Circular No.18/99                                                                                            December 30, 1999

LL MEMBERS OF THE INSTITUTE

 

Dear Member,

 

IAS – 19 (Revised) Employee Benefits

 

Members are aware that IAS 19 relating to Retirement Benefit Costs was revised by International Accounting Standards Committee in February 1998. It now deals with all employee benefits.

 

The Standard identifies five types of employee benefits: -

 

1.         Short-term benefits, such as: -

 

(a)                                        wages, salaries and social security contributions;

 

(b)                                        short-term compensated absences (such as paid annual leave and paid sick leave) where the absences are expected to occur within twelve months after the end of the period in which the employees render the related employee service;

 

 

(c)                                        profit sharing and bonuses payable within twelve months after the end of the period in which the employees render the related service; and

 

 

(d)                                        non-monetary benefits (such as medical care, housing, cars and free or subsidized goods or services) for current employees.

 

2.         Post-employment benefits such as pensions, other retirement benefits, post-employment life insurance and post-employment medical care.

 

1.                   Other long-term employee benefits, including long service leave or sabbatical leave, jubilee or other long-service benefits, long term disability benefits and, if not due within 12 months, profit sharing, bonuses and deferred compensation;

 

2.                   Termination benefits; and

 

5.         Equity compensation benefits, such as share options. For equity compensation benefits, the Standard requires certain disclosures, but does not specify recognition and measurement requirements.

 

Main features of provisions relating to short-term and termination benefits are as follows: -

 

Short-term Benefits

 

The Standard requires that when an employee has rendered service to an enterprise during an accounting period, the enterprise should recognize the undiscounted amount of short-term employee benefits expected to be paid in exchange for that service: -

 

(a)                as a liability (accrued expense), after deducting any amount already paid. If the amount already paid exceeds the undiscounted amount of the benefits, an enterprise should recognize that excess as an asset (prepaid expense) to the extent that the prepayment will lead to, for example, a reduction in future payments or a cash refund; and

 

(b)                as an expense, unless another International Accounting Standard requires or permits the inclusion of the benefits in the cost of an asset.

 

Following paragraphs explain how an enterprise should apply this requirement to short-term employee benefits in the form of compensated absences and profit sharing and bonus plans.

 

Short-term Compensated Absences

 

An enterprise should recognize the expected cost of short-term employee benefits in the form of compensated absences as follows: -

 

(a)                                        in the case of accumulating compensated absences, when the employees render service that increases their entitlement to future compensated absences; and

 

(b)                                        in the case of non-accumulating compensated absences, when the absences occur.

 

An enterprise should measure the expected cost of accumulating compensated absences as the additional amount that the enterprise expects to pay as a result of the unused entitlement that has accumulated at the balance sheet date.

 

Profit Sharing and Bonus Plans

 

An enterprise should recognize the expected cost of profit sharing and bonus payments when, and only when: -

 

(a)                                        the enterprise has a present legal or constructive obligation to make such payments as a result of past events; and

 

(b)                                        a reliable estimate of the obligation can be made.

 

A present obligation exists when, and only when, the enterprise has no realistic alternative but to make the payments.

 

Termination Benefits

 

An enterprise should recognize termination benefits when the enterprise is demonstrably committed to either: -

 

·         Terminate the employment of an employee or group of employees before the normal retirement date; or

 

·         Provide termination benefits as a result of an offer made in order to encourage voluntary redundancy.

 

For detailed guidance, members are requested to refer to the Standard.

 

The Standard is effective for accounting periods beginning on or after January 1, 1999. As such enterprises, including banks and financial institutions, closing their accounts on December 31, 1999 should comply with the requirements of IAS 19 (Revised).

Yours truly,

Syed Sajid Ali

Director Technical Services