CMA Intermediate · Corporate Accounting and Auditing

Employee Benefits (Ind AS 19): formula sheet

Full chapter guide

Key formulas

Employee benefits: All forms of consideration given by an entity in exchange for service rendered by employees or for the termination of employment; Learn this definition in this form. It includes benefits to dependants and beneficiaries.
Short-term employee benefits: Due to be settled wholly within 12 months after the end of the annual reporting period in which the service is rendered; Examples: wages, salaries, social security contributions, paid annual leave, paid sick leave, profit-sharing and bonuses payable within that time, and non-monetary benefits for current employees. Not termination benefits.
Post-employment benefits: Employee benefits (other than termination benefits and short-term employee benefits) payable after completion of employment; Examples: retirement benefits such as pensions and gratuity, post-employment life insurance and medical care.
Other long-term employee benefits: All employee benefits other than short-term, post-employment and termination benefits; Examples: long-service leave, jubilee benefits, long-term disability benefits, and certain deferred bonuses not due within 12 months.
Termination benefits: Employee benefits provided in exchange for termination of employment because of either (a) the employer's decision to terminate employment before the normal retirement date, or (b) the employee's decision to accept an offer of benefits in exchange for termination; The trigger is the end of employment, not the service given.
Defined contribution vs defined benefit plans: DC: employer's obligation is limited to the amount it agrees to contribute. DB: all post-employment plans other than DC plans; In a DC plan the employee bears the investment and actuarial risk. In a DB plan the employer bears them in substance.
Accrual principle: Liability when employee has rendered service for benefits to be paid in future; expense when the entity consumes the benefit from that service; This drives the timing of recognition under all four categories.
Short-term benefit test: Settled wholly before 12 months after the end of the reporting period in which service is rendered; If not met, the item is an other long-term employee benefit, for example bonuses not expected to be settled in that time.
Accumulating paid absences: Recognise when employees render service that increases their entitlement to future paid absences; Applies to both vesting and non-vesting. Non-vesting only affects measurement.
Non-accumulating paid absences: Recognise when the absence occurs; No liability or expense before the absence.
Measurement of accumulating leave: Expense = expected additional amount the entity expects to pay because of unused entitlement at the reporting date; Measured at undiscounted amount. Use the expected extra days used × daily pay.
Bonus and profit-sharing: Recognise as expense (not as appropriation of profit) when there is a present legal or constructive obligation and a reliable estimate; Allow for employees expected to leave without receiving the bonus.
Defined contribution test: Obligation limited to agreed contribution → Defined contribution plan; Employee bears actuarial and investment risk (Ind AS 19, para 28).
Defined benefit test: Obligation to provide agreed benefits → Defined benefit plan; Entity bears actuarial and investment risk (para 30). If risk sits with the entity, it is defined benefit.
Cases where obligation goes beyond contributions (para 29): Benefit formula not linked solely to contributions and needing further contributions if assets are insufficient | Guaranteed return on contributions | Informal practice creating a constructive obligation; These are examples where the entity's obligation is not limited to the amount it agrees to contribute. Example of a constructive obligation: a history of raising benefits for former employees to keep pace with inflation, even with no legal obligation.
Defined contribution expense: Expense for the period = Contribution payable for the period; No actuarial assumptions, no actuarial gain or loss. Measured undiscounted, except where the obligation is not expected to be settled wholly before twelve months after the end of the annual reporting period in which the employees render the related service (para 50).
Defined benefit accounting features: Actuarial assumptions + discounting + possible actuarial gains/losses; Accounting is complex (para 55).
Multi-employer plan without enough information: Account as if defined contribution plan + disclose information required by para 148; Applies when sufficient information to use defined benefit accounting is not available (para 34).
Net defined benefit liability (asset): Present value of DBO − Fair value of plan assets (adjusted for any asset ceiling); A positive result is a liability. A negative result is an asset, limited by the asset ceiling.
Current service cost (one-year unit): Benefit attributed to the current year ÷ (1 + r)^n; n is the number of years until the benefit is expected to be paid. r is the discount rate.
DBO roll-forward: Opening DBO + Interest cost + Current service cost + Past service cost − Benefits paid ± Actuarial (gain) loss = Closing DBO; Interest cost is the discount rate × opening DBO, adjusted for benefits paid or amendments during the year.
Plan asset roll-forward: Opening plan assets + Interest income + Contributions − Benefits paid + Return on plan assets excluding interest income = Closing plan assets; Interest income is the discount rate × fair value of plan assets at the start of the year, adjusted for contributions and payments (para 125).
Net interest: Interest cost on DBO − Interest income on plan assets; Same discount rate for both. Shown in profit or loss.
Return on plan assets for OCI: Actual return on plan assets − Interest income on plan assets; The difference is a remeasurement in OCI (para 125).
Past service cost: DBO after amendment or curtailment − DBO before it, remeasured on current assumptions; Arises from plan amendment or curtailment. Not an actuarial gain or loss (para 129). Remeasure as per para 99.
Net defined benefit liability (asset): PV of DBO − Fair value of plan assets (adjusted for any asset ceiling); Para 57. A positive result is a liability; a negative result is an asset, subject to the ceiling.
Net interest: Opening net defined benefit liability (asset) × Discount rate; Para 123A. Use the opening balance and discount rate, adjusted for contributions and benefit payments during the year. Goes to profit or loss.
Interest income on plan assets: Opening fair value of plan assets × Discount rate; Para 125. Adjust for contributions and payments during the year.
Remeasurement on plan assets: Actual return on plan assets − Interest income on plan assets; Para 125 and 127(b). Gain in OCI if positive, loss if negative.
Actuarial gain or loss on DBO: Closing DBO (actual) − Closing DBO expected from opening DBO + current service cost + interest cost − benefits paid; Balancing figure. An increase in DBO beyond expectation is a loss. Taken to OCI.
Where each item goes: Service cost, past service cost, settlement gain/loss, net interest → P&L; Remeasurements → OCI; Paras 120 and 129. OCI items are not reclassified to P&L (para 122).
Other long-term benefits: amount in profit or loss: Service cost + Net interest on net defined benefit liability (asset) + Remeasurements; Net total goes to profit or loss (para 156), unless another Ind AS permits inclusion in the cost of an asset. No OCI.
Net defined benefit liability (asset) for long-term benefits: Present value of obligation − Fair value of plan assets (if any); Use this balance to compute net interest and the closing liability.
Termination benefit, resignation vs entity request: Termination benefit = Benefit on entity's request − Lower benefit on employee's request; Only the excess is a termination benefit (para 160); the lower amount is post-employment.
Termination benefit measurement rule: Enhancement to post-employment → post-employment rules; else settled wholly within 12 months after year-end → short-term rules; otherwise → other long-term rules; Para 169. The 12 months run from the end of the annual reporting period in which the benefit is recognised.
Classification test for other long-term benefits: Not expected to be settled wholly before 12 months after the end of the period in which service is rendered; Para 153. If it is expected to be settled sooner, it is short-term.

Quick revision

Employee benefits are all forms of consideration given in exchange for employee service or for termination of employment.
The four classes are short-term, post-employment, other long-term and termination benefits.
Short-term benefits are expected to be settled wholly before twelve months after the end of the reporting period in which the service is rendered.
Post-employment benefits are payable after the completion of employment and exclude termination and short-term benefits.
Defined contribution plan: the obligation is limited to the agreed contribution, and actuarial and investment risk fall in substance on the employee.
Defined benefit plan: any post-employment plan that is not defined contribution, with risks falling in substance on the entity.
Defined contribution accounting needs no actuarial assumptions and has no actuarial gain or loss.
Defined contribution obligations are undiscounted unless not expected to be settled wholly within twelve months after the reporting period.
Net defined benefit liability (asset) is the deficit or surplus, adjusted for any asset ceiling effect.
Deficit or surplus = present value of the defined benefit obligation less fair value of plan assets.
Other long-term benefits use a simplified method that does not recognise remeasurements in OCI.
Termination benefits follow short-term rules if settled within twelve months, otherwise other long-term rules, unless they enhance post-employment benefits.

Common mistakes

Treating an ESOP as an employee benefit under Ind AS 19. Fix: Remember that benefits covered by Ind AS 102 Share-based Payment are outside the scope of Ind AS 19.
Calling every payment made at the time of retirement or exit a post-employment benefit, including a payment on forced redundancy. Fix: Check the trigger. If the employer decides to end employment before normal retirement date, or the employee accepts an exit offer, it is a termination benefit.
Treating non-vesting accumulating leave as not recognised. Fix: Recognise it. Non-vesting only affects measurement, since some employees may leave before using the leave.
Recognising a liability for unused sick leave that lapses. Fix: For non-accumulating absences, recognise nothing until the absence occurs.
Classifying a plan by its name or by whether a separate fund exists. Fix: Classify on economic substance. The standard applies whether or not a separate entity is set up. Check who bears the risk.
Calling a plan defined contribution when the entity guarantees a return. Fix: A guarantee of a specified return on contributions means the obligation is not limited to the contribution. Treat it as defined benefit.
Putting actuarial gains and losses in profit or loss. Fix: Remember the split: service cost and net interest in profit or loss, all remeasurements in OCI (para 57).
Treating a plan amendment as an actuarial loss. Fix: Para 129 says changes from amendment, curtailment or settlement give past service cost or settlement gains or losses, not actuarial gains and losses. Past service cost goes to profit or loss.
Taking actuarial gains and losses to profit or loss Fix: Under Ind AS 19, remeasurements go to OCI (para 120(c)). Recycling to profit or loss later is not allowed (para 122).
Treating the whole actual return on plan assets as OCI Fix: Only the excess or shortfall over interest income is in OCI. Interest income at the discount rate is part of net interest in profit or loss.

Exam tips

For MCQs, check the trigger and the timing in the stem. The question often hides the answer in one phrase such as 'accepted an offer' or 'after retirement'.
In theory questions, define the term first, give two examples, then state the accounting consequence. This pattern earns most of the step marks.
Write the four categories as a numbered list and give one example for each. Examiners look for all four.
Always mention the Ind AS 102 exclusion when scope is asked. It is a favourite one-mark point.
Learn the link between this topic and the next ones: classification here decides which measurement rules you apply later.
Write the classification first: accumulating or non-accumulating, vesting or non-vesting. Step marks often depend on it.
Show the journal entry with a clear debit to employee benefit expense.
Always say the amount is undiscounted for short-term benefits.