1 Section 28 Employee BenefitsThe IFRS for SMEs 1 Section 28 Employee Benefits © 2011 IFRS Foundation 1

2 Section 28 – scope 2 Employee benefits (EBs) are all forms of consideration given by an entity in exchange for service rendered by employees, including directors and management. Section 28 applies to all EBs, except for share-based payment transactions, which are covered by Section 26 Share-based Payment. © 2011 IFRS Foundation 2

3 Section 28 – types of employee benefits3 4 types of EBs: short-term employee benefits post-employment benefits other long-term employee benefits termination benefits And equity compensation (see Section 26) © 2011 IFRS Foundation 3

4 Section 28 – general recognition criteria4 Recognise cost of EBs to which employees have become entitled for service rendered to entity in reporting period. liability, after deducting amounts that have been paid. Asset if prepaid EB expense expense, unless another section requires cost included in asset (for example inventories or PP&E) © 2011 IFRS Foundation 4

5 Section 28 – short-term employee benefits5 Short-term employee benefits (S/TEBs) are wholly due within 12 months after the end of the period in which the employees render the related service (hereafter 12 month limitation). but excludes termination benefits. © 2011 IFRS Foundation 5

6 Section 28 – short-term employee benefits6 Examples of S/TEBs include: wages, salaries & social security contrib; S/T compensated absences (paid annual leave & paid sick leave) for absences expected to occur within 12 month limitation; profit-sharing & bonuses payable within 12 month limitation; & non-monetary benefits (such as medical care, housing, cars and free or subsidised goods or services) for current employees. © 2011 IFRS Foundation 6

7 Section 28 – measurement of S/TEBs7 Measure S/TEBs that meet general recognition criteria (above) at the undiscounted amount expected to be paid © 2011 IFRS Foundation 7

8 Section 28 – examples S/TEBsEx 10*: An employee is entitled to 5 days paid sick leave a year. Unused sick leave is carried forward for 1 calendar year. It is allocated on a FIFO basis. No sick leave is expected to lapse. Employee 1 earns 400 per working day. Sick leave record: 4.5 days accumulated at 1/1/2015; 2 days taken in Salary increase = 5% effective 1/1/2016. 31/12/20X1 liability = Ksh.2,100 (i.e 400 wage rate × 1.05 increase × 5 (max) days due at 31/12/2015 & expected to be taken in 2016. * see example 10 in Module 28 of the IFRS Foundation training material © 2011 IFRS Foundation 8

9 Section 28 – examples S/TEBs9 Ex 13*: Same as Ex 10 except sick leave cannot be carried forward to the next calendar year & does not vest (ie is not paid out in cash). No liability at 31/12/2015 (no obligation). Ex 10a: Similar to Ex 10 and Ex 13 except sick leave is paid out in cash in January 2016 payroll at 2015 salary rate. 31/12/2015 liability = 1,200 (i.e 400 wage rate × 3 (5 earned less 2 taken) days due at 31/12/2015 & paid out in 2016 * see example 13 in Module 28 of the IFRS Foundation training material © 2011 IFRS Foundation 9

10 Section 28 – examples S/TEBs10 Ex 17*: A pays 3% of year’s profit (before profit sharing) to employees who serve throughout the current year & who will continue to serve throughout the following year. A expects to save 10% through staff turnover. The bonus will be paid on 31/12/2016. Profit for 2015 before profit sharing = CU1,000,000. Liability at 31/12/2015 & expense = Ksh.27,000 (i.e 3% × 1,000,000 × 90%) * see example 17 in Module 28 of the IFRS Foundation training material © 2011 IFRS Foundation 10

11 Section 28 – post-employment benefits11 Post-employment benefits (PEBs) are employee benefits (other than termination benefits) that are payable after the completion of employment Examples of PEBs include retirement benefits, such as pension other PEBs, such as post-employment life insurance and post‑employment medical care © 2011 IFRS Foundation 11

12 Section 28 – post-employment benefits12 Arrangements whereby an entity provides PEBs are PEB plans. 2 types of PEB plans: defined contribution plans (entity pays fixed contributions into a separate entity (a fund) and has no further obligations, ie all risks with employee). defined benefit plans (actuarial & investment risk (if funded) with entity). © 2011 IFRS Foundation 12

13 Section 28 – PEBs defined contribution13 Recognise the contribution payable for the period as an expense, unless another section requires the cost to be recognised as part of the cost of an asset (e.g inventories or PP&E). Ex 18*: On 8/1/2016 a retailer paid 100 contribution to a defined contribution plan in part exchange for services performed by the entity’s employees in December 2015. At 31/12/2015 recognise Ksh.100 liability (accrual of PEBs) & Ksh.100 expense in profit or loss. © 2011 IFRS Foundation 13

14 Section 28 – PEBs defined benefit plans14 Apply general recognition principle, recognise: a liability for its obligations under defined benefit plans net of plan assets—its ‘defined benefit liability’ ( paragraphs 28.15–28.23). the net change in that liability during the period as the cost of its defined benefit plans during the period ( paragraphs 28.24–28.27). © 2011 IFRS Foundation 14

15 Section 28 – defined benefit liability15 Measure defined benefit liability at net of: PV of defined benefit obligation (DBO) FV of plan assets (if any) out of which the obligations are to be settled directly paragraphs 11.27–11.32 provide guidance on fair value measurement). If PV of DBO < FV of plan assets, plan has a surplus. Recognise surplus as asset only to extent recoverable through reduced future contributions or through refunds from the plan. © 2011 IFRS Foundation 15

16 Section 28 – defined benefit obligation (DBO)16 PV of DBO reflects estimated amount of benefit that employees have earned in return for their service in the current & prior periods including benefits that are not yet vested including the effects of benefit formulas that give employees greater benefits for later years of service (eg final salary). Significant judgements in measuring DBO include actuarial assumptions. © 2011 IFRS Foundation 16

17 Section 28 – DBO actuarial assumptions17 Actuarial assumptions comprise: demographic assumptions, eg: (i) mortality during & after employment; (ii) employee turnover, disability & early retirement; (iii) proportion of plan members with dependants who will be eligible for benefits; & (iv) claim rates under medical plans; financial assumptions, eg: (i) discount rate; (ii) future salary & benefit levels; (iii) for medical benefits—future medical costs, including cost of administering claims and benefit payments. © 2011 IFRS Foundation 17

18 Section 28 – DBO valuation method18 Measure DBO using projected unit credit method (PUC). However, if undue cost or effort use simplified calculation. Under simplified calculation: ignore estimated future salary increases; ignore future service of current employees (ie assume closure of the plan for existing as well as any new employees); & ignore possible in-service mortality of current employees (however, consider mortality after service (ie life expectancy)). © 2011 IFRS Foundation 18

19 Section 28 – DBO PUC valuation method19 Ex 30*: Lump sum benefit payable on retirement = 1% of final salary for each year of service. Salary in Y1 = 10,000 (increase at 7% pa). Discount rate = 10% pa. Employee expected to retire at end of Y5. Shows how the obligation builds up: assuming that there are no changes in actuarial assumptions. for simplicity, this example assumes employee will stay until end of Y5. * see example 30 in Module 28 of the IFRS Foundation training material © 2011 IFRS Foundation 19

20 Section 28 – DBO PUC valuation method20 Year 1 2 3 4 5 Attributed to: – prior years - 131 262 393 524 – current year (1% of final salary) – current and prior years 655 Opening obligation 89 196 324 476 Interest at 10% 9 20 33 48 Current service cost 98 108 119 Closing obligation © 2011 IFRS Foundation 20

21 Section 28 – DBO PUC valuation method21 Notes on PUC calculations: Current service cost is the present value of benefit attributed to the current year e.g Y1—131 × 1/(1.1)4 = 131 ÷ = 89.47 The closing obligation is the present value of benefit attributed to current and prior years. © 2011 IFRS Foundation 21

22 Section 28 – DBO simplified method22 Ex 33*: Same as Ex 30, except use simplified method of calculation. * see example 33 in Module 28 of the IFRS Foundation training material © 2011 IFRS Foundation 22

23 Section 28 – DBO simplified method23 Year 1 2 3 4 5 1% of current salary (increase at 7% per year) 100 107 114 123 131 Years service at end of year FV of obligation 214 343 490 655 Discount factor (10%) 0.6830 0.7513 0.8264 0.9091 PV of obligation 68 161 284 445 Opening obligation – Interest (10%) 7 16 28 45 Current service cost 80 95 111 Actuarial gain or loss (balancing figure) 12 22 34 Closing obligation © 2011 IFRS Foundation 23

24 Section 28 – DBO simplified method24 Notes on simplified method calculations Current service cost = PV of benefit attributed to the current year Calculation Y1: 100 salary × 1/(1.1)4 = 68.30 Closing obligation = PV of benefit attributed to current & prior years Calculation Y1: 100 × 1 year’s service ÷ 1/(1.1)4 =68.30 © 2011 IFRS Foundation 24

25 Section 28 – defined benefit expense25 Recognise net change in defined benefit liability in the period (other than benefits paid to employees or contributions from the employer) as the cost of its defined benefit plans during the period. Recognise cost either (accounting policy) entirely in profit or loss as an expense, or partly in profit or loss & partly as an item of OCI (only actuarial gains & losses can be in OCI) unless part of the cost of an asset (e.g Section 17 PP&E). © 2011 IFRS Foundation 25

26 Section 28 – defined benefit expense Ex26 Ex 39*: A recognises actuarial gains & losses in profit or loss. Employees promised a pension of 0.2% of final salary for each year of service. The pension is payable from the age of 65. The plan is unfunded. At 31/12/2015 Current Account of the plan obligation = Ksh.1,000 (2014: Ksh.900). In 2015 A paid pensions of Ksh.40 to its past employees. * see example 39 in Module 28 of the IFRS Foundation training material © 2011 IFRS Foundation 26

27 Section 28 – defined benefit expense Ex27 Defined benefit plan obligation (liability) account 1/1/2015 Opening balance 900 2015 Pension paid 40 31/12/2015 Closing balance 1,000 20X1 Profit or loss 140 1,040 1/1/20X2 © 2011 IFRS Foundation 27

28 Section 28 – defined benefit expense ExEx 42*: Same as Ex 39 except recognises all actuarial gains & losses in OCI. Suppose Kshs.50 of the cost of the defined benefit plan for 2015 is attributable to actuarial losses. Recognise Ksh.140 expense for 2015 as follows: Ksh.50 in OCI (i.e actuarial gains & losses) Ksh.90 (the remainder) in profit or loss. * see example 42 in Module 28 of the IFRS Foundation training material © 2011 IFRS Foundation 28

29 Section 28 – defined benefit expense Ex29 Ex 40*: Same as Ex 39 except plan is funded in 2015 fund paid pensions of Ksh. 40 to past employees & entity contributed Ksh.110 to the fund. at 31/12/2015 FV of plan assets = 980 (2014: 890). * see example 40 in Module 28 of the IFRS Foundation training material © 2011 IFRS Foundation 29

30 Section 28 – defined benefit expense Ex30 Funded defined benefit plan (liability) account 1/1/2015 Opening balance 10(a) 2015 Increase funding 110 31/12/2015 Closing balance 20(b) Profit or loss 120(c) 130 1/1/2016 20 (a) 900 obligation less 890 plan assets (b) 1,000 obligation less 980 plan assets (c) balancing figure © 2011 IFRS Foundation 30

31 Section 28 – other long-term employee benefits31 Other long-term employee benefits (OL/TEBs) are employee benefits (other than post-employment benefits & termination benefits) that are not wholly due within 12 months after the end of the period in which the employees render the related service. © 2011 IFRS Foundation 31

32 Examples of OL/TEBs include: Section 28 – OL/TEBs 32 Examples of OL/TEBs include: long-term compensated absences, eg long-service or sabbatical leave long-service benefits long-term disability benefits profit-sharing & bonuses payable + 12 months after the end of the period in which the employees render the related service deferred compensation paid + 12 months after the end of the period in which it is earned © 2011 IFRS Foundation 32

33 Section 28 – OL/TEBs 33 Recognise a liability for OL/TEBs measured at the net of: PV of the benefit obligation FV of plan assets (if any) out of which the obligations are to be settled directly. Expense recognition is same as post-employment defined benefit plan can choose to recognise actuarial gains & losses in other comprehensive income. © 2011 IFRS Foundation 33

34 Section 28 – termination benefits34 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 voluntary redundancy in exchange for those benefits. © 2011 IFRS Foundation 34

35 Section 28 – termination benefits35 Termination benefits include commitments by legislation, by contractual or other agreements with employees or their representatives or by a constructive obligation based on business practice, custom or a desire to act equitably, to make payments (or provide other benefits) to employees when it terminates their employment. © 2011 IFRS Foundation 35

36 Section 28 – recognition & measurement36 Recognise termination benefits as a liability & an expense only when the entity is demonstrably committed either: to terminate the employment of an employee before the normal retirement date, or to provide termination benefits as a result of a firm voluntary redundancy offer. measure at best estimate of expenditure that would be required to settle the obligation at reporting date (PV if > 12 months). © 2011 IFRS Foundation 36

37 Section 28 – EBs disclosures37 PEBs have extensive disclosures. S/TEBs Section 28 does not specify disclosures For each category OL/TEBs & termination benefits: the nature of the benefit, the amount of its obligation and the extent of funding at the reporting date. © 2011 IFRS Foundation 37

38 Conclusion Recognize employee benefits when service is rendered. Post-employment benefit plans are classified as DC/DB plans •Defined contribution plans;Cost of benefits = contribution paid or payable to the plan •Defined benefit plans;Cost of benefit = present value of entitlement earned Many variable factors such as final or average pay levels Complex calculations; Plan assets at fair value © 2011 IFRS Foundation

39 THE END THANK YOU INTERCTIVE SENSION© 2011 IFRS Foundation