Measurement of employee benefits under IAS 19

After we have devoted much attention to the measurement of assets it is now the time to look at the measurement of liabilities. Today we are going to focus on employee benefits. Companies are increasingly offering a wide variety of employee benefits to their employees. The question which follows is how to value such benefits, especially the long-term ones. This and other matters relating to employee benefits are addressed in IAS 19 Employee Benefits.

Employee benefits – but what exactly are they?

Firstly, we have to ask ourselves what we mean by employee benefits – are these only the wages or salaries paid to employees? Well, not really, the definition of an employee benefit under IAS 19 is broader than that. This is because employee benefits are all forms of consideration offered by an entity to its employees in exchange for service rendered by employees or for the termination of employment. Furthermore, they also include benefits provided to employees' dependants – children, spouses or other dependants (IAS 19, paragraph 6). 

Types of employee benefits

Today, we can see many types of benefits offered to employees – ranging from basic wages or salaries, through jubilee (long-service) awards and bonuses, to non-monetary benefits such as medical care or a company car. Each of these benefits may be assigned to a different category. Under IAS 19 there are four basic types of employee benefits:

• Short-term employee benefits – these are settled within 12 months after the end of the reporting period in which the employees rendered the related work. Short-term benefits include wages, salaries and social security contributions, bonuses, profit-sharing, paid annual leave and paid sick leave, as well as non-monetary benefits for employees (e.g. medical care) (IAS 19, paragraph 9);
• Post-employment benefits – these include retirement benefits and other post-employment benefits such as post-employment life insurance or pension schemes;
• Other long-term employee benefits – these are benefits that will be paid on a specified date. These mainly include jubilee or other long-service benefits, long-term paid absences or disability benefits;
• Termination benefits – as the name suggests, these are benefits provided in exchange for the termination of an employee's employment as a result of an entity’s decision before the normal retirement date or an employee’s decision to accept an offer of benefits in exchange for the termination of employment.

Depending on the category, the benefit should be properly recognised in the entity's books of account. The basic principle for the recognition of employee benefits is to recognise an employee benefit liability when an employee has provided service in exchange for employee benefits. The entity should show an expense, on the other side (double entry) in its books of account, when the entity consumes the economic benefits arising from the service provided by an employee. The exception is when, under another IAS (including IAS 2 Inventories), the benefit is included in the cost of an asset. There is one more situation in which the measurement of employee benefits is not recognised as an expense – in the case of post-employment benefits, in strictly defined situations, their measurements are recognised in other comprehensive income. However, no such benefits have occurred yet in the Polish business practice. The value of a benefit is also shown in a different way depending on the category to which the benefit qualifies. Therefore, the key is to correctly assign a benefit to the category – this will affect how the benefit is further shown in the books of account.

When entering employee provisions in the books of account, one should also remember about the tax implications. Employee provisions are a deductible temporary difference in income tax and a deferred tax asset should be created from them.

The realities of employee benefits in Poland

In practice, what we see most commonly in Poland are short-term and other long-term employee benefits, this is why we are going to focus on these categories here.

Short-term benefits

The amount of short-term employee benefits is relatively easy to determine. In this case, the liability (accrued expense) is recognised on an undiscounted basis – the benefit is provided in the short term, so we do not need to take the time value of money into account by discounting. However, in determining the amount of a short-term benefit, it is to be borne in mind that any amounts already paid should be deducted. It is also worth mentioning that if the amounts already paid exceed the undiscounted amount of the liability, the entity should recognise that excess as an asset (prepaid expense).

When measuring short-term paid absences, these must be distinguished into accumulating and non-accumulating (IAS 19, paragraphs 13-15). Non-accumulating paid absences will include e.g. sick pay. For this type of benefits, a company recognises no liability until the time of the absence, because an employee’s service does not affect the amount of the benefit. Accumulating paid absences, on the other hand, are, as the very name suggests, those that are carried forward and can be used in the next period – for example, if an employee does not use all of their holiday entitlement, the entitlement to use such unused days is carried forward to the next period. The measurement of this benefit is particularly relevant if an employee is entitled to a cash equivalent for unused accumulating absences upon the termination of employment.

Long-term benefits

In the case of long-term benefits, determining their value is slightly more complicated. Firstly, such benefits will be paid over a period longer than 12 months; therefore, the time value of money should be taken into account and the present value of the employee benefit obligation should be determined by discounting. The question here is how to determine the discount rate to reliably measure the present value. It is most often determined at the level of market yields on government bonds (IAS 19, paragraph 83). Companies increasingly use the services of an actuary to measure employee benefits that require taking a number of factors and making appropriate assumptions into account. However, this is not mandatory and an entity can also measure an employee benefit liability itself. It should be remembered that various factors need to be taken into account in the measurement of benefits to determine the cost of future benefit payments as accurately as possible. Demographic and financial assumptions are used in measuring employee benefit liabilities. The demographic assumptions relate to the characteristics of employees who are entitled to benefits. These assumptions include, e.g., employee turnover and mortality, while the main financial assumption is the discount rate or salary growth rate and inflation. Accordingly, we can see that economic factors also have a direct impact on the amounts of employee benefits. 

Analysing the above, we can conclude that the current economic situation caused by the coronavirus pandemic also affects the measurement of liabilities. It is particularly important to make appropriate assumptions for the measurement of employee benefit liabilities and to take account of the changes occurring in the economic landscape. Links can be observed, for example, between a change in the interest rates on government bonds and the discount rate affecting the amounts of long-term benefits. Each entity offers certain benefits to its employees which is why it should consider the impact of the current situation on the measurement of that liability.