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ACCA Strategic Professional · Strategic Business Reporting (International) · Employee benefits

Halden Co has a constructive obligation to pay a profit-related bonus to employees. Which statement about recognising the bonus as a short-term employee benefit under IAS 19 is correct?

Halden should recognise a liability and expense when it has a present legal or constructive obligation arising from past events and can estimate the amount reliably. Payment timing is irrelevant, bonuses are an expense rather than an equity distribution, and a constructive obligation from established practice is enough.

  1. ARecognise a liability and expense when there is a present legal or constructive obligation and a reliable estimate can be madeCorrect
  2. BRecognise the expense only when the bonus is paid in cash
  3. CRecognise the bonus as a deduction from equity because it distributes profit
  4. DRecognise the bonus only if a legal obligation exists in the employment contract

Explanation

IAS 19 requires recognition of the expected cost of profit-sharing and bonus plans when the entity has a present legal or constructive obligation as a result of past events and a reliable estimate is possible. Cash-basis recognition and equity deduction are incorrect. A constructive obligation, such as established practice, is sufficient without a contractual term.

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