AS 15 Employee Benefits: formula sheet

Key formulas

Short-term benefit test

Benefit (other than a termination benefit) settled wholly within 12 months after the end of the period of service → short-term

If any part falls due later, it is not short-term. Check the whole settlement, not the accrual.

Plan assets

Plan assets = assets held by a long-term employee benefit fund + qualifying insurance policies

Fund assets must be held by an entity legally separate from the reporting enterprise and be available only to pay employee benefits. They are not available to the enterprise's creditors, even in liquidation, and cannot return to the enterprise except to reimburse benefits paid or on surplus after all obligations are met. A qualifying insurance policy needs a non-related insurer and the same protections: proceeds only for employee benefits, beyond the reach of the enterprise's creditors, and payable to the enterprise only as surplus or reimbursement of benefits already paid.

Actuarial gains and losses

Actuarial gains and losses = experience adjustments + effects of changes in actuarial assumptions

Under AS 15 (Revised 2005), actuarial gains and losses are recognised immediately in the statement of profit and loss (for defined benefit plans and other long-term benefits).

Vested benefit

Vested = right to benefit not conditional on continued employment

Non-vested benefits are still obligations if the employee must render further service to earn them.

Four categories

Short-term | Post-employment | Other long-term | Termination

Classify first, then apply the category's rule.

Short-term benefit recognition

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

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

Accumulating compensated absence (accrual)

Liability = additional amount the entity expects to pay as a result of the unused entitlement accumulated at the balance sheet date

Use the daily pay rate given in the question, which is the rate expected to apply when the leave is taken or paid. Do not discount.

Unused leave entitlement

Additional amount = days expected to be taken or paid because of the accumulated unused leave × daily rate

Follow the order of use the question states. In the usual convention, leave is taken first from the current year's entitlement and then from the balance carried forward. For vesting leave, the liability is the undiscounted amount payable on the unused entitlement, with no adjustment for leavers.

Non-accumulating absence

Recognise expense only when the absence occurs

Salary paid for the period already covers it, so no extra accrual.

Profit sharing and bonus

Recognise when: present obligation exists AND reliable estimate possible

This is a recognition test, not a fixed formula. Where the plan makes payment depend on employees staying, estimate the expected cost after allowing for the employees expected to leave. Follow the plan terms given in the question.

Definition test

Obligation limited to fixed contribution → Defined contribution plan; otherwise → Defined benefit plan

The test is whether you must pay more if the fund falls short. Always apply this test first.

Expense for the period

Expense = Contribution payable for service rendered in the period

Charge it to the Statement of Profit and Loss unless another AS (such as AS 10 or AS 2) permits inclusion in an asset's cost.

Liability or prepaid amount

Liability = Contribution due − Contribution paid (if positive); Prepaid expense = Contribution paid − Contribution due (if positive)

Recognise a prepaid amount as an asset only to the extent it reduces future payments or gives a cash refund.

Discounting rule

Where contributions to a defined contribution plan do not fall due wholly within 12 months after the end of the period in which the employees render the service → discount them using the discount rate (the market yield on government bonds at the balance sheet date)

Most contributions fall due within 12 months, so most exam problems do not need discounting.

Multi-employer plan with insufficient information

If it is a defined benefit plan and sufficient information is not available → account for your share as a defined contribution plan, and disclose that the plan is a defined benefit plan and the reason sufficient information is not available

Use this only when you cannot get enough information to account for it as a defined benefit plan.

Insured benefits

If your obligation is limited to the premiums and you have no legal or constructive obligation to pay the benefits directly or to pay further amounts if the insurer fails to pay all future benefits → account for it as a defined contribution plan; otherwise → defined benefit plan

Paying premiums alone does not decide it. If you must pay the employee directly or make good the insurer's failure, it is a defined benefit plan.

Disclosure

Disclose the amount recognised as expense for defined contribution plans

Where AS 18 requires it, also disclose the amount for key management personnel.

Balance sheet amount

Liability = PVO − unrecognised past service cost − fair value of plan assets

Actuarial gains and losses are recognised immediately, so only unrecognised past service cost remains as an adjustment. A negative result is an asset, limited to the ceiling: the net total of unrecognised past service cost, plus the present value of available refunds and reductions in future contributions.

PVO reconciliation

Closing PVO = Opening PVO + Interest cost + Current service cost + Past service cost from plan amendments + Actuarial loss − Actuarial gain − Benefits paid

Past service cost arises when a plan is amended. It is recognised on a straight-line basis over the average period until the benefits become vested, and is recognised immediately to the extent the benefits are already vested. Actuarial gain or loss is usually the balancing figure.

Plan assets reconciliation

Closing fair value = Opening fair value + Expected return + Contributions + Actuarial gain − Actuarial loss − Benefits paid

Actuarial gain or loss on assets is the difference between actual and expected return.

Interest cost

Interest cost = Opening PVO × discount rate

Adjust for benefits paid or service cost added during the year only if the question gives timing or asks for it.

Expected return on plan assets

Expected return = Opening fair value × expected rate

Contributions and benefits paid during the year are weighted for time if dates are given.

Expense for the period

Current service cost + Interest cost − Expected return + Actuarial loss (or − gain) + Past service cost recognised

Show each item separately in the answer.

Unit credit for one year

Benefit per year of service = Projected final benefit ÷ Total years of service

Used in the projected unit credit method. Discount the benefit for service to date over the remaining years to payment.

Past service cost expense (non-vested part)

Annual charge = Non-vested past service cost ÷ Average period until benefits become vested

The vested part is charged immediately in full. Charge the non-vested part straight-line, not on a reducing basis.

Unrecognised past service cost

Unrecognised = Total past service cost − Amount already charged to profit or loss

It is deducted when you compute the balance sheet amount. It is not shown as a separate liability.

Balance sheet amount for a defined benefit plan

Liability (asset) = PV of DBO − Fair value of plan assets − Unrecognised past service cost

Actuarial gains and losses are recognised immediately in profit or loss under revised AS 15, so they are not carried as unrecognised items and do not appear in this formula.

Gain or loss on curtailment or settlement

Gain = Reduction in PV of DBO − Related unrecognised past service cost − Reduction in FV of plan assets (assets paid out or transferred). A negative result is a loss.

For a curtailment, plan assets are normally unchanged, so gain = reduction in DBO − related unrecognised past service cost. Recognise it when the curtailment or settlement occurs.

Transitional liability on first adoption

Transitional liability = PV of DBO − FV of plan assets − Past service cost to be recognised in later periods

Compare it with the liability already recognised under the previous policy.

Treatment of the transitional difference

If transitional liability > previous liability: charge the increase to opening revenue reserves in full, or to profit or loss straight-line over a period of up to 5 years. If it is lower: adjust (credit) the decrease against opening revenue reserves and surplus, not profit or loss.

The entity chooses between the two options for an increase. Under the second option any period up to 5 years is allowed, and 5 years is the maximum. The period runs from the date of adoption. A decrease is never credited to profit or loss.

Asset ceiling

Surplus = FV of plan assets − PV of DBO. The balance sheet formula gives Liability (asset) = PV of DBO − FV of plan assets − Unrecognised past service cost. If this is negative, its size is the net asset: (a) = Surplus + Unrecognised past service cost. Asset recognised = Lower of (a) and (b), where (b) = Unrecognised past service cost + PV of available refunds and reductions in future contributions

Figure (a) is the balance sheet formula turned into an asset. Unrecognised past service cost was deducted in the liability formula, so it is added back when the result is an asset. Figure (b) is what the entity can truly benefit from. Actuarial gains and losses are recognised immediately, so there are no unrecognised actuarial items in this test.

Liability for other long-term benefits

Liability = Present value of defined benefit obligation − Fair value of plan assets (if any)

Applies at the balance sheet date. Deduct only the fair value of plan assets out of which the obligations are to be settled directly. No corridor and no deferral.

Expense for other long-term benefits

Expense = Current service cost + Interest cost − Expected return on plan assets and on any reimbursement right recognised as an asset + Actuarial gains/losses (net) + Past service cost + Effect of curtailments/settlements

These are the items AS 15 lists for the expense. All of them go to the statement of profit and loss in the same period, and actuarial gains and past service cost are not deferred. Actuarial gains reduce the expense. The expected return term applies only where plan assets or reimbursement rights exist; if there are none, leave it out.

Termination benefit recognition test

Recognise when: detailed formal plan exists (identifying location, function and approximate number of employees, benefits per job classification or function, and time of implementation) AND no realistic possibility of withdrawal

For voluntary redundancy, once the commitment test is met, measure the liability on the number of employees expected to accept the offer.

Discounting rule for termination benefits

Benefits due more than 12 months after balance sheet date → discount using the discount rate for defined benefit obligations

The discount rate is based on market yields on government bonds at the balance sheet date.

Closing PV of an obligation payable in n years

PV = Amount ÷ (1 + r)ⁿ

Use when a question asks you to discount a termination payment or a long-service award.

Quick revision

• Four classes: short-term, post-employment, other long-term, termination benefits.
• Defined contribution plan: employer's obligation is limited to the agreed contribution, and the expense is the contribution payable for the period.
• Defined benefit plan: the employer bears the actuarial and investment risk, so it needs actuarial measurement.
• Unpaid contributions are shown as a liability; excess paid over the amount due is shown as a prepaid expense to the extent it will be refunded or reduce future payments.
• Short-term benefits are recognised at the undiscounted amount expected to be paid for service rendered.
• Accumulating compensated absences are recognised as the employees render service that increases their entitlement.
• Non-accumulating absences are recognised only when the absence actually occurs.
• Defined benefit obligation is measured using the projected unit credit method.
• The discount rate for the obligation is determined by reference to market yields on government bonds at the balance sheet date.
• Defined benefit liability = present value of the defined benefit obligation − unrecognised past service cost − fair value of plan assets.
• Where the formula gives a negative amount, the resulting asset is limited to the net total of unrecognised past service cost plus the present value of available refunds or reductions in future contributions.
• Actuarial gains and losses are recognised immediately in the statement of profit and loss, so none is deferred and carried into the liability calculation.
• The profit and loss charge uses the expected return on plan assets, not the actual return. The difference between actual and expected return is an actuarial gain or loss, recognised immediately.
• Past service cost is recognised as an expense on a straight-line basis over the average period until the benefits become vested. Cost for benefits that are already vested is recognised immediately.
• Termination benefits are recognised when the entity is demonstrably committed to ending employment or to offering the benefits.

Common mistakes

• Treating all benefits payable during employment as short-term. Fix: Test settlement timing. If it is not wholly due within twelve months after the service period, it is not short-term.
• Calling any investment held for employees plan assets. Fix: Plan assets must sit in a legally separate fund or be qualifying insurance policies, and be available only to pay employee benefits. A policy qualifies only if the insurer is not a related party, the proceeds are not available to the enterprise's creditors, and they are not payable to the enterprise except as surplus or reimbursement of benefits already paid.
• Accruing a liability for non-accumulating leave that is unused at year end. Fix: Remember that non-accumulating leave lapses. The obligation arises only when the absence occurs, so nothing is accrued in advance.
• Discounting short-term benefit liabilities to present value. Fix: Short-term benefits are measured at the undiscounted amount. No actuarial method applies.
• Calling every provident fund a defined contribution plan. Fix: Check who bears the risk. Government-administered PF is defined contribution. In an exempt trust, if you must make good the interest shortfall, treat that obligation as defined benefit.
• Doing an actuarial valuation for a defined contribution plan. Fix: For defined contribution, the expense is just the contribution payable for the period. Actuarial valuation and the projected unit credit method belong to defined benefit plans.
• Deferring actuarial gains and losses or taking them to other comprehensive income. Fix: Under AS 15 recognise actuarial gains and losses in full in the statement of profit and loss of the period. Only under Ind AS 19 do they go to other comprehensive income.
• Computing interest cost on the closing PVO. Fix: Use the opening PVO, adjusted only for items with given timing.
• Spreading the whole past service cost over the vesting period. Fix: Always split into vested and non-vested first. The vested part is charged immediately. Only the non-vested part is spread.
• Dividing by the wrong period, such as the employee's remaining service or the plan life. Fix: Use the average period until the benefits become vested, as given in the question.

Exam tips

• Open every theory answer with the AS 15 definition, then apply it to the facts. This follows the provision-facts-conclusion pattern and earns step marks.
• Learn one example for each of the four categories. Examiners often ask you to classify a benefit from its description.
• Memorise the plan-asset conditions: separate legal entity, available only for employee benefits, protected from creditors. For insurance policies, remember all four conditions: non-related insurer, proceeds only for employee benefits, not available to the enterprise's creditors, and payable to the enterprise only as surplus or reimbursement of benefits already paid.
• Remember that AS 15 (Revised 2005) takes actuarial gains and losses to the statement of profit and loss immediately, for defined benefit plans and other long-term benefits. Link this to your defined benefit plan study.
• MCQs have no negative marking, so always attempt them. Eliminate wrong categories by checking the cause of the benefit and the twelve-month test.
• Always start your answer by classifying the leave as accumulating or non-accumulating, vesting or non-vesting. Examiners award marks for this.
• Read the expected usage carefully. The question usually tells you how many employees will use carried leave. Accrue only that.
• Show the working in a small table with days, rate and amount. Step marks are given even if the final figure is off.