IAS 19 EMPLOYEE BENEFITS AND IAS 26 ACCOUNTING AND REPORTING BY RETIREMENT BENEFIT PLANS

1 INTRODUCTION

IAS 19 prescribes the accounting treatment of employee benefits. In June 2011, the IASB amended IAS 19. The new version of the Standard has to be applied in the financial statements as at Dec 31, 2013 (if the entity's reporting periods are identical with the calendar years). Earlier application is permitted (IAS 19.172). In the European Union, new IFRSs have to be endorsed by the European Union before they can be applied. The new version of IAS 19 has already been endorsed by the EU. The amended standard has to be applied retrospectively with two exceptions (IAS 19.173).

This chapter of the book is structured as follows:

• Section 2 discusses the rules applicable if the entity decides not to apply the new version of IAS 19 early.
• Section 3 discusses the main differences between the “old” and the “new” version of IAS 19.

2 FINANCIAL REPORTING WITHOUT EARLY APPLICATION OF THE AMENDMENTS TO IAS 19 ISSUED IN JUNE 2011

2.1 Introduction and Scope

IAS 19 prescribes the accounting treatment of employee benefits. Employee benefits comprise all forms of consideration given by an entity in exchange for service rendered by employees (IAS 19.7). Employees include directors and other management personnel (IAS 19.6). IAS 19 is applied to all employee benefits except those to which IFRS 2 (share-based payment) applies (IAS 19.1). In IAS 19 and in the remainder of this chapter of the book, employee benefits are classified as follows:

• Short-term employee benefits (Section 2.2)
• Post-employment benefits (Section 2.3)
• Other long-term employee benefits (Section 2.4)
• Termination benefits (Section 2.5)

IAS 19 is generally based on the following principles (objective of IAS 19):

• A liability is recognized when an employee has provided service in exchange for employee benefits to be paid in the future.
• An expense is recognized when the entity consumes the economic benefit arising from service provided by an employee in exchange for employee benefits.

The reporting by employee benefit plans is not within the scope of IAS 19 because it is dealt with by IAS 26 (IAS 19.2). In some countries (e.g. Germany), the practical significance of the rules of IAS 26 is low because national laws and frequently also the articles of association require reports according to national GAAP. Consequently, the significance of IAS 26 has to be assessed from country to country.

2.2 Short-term Employee Benefits

This category comprises employee benefits that are due to be settled within 12 months after the end of the period in which the employees render the related service (and which do not represent termination benefits) (IAS 19.7). Examples are the following (IAS 19.4 and 19.8):

• Wages, salaries, and social security contributions.
• Compensated absences (where the compensation for the absences is due to be settled within 12 months after the end of the period in which the employees render the related employee service).
• Profit-sharing and bonuses (which are payable within 12 months after the end of the period in which the employees render the related service).
• Non-monetary benefits for current employees (such as medical care, housing, cars, and free or subsidized goods or services).

The accounting treatment of short-term employee benefits is generally straightforward. This is because no actuarial assumptions are required and measurement of short-term employee benefit obligations is effected on an undiscounted basis (IAS 19.9).

When an employee has rendered service to an entity during an accounting period, the undiscounted amount of short-term employee benefits expected to be paid in exchange for that service is generally recognized by the entry “Dr Expense Cr Liability.”

2.3 Post-employment Benefits

2.3.1 Introduction

Post-employment benefits are employee benefits which are payable after the completion of employment (and which do not represent termination benefits) (IAS 19.7). Examples are pensions, post-employment life insurance, and post-employment medical care (IAS 19.4 and 19.24). IAS 19 applies to all such plans whether or not they involve the establishment of a separate entity to receive contributions and to pay benefits (IAS 19.24).

Post-employment benefit plans are classified on the basis of the economic substance of the plan as follows (IAS 19.7 and 19.25–19.27):

• Under a defined contribution plan, the entity pays fixed contributions into a separate entity (i.e. into 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). Under defined benefit plans, actuarial risk (that benefits will be less than expected) and investment risk (that assets invested will be insufficient to meet expected benefits) fall on the employee.
• Defined benefit plans are defined as post-employment benefit plans which do not represent defined contribution plans. Under such a plan, the entity's obligation is to provide the agreed benefits to current and former employees. Actuarial risk (that benefits will cost more than expected) and investment risk fall, in substance, on the entity.

2.3.2 Defined Contribution Plans

Defined contribution plans are generally accounted for like short-term employee benefits (IAS 19.43–19.44 and 19.9–19.10).1 Where contributions to a defined contribution plan do not fall due wholly within 12 months after the end of the period in which the employees render the related service, discounting is necessary (IAS 19.43 and 19.45).

2.3.3 Defined Benefit Plans

2.3.3.1 Measurement of the obligation

The post-employment benefit obligation is measured on a discounted basis (IAS 19.48). The interest rate is generally determined by reference to market yields at the end of the reporting period on high quality corporate bonds. The currency and term of these corporate bonds has to be consistent with the currency and estimated term of the obligation (IAS 19.78).

The present value of the defined benefit obligation is the present value (without deducting any plan assets) of the expected future payments required to settle the obligation (IAS 19.7). Present value is determined according to the “projected unit credit method.” According to this method, each period of service gives rise to an additional unit of benefit entitlement and each unit is measured separately in order to build up the final obligation.2 The whole of a post-employment benefit obligation is discounted, even if part of the obligation falls due within 12 months after the reporting period (IAS 19.64–19.66).

Current service cost is the increase in the present value of the defined benefit obligation resulting from employee service in the current period. Interest cost is the increase during a period in the present value of the obligation which arises because the benefits are one period closer to settlement (IAS 19.7).

2.3.3.2 Plan assets

Sometimes plan assets exist relating to defined benefit plans. Plan assets comprise the following types of assets (IAS 19.7):

• Assets held by long-term employee benefit funds: These are assets (other than nontransferable financial instruments issued by the reporting entity) that meet both of the following conditions:
• They are held by an entity (a fund) that is legally separate from the reporting entity and that exists solely to pay or fund employee benefits.
• They are available to be used only to pay or fund employee benefits, are not available to the reporting entity's own creditors (even in the case of bankruptcy), and cannot be returned to the reporting entity unless either:
• the remaining assets of the fund are sufficient to meet all the related employee benefit obligations of the plan or the reporting entity, or
• the assets are returned to the reporting entity to reimburse it for employee benefits that were already paid.
• Qualifying insurance policies3: A qualifying insurance policy is an insurance policy issued by an insurer that is not a related party (as defined in IAS 24) of the reporting entity. Both of the following conditions must be met:
• The proceeds of the policy can be used only to pay or fund employee benefits under a defined benefit plan.
• The proceeds of the policy are not available to the reporting entity's own creditors (even in the case of bankruptcy) and cannot be paid to the reporting entity unless either:
• the proceeds represent surplus assets that are not needed for the policy to meet all the related employee benefit obligations, or
• the proceeds are returned to the reporting entity in order to reimburse it for employee benefits already paid.

In the statement of financial position, the defined benefit liability is reduced by the fair value of the related plan assets. Fair value is the amount for which an asset could be exchanged or a liability settled between knowledgeable, willing parties in an arm's length transaction (IAS 19.7, 19.54, and 19.102–19.104).

2.3.3.3 Actuarial gains and losses

Actuarial assumptions are assumptions which are necessary when measuring the defined benefit obligation. They comprise assumptions relating to the following parameters (IAS 19.73):

• Demographic parameters (e.g. mortality, rates of employee turnover, and retirement age).
• Financial parameters (e.g. discount rate, future salary levels including career trends, and the expected rate of return on plan assets (such as interest and gains or losses on the plan assets – IAS 19.7)).

At the beginning of the reporting period, the development of the actuarial parameters (i.e. the rate of fluctuation, future salary levels, etc.) until the end of the reporting period is estimated. On the basis of these assumptions, an expected amount of the obligation and of the plan assets as at the balance sheet date is determined. At the end of the reporting period, the actual values of the obligation and of the plan assets are compared with the expected amounts. Differences result in actuarial gains or losses.

If the obligation is higher (lower) than initially expected, this is disadvantageous (advantageous) for the entity. This means that there is an actuarial loss (gain). If the value of plan assets is finally higher (lower) than initially expected, this is advantageous (disadvantageous) for the entity. This means that there is an actuarial gain (loss).

The following table illustrates these considerations:4

Actuarial gains or losses are accounted for in one of the following ways:

• Corridor method (IAS 19.92–19.93):5 According to this method, actuarial gains or losses are not recognized until they exceed a certain level. This means that the previously unrecognized actuarial gains and losses (offset against each other) as at the end of the prior period 00 have to be compared with a limit (called the corridor). The amount in excess of the corridor divided by the expected average remaining working lives of the employees participating in the plan is recognized in the current period (i.e. in 01). Such a pro rata actuarial loss (gain) that has to be recognized in the current period (01) increases (decreases) the expense of the current period (01). The corridor (which has to be determined separately for each defined benefit plan as at the end of the prior period) is the greater of the following amounts:
  • 10% of the present value of the defined benefit obligation (before deducting plan assets).
  • 10% of the fair value of any plan assets.
  Regarding the comparison of the previously unrecognized actuarial gains or losses with the corridor (as described above), the actuarial gains or losses arising on the plan assets are offset with those arising on the defined benefit obligation (IAS 19.105).

• Faster recognition in profit or loss than under the corridor method (IAS 19.93 and 19.95): It is possible to apply any systematic method that results in faster recognition of actuarial gains and losses than under the corridor method, provided that the same basis is applied to both gains and losses and the basis is applied consistently from period to period. An example is the immediate recognition of all actuarial gains and losses in profit or loss in the period in which they occur.
• Recognition in other comprehensive income (IAS 19.93A–19.93D): If all actuarial gains and losses are recognized in the period in which they occur, they may be recognized in other comprehensive income. This requires that the entity does so for all of its defined benefit plans and for all of its actuarial gains and losses.

2.3.3.4 Presentation

In determining the defined benefit liability presented in the statement of financial position, the defined benefit obligation is reduced by the fair value of the related plan assets or vice versa. This means that only a net asset or a net liability is presented (IAS 19.54 and 19.102). However, a net asset cannot always be recognized in full (IAS 19.58–19.60 and IFRIC 14). An asset relating to one plan is only offset against a liability relating to another plan if certain criteria are met (IAS 19.116–19.117).

In the statement of comprehensive income, interest costs arising on defined benefit obligations and the expected return on plan assets can be presented either within the results of operating activities or within the results of financing activities (IAS 19.119).

If actuarial gains and losses are recognized in other comprehensive income, they have to be recognized immediately in retained earnings (IAS 19.93D). In the statement of changes in equity, retained earnings arising from actuarial gains and losses recognized in other comprehensive income are presented as a separate column in addition to other retained earnings. This is to ensure that profit or loss relating to other retained earnings is presented at the crossing of the column “other retained earnings” and the line “total comprehensive income” (as required by IAS 1.106(d)(i)).

2.4 Other Long-term Employee Benefits

Other long-term employee benefits are employee benefits that are not due to be settled within 12 months after the end of the period in which the employees render the related services and which are neither post-employment benefits, nor termination benefits (IAS 19.7). Examples are long-service leave, jubilee benefits, and profit-sharing arrangements, if they are not payable wholly within 12 months after the end of the period (IAS 19.4 and 19.126).

In the case of other long-term employee benefits, all actuarial gains and losses are recognized immediately in profit or loss. Neither application of the corridor method, nor recognition in other comprehensive income is possible (IAS 19.127).6 The amount recognized as a liability is calculated by reducing the present value of the defined benefit obligation by the fair value of the related plan assets (IAS 19.128).

2.5 Termination Benefits

Termination benefits are employee benefits payable as a result of either (IAS 19.7):

• the entity's decision to terminate an employee's employment before the normal retirement date or
• an employee's decision to accept voluntary redundancy in exchange for those benefits.

Consequently, in the case of termination benefits the event that gives rise to an obligation is the termination rather than employee service (IAS 19.132).

Termination benefits are recognized as an expense and as a liability when the entity is demonstrably committed to either (IAS 19.133):

• terminate the employment of an employee or of a group of employees before the normal retirement date, or
• provide termination benefits as a result of an offer made in order to encourage voluntary redundancy.

The entity is demonstrably committed to a termination when the entity has a detailed formal plan (which has to comply with certain minimum requirements) for the termination and is without realistic possibility of withdrawal (IAS 19.134).

With regard to recognition, it is not necessary that the specific employees who will be made redundant have been informed that they are being made redundant (i.e. communication of a restructuring or termination plan to an employee group that includes the affected employees is sufficient to raise a valid expectation).7

In the case of voluntary redundancies, a liability is recognized only if it is probable that the offer will be accepted and if it is possible to estimate the number of acceptances reliably.8

When termination benefits fall due more than 12 months after the reporting period, they are discounted (using the discount rate specified in IAS 19.78 with regard to defined benefit plans that represent post-employment benefits9). In the case of an offer made to encourage voluntary redundancy, the measurement of termination benefits is based on the number of employees expected to accept the offer (IAS 19.139–19.140).

2.6 Examples with Solutions

Example 1

Illustrating the projected unit credit method

On Jan 01, 01, entity E hires Mr X. Upon termination of service, a lump sum is payable to Mr X equaling 1% of final annual salary for each year of service. Mr X's salary in 01 is CU 100, which is assumed to increase at 8% (compound) p.a. The discount rate is 10% p.a. It is expected that Mr X will leave entity E on Dec 31, 04. For simplification purposes it is assumed that there are no changes in actuarial assumptions. Moreover, the additional adjustment needed to reflect the probability that Mr X may leave entity E at an earlier or later date is ignored in this example.

Required

Determine (a) the carrying amount of the liability as at Dec 31 and (b) the current service cost and interest cost in E's financial statements as at Dec 31 for the years 01–04.

Hints for solution

In particular Section 2.3.3.1.

Solution

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Example 2

Defined benefit plan without plan assets

Entity E stipulated a defined benefit plan with its employees:

	01	02
Actual obligation as at Jan 01	100	130
Current service cost	14	20
Interest cost	10	13
Benefits paid	8	11
Actual obligation as at Dec 31	130	140

Posting status:

There have not yet been any entries.

Required

Prepare any necessary entries in E's financial statements as at Dec 31 for the years 01 and 02. E recognizes actuarial gains and losses:

(a) according to the corridor method (IAS 19.92–19.93) and under the assumption that the cumulative unrecognized actuarial losses as at Jan 01, 01 are CU 20. The expected average remaining working life of the employees is 10 years.

(b) entirely immediately in profit or loss (IAS 19.93 and 19.95).

(c) entirely immediately in other comprehensive income (IAS 19.93A–19.93D).

Also determine the carrying amount of the liability for each of these versions as at Jan 01, 01, Dec 31, 01, and Dec 31, 02.

Hints for solution

In particular Sections 2.3.3.3 and 2.3.3.4.

Solution (general explanations)

Actuarial gains (–)/losses (+) arising in 01 and 02
	01	02
Actual obligation as at Jan 01	100	130
Current service cost	14	20
Interest cost	10	13
Benefits paid	−8	−11
Expected obligation as at Dec 31	116	152
Actual obligation as at Dec 31	130	140
Actuarial gains/losses	14	–12

Solution (a)

Actuarial gains (–)/losses (+) to be recognized in 01 and 02
	01	02
Actual obligation as at Jan 01	100	130
Corridor (10% according to IAS 19.92)	10	13
Cumulative unrecognized actuarial gains/losses as at Jan 01	20	33
Actuarial gains/losses in excess of the corridor	10	20
Average remaining working lives of the employees (in years)	10	10
Actuarial gains/losses to be recognized	1	2

Development of the cumulative unrecognized actuarial gains (–)/losses (+)
	01	02
Balance as at Jan 01	20	33
Actuarial gains/losses for the year	14	−12
Removal (actuarial gains/losses to be recognized)	1	2
Balance as at Dec 31	33	19

Expense to be recognized and change in the carrying amount of the liability
	01	02
Current service cost	14	20
Interest cost	10	13
Actuarial gains (–)/losses (+)	1	2
Expense to be recognized	25	35
Benefits paid	−8	−11
Change in the carrying amount of the liability	17	24

When there are unrecognized actuarial losses (gains) at a particular balance sheet date, this means that the carrying amount of the liability is smaller (larger) than the actual obligation. Thus, the carrying amount of the liability is calculated according to the following formula: Actual obligation + cumulative unrecognized actuarial gains – cumulative unrecognized actuarial losses.

Solution (b)

Expense to be recognized
	01	02
Current service cost	14	20
Actuarial gains (–)/losses (+)	14	−12
Interest cost	10	13
Expense to be recognized	38	21
Verification of the results
Carrying amount of the liability (= actual obligation) as at Jan 01, 01	100
Expense to be recognized	38
Benefits paid	−8
Carrying amount of the liability (= actual obligation) as at Dec 31, 01	130
Expense to be recognized	21
Benefits paid	−11
Carrying amount of the liability (= actual obligation) as at Dec 31, 02	140

Solution (c)

In this version, actuarial gains and losses are recognized entirely immediately in other comprehensive income.

Expense to be recognized in profit or loss and change in the carrying amount of the liability
	01	02
Current service cost	14	20
Interest cost	10	13
Expense to be recognized in profit or loss	24	33
Actuarial gains (–)/losses (+) (other comprehensive income)	14	−12
Benefits paid	−8	−11
Change in the carrying amount of the liability	30	10
Verification of the results
Carrying amount of the liability (= actual obligation) as at Jan 01, 01	100
Expense to be recognized in profit or loss	24
Actuarial gains (–)/losses (+) (other comprehensive income)	14
Benefits paid	−8
Carrying amount of the liability (= actual obligation) as at Dec 31, 01	130
Expense to be recognized in profit or loss	33
Actuarial gains (–)/losses (+) (other comprehensive income)	−12
Benefits paid	−11
Carrying amount of the liability (= actual obligation) as at Dec 31, 02	140

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Example 3

Defined benefit plan with plan assets

Entity E stipulated a defined benefit plan with its employees. This plan is the same as the plan described in Example 2. However, there are also plan assets.

	01	02
Actual obligation as at Jan 01	100	130
Current service cost	14	20
Interest cost	10	13
Benefits paid	8	11
Actual obligation as at Dec 31	130	140
Actual fair value of the plan assets as at Jan 01	70	90
Contributions	6	10
Expected return on plan assets	12	10
Actual fair value of the plan assets as at Dec 31	90	100

Posting status:

There have not yet been any entries.

Required

Prepare any necessary entries in E's financial statements as at Dec 31 for the years 01 and 02. E recognizes actuarial gains and losses entirely and immediately in other comprehensive income (IAS 19.93A–19.93D). Also determine the carrying amount of the liability as at Jan 01, 01, Dec 31, 01, and Dec 31, 02.

Hints for solution

In particular Sections 2.3.3.2–2.3.3.4.

Solution

Actuarial gains (–)/losses (+) arising in 01 and 02
	01	02
Actual obligation as at Jan 01	100	130
Current service cost	14	20
Interest cost	10	13
Benefits paid	−8	−11
Expected obligation as at Dec 31	116	152
Actual obligation as at Dec 31	130	140
Actuarial gains/losses arising on the obligation	14	−12
Actual fair value of the plan assets as at Jan 01	70	90
Expected return on plan assets	12	10
Contributions	6	10
Benefits paid	−8	−11
Expected fair value of the plan assets as at Dec 31	80	99
Actual fair value of the plan assets as at Dec 31	90	100
Actuarial gains/losses arising on the plan assets	−10	−1
Total actuarial gains/losses	4	−13

If the actuarial gains and losses are recognized immediately, the carrying amount of the liability is the difference between the actual obligation and the actual fair value of the plan assets.

Expense to be recognized in profit or loss and change in the carrying amount of the liability
	01	02
Current service cost	14	20
Expected return on plan assets	−12	−10
Interest cost	10	13
Expense to be recognized in profit or loss	12	23
Actuarial gains (–)/losses (+) (other comprehensive income)	4	−13
Benefits paid	−6	−10
Change in the carrying amount of the liability	10	0
Verification of the results
Carrying amount of the liability as at Jan 01, 01	30	= 100 – 70
Expense to be recognized in profit or loss	12
Actuarial gains (–)/losses (+) (other comprehensive income)	4
Contributions	−6
Carrying amount of the liability as at Dec 31, 01	40	= 130 – 90
Expense to be recognized in profit or loss	23
Actuarial gains (–)/losses (+) (other comprehensive income)	−13
Contributions	−10
Carrying amount of the liability as at Dec 31, 02	40	= 140 – 100

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Example 4

Statement of comprehensive income and statement of changes in equity – actuarial losses10

In 02, entity E decides on a retirement plan for its employees that constitutes a defined benefit plan. In 02, actuarial losses of CU 3 are incurred on the plan and the remaining employee benefits expense (including interest costs) is CU 7.

Required

(a) Prepare any necessary entries in E's financial statements as at Dec 31, 02.

(b) Illustrate the effects of the entries on E's single statements of comprehensive income for the years 01 and 02.

(c) Illustrate the effects of the entries on E's statement of changes in equity as at Dec 31, 02.

E presents interest costs in employee benefits expense, i.e. within the results of operating activities and recognizes actuarial gains and losses in other comprehensive income.

In 01 and 02, the carrying amount of E's issued capital is CU 100 and the carrying amount of E's capital reserve is CU 20.

Hints for solution

In particular Section 2.3.3.4.

Solution

The actuarial loss is presented within other comprehensive income in the statement of comprehensive income and as a separate category of retained earnings in the statement of changes in equity (IAS 19.93D, IAS 1.96, and 1.IG). Actuarial gains and losses are part of other comprehensive income I. Thus, they are never reclassified to profit or loss (IAS 1.96 and 1.7).

The defined benefit plan has the following effects on the statement of comprehensive income:

	02	01
PROFIT OR LOSS SECTION
Employee benefits expense	−7	0
Results of operating activities	−7	0
LOSS FOR THE YEAR	−7	0
OCI SECTION
Items that will not be reclassified to profit or loss (OCI I):
Actuarial loss on the defined benefit plan	−3	0
Subtotal	−3	0
OTHER COMPREHENSIVE INCOME	−3	0
TOTAL COMPREHENSIVE INCOME	−10	0

The defined benefit plan has the following effects on the statement of changes in equity:

In the statement of changes in equity, the retained earnings arising from actuarial losses are disclosed in a separate column, which is presented in addition to other retained earnings (IAS 19.93D, IAS 1.96, and 1.IG). In 02, an amount of CU –7 is presented at the crossing of the column “other retained earnings” and the line “total comprehensive income.” This corresponds with the loss for the year 02 presented in the statement of comprehensive income.

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3 THE AMENDMENTS TO IAS 19 ISSUED IN JUNE 2011

This section describes the most important changes from the previous version of IAS 19.

Only changes that relate to topics discussed in Section 2 are explained.

3.1 Post-employment Benefits

To begin with, different terms are used in the new version of the standard, although this does not change the accounting treatment of defined benefit plans:

• According to the new version of IAS 19, the net defined benefit liability (asset) represents the deficit or surplus, adjusted for any effect of limiting a net defined benefit asset to the asset ceiling (IAS 19.8 and 19.64). The deficit or surplus is the present value of the defined benefit obligation less the fair value of any plan assets. The asset ceiling represents the present value of any economic benefits available in the form of refunds from the plan or reductions in future contributions to the plan (IAS 19.8).

Moreover, some of the definitions used in the standard have been changed (e.g. the definitions relating to defined benefit cost explained later), which has consequences for financial reporting (IAS 19.8):

• Net interest on the net defined benefit liability (asset) represents the change during the period in the net defined benefit liability (asset) that arises from the passage of time. Net interest is determined by multiplying the net defined benefit liability (asset) by the discount rate specified by IAS 19, both as determined at the beginning of the annual reporting period (taking into account any changes in the net defined benefit liability or asset during the period as a result of contribution and benefit payments). Net interest consists of interest income on plan assets, interest cost on the defined benefit obligation, and interest on the effect of the asset ceiling (IAS 19.83 and 19.123–19.124).
• The amended standard introduces the term “remeasurements of the net defined benefit liability (asset)”, which represent the period-to-period fluctuations in the amounts of defined benefit obligations and plan assets (IAS 19.BC65c). To state this more precisely, remeasurements consist of the following three components (IAS 19.8, 19.57d, and 19.127):
  • Actuarial gains and losses. According to the amended standard, these gains and losses only comprise changes in the present value of the defined benefit obligation resulting from (a) experience adjustments (which are the effects of differences between the previous actuarial assumptions and what has actually occurred) and (b) the effects of changes in actuarial assumptions.
  • The return on plan assets (e.g. interest, dividends, and realized and unrealized gains or losses on plan assets) excluding amounts included in net interest on the net defined benefit liability or asset. This means in effect that the difference between the interest income on plan assets and the return on plan assets is included in the remeasurement (IAS 19.125).
  • Any change in the effect of the asset ceiling excluding amounts included in net interest on the net defined benefit liability or asset (IAS 19.126).

According to the “old” version of the standard, entities are allowed to choose between different methods of recognizing and presenting actuarial gains or losses (IAS 19.BC66):11

• Corridor method
• Faster recognition in profit or loss than under the corridor method
• Recognition in other comprehensive income.

These options are not available according to the amended version of IAS 19, under which remeasurements of the net defined benefit liability (asset) have to be recognized and presented in other comprehensive income (IAS 19.120). Remeasurements are never reclassified from other comprehensive income to profit or loss. However, it is possible to transfer the amounts recognized in other comprehensive income from one category of equity to another one (IAS 19.122). The prohibition of reclassification corresponds with the “old” version of the standard.

The 2010 ED proposed to carry forward the requirement to transfer amounts recognized in other comprehensive income directly to retained earnings. However, the amendments made in June 2011 permit transferring the cumulative remeasurements within equity, and do not impose specific requirements on that transfer (see IAS 19.BC100 and the amendment of IAS 1.96 due to the amendment of IAS 19 in June 2011).

3.2 Termination Benefits

The IASB changed the recognition and measurement rules for termination benefits. In this section, the new rules are presented.

3.2.1 Recognition

A liability for termination benefits has to be recognized at the earlier of the following dates (IAS 19.165):

• When the entity can no longer withdraw the offer of those benefits.
• When the entity recognizes costs for a restructuring that is within the scope of IAS 37 and involves the payment of termination benefits.

For termination benefits which are 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 the following (IAS 19.166):

• When the employee accepts the offer.
• When a restriction (e.g. a legal, regulatory or contractual requirement) on the entity's ability to withdraw the offer takes effect. This would be when the offer is made if the restriction existed at the time of the offer.

For termination benefits payable as a result of an entity's decision to terminate an employee's employment, the entity can no longer withdraw the offer of termination benefits when it has communicated a plan of termination meeting all of the following criteria to the affected employees (IAS 19.167):

• Actions required to complete the plan indicate that it is unlikely that there will be significant changes to the plan.
• The plan identifies the number of employees whose employment is to be terminated, their job classifications or functions, and their locations (but the plan need not identify each individual employee) as well as the expected completion date.
• The plan establishes the termination benefits that employees will receive in sufficient detail so that employees can determine the type and amount of benefits they will receive when their employment is terminated.

3.2.2 Measurement Before the amendments

were made in June 2011, IAS 19 required termination benefits that became due more than 12 months after the reporting date to be discounted, but provided no further measurement guidance. The IASB amended IAS 19 to state explicitly that the measurement of termination benefits should be consistent with the measurement requirements for the nature of the underlying benefits (IAS 19.BC261).

According to the amended standard, it is necessary to measure termination benefits on initial recognition, and to measure and recognize subsequent changes in accordance with the nature of the employee benefit, provided that if the termination benefits are an enhancement to post-employment benefits, the entity has to apply the requirements for post-employment benefits. Otherwise (IAS 19.169):

• if the termination benefits are expected to be settled wholly before 12 months after the end of the annual reporting period in which the termination benefit is recognized, the requirements for short-term employee benefits have to be applied.
• if the termination benefits are not expected to be settled wholly before 12 months after the end of the annual reporting period, the requirements for other long-term employee benefits have to be applied.

Since termination benefits are not provided in exchange for services, IAS 19.70–19.74 relating to the attribution of the benefit to periods of service are not relevant (IAS 19.170).

1 See Section 2.2.

2 See Example 1.

3 A qualifying insurance policy within the meaning of IAS 19 is not necessarily an insurance contract as defined in IFRS 4 (IAS 19.7, Footnote 1).

4 See KPMG, Insights into IFRS, 5th edition, 4.4.500.30.

5 In the following text it is assumed that IAS 19.58A does not apply (IAS 19.92).

6 See KPMG, Insights into IFRS, 5th edition, 4.4.990.10.

7 See KPMG, Insights into IFRS, 7th edition, 4.4.1060.50.

8 See KPMG, Insights into IFRS, 7th edition, 4.4.1070.20.

9 See Section 2.3.3.1.

10 See the chapter on IAS 1, Section 6.3 with regard to the presentation of the statement of changes in equity.

11 See Section 2.3.3.3.