0322-3385752 0336-8099762 r-1173, al-noor society, block 19, f.b.area, karachi
TRANSCRIPT
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Employee Benefits: IAS 19
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KHALID AZIZ
0322-33857520336-8099762
R-1173, AL-NOOR SOCIETY, BLOCK 19, F.B.AREA, KARACHI.
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PIPFA PIPFA STUDENTS INTERMEDIATE FINANCIAL ACCOUNTING PERFORMANCE MEASUREMENT COMPLETION OF SYLLABUS IN 1
MONTH JOIN KHALID AZIZ 0322*3385752 R1173-ALNOOR SOCIETY BLOCK 19
F.B.AREA-KARACHI.
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ICAP ICAP STUDENTS MODULE B FINANCIAL ACCOUNTING BUSINESS ECONOMICS MODULE D COST ACCOUNTING COMPLETION OF SYLLABUS IN 3 MONTHS JOIN KHALID AZIZ 0322*3385752 R1173, ALNOOR SOCIETY, BLOCK 19.
F.B.AREA, KARACHI.
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MA-ECONOMICSEXTERNAL
PREVIOUS MICRO ECONOMICS & STATISTICS FINAL MACRO ECONOMICS
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B.COM REGULAR & PRIVATEPART 1 ACCOUNTING, STATISTICS & ECONOMICS.
PART 2 ADVANCED & COST ACCOUNTING, BUSINESS LAW, AUDITING & TAX.
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INTER COMMERCE
1ST YEAR ACCOUNTING, BUSINESS MATHS & ECONOMICS.
2ND YEAR ACCOUNTING & STATISTICS.
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O/A LEVELS
ACCOUNTING, ECONOMICS, BUSINESS STUDIES, URDU & PAK STUDIES.
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KHALID AZIZ
COMMERCE COACH 0322-3385752 0336-8099762 R-1173, AL-NOOR SOCIETY, BLOCK 19,
F.B.AREA, KARACHI.
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Related standards IAS 19 Current GAAP comparisons Looking ahead End-of-chapter practice
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Employee Benefits
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IFRS 2 Share-based payment IAS 24 Related party disclosures
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Related Standards
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Objective and scope Short-term employee benefits Post-employment benefit plans Post-employment benefits: defined
contribution plans Post-employment benefits: defined benefit
plans Other long-term employee benefits Termination benefits
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IAS 19 – Overview
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Accounting and disclosure requirements for employee benefits: all forms of consideration given by an entity in exchange for employee services rendered
◦ Short-term employee benefits◦ Post-employment benefits◦ Other long-term employee benefits◦ Termination benefits
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IAS 19 – Objective and Scope
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Short-term employee benefits – benefits other than termination benefits that are due to be settled within 12 months after the end of the period in which the related service is rendered
Example:◦ Salaries, wages, social security contributions◦ Short-term compensated absences such as paid
annual and sickness leaves◦ Profit-sharing and bonuses◦ Non-monetary benefits such as medical care,
housing, etc.
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IAS 19 – Short-term Employee Benefit
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Short-term compensated absences:◦ Recognize a cost and liability = the undiscounted amount
of benefits expected to be paid
Some benefits accumulate ◦ Accrue as employee provides services (e.g., paid vacation
leave)
Some do not accrue (e.g., parental leave)◦ Recognize cost and liability when event occurs that
obligates the entity to provide the benefit
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IAS 19 – Short-term Employee Benefit
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Profit-sharing and bonus plans:◦ Recognize cost and liability only when
a legal or constructive obligation exists, and amount can be reasonably estimated
To reasonably estimate, must have one of the following:◦ plan has formal terms including a formula◦ amount is known before F/S are authorized for
release◦ past practice provides clear evidence of amount
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IAS 19 – Short-term Employee Benefits
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Post-employment benefit plans – formal or informal arrangements to provide benefits after employment, such as pension benefits and post-employment medical care
Two types of plan:◦ defined contribution plan: employer makes
specific contributions, employee benefits = whatever has accumulated
◦ defined benefit plan: employer promises to pay a post-employment benefit, if not enough funds have accumulated, employer is responsible for the difference
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IAS 19 – Post-employment Benefit Plans
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IAS 19 – Post-employment Benefit Plans
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- Relatively straightforward
- Liability is recognized only for contributions unpaid at the end of the period
- Expense recognized in same period as services are rendered
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IAS 19 – Post-employment Benefits: Defined Contribution Plans
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- Complex- Accounting measures depend on actuarial assumptions far into the future- Obligations are settled many years after service is provided by employees – need to take time value of money into account- Many plans are funded and rely on investment returns to grow- Employer underwrites actuarial and investment risks 22
IAS 19 – Post-employment Benefits: Defined Benefit Plans
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Accounting building blocks
◦ Present value of a defined benefit obligation – the discounted present value of the expected future payments required to settle an entity’s obligation resulting from employee service accumulated to date
◦ Plan assets – assets held by the long-term employee benefit fund that exists solely to pay employee benefits as they fall due.
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IAS 19 – Post-employment Benefits: Defined Benefit Plans
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Changes in the PV of the defined benefit obligation (DBO) – based on projected salaries:
Present value of the obligation, beginning of period+ Current period’s service cost+ Interest cost on the outstanding obligation for the
period+/- Past service costs from plan amendments in the
period- - Benefits paid under the plan in the period+/- +/- Actuarial gains (-) and losses (+) in the period_______________= = Present value of the obligation, end of period________________
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IAS 19 – Post-employment Benefits: Defined Benefit Plans
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PV of the defined benefit obligation depends on:◦ actuarial assumptions (mortality rates, employee
turnover, dependants)◦ financial assumptions (discount rate, future salary
levels, future medical costs)
Discount/interest rate = end-of-period market yield on high-quality corporate bonds with terms that correspond to obligation
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IAS 19 – Post-employment Benefits: Defined Benefit Plans
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Current service cost = PV of benefits earned for service in current period
Past service cost (PSC) = change in PV of DBO from introducing plan that includes benefits for past service or from a change in the benefits payable related to past service under existing plan
Actuarial gains/losses = effects of changes in actuarial assumptions and experience adjustments for difference between previous estimates and what actually occurred.
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IAS 19 – Post-employment Benefits: Defined Benefit Plans
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Changes in the FV of plan assets: Fair value of plan assets, beginning of period
+ Contributions from employer/employees in the period+/- Actual return on plan assets in the period- Benefits paid under the plan in the
period__________
= Fair value of plan assets, end of period____________
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IAS 19 – Post-employment Benefits: Defined Benefit Plans
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Actual return on plan assets = interest, dividends, other income and realized and unrealized gains and losses on assets held in plan Expected return on plan assets = return used by actuary in determining funding requirements
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IAS 19 – Post-employment Benefits: Defined Benefit Plans
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Benefit cost to recognize each period
Current service cost for the period + Interest cost for the period
- Expected return on plan assets for the period +/- Actuarial gain (-) or loss(+) amortized in the period +/- Past service cost recognized in the period = Post-employment benefit cost to profit or loss
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IAS 19 – Post-employment Benefits: Defined Benefit Plans
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Benefit cost variables taken from ◦ PV of PBO, and ◦ Fund assets◦ Information in working papers for actuarial
gain/loss and PSC Amortization of actuarial gain/loss – use corridor method PSC
for vested benefits, expense in period for unvested benefits, amortize to expense on straight-
line basis over average period until vested
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IAS 19 – Post-employment Benefits: Defined Benefit Plans
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Actuarial gains/losses: 2 options1. recognize all actuarial gains/losses in OCI when
they occur, and then directly to retained earnings – not through P&L
2. do not recognize/amortize unless accumulated net actuarial gain/loss is significant*; if significant, amortize excess amount to expense over average working lives of employees in plan
*significant: if at the first of the period, it is more than 10% of the larger of the beginning of the period PV of PBO and the fund assets
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IAS 19 – Post-employment Benefits: Defined Benefit Plans
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Entries:
Dr. Employee benefit expense $XCr. Defined benefit liability $X
To record expense and recognize liability.
Dr. Defined benefit liability $YCr. Cash $Y
To record contribution to plan assets.
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IAS 19 – Post-employment Benefits: Defined Benefit Plans
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Balance in Defined Benefit Liability on balance sheet can be reconciled to building blocks:
Present value of the defined benefit obligation - Fair value of the plan assets = Funded status of the plan +/- Net unrecognized actuarial gains (+) or losses
(-) - Unrecognized past service costs = Defined benefit liability
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IAS 19 – Post-employment Benefits: Defined Benefit Plans
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Extensive disclosures required◦ Description of plans and accounting policies◦ Reconciliation of changes in PV of PBO and fund
assets◦ Reconciliation of B/S account to funded status◦ Components of and total expense◦ Information about plan assets and actuarial
assumptions, sensitivity analysis, historical data◦ Best estimate of expected contribution to plan in
year after B/S date
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IAS 19 – Post-employment Benefits: Defined Benefit Plans
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Examples:◦ long-term disability benefits, long-service or
sabbatical leaves, deferred compensation (>12 months)
◦ similar to post-employment benefits, but with less measurement uncertainty
◦ all aspects recognized in expense in year; no defer and amortize
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IAS 19 – Other Long-term Employee Benefits
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IAS 19 – Other Long-term Employee Benefits
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Termination benefits – benefits payable as a result of:◦ ending an employee’s employment before normal retirement
date, or◦ employee accepts voluntary termination in exchange for
benefits
Recognize liability and expense only when entity is demonstrably committed to plan. Plan sets out:
a) location, function and approximate number of employees being terminated;
b) termination benefits to be provided for each job classification or function; and
c) when the plan will be implemented Entire cost is expensed when entity is committed to plan
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IAS 19 – Termination Benefits
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IAS 19 on IASB current agenda Goal - issue interim standard with
significant improvements by 2011 March 2008 Discussion Paper (DP) issued –
limited scope Exposure Draft expected in late 2009 After DP issues resolved, second phase of
project will begin
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Looking Ahead
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Tentative decisions made by IAS Board◦ All changes in plan assets and benefit obligation should be
recognized when incurred◦ No need to separately recognize expected return
on plan assets◦ All past service cost should be recognized in
expense when plan amended◦ Variety of presentation approaches for components
of defined benefit expense – IASB seeking input◦ New definitions needed for post-employment
benefits and defined benefit plans
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Looking Ahead