Question

Question 8

Define long and short term employment benefits. Discuss how these are accounted for under international financial reporting standards (IFRS 2 and IAS 19) and the impact of the accounting treatments on the financial statements. Critically assess the key issues in the implementation of these standards.

Answer 1

SHORT-TERM EMPLOYEE BENEFITS
Short-term employee benefits include items expected to be settled wholly before twelve months after the end of the annual reporting period in which the employees render the related services. o It includes  wages, salaries and social security contributions;  paid annual leave and paid sick leave;  profit-sharing and bonuses; and  non-monetary benefits (such as medical care, housing, cars and free or subsidised goods or services) for current employees.

1) Recognition and Measurement of Short-term Benefits

Accounting for short term benefits has two characteristics:
measurement of short term benefits are measured on an undiscounted basis; and
it involves no actuarial assumptions to be made, hence there is no accounting required for any actuarial gain/loss.
Note: Recognition of short term employee benefit is in the form of either paid expenses or profit sharing or bonus plans

2) Short -term paid absences

Accumulating Paid Absences These are the absences that are carried forward and can be used in future periods if the employee is not able to use them in current reporting period of the employer. They can be either:

Vesting: In this case, employees are entitled to a cash-payment for the unutilised entitlement at the time of leaving the entity.

Non-vesting: In this case, employees are not entitled to a cash payment for unused entitlement on leaving.

Non-accumulating Paid Absences:

These are the absences that do not carry forward and they will lapse if the current period’s entitlement is not used in full by the employee and  This also do not entitle employees to a cash payment for unused entitlement on leaving the entity.
Example: Sick pay (to the extent that unused past entitlement does not increase future entitlement), maternity or paternity leave and compensated absences for jury service or military service.
An entity shall recognise no liability or expense as the employee service does not increase the amount of the benefit.

3) Profit-sharing and Bonus Plans : Expected costs of profit-sharing and bonus plans shall be recognised when:
(a) the entity has a present legal or constructive obligation to make such payments as a result of past events; and
(b) a reliable estimate of the obligation can be made by the entity.  

A present obligation exists when, and only when, an entity has no realistic alternative but to make the payments in lieu of profits and bonuses to its employees.

An obligation under profit-sharing and bonus plans results from employee service and not from a transaction with the entity’s owners.

Therefore, an entity recognises the cost of profit-sharing and bonus plans not as a distribution of profit but as an expense.

LONG-TERM EMPLOYEE BENEFITS

Other long-term employee benefits which are not expected to be settled wholly before twelve months after the end of the annual reporting period in which the employees render the related service.  Other long-term employee benefits include, for example:
(a) long-term paid absences such as long-service or sabbatical leave;
(b) jubilee or other long-service benefits;
(c) long-term disability benefits;
(d) profit-sharing and bonuses; and
(e) deferred remuneration.
The measurement of other long-term employee benefits is not usually subject to the same degree of uncertainty as the measurement of post-employment benefits. It is also there that the introduction of, or changes to, other long-term employee benefits rarely causes a material amount of past service cost. This method does not recognise remeasurements in other comprehensive income as required under the accounting required for post-employment benefits.

Recognition and Measurement

The amount recognised as a liability for other long-term employee benefits shall be the net total of the following amounts:
(a) the present value of the defined benefit obligation at the end of the reporting period;
(b) minus the fair value at the end of the reporting period of plan assets (if any) out of which the obligations are to be settled directly.
An entity shall recognise the net total of the following amounts as expense or income for other long-term employee benefits, except to the extent that another Standard requires or permits their inclusion in the cost of an asset:
(a) service cost;
(b) net interest on the net defined benefit liability (asset); and
(c) remeasurements of the net defined benefit liability (asset).

Issue in implementation of IAS 19 :

The main issues in IAS 19 were caused by a range of options that meant that:

• gains and losses could be recognised either in profit or loss or other comprehensive income.

• gains and losses were sometimes recognised in the period when they occured and sometimes not.

• a deficit could be recognised as an asset and a surplus could be recognised as a liability

As a result of these issues it was difficult to compare companies with similar obligations. The option to defer recognition of some changes could prevent users from gaining a clear picture of the gains and losses that arose in the current period.