The objective of this Standard is to prescribe the accounting and disclosure for employee benefits.
Employee benefits are all forms of consideration given by an entity in exchange for service rendered by employees or for the termination of employment.
The standard requires to recognize
A liability — When an employee has provided service in exchange for employee benefits to be paid in the future.
An expense — When the entity consumes the economic benefit arising from service provided by an employee in exchange for employee benefits.
What are the types of employee benefits?
Short-term Benefits
Short-term employee benefits are employee benefits (other than termination benefits) that are expected to be settled wholly before twelve months after the end of the annual reporting period in which the employees render the related services.
Example: Wages, salaries, paid annual leave, paid sick leave etc.
Other Long-term Employee Benefits
All employee benefits other than short-term employee benefits, post-employment benefits and termination benefits.
Example: Sabbatical leave, long term paid absences, long service benefits etc.
Post-employment Benefits
Post-employment benefits are employee benefits (other than termination benefits and short term employee benefits) that are payable after the completion of employment. Post-employment benefit plans are formal or informal arrangements under which an entity provides post-employment benefits for one or more employees.
Example: Pensions, lump sum payment on retirement, post-employment life insurance & medical care.
Termination benefits are employee benefits provided in exchange for the termination of an employee’s employment.
How to account for short term employee benefits?
When an employee has rendered service to an entity during an accounting period, the entity shall recognize an expense & record a liability to be paid to the employee.
Short term employee expenses a/c Dr
Liability a/c Cr
If the service by employee is rendered in the construction of an asset (inventories or property, plant & equipment).
Asset a/c Dr
Liability a/c Cr
How to account for other long-term benefits?
The standard requires re-measurement of other long-term benefits in profit & loss a/c after accounting for the following.
Service cost;
Net interest on the net defined benefit liability (asset); and
Remeasurements of the net defined benefit liability (asset).
Profit & loss a/cAssetsLiabilitiesOpening balanceDrCrBenefits paid outCrDrInterest expenseDrCrInterest incomeCrDrCurrent Service CostDrCrPast service CostDrCrContributions paidDrRe-measurement Net balanceBalancing figureBalancing figureClosing balancesDrCr
A service cost is recognized for each year of long term benefit charged to profit & loss a/c.
A contribution to a fund to be in a position to settle the liability, by setting up a plan asset, which earns interest at the end of each year recognized as income in profit & loss a/c.
The liability is the discounted value at each year, followed with unwinding of discount, resulting in interest charge to profit & loss a/c.
The liability reduces if any benefits paid out from plan assets.
What are ways in which post-employment benefit plans are structured?
There are two ways of settling post-employment benefits
Defined Contribution plans (Limited liability of employer making a fixed contribution to fund, actuarial or investment risk of employee)
Defined Benefit plans (Employer liable to make up for the shortfall with an agreed defined benefit for each year of completed service)
How to account for post-employment defined contribution plans?
The accounting for post-employment benefit plans is dependent on the risk associated with the liability.
The employer pays a fixed contribution to the fund, and howsoever the fund performs, the amount is paid to the employee as post-employment benefit. The risk of gain/loss in the fund belongs to the employee with a limited liability for the employer. This is known as Defined Contribution plan.
When an employee has rendered service to an entity during an accounting period, the entity shall recognize an expense & record a liability to be paid to the employee.
Defined contribution expense a/c Dr
Liability a/c Cr
If the service by employee is rendered in the construction of an asset (inventories or property, plant & equipment).
Asset a/c Dr
Liability a/c Cr
A fund is set up by making contribution to the fund at the end of each year.
Plan assets a/c Dr
Cash a/c Cr
Investment returns
Plan assets a/c Dr
Investment income a/c Cr
On settlement of liability
Liability a/c Dr
Plan assets a/c Cr
In consequence, actuarial risk (that benefits will be less than expected) and investment risk (that assets invested will be insufficient to meet expected benefits) fall, in substance, on the employee.
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