IAS 19 – Employee Benefits is an International Accounting Standard issued by the International

Financial Reporting Standards (IFRS) Board. It prescribes the accounting treatment and
disclosures for employee benefits, ensuring that these benefits are recognized in financial
statements when an entity provides services in exchange.

Here is a structured summary of IAS 19:

Scope of IAS 19

IAS 19 applies to all employee benefits, which are categorized into the following:

1. Short-term employee benefits (e.g., wages, salaries, annual leave)

2. Post-employment benefits (e.g., pensions, gratuities)
3. Other long-term employee benefits (e.g., long service awards)
4. Termination benefits (e.g., severance pay)

Categories of Employee Benefits

1. Short-term Employee Benefits

 Benefits payable within 12 months after the reporting period.

 Examples: salaries, wages, bonuses, sick leave, annual leave.
 Accounting Treatment: Recognized as an expense and liability when the employee
provides the service.

2. Post-employment Benefits

 Benefits payable after the employment period (e.g., pensions, retirement benefits).
 These are classified as:
o Defined Contribution Plans: Employer’s obligation is limited to fixed
contributions.
Recognition: Contributions are expensed as incurred.
o Defined Benefit Plans: Employer's obligation is to provide specific benefits.
Recognition: Requires actuarial valuation of obligations and plan assets.

Key terms for defined benefit plans:

 Present Value of Defined Benefit Obligation (DBO): Current value of future payments.
 Plan Assets: Assets held in a fund to meet obligations.
 Net Defined Benefit Liability/Asset = DBO – Fair Value of Plan Assets.

Actuarial Gains and Losses:

  Changes due to assumptions or experiences.
 Recognized in Other Comprehensive Income (OCI), not reclassified to profit or loss.

3. Other Long-term Employee Benefits

 Benefits not due within 12 months but not post-employment.

 Examples: long service awards, disability benefits.
 Accounting treatment is similar to defined benefit plans, but actuarial gains/losses are
recognized in profit or loss (not OCI).

4. Termination Benefits

 Benefits provided as a result of termination (voluntary or involuntary).

 Recognition: Expensed when the entity can no longer withdraw the offer.

Key Concepts in IAS 19

1. Actuarial Valuation: Required for defined benefit plans. Uses assumptions about salary
increases, life expectancy, and discount rates.
2. Discount Rate: Based on market yields of high-quality corporate bonds (or government
bonds if corporate bonds are unavailable).
3. Past Service Cost: Changes to defined benefit plans that impact prior service periods.

Disclosures

Entities must disclose:

 Nature and description of benefit plans.

 Financial impact (expense, liability/asset).
 Actuarial assumptions used for defined benefit plans.
 Sensitivity analysis of key assumptions.

Importance for Companies

 Accurate reflection of employee benefits liabilities.

 Recognition of long-term obligations.
  Transparent disclosures to stakeholders.

Let me know if you'd like further details on any of these components or examples of how IAS 19
is applied in practice!

4o

You said:

Example about this

2/2
ChatGPT said:

ChatGPT

Here’s an example to illustrate IAS 19 – Employee Benefits for a Defined Benefit Plan.

Scenario:

XYZ Ltd., a company in Ethiopia, provides a Defined Benefit Pension Plan for its employees.
Under the plan, an employee will receive 1% of their final salary for each year of service
upon retirement. The plan is funded, meaning assets are set aside to meet the obligation.

Key Data (as of reporting date):

1. Number of years of service of an employee: 10 years

2. Employee's current annual salary: ETB 100,000
3. Expected salary growth: 5% annually
4. Discount rate: 8%
5. Estimated retirement date: in 20 years
6. Fair value of plan assets: ETB 50,000
7. Actuarial calculation:
o Present Value of Defined Benefit Obligation (PVDBO): ETB 100,000

Steps for Accounting under IAS 19

Step 1: Recognize Defined Benefit Obligation (DBO)

The company’s obligation is based on the present value of future benefits to be paid to the
employee.

 PVDBO = ETB 100,000 (provided by the actuary).

Step 2: Recognize Plan Assets

The fair value of the plan assets is ETB 50,000.

Step 3: Net Defined Benefit Liability (NDBL)

Net Defined Benefit Liability (or Asset) is calculated as:

NDBL=PVDBO−Fair Value of Plan Assets\text{NDBL} = \text{PVDBO} - \text{Fair Value of

Plan Assets}NDBL=PVDBO−Fair Value of Plan Assets NDBL=100,000−50,000=50,000
(liability).\text{NDBL} = 100,000 - 50,000 = 50,000 \, \
text{(liability)}.NDBL=100,000−50,000=50,000(liability).

Step 4: Recognize Expenses in Profit or Loss

The expense for the period will include:

1. Current Service Cost: Value of benefits earned during the year.

2. Net Interest on Defined Benefit Liability: Net Interest=NDBL×Discount Rate\text{Net
Interest} = \text{NDBL} \times \text{Discount Rate}Net Interest=NDBL×Discount Rate
Net Interest=50,000×8%=4,000.\text{Net Interest} = 50,000 \times 8\% =
4,000.Net Interest=50,000×8%=4,000.

Step 5: Actuarial Gains/Losses

If actuarial assumptions (e.g., discount rate, salary growth) change, the resulting difference in the
DBO is treated as an actuarial gain/loss. This is recognized in Other Comprehensive Income
(OCI).

Journal Entries

1. Recognition of Defined Benefit Liability:

java
Copy code
Dr. Defined Benefit Expense (Profit or Loss) 4,000
Dr. OCI – Actuarial Losses X (if applicable)
Cr. Net Defined Benefit Liability 50,000

2. Contributions to Plan Assets (if company contributes during the year):

Copy code
 Dr. Plan Assets X
Cr. Cash/Bank X

Disclosures in Financial Statements

XYZ Ltd. will disclose:

1. The present value of the DBO: ETB 100,000

2. Fair value of plan assets: ETB 50,000
3. Net Defined Benefit Liability: ETB 50,000
4. Assumptions used (e.g., discount rate of 8%, salary growth of 5%).
5. Expenses in profit or loss (e.g., ETB 4,000 for interest cost).
6. Actuarial gains/losses in OCI.

Summary

 The company recognizes a net liability of ETB 50,000.

 The annual expense (net interest + current service cost) is recognized in Profit or Loss.
 Any actuarial gains/losses are recognized in OCI.

This example demonstrates how IAS 19 requires careful measurement of long-term obligations
and ensures transparency in financial reporting.

Would you like me to expand on any specific part of this example, such as actuarial
assumptions or discount rate calculation?

4o

You said:

yes
ChatGPT said:

ChatGPT

Actuarial Assumptions and Discount Rate Calculation in IAS 19

When dealing with defined benefit plans under IAS 19, actuarial assumptions play a critical
role in calculating the Present Value of Defined Benefit Obligation (PVDBO). These
assumptions include financial assumptions and demographic assumptions.
1. Actuarial Assumptions

A. Financial Assumptions

Financial assumptions relate to the future economic conditions and include:

1. Discount Rate
o The discount rate is used to determine the present value of future benefit
payments.
o It is based on the market yields of high-quality corporate bonds at the reporting
date.
o If there is no deep market for corporate bonds (common in countries like
Ethiopia), the yield on government bonds with similar maturity should be used.
2. Salary Growth Rate
o The assumed future annual increase in salaries due to inflation, promotions, or
other factors.
o For example: "5% annual growth in salaries."
3. Inflation Rate
o Expected inflation impacts salary growth and benefit amounts.
4. Expected Return on Plan Assets
o Estimated return on investments made by the plan assets.

B. Demographic Assumptions

These relate to the future characteristics of employees and include:

1. Mortality Rates
o Expected lifespan of employees, based on actuarial tables.
o For example: Life expectancy at age 60.
2. Employee Turnover
o The probability of employees leaving the company before retirement.
3. Retirement Age
o The assumed age at which employees will retire.

2. Discount Rate Calculation Example

In Ethiopia, assume XYZ Ltd. does not have access to a deep market for corporate bonds.
Therefore, the company uses the yield on government bonds to calculate the discount rate.

Data:
  Government bond yield with 20 years to maturity: 8%.

The discount rate will be 8%, as this represents a risk-free rate that aligns with the expected
maturity of the defined benefit obligation.

3. Example: Calculating PVDBO

Let’s calculate the Present Value of Defined Benefit Obligation (PVDBO) using a simple case:

Scenario:

 The employee will retire in 20 years.

 Salary growth rate = 5% annually.
 Discount rate = 8% annually.
 Benefit: 1% of final salary for each year of service.
 Years of service at retirement: 30 years.
 Current salary = ETB 100,000.

Step 1: Project Final Salary

The final salary at retirement is calculated as:

Final Salary=Current Salary×(1+Salary Growth Rate)Years to Retirement\text{Final Salary} = \

text{Current Salary} \times (1 + \text{Salary Growth Rate})^{\text{Years to
Retirement}}Final Salary=Current Salary×(1+Salary Growth Rate)Years to Retirement
Final Salary=100,000×(1+0.05)20\text{Final Salary} = 100,000 \times (1 +
0.05)^{20}Final Salary=100,000×(1+0.05)20 Final Salary=100,000×2.6533=265,330\text{Final
Salary} = 100,000 \times 2.6533 = 265,330Final Salary=100,000×2.6533=265,330

Step 2: Calculate Annual Pension Payment

The annual benefit is 1% of final salary for each year of service:

Annual Benefit=1%×Final Salary×Years of Service\text{Annual Benefit} = 1\% \times \

text{Final Salary} \times \text{Years of
Service}Annual Benefit=1%×Final Salary×Years of Service Annual Benefit=1%×265,330×30\
text{Annual Benefit} = 1\% \times 265,330 \times 30Annual Benefit=1%×265,330×30
Annual Benefit=2,653.30×30=79,599\text{Annual Benefit} = 2,653.30 \times 30 =
79,599Annual Benefit=2,653.30×30=79,599
Step 3: Discount the Annual Benefit to Present Value

Using the discount rate of 8%, we calculate the present value of the benefits as follows:

PVDBO=Annual Benefit(1+Discount Rate)Years to Retirement\text{PVDBO} = \frac{\

text{Annual Benefit}}{(1 + \text{Discount Rate})^{\text{Years to
Retirement}}}PVDBO=(1+Discount Rate)Years to RetirementAnnual Benefit
PVDBO=79,599(1+0.08)20\text{PVDBO} = \frac{79,599}{(1 +
0.08)^{20}}PVDBO=(1+0.08)2079,599 PVDBO=79,5994.661=17,079\text{PVDBO} = \
frac{79,599}{4.661} = 17,079PVDBO=4.66179,599=17,079

4. Key Takeaways

1. Actuarial assumptions (like salary growth rate, mortality, discount rate) are critical
inputs for defined benefit plans.
2. The discount rate reflects the time value of money using government or corporate bond
yields.
3. The PVDBO shows the current liability, ensuring proper recognition under IAS 19.

Would you like further elaboration on any step, such as handling actuarial gains/losses or
presenting this in financial statements?

Great! Let me know if you need further clarification on any part of IAS 19, additional examples,
or help with other standards like IAS 16 (Property, Plant, and Equipment), IFRS 9 (Financial
Instruments), or any related accounting topics.

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 IAS 16: Property, Plant, and Equipment

 IFRS 9: Financial Instruments
 IAS 36: Impairment of Assets
 IAS 12: Income Taxes
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