Spread the cost over the service period
2. If Payments are More Than 12 Months Away
You might need to discount them (reduce for time value of money).
3. Keep It Simple Where Possible
- If amounts are small, don't overcomplicate
- Focus on material items
- Get help for complex pension calculations
4. Documentation Matters
- Keep records of bonus plans
- Document termination decisions
- Maintain employee service records
COMMON MISTAKES TO AVOID
- Recording termination benefits too early - Wait until you're truly committed
- Forgetting to accrue vacation pay - If it accumulates, it's a liability
- Mixing up pension types - Know if it's defined contribution or defined benefit
- Not considering constructive obligations - If you always do something, you might have to keep doing it
SUMMARY FLOWCHART
Employee Benefit
β
When is it paid?
β
βββββββββββββββββββ¬ββββββββββββββββββ¬ββββββββββββββββββ
β Within 12 monthsβ After retirementβ More than 12 β
β β β months later β
β β β β
β SHORT-TERM β POST-EMPLOYMENT β LONG-TERM β
β β’ Record when β β’ Defined Cont: β β’ Spread over β
β work done β Simple β service years β
β β’ Usually β β’ Defined Ben: β β
β undiscounted β Complex β β
βββββββββββββββββββ΄ββββββββββββββββββ΄ββββββββββββββββββ
β
β Or is it due to termination?
β
TERMINATION
β’ Record when committed
β’ Need detailed plan
FINAL THOUGHT
IAS 19 might seem complex, but the basic principle is simple: match the cost of employee benefits with the period when employees earn them. Start with the easy stuff (salaries, basic bonuses) and get professional help for the complex pension calculations. The key is being consistent and transparent about your obligations to employees.
