The cost of providing employee benefits

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Objective of IAS 19

The objective of IAS 19 is to prescribe the accounting and disclosure for employee benefits (that is, all forms of consideration given by an entity in exchange for service rendered by employees). The principle underlying all of the detailed requirements of the Standard is that the cost of providing employee benefits should be recognized in the period in which the benefit is earned by the employee, rather than when it is paid or payable.


IAS 19 applies to (among other kinds of employee benefits):

wages and salaries

compensated absences (paid vacation and sick leave)

profit sharing plans


medical and life insurance benefits during employment

housing benefits

free or subsidized goods or services given to employees

pension benefits

post-employment medical and life insurance benefits

long-service or sabbatical leave

'jubilee' benefits

deferred compensation programmes

Termination benefits.

Basic Principle of IAS 19

The cost of providing employee benefits should be recognized in the period in which the benefit is earned by the employee, rather than when it is paid or payable.

Short-term Employee Benefits

For short-term employee benefits (those payable within 12 months after service is rendered, such as wages, paid vacation and sick leave, bonuses, and nonmonetary benefits such as medical care and housing), the undiscounted amount of the benefits expected to be paid in respect of service rendered by employees in a period should be recognized in that period. [IAS 19.10] The expected cost of short-term compensated absences should be recognized as the employees render service that increases their entitlement or, in the case of non-accumulating absences, when the absences occur. [IAS 19.11]

Profit-sharing and Bonus Payments

The entity should recognize the expected cost of profit-sharing and bonus payments when, and only when, it has a legal or constructive obligation to make such payments as a result of past events and a reliable estimate of the expected cost can be made. [IAS 19.17]

Types of Post-employment Benefit Plans

The accounting treatment for a post-employment benefit plan will be determined according to whether the plan is a defined contribution or a defined benefit plan:

Under a defined contribution plan, the entity pays fixed contributions into a fund but has no legal or constructive obligation to make further payments if the fund does not have sufficient assets to pay all of the employees' entitlements to post-employment benefits.

A defined benefit plan is a post-employment benefit plan other than a defined contribution plan. These would include both formal plans and those informal practices that create a constructive obligation to the entity's employees.

Defined Contribution Plans

For defined contribution plans, the cost to be recognized in the period is the contribution payable in exchange for service rendered by employees during the period. [IAS 19.44]

If contributions to a defined contribution plan do not fall due within 12 months after the end of the period in which the employee renders the service, they should be discounted to their present value. [IAS 19.45]

Defined Benefit Plans

For defined benefit plans, the amount recognized in the balance sheet should be the present value of the defined benefit obligation (that is, the present value of expected future payments required to settle the obligation resulting from employee service in the current and prior periods), as adjusted for unrecognized actuarial gains and losses and unrecognized past service cost, and reduced by the fair value of plan assets at the balance sheet date. [IAS 19.54]

The present value of the defined benefit obligation should be determined using the Projected Unit Credit Method. [IAS 19.64] Valuations should be carried out with sufficient regularity such that the amounts recognized in the financial statements do not differ materially from those that would be determined at the balance sheet date. [IAS 19.56] The assumptions used for the purposes of such valuations should be unbiased and mutually compatible. [IAS 19.72] The rate used to discount estimated cash flows should be determined by reference to market yields at the balance sheet date on high quality corporate bonds. [IAS 19.78]

On an ongoing basis, actuarial gains and losses arise that comprise experience adjustments (the effects of differences between the previous actuarial assumptions and what has actually occurred) and the effects of changes in actuarial assumptions. In the long-term, actuarial gains and losses may offset one another and, as a result, the entity is not required to recognize all such gains and losses in profit or loss immediately. IAS 19 specifies that if the accumulated unrecognized actuarial gains and losses exceed 10% of the greater of the defined benefit obligation or the fair value of plan assets, a portion of that net gain or loss is required to be recognized immediately as income or expense. The portion recognized is the excess divided by the expected average remaining working lives of the participating employees. Actuarial gains and losses that do not breach the 10% limits described above (the 'corridor') need not be recognized - although the entity may choose to do so. [IAS 19.92-93]

Other Long-term Benefits

IAS 19 requires a simplified application of the model described above for other long-term employee benefits. This method differs from the accounting required for post-employment benefits in that: [IAS 19.128-129]

actuarial gains and losses are recognized immediately and no 'corridor' (as discussed above for post-employment benefits) is applied; and

all past service costs are recognized immediately.

Termination Benefits

For termination benefits, IAS 19 specifies that amounts payable should be recognized when, and only when, the entity is demonstrably committed to either: [IAS 19.133]

terminate the employment of an employee or 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 will be demonstrably committed to a termination when, and only when, it has a detailed formal plan for the termination and is without realistic possibility of withdrawal. [IAS 19.134] Where termination benefits fall due after more than 12 months after the balance sheet date, they should be discounted. (

Application of IAS 19 on Tesco plc.

IAS 19 Non-cash Income Statement charge for pensions - Under IAS 19 'Employee Benefits', the cost of providing pension benefits in the future is discounted to a present value at the corporate bond yield rates applicable on the last day of the previous financial year.

Corporate bond yield rates vary over time which in turn creates volatility in the group income statement and group balance sheet. IAS 19 also increases the charge for young pension schemes, in the case of Tesco's, by requiring the use of rates which do not take into account the future expected returns on the assets held in the pension scheme which will fund pension liabilities as they fall due. The sum of these two effects makes the IAS 19 charge disproportionately higher and more volatile than the cash contributions the group is required to make in order to fund all future liabilities.

Therefore, within underlying profit the company seemed to add the normal cash contributions for pensions but excluded the volatile element of IAS 19. This is presented in such way to show the fair measure of the cost of providing post-employment benefits in Tesco’s responsibility.