Insight
Accounting for post- employment benefit plans
September 2015
This cost either exists as a liability where the benefit becomes due in the future, or as an expense when the liability crystallises and becomes a cost.
Defining employee benefits
IAS 19 breaks down employee benefits into four categories:
- Short-term benefits - including wages, salaries, sick pay and holiday pay
- Post-employment benefits - pensions and other retirement benefits
- Other long-term employee benefits - including long-service leave, sabbatical leave, and other long-service awards
- Termination benefits - payments arising as a result of an employee leaving service.
In this article we will look specifically at postemployment benefits and the accounting and disclosure implications.
Post-employment benefits
When we think of post-employment benefits we mainly talk about retirement benefits although any post-employment life assurance or health benefits will also fall in this category.
Classes of post-employment benefit plans
We can break these down into categories:
- Defined contribution - known cost but unknown benefit
- Defined benefit - known benefit but unknown cost
Defined contribution plans
As an employer you pay contributions into a fund. Your obligation extends only to paying contributions and not the size of the eventual employee benefit - the eventual size of the fund, made up of contributions and investment growth, will determine the size of the employee benefit.
Defined benefit plans
These arrangements create a liability for you to pay a specific benefit when an employee retires. An actuary will make assumptions about future investment returns, salary inflation, membership demographics, and mortality and arrive at the financial contribution you need to make. Because an employer is obliged to provide the benefit regardless of the cost, these schemes are now the domain of only the largest employers and public sector employers.
Accounting treatment
The accounting treatment of defined contribution plans is quite simple - contributions when you pay them are an expense, unpaid contributions are a liability, and overpaid contributions are an asset. Accounting for defined benefit schemes is more complicated and based on a snapshot of asset values and assumptions about future liabilities. This will result in either a surplus where assets exceed liabilities or a deficit where liabilities exceed assets. The surplus or deficit will appear on the balance sheet.
Disclosure
The disclosure requirements for defined contribution plans is straightforward; it is simply the amount you show in your accounts as an expense.
There are several disclosure requirements for defined benefit schemes. These include details of the plan, asset and liability reconciliation, current asset valuation, any movement in liabilities, investment return on assets, and the actuarial assumptions used.
Multi-employer plans
It is possible for your business to belong to an umbrella arrangement with other employers. These plans may be set up by trade associations so their members can pool resources and costs. If you are a member of a multi-employer defined contribution plan, your accounting and disclosure requirements are no different to any other defined contribution plan.
If you are a member of a multi-employer defined benefit plan, the accounting and disclosure requirements don't change from those we've already discussed. However, your accounting and disclosure obligations are limited to your proportionate share of the plan.
Summary
IAS 19 doesn't present you with any great difficulties where post-employment benefits are concerned, especially as you are unlikely to offer a defined benefit plan. However, it is always wise to seek advice to ensure you meet your obligations.