ACCA Strategic Professional · Strategic Business Reporting (International)

Employee Benefits for ACCA SBR: IAS 19 Study Guide

Employee benefits are covered by IAS 19. You classify each benefit as short-term, post-employment, other long-term or termination. For defined benefit plans, you measure the net liability or asset, then split the cost between profit or loss and other comprehensive income. You also explain and disclose the numbers.

What this chapter covers

This chapter covers IAS 19 Employee Benefits. The standard sorts benefits into four groups: short-term benefits, post-employment benefits, other long-term benefits and termination benefits. Most of the exam effort goes into post-employment plans, because defined benefit plans need estimates and several calculations.

The key skill is knowing which part of the cost goes where. Current service cost, past service cost, gains or losses on settlement and net interest go to profit or loss. Remeasurements go to other comprehensive income and are not recycled to profit or loss later. You also need to apply the asset ceiling where a plan is in surplus.

This chapter links to other parts of SBR. Group accounts questions may include a pension plan in a subsidiary or an acquisition. Reporting and ethics questions may test management bias in actuarial assumptions or in plan disclosures. Financial instruments, provisions and the Conceptual Framework often appear nearby, so be ready to explain why a treatment is faithful and useful to users, not just compute it.

Employee benefits are a favourite for SBR because they combine calculation, judgement and explanation in one scenario. A typical question asks you to adjust draft figures, explain the treatment and comment on sensitive assumptions such as the discount rate. The 50% pass mark is reached by steady marks across all of these parts. A well-structured answer on pensions can secure many of the marks, because the rules are fixed and the workings follow a repeatable layout. Professional skills marks reward clear, concise and well-argued explanations, so practise writing short notes for a finance director as well as doing the numbers.

Employee benefits: topics in the order to study them

1IAS 19 Scope and Short-term Employee BenefitsStart here to learn the four benefit categories and the simple accrual rules, which make the later categories easier to place.
2Defined Contribution vs Defined Benefit PlansNext, learn how to classify a plan, since the classification decides whether you do simple accruals or full actuarial measurement.
3Defined Benefit Plans: Measurement and Net LiabilityThis builds the core: present value of the obligation, fair value of plan assets and the net defined benefit liability or asset, including the asset ceiling.
4Defined Benefit Costs: P&L and OCI RecognitionOnce you can measure the net position, you can reconcile its movement and decide what goes to profit or loss and what goes to OCI.
5Past Service Cost, Curtailments and SettlementsThese are changes to a plan that add extra items to the reconciliation, so they come after the basic cost model is secure.
6Other Long-term Benefits and Termination BenefitsThese are shorter topics that borrow from earlier rules, with key differences in OCI treatment and recognition timing.
7Disclosure and Ethical Issues in Employee BenefitsFinish with disclosure and ethics, which draw on everything above and are often the discussion part of the question.

How to prepare Employee benefits

Treat this chapter as one reconciliation plus a set of rules for where each item goes. Build the layout first, then practise it until it is automatic.

Learn the four categories of benefit and write one line on the recognition rule for each.
Memorise the classification test: who bears actuarial and investment risk decides defined contribution or defined benefit.
Practise the net defined benefit liability reconciliation: opening balance, current service cost, net interest, contributions, benefits paid and remeasurements, then closing balance.
For each line in the reconciliation, mark whether it goes to profit or loss or to OCI, and do this from memory.
Add past service cost, curtailments, settlements and the asset ceiling one at a time, redoing a full question after each addition.
Write short explanations on discount rate, actuarial assumptions and disclosure, as if briefing a manager.
Finish with full past-style scenarios under time pressure, including an ethics point on assumptions or presentation.

Common mistakes in Employee benefits

Putting actuarial gains and losses through profit or loss for post-employment plans.
Fix: For post-employment defined benefit plans, all remeasurements go to OCI. Only for other long-term benefits do they go to profit or loss.
Calculating net interest on the closing balance.
Fix: Use the opening net liability times the discount rate, then adjust for contributions and benefits paid during the year at the time they occurred.
Treating all pension payments as an expense.
Fix: Contributions paid reduce the net liability. The expense is current service cost, net interest and any past service cost, not the cash paid.
Ignoring the asset ceiling when a plan is in surplus.
Fix: If the plan has a surplus, check whether the economic benefit available is lower. Limit the asset to the asset ceiling and recognise the change in the effect of the ceiling, excluding amounts included in net interest, in OCI.
Giving only numbers with no explanation or ethical comment.
Fix: Add a short reasoning line on each treatment. Where assumptions are aggressive, discuss bias, scepticism and the effect on users.
Confusing curtailments with settlements.
Fix: A curtailment reduces future service, such as a large reduction in employees. A settlement ends obligations for some benefits, such as a lump-sum buyout. State the event first, then the treatment.

Last-day revision: Employee benefits

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.

Employee benefits practice questions

Employee benefits in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Employee benefits: frequently asked questions

How much of SBR is employee benefits?

Employee benefits is one chapter among several that can be examined in a written scenario. It is likely to appear as part of a larger question, so you should learn it well. Do not rely on guessing which topics will come up.

Do I need to know actuarial methods for IAS 19?

You do not need to carry out actuarial valuations. You need to know that the obligation is measured using the projected unit credit method and what the assumptions mean. Focus on how to use the figures given in the question.

Where do remeasurements of a defined benefit plan go?

They go to other comprehensive income and stay in equity. They are not reclassified to profit or loss in later periods, although you may transfer them within equity.

What is the difference between past service cost and current service cost?

Current service cost is the increase in the obligation from employee service in the current period. Past service cost is the change in the obligation from a plan amendment or curtailment relating to earlier service. Both go to profit or loss.

How should I answer ethics parts on pensions?

Identify the pressure, such as optimistic assumptions that reduce the liability. Explain the effect on the financial statements and users, then say what a professional accountant should do, such as challenge the assumptions and seek independent actuarial evidence.