Employee benefits: formula sheet

Key formulas

Short-term benefit recognition

Expense and liability = undiscounted amount expected to be paid for service rendered − amounts already paid

No discounting and no actuarial assumptions for short-term benefits.

Accumulating compensated absence

Liability = unused days expected to be taken × expected daily pay cost

Use the additional amount expected to be paid. Vesting does not change the principle. Non-vesting only affects the number of days expected to be used.

Short-term test

Settled wholly within 12 months after the end of the period in which service is rendered

If not, treat as other long-term benefit.

Profit-sharing and bonus recognition

Recognise when: present legal or constructive obligation + reliable estimate

Allow for employees expected to leave if payment depends on staying.

Non-accumulating absences

Recognise when the absence takes place

Includes sick leave that lapses if unused, and maternity leave.

Net defined benefit liability (asset)

Net DB liability (asset) = PV of DBO − Fair value of plan assets

A positive answer is a liability. A negative answer is a potential asset, subject to the asset ceiling.

Roll-forward of the DBO

Closing DBO = Opening DBO + Current service cost + Interest cost + Past service cost − Benefits paid ± Actuarial (remeasurement) loss/gain

Settlements also reduce the DBO. Benefits paid come out of the DBO and out of plan assets.

Roll-forward of plan assets

Closing assets = Opening assets + Interest income + Contributions − Benefits paid ± Remeasurement gain/loss on assets

The remeasurement is the return on assets excluding the interest income amount.

Net interest

Net interest = Opening net DB liability (asset) × discount rate

Adjust for material contributions and benefit payments during the year, weighted by time. Use the discount rate set at the start of the year.

Recognition of the cost

P&L: current service cost + past service cost + net interest. OCI: remeasurements

Remeasurements are never reclassified to profit or loss later. They include actuarial gains and losses, return on assets above interest income and changes in the asset ceiling effect.

Asset ceiling

Recognised asset = lower of (surplus) and (asset ceiling)

Asset ceiling = PV of refunds available plus PV of reductions in future contributions. Any excess is written off through OCI.

Net defined benefit liability (asset)

Present value of obligation − Fair value of plan assets

A negative result is a net asset, limited by the asset ceiling.

Net interest

Net defined benefit liability at start of year × discount rate, adjusted for contributions and benefits paid in the year

Use the discount rate at the start of the year. Equals interest on obligation minus interest on assets.

Obligation reconciliation

Opening + current service cost + interest cost + past service cost + actuarial losses (− gains) − benefits paid = Closing

The actuarial figure is usually the balancing figure.

Plan assets reconciliation

Opening + interest income + contributions + return on assets excluding interest (− loss) − benefits paid = Closing

Return excluding interest is usually the balancing figure.

Profit or loss charge

Current service cost + past service cost + settlement loss (− gain) + net interest

Service cost may sit in operating costs. Net interest is a finance cost.

OCI remeasurement

Actuarial (gain) loss on obligation − (Return on plan assets excluding interest) + change in asset ceiling effect excluding interest

Not reclassified to profit or loss.

Net liability roll-forward

Opening net liability + P&L charge + OCI loss (− gain) − contributions = Closing net liability

Use as a check on your split.

Past service cost

Past service cost = PV of obligation after amendment or curtailment − PV of obligation before

Both values are measured at the date of the event using current assumptions, after the net liability has been remeasured. Positive is a cost, negative is a gain. Recognised in profit or loss.

Gain or loss on settlement

Gain or loss = PV of obligation settled − settlement price

Settlement price includes plan assets transferred and any direct payments by the entity. A positive result is a gain. Recognised in profit or loss.

Net interest after a remeasurement

Net interest = net defined benefit liability (asset) after the event × discount rate × remaining period

Use the updated discount rate and the updated net liability for the period after the event. Use the earlier figures for the period before it.

Timing rule

Recognise at the earlier of: (1) the event date; (2) when related restructuring costs or termination benefits are recognised

Applies to past service cost including curtailments. Vesting is irrelevant.

Net liability roll-forward

Closing net liability = opening + current service cost + net interest + past service cost + settlement loss (− settlement gain) + remeasurements in OCI − contributions − ordinary benefits paid directly by the entity

Ordinary benefits paid out of plan assets reduce the obligation and the assets equally, so they do not change the net figure. Ordinary benefits paid directly by the entity reduce the obligation only, so they reduce the net liability. The settlement gain or loss (obligation settled minus settlement price, including plan assets transferred and direct payments by the entity) captures the full net effect of a settlement. Do not deduct settlement payments again as contributions or benefits paid, or you will double count.

Other long-term benefit liability

Net liability = PV of defined benefit obligation − fair value of plan assets

Use the projected unit credit method. Plan assets are rare for these benefits.

Charge for other long-term benefits

P&L = current service cost + net interest on net liability + remeasurements (+ past service cost, settlement gain or loss)

All components go to profit or loss. No OCI element, unlike post-employment defined benefit plans.

Termination benefit recognition date

Recognise at the EARLIER of: (a) entity can no longer withdraw the offer; (b) entity recognises related IAS 37 restructuring costs

Voluntary: usually acceptance. Involuntary: plan communicated to affected employees and criteria met.

Termination benefit measurement

Best estimate of the cost; discount if due more than 12 months after the reporting date

If an offer encourages voluntary redundancy, measure on the number of employees expected to accept.

Termination benefits are not service-related

Benefits tied to future service are NOT termination benefits

If employees must work on until a leaving date, the benefit is a short-term or other long-term benefit. Spread the cost over the service period.

Net defined benefit liability (asset)

Present value of defined benefit obligation − fair value of plan assets

A negative result is an asset, limited by the asset ceiling in IAS 19.

Net interest on the net liability

Net defined benefit liability at start of year × discount rate

Use the same discount rate for the obligation and the assets. Adjust for significant contributions and benefits paid in the year.

Remeasurements in OCI

Actuarial gains and losses + return on plan assets (excluding amounts in net interest) + asset ceiling changes

Never reclassified to profit or loss in later periods.

Sensitivity of the obligation

Change in obligation = obligation recalculated with a reasonably possible change in one assumption − reported obligation

IAS 19 requires disclosure of how the obligation would have been affected by reasonably possible changes in each significant actuarial assumption, with the others held constant.

Disclosure groups

Characteristics and risks + amounts in the statements + future cash flows

A useful structure for any disclosure answer.

Quick revision

• IAS 19 groups benefits into short-term, post-employment, other long-term and termination benefits.
• Short-term benefits are expensed as the service is provided, with an accrual for unpaid amounts.
• Defined contribution: the cost is the contribution payable for the period, and the employer has no further obligation beyond that.
• Defined benefit: the employer carries the actuarial and investment risk.
• Net defined benefit liability = present value of obligation − fair value of plan assets.
• Current service cost, past service cost and settlement gains or losses go to profit or loss.
• Net interest is the net defined benefit liability or asset multiplied by the discount rate at the start of the year, adjusted for contributions and payments in the year.
• Remeasurements go to OCI and are never reclassified to profit or loss.
• Remeasurements include actuarial gains and losses, return on plan assets above the interest amount, and changes in the effect of the asset ceiling (excluding amounts in net interest).
• Past service cost is recognised in profit or loss at the earlier of the date of the plan amendment or curtailment and the date the entity recognises related restructuring costs or termination benefits.
• Termination benefits are recognised at the earlier of when the entity can no longer withdraw the offer and when related restructuring costs are recognised.
• Other long-term benefits are measured in a similar way to defined benefit plans (projected unit credit), but service cost, net interest and remeasurements are all recognised in profit or loss.

Common mistakes

• Discounting short-term benefits to present value. Fix: Short-term benefits are measured undiscounted. Only post-employment and other long-term benefits need discounting.
• Ignoring non-vesting accumulating leave. Fix: A liability still arises. Reduce it for the days expected not to be used, but do not drop it.
• Using the expected return on plan assets instead of the discount rate for interest income. Fix: Apply the same discount rate to both the DBO and the plan assets. The difference between actual return and interest income goes to OCI.
• Putting actuarial gains and losses through profit or loss. Fix: The corridor is gone. All remeasurements go to OCI immediately and are never recycled to profit or loss.
• Putting actuarial gains and losses in profit or loss. Fix: Under current IAS 19 all remeasurements go to OCI and are never reclassified to profit or loss.
• Using the expected return on plan assets as income in profit or loss. Fix: Use the discount rate on assets as well. Only the net interest goes to profit or loss. Actual return less interest income goes to OCI.
• Spreading past service cost over the vesting period. Fix: Recognise the full amount in profit or loss at the earlier of the event date and the date related restructuring costs are recognised.
• Putting past service cost or settlement gains in OCI. Fix: Only remeasurements go to OCI: actuarial gains and losses, the return on plan assets excluding amounts in net interest, and changes in the effect of the asset ceiling excluding amounts in net interest. Past service cost and settlement gains or losses go to profit or loss.
• Recognising termination benefits only when employees leave or are paid. Fix: Recognise when the offer cannot be withdrawn or when the restructuring costs are recognised, whichever is earlier.
• Putting remeasurements of long-term benefits into OCI. Fix: For other long-term benefits, all components, including remeasurements, go to profit or loss.

Exam tips

• Always state the category and the 12-month test first. The marker looks for it.
• Use the words legal or constructive obligation when explaining bonus recognition.
• Show a clear journal. Examiners reward simple, correct entries with brief reasoning.
• In a scenario with ethics themes, such as manipulated bonus accruals or leave provisions, comment on earnings management and show scepticism.
• Keep to what the question asks. Short-term benefit answers are brief, so do not add actuarial detail.
• Show both reconciliations in full, even if the question looks short. Marks go for each correct line and for the balancing remeasurement figure.
• Always state the allocation: service cost and net interest to profit or loss, remeasurements to OCI. Many students lose marks by getting the numbers right and the location wrong.
• In SBR scenario questions, a short reasoned note on discount rate or assumptions earns professional skills marks. Say why a change in assumption moves the DBO.