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IFRS Recognition and measurement of pension plans defined contribution and defined benefit

IFRS Recognition and measurement of pension plans defined contribution and defined benefit

IFRS Recognition and measurement of pension plans defined contribution and defined benefit: This Standard shall be applied by an employer in accounting for all employee benefits, except those to which IFRS 2 Share-based Payment applies.

This Standard does not deal with reporting by employee benefit plans (see IAS 26 Accounting and Reporting by Retirement Benefit Plans).

The employee benefits to which this Standard applies include those provided:

  1. Under formal plans or other formal agreements between an entity and individual employees, groups of employees or their representatives;
  2. Under legislative requirements, or through industry arrangements, whereby entities are required to contribute to national, state, industry or other multi-employer plans;
  3. By those informal practices that give rise to a constructive obligation. Informal practices give rise to a constructive obligation where the entity has no realistic alternative but to pay employee benefits. An example of a constructive obligation is where a change in the entity’s informal practices would cause unacceptable damage to its relationship with employees.

Post-employment benefits include:

  1. retirement benefits, such as pensions
  2. other post-employment benefits, such as post-employment life insurance and post-employment medical care. Arrangements whereby an entity provides post-employment benefits are post-employment benefit plans.

An entity applies this Standard to all such arrangements whether or not they involve the establishment of a separate entity to receive contributions and to pay benefits.

IFRS Recognition and measurement of pension plans defined contribution and defined benefit is an accounting rule concerning employee benefits under the IFRS rules set by the International Accounting Standards Board. In this case, “employee benefits” includes wages and salaries as well as pensions, life insurance, and other perquisites.

The rules in IAS 19 explains the accounting for longer term employee benefits and post employment plans such as defined benefit retirement plans. Accordingly, most of the standard is taken up with explaining the rules for long term employee benefits.

IFRS Recognition and measurement of pension plans defined contribution and defined benefit

As issued at 1 January 2012. Includes IFRSs with an effective date after 1 January 2012 but not the IFRSs they will replace. This extract has been prepared by IFRS Foundation staff and has not been approved by the IASB. For the requirements reference must be made to International Financial Reporting Standards. Employee benefits are all forms of consideration given by an entity in exchange for service rendered by employees or for the termination of employment.

IFRS Recognition and measurement of pension plans defined contribution and defined benefit

The objective of this Standard is to prescribe the accounting and disclosure for employee benefits. The Standard requires an entity to recognise:

  1. A liability when an employee has provided service in exchange for employee benefits to be paid in the future.
  2. An expense when the entity consumes the economic benefit arising from service provided by an employee in exchange for employee benefits. This Standard shall be applied by an employer in accounting for all employee benefits, except those to which IFRS 2 Share-based Payment applies.

IFRS Recognition and measurement of pension plans defined contribution and defined benefit:

Short-term employee benefits:  Short-term employee benefits are employee benefits (other than termination benefits) that are expected to be settled wholly before twelve months after the end of the annual reporting period in which the employees render the related service.

IFRS Recognition and measurement of pension plans defined contribution and defined benefit

When an employee has rendered service to an entity during an accounting period, the entity shall recognise the undiscounted amount of short-term employee benefits expected to be paid in exchange for that service:

  1. As a liability (accrued expense), after deducting any amount already paid. If the amount already paid exceeds the undiscounted amount of the benefits, an entity shall recognise that excess as an asset (prepaid expense) to the extent that the prepayment will lead to, for example, a reduction in future payments or a cash refund.
  2. As an expense, unless another IFRS requires or permits the inclusion of the benefits in the cost of an asset.

IFRS Recognition and measurement of pension plans defined contribution and defined benefit

Post-employment benefits:  Post-employment benefits are employee benefits  that are payable after the completion of employment. Post-employment benefit plans are formal or informal arrangements under which an entity provides post-employment benefits for one or more employees.

Post-employment benefit plans are classified as either defined contribution plans or defined benefit plans, depending on the economic substance of the plan as derived from its principal terms and conditions. Post-employment benefits: defined contribution plans Defined contribution plans are post-employment benefit plans under which an entity pays fixed contributions into a separate entity (a fund) and will have no legal or constructive obligation to pay further contributions if the fund does not hold sufficient assets to pay all employee benefits relating to employee service in the current and prior periods.

IFRS Recognition and measurement of pension plans defined contribution and defined benefit

Under defined contribution plans the entity’s legal or constructive obligation is limited to the amount that it agrees to contribute to the fund. Thus, the amount of the post-employment benefits received by the employee is determined by the amount of contributions paid by an entity to a post-employment benefit plan or to an insurance company, together with investment returns arising from the contributions.

In consequence, actuarial risk  and investment risk fall, in substance, on the employee.

IFRS Recognition and measurement of pension plans defined contribution and defined benefit

When an employee has rendered service to an entity during a period, the entity shall recognise the contribution payable to a defined contribution plan in exchange for that service:

(a) As a liability (accrued expense), after deducting any contribution already paid. If the contribution already paid exceeds the contribution due for service before the end of the reporting period, an entity shall recognise that excess as an asset to the extent that the prepayment will lead to, for example, a reduction in future payments or a cash refund.

(b) As an expense, unless another IFRS requires or permits the inclusion of the contribution in the cost of an asset (see, for example, IAS 2 Inventories and IAS 16 Property, Plant and Equipment).

Post-employment benefits: defined benefit plans Defined benefit plans are post-employment benefit plans other than defined contribution plans. Under defined benefit plans:

(a) The entity’s obligation is to provide the agreed benefits to current and former employees.

(b) Actuarial risk and investment risk fall, in substance, on the entity. If actuarial or investment experience are worse than expected, the entity’s obligation may be increased.

IFRS Recognition and measurement of pension plans defined contribution and defined benefit

Accounting by an entity for defined benefit plans involves the following steps:

  1. Determining the deficit or surplus.
    1. Using an actuarial technique, the projected unit credit method, to make a reliable estimate of the ultimate cost to the entity of the benefit that employees have earned in return for their service in the

IFRS Recognition and measurement of pension plans defined contribution and defined benefit

Employee benefits and benefits in kind include various types of non-wage compensation provided to employees in addition to their normal wages or salaries.

In instances where an employee exchanges (cash) wages for some other form of benefit is generally referred to as a ‘salary packaging’ or ‘salary exchange’ arrangement. In most countries, most kinds of employee benefits are taxable to at least some degree.

IFRS Recognition and measurement of pension plans defined contribution and defined benefit

Examples of these benefits include: housing furnished or not, with or without free utilities, group insurance, disability income protection, retirement benefits, daycare, tuition reimbursement, sick leave, vacation (paid and non-paid), social security, profit sharing, employer student loan contributions, conveyance, domestic help (servants) and other specialised benefits.

The purpose of employee benefits is to increase the economic security of staff members, and in doing so, improve worker retention across the organisation. As such, it is one component of reward management.

The term perks is often used colloquially to refer to those benefits of a more discretionary nature. Often, perks are given to employees who are doing notably well and/or have seniority. Common perks are take-home vehicles, hotel stays, free refreshments, leisure activities on work time (golf, etc.), stationery, allowances for lunch, and—when multiple choices exist—first choice of such things as job assignments and vacation scheduling. They may also be given first chance at job promotions when vacancies exist.

IFRS Recognition and measurement of pension plans defined contribution and defined benefit

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