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12.3.1
Present legal or constructive obligation
A present obligation exists when, and only when, the entity has no realistic alternative
but to make the payments. [IAS 19.19]. IAS 19 clarifies that where a profit-sharing plan is
subject to a loyalty period (i.e. a period during which employees must remain with the
entity in order to receive their share), a constructive obligation is created as employees
render service that increases the amount to be paid if they remain in service until the
end of the specified period. However, the possibility of employees leaving during the
loyalty period should be taken into account in measuring the cost of the plan. [IAS 19.20].
The standard illustrates the approach as follows:
Example 31.9: Profit sharing and bonus plans
A profit-sharing plan requires an entity to pay a specified proportion of its net profit for the year to
employees who serve throughout the year. If no employees leave during the year, the total profit-sharing
payments for the year will be 3% of profit. The entity estimates that staff turnover will reduce the payments
to 2.5% of profit.
The entity recognises a liability and an expense of 2.5% of net profit.
It is worth noting that in the scenario above, when an entity prepares its accounts for
the year it will no longer be uncertain whether all eligible employees become entitled
to the bonus, as that is determined at the year-end. That means the reduction in the
accrual from 3% to 2.5% should be an observable fact not an ‘estimate’.
In our view, the standard is ambiguous regarding the period over which the expense of
profit-sharing arrangements should be recognised where the amount paid is calculated
by reference to the profit for a period, but payment is conditional upon the employee
remaining in service beyond the end of that period. In particular, the requirement to
recognise a cost over the period during which ‘... employees render service that
increases the amount to be paid if they remain in service until the end of the specified
period’ could be read in two ways depending on the view taken as to what is the
reference point in relation to which the amount paid increases.
One interpretation would be that the employee would receive nothing if he were to
leave before the end of the additional service period. On this view, the cost would be
recognised over not just the year in which it is ‘earned’, but over the longer period to
when the employee has an unconditional right.
An alternative interpretation would be that, as the profit share is determined by
reference to profit for a particular financial year, the amount of the bonus to be received
stops increasing once the profit for the financial year stops increasing. Under this view,
the cost of the bonus would all be recognised during that financial year.
In our opinion, either view is acceptable if applied consistently.
The standard also states that where an entity has a practice of paying bonuses, it has a
constructive obligation to pay a bonus, even though there may be no legal obligation for
it to do so. Again, however, in measuring the cost, the possibility of employees leaving
before receiving a bonus should be taken into account. [IAS 19.21].
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12.3.2
Reliable estimate of provision
A reliable estimate of a legal or constructive obligation under a profit-sharing or bonus
plan can be made when and only when:
• the formal terms of the plan contain a formula for determining the amount of
the benefit;
• the entity determines the amounts to be paid before the financial statements are
authorised for issue; or
• past practice gives clear evidence of the amount of the entity’s constructive
obligation. [IAS 19.22].
IAS 19 states that an obligation under a profit-sharing or bonus plan must be accounted
for as an expense and not a distribution of profit, since it results from employee service
and not from a transaction with owners. [IAS 19.23]. Where profit-sharing and bonus
payments 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, they
should be accounted for as other long-term employee benefits (see 13 below). [IAS 19.24].
12.3.3
Statutory profit-sharing based on taxable profit.
In November 2010, the Interpretations Committee was asked to clarify how to account
for a particular statutory employee benefit whereby 10% of taxable profit is shared with
employees. In particular, the request sought clarification as to whether analogy could
be made to IAS 12 – Income Taxes – to account for temporary differences between
accounting and taxable profit which would reverse in the future.
The Interpretations Committee thought that such an approach was not acceptable. It
decided not to add the item to its agenda saying ‘[t]he Committee noted that the
statutory employee profit-sharing arrangement described in the request should be
accounted for in accordance with IAS 19, and that IAS 19 provides sufficient guidance
on amounts that should be recognised and measured, with the result that significantly
divergent interpretations are not expected in practice. Consequently, the Committee
decided not to add this issue to its agenda’.16
13
LONG-TERM EMPLOYEE BENEFITS OTHER THAN POST-
EMPLOYMENT BENEFITS
13.1 Meaning of other long-term employee benefits
These are all employee benefits other than post-employment benefits and termination
benefits. [IAS 19.8]. They include the following if not expected to be settled wholly before
twelve months after the end of the annual reporting period in which the employees
rendered the related service:
• long-term paid absences such as long-service or sabbatical leave;
• jubilee or other long-service benefits;
• long-term disability benefits;
• profit-sharing and bonuses; and
• deferred remuneration. [IAS 19.153].
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13.2 Recognition and measurement
For such benefits IAS 19 requires a simplified version of the accounting treatment
required in respect of defined benefit plans (which is discussed in detail at 5 above). The
amount recognised as a liability for other long-term employee benefits should be the
net total, at the end of the reporting period, of the present value of the defined benefit
obligation and the fair value of plan assets (if any) out of which the obligations are to be
settled directly. The net total of the following amounts should be recognised in profit or
loss, except to the extent that another IFRS 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).
In other words, all assets, liabilities, income and expenditure relating to such benefits
should be accounted for in the same way, and subject to the same restrictions on the
recognition of assets and in
come, as those relating to a defined benefit pension plan
(see 8.1 and 8.2 above), except that remeasurements are recognised in profit or loss.
[IAS 19.155-156].
The standard explains the use of this simplified approach by asserting that the
measurement of other long-term employee benefits is not usually subject to the same
degree of uncertainty as that of post-employment benefits. [IAS 19.154].
An illustration of the methodology to calculate the defined benefit obligation, service
and interest costs is given in Example 31.2 at 7.3 above.
13.2.1
Attribution to years of service
Long-term employee benefit arrangements will typically have conditions attached to
secure their vesting.
IAS 19 is unclear on the attribution of long-term remuneration to the years of service
over which they are earned.
Consider an award made at the start of the year for a fixed cash payment. A third of the
payment vests on each of the first, second and third anniversaries of the grant for
employees still employed at each vesting date.
One interpretation would be that the ‘benefit formula’ attributes a third of the award to
each year and that each of the three income statements will bear one third of the expense.
An alternative view is that there are three distinct awards with the same grant date, but
with durations of one, two and three years. This pattern of vesting is sometimes
described as ‘graded vesting’ and is discussed, in relation to share-based payments, in
Chapter 30 at 6.2.2 and illustrated in Example 30.9.
In our view, either approach is acceptable if applied consistently.
13.2.2 Long-term
disability
benefit
Where long-term disability benefit depends on the length of service of the employee,
an obligation arises as the employee renders service, which is to be measured according
to the probability that payment will be required and the length of time for which
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payment is expected to be made. If, however, the level of benefit is the same for all
disabled employees regardless of years of service, the expected cost is recognised only
when an event causing disability occurs. [IAS 19.157].
It is not clear why this distinction is made, since in principle both types of benefit are
equally susceptible to actuarial measurement. If anything the cost of benefits applicable
to all employees regardless of service is probably easier to quantify actuarially. Given
that an exposure to disability benefits which grows with years of service is fully provided
for (actuarially) as it grows over time, it would seem logical for full provision to be made
immediately for an exposure which comes into being (in full) on the day the employee
commences employment. The problem with such an approach would be what to do
with the debit entry. It would not represent an asset as envisaged in the Conceptual
Framework (see Chapter 2), which would tend to imply an instant charge to profit or
loss. This may have been the reason for the Board to make the exception and link the
recognition to the actual disability event. These issues are similar to those surrounding
death-in-service benefits discussed at 3.6 above.
13.2.3
Long-term benefits contingent on a future event
It may be the case that a long-term benefit becomes payable only on the occurrence of
an uncertain future event, for example an initial public offering of an entity’s shares
(IPO) or an exit event. Such events are binary in nature and would result in payment
either to no employees with entitlements under the plan or to all such employees.
As discussed at 13.2 above, the projected unit credit method is applied to long-term
employee benefits, [IAS 19.154], however the key question that arises is whether the
accounting should reflect the single best estimate of the outcome; or, the expected value
– that is, a weighted average of possible outcomes. Paragraph 72 of the standard states
that ‘the probability that the specified event will occur affects the measurement of the
obligation, but does not determine whether the obligation exists’. This sets out the
requirement that probability affects measurement. The manner in which probability
affects measurement is dealt with in paragraph 76 which requires actuarial assumptions
to be a best estimate of the ultimate cost of providing benefits. Accordingly, we believe
that the best estimate of the outcome of the uncertain event should be used when
accounting for long-term employee benefits where the outcome is binary. Therefore if
an IPO (or exit event) is not probable the liability should be measured at nil. When the
IPO (or exit event) is or becomes probable (that is, more likely than not) the actuarial
assumption used in applying the projected unit credit method should reflect the full
benefits which would be payable upon the occurrence of the event.
14 TERMINATION
BENEFITS
Termination benefits are employee 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 an offer of benefits in exchange for the
termination of employment. [IAS 19.8].
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They are accounted for differently from other employee benefits because the event that
gives rise to an obligation for them is the termination of employment rather than the
rendering of service by the employee. [IAS 19.159].
Termination benefits do not include employee benefits resulting from termination of
employment at the request of the employee without an entity’s offer, or as a result of
mandatory retirement requirements, because those benefits are post-employment
benefits. Some entities provide a lower level of benefit for termination of employment
at the request of the employee (in substance, a post-employment benefit) than for
termination of employment at the request of the entity. The difference between the
benefit provided for termination of employment at the request of the employee and a
higher benefit provided at the request of the entity is a termination benefit. [IAS 19.160].
The form of the employee benefit does not determine whether it is provided in
exchange for service or in exchange for termination of the employee’s employment.
Termination benefits are typically lump sum payments, but sometimes also include:
• enhancement of post-employment benefits, either indirectly through an employee
benefit plan or directly; and
• salary until the end of a specified notice period if the employee renders no further
service that provides economic benefits to the entity. [IAS 19.161].
Indicators that an employee benefit is provided in exchange for services include
the following:
• the benefit is conditional on future service being provided (including benefits that
increase if further service is provided); and
• the benefit is provided in accordance with the terms of an employee benefit plan.
[IAS 19.162].
Some termination benefits are provided in accordance with the terms of an existing
employee benefit plan. For example, they may be specified by sta
tute, employment
contract or union agreement, or may be implied as a result of the employer’s past practice
of providing similar benefits. As another example, if an entity makes an offer of benefits
available for more than a short period, or there is more than a short period between the
offer and the expected date of actual termination, an entity should consider whether it
has established a new employee benefit plan and hence whether the benefits offered
under that plan are termination benefits or post-employment benefits. Employee benefits
provided in accordance with the terms of an employee benefit plan are termination
benefits if they both result from an entity’s decision to terminate an employee’s
employment and are not conditional on future service being provided. [IAS 19.163]. Benefits
payable to incentivise employees to remain in service with the entity until the end of the
termination period (referred to as stay bonuses) are not termination benefits because they
are dependent on service being provided. These would be accounted for as either a short-
term or long-term employee benefit as appropriate (see 12 and 13 above).
14.1 Statutory termination indemnities
Some employee benefits are provided regardless of the reason for the employee’s
departure. The payment of such benefits is certain (subject to any vesting or minimum
service requirements) but the timing of their payment is uncertain. Although such
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benefits are described in some jurisdictions as termination indemnities or termination
gratuities, they are post-employment benefits rather than termination benefits, and an
entity accounts for them as post-employment benefits. [IAS 19.164].
14.2 Recognition
An entity should recognise termination benefits as a liability and an expense at the
earlier of the following dates:
• when it can no longer withdraw the offer of those benefits; and
• when it recognises costs for a restructuring that is within the scope of IAS 37 and
involves the payment of termination benefits (discussed in Chapter 27 at 6.1). [IAS 19.165].
For termination benefits payable as a result of an employee’s decision to accept an offer
of benefits in exchange for the termination of employment, the time when an entity can
no longer withdraw the offer of termination benefits is the earlier of:
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 563
