pool the assets contributed by various entities that are not under
common control; and
use those assets to provide benefits to employees of more than one entity, on the basis that contribution and benefit levels are determined without regard to the identity of the entity that employs the employees.
Definitions relating to the net defined benefit liability
The net defined benefit liability (asset) is the deficit or surplus, adjusted
for any effect of limiting a net defined benefit asset to the asset ceiling.
The deficit or surplus is:
the present value of the defined benefit obligation less
the fair value of plan assets (if any).
The asset ceiling is the present value of any economic benefits available in the form of refunds from the plan or reductions in future contributions to the plan.
The present value of a defined benefit obligation is the present value, without deducting any plan assets, of expected future payments required to settle the obligation resulting from employee service in the current and prior periods.
Plan assets comprise:
assets held by a long-term employee benefit fund; and
qualifying insurance policies.
Assets held by a long-term employee benefit fund are assets (other than non-transferable financial instruments issued by the reporting entity)
are held by an entity (a fund) that is legally separate from the
reporting entity and exists solely to pay or fund employee benefits;
are available to be used only to pay or fund employee benefits, are
not available to the reporting entity's own creditors (even in bankruptcy), and cannot be returned to the reporting entity,
the remaining assets of the fund are sufficient to meet all
the related employee benefit obligations of the plan or the
reporting entity; or
the assets are returned to the reporting entity to reimburse
it for employee benefits already paid.
A qualifying insurance policy is an insurance policy1 issued by an insurer that is not a related party (as defined in IAS 24 Related Party Disclosures)
of the reporting entity, if the proceeds of the policy:
can be used only to pay or fund employee benefits under a defined
benefit plan; and
are not available to the reporting entity's own creditors (even in bankruptcy) and cannot be paid to the reporting entity, unless
the proceeds represent surplus assets that are not needed for the policy to meet all the related employee benefit
the proceeds are returned to the reporting entity to reimburse it for employee benefits already paid.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date. (See IFRS 13 Fair Value Measurement.)
Definitions relating to defined benefit cost
Service cost comprises:
current service cost, which is the increase in the present value of the defined benefit obligation resulting from employee service in the
past service cost, which is the change in the present value of the defined benefit obligation for employee service in prior periods,
resulting from a plan amendment (the introduction or withdrawal of, or changes to, a defined benefit plan) or a curtailment (a significant reduction by the entity in the number of employees covered by a plan);
any gain or loss on settlement.
A qualifying insurance policy is not necessarily an insurance contract, as defined in IFRS 4 Insurance
Net interest on the net defined benefit liability (asset) is the change during the period in the net defined benefit liability (asset) that arises from the passage of time.
Remeasurements of the net defined benefit liability (asset) comprise:
actuarial gains and losses;
the return on plan assets, excluding amounts included in net interest
on the net defined benefit liability (asset); and
any change in the effect of the asset ceiling, excluding amounts
included in net interest on the net defined benefit liability (asset).
Actuarial gains and losses are changes in the present value of the defined
benefit obligation resulting from:
experience adjustments (the effects of differences between the
previous actuarial assumptions and what has actually occurred);
the effects of changes in actuarial assumptions.
The return on plan assets is interest, dividends and other income derived from the plan assets, together with realised and unrealised gains or losses
on the plan assets, less:
any costs of managing plan assets; and
any tax payable by the plan itself, other than tax included in the
actuarial assumptions used to measure the present value of the defined benefit obligation.
A settlement is a transaction that eliminates all further legal or constructive obligations for part or all of the benefits provided under a defined benefit plan, other than a payment of benefits to, or on behalf of, employees that is set out in the terms of the plan and included in the actuarial assumptions.
Short-term employee benefits
Short-term employee benefits include items such as the following, if expected to
be settled wholly before twelve months after the end of the annual reporting
period in which the employees render the related services:
wages, salaries and social security contributions;
paid annual leave and paid sick leave;
profit-sharing and bonuses; and
non-monetary benefits (such as medical care, housing, cars and free or subsidised goods or services) for current employees.
An entity need not reclassify a short-term employee benefit if the entity's
expectations of the timing of settlement change temporarily. However, if the characteristics of the benefit change (such as a change from a non-accumulating benefit to an accumulating benefit) or if a change in expectations of the timing
of settlement is not temporary, then the entity considers whether the benefit still meets the definition of short-term employee benefits.
Recognition and measurement
All short-term employee benefits
When an employee has rendered service to an entity during an accounting period, the entity shall recognise the undiscounted amount of short-term employee benefits expected to be paid in exchange for that
as a liability (accrued expense), after deducting any amount
already paid. If the amount already paid exceeds the undiscounted amount of the benefits, an entity shall recognise 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.
as an expense, unless another IFRS requires or permits the inclusion of the benefits in the cost of an asset (see, for example, IAS 2 Inventories and IAS 16 Property, Plant and Equipment).
Paragraphs 13, 16 and 19 explain how an entity shall apply paragraph 11 to short-term employee benefits in the form of paid absences and profit-sharing and bonus plans.
Short-term paid absences
An entity shall recognise the expected cost of short-term employee
benefits in the form of paid absences under paragraph 11 as follows:
in the case of accumulating paid absences, when the employees render service that increases their entitlement to future paid absences.
in the case of non-accumulating paid absences, when the absences occur.
An entity may pay employees for absence for various reasons including holidays,
sickness and short-term disability, maternity or paternity, jury service and
military service. Entitlement to paid absences falls into two categories:
accumulating; and (b) non-accumulating.
Accumulating paid absences are those that are carried forward and can be used in future periods if the current period's entitlement is not used in full. Accumulating paid absences may be either vesting (in other words, employees are entitled to a cash payment for unused entitlement on leaving the entity) or non-vesting (when employees are not entitled to a cash payment for unused entitlement on leaving). An obligation arises as employees render service that increases their entitlement to future paid absences. The obligation exists, and is recognised, even if the paid absences are non-vesting, although the possibility that employees may leave before they use an accumulated non-vesting entitlement affects the measurement of that obligation.
An entity shall measure the expected cost of accumulating paid absences as the additional amount that the entity expects to pay as a result of the unused entitlement that has accumulated at the end of the reporting period.
The method specified in the previous paragraph measures the obligation at the amount of the additional payments that are expected to arise solely from the fact that the benefit accumulates. In many cases, an entity may not need to make detailed computations to estimate that there is no material obligation for unused paid absences. For example, a sick leave obligation is likely to be material only if there is a formal or informal understanding that unused paid sick leave may be taken as paid annual leave.
Example illustrating paragraphs 16 and 17
An entity has 100 employees, who are each entitled to five working days of paid sick leave for each year. Unused sick leave may be carried forward for
one calendar year. Sick leave is taken first out of the current year's
entitlement and then out of any balance brought forward from the previous year (a LIFO basis). At 31 December 20X1 the average unused entitlement is
two days per employee. The entity expects, on the basis of experience that is expected to continue, that 92 employees will take no more than five days of paid sick leave in 20X2 and that the remaining eight employees will take an average of six and a half days each.
The entity expects that it will pay an additional twelve days of sick pay as a result of
the unused entitlement that has accumulated at 31 December 20X1 (one and a half days
each, for eight employees). Therefore, the entity recognises a liability equal to twelve days of sick pay.
Profit-sharing and bonus plans
An entity shall recognise the expected cost of profit-sharing and bonus
payments under paragraph 11 when, and only when:
the entity has a present legal or constructive obligation to make
such payments as a result of past events; and
a reliable estimate of the obligation can be made.
A present obligation exists when, and only when, the entity has no
realistic alternative but to make the payments.
Under some profit-sharing plans, employees receive a share of the profit only if
they remain with the entity for a specified period. Such plans create a
constructive obligation as employees render service that increases the amount to be paid if they remain in service until the end of the specified period. The measurement of such constructive obligations reflects the possibility that some employees may leave without receiving profit-sharing payments.
Example illustrating paragraph 20
A profit-sharing plan requires an entity to pay a specified proportion of its
profit for the year to employees who serve throughout the year. If no
employees leave during the year, the total profit-sharing payments for the
year will be 3 per cent of profit. The entity estimates that staff turnover will reduce the payments to 2.5 per cent of profit.
The entity recognises a liability and an expense of 2.5 per cent of profit.
An entity may have no legal obligation to pay a bonus. Nevertheless, in some cases, an entity has a practice of paying bonuses. In such cases, the entity has a constructive obligation because the entity has no realistic alternative but to pay the bonus. The measurement of the constructive obligation reflects the possibility that some employees may leave without receiving a bonus.
An entity can make a reliable estimate of its legal or constructive obligation
under a profit-sharing or bonus plan when, and only when:
the formal terms of the plan contain a formula for determining the
amount of the benefit;
the entity determines the amounts to be paid before the financial
statements are authorised for issue; or
past practice gives clear evidence of the amount of the entity's
An obligation under profit-sharing and bonus plans results from employee service and not from a transaction with the entity's owners. Therefore, an entity recognises the cost of profit-sharing and bonus plans not as a distribution of profit but as an expense.
If profit-sharing and bonus payments are 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, those payments are other long-term employee benefits (see paragraphs 153-158).
Although this Standard does not require specific disclosures about short-term
employee benefits, other IFRSs may require disclosures. For example, IAS 24 requires disclosures about employee benefits for key management personnel. IAS 1 Presentation of Financial Statements requires disclosure of employee benefits
Post-employment benefits: distinction between defined
contribution plans and defined benefit plans
Post-employment benefits include items such as the following:
retirement benefits (eg pensions and lump sum payments on
other post-employment benefits, such as post-employment life insurance
and post-employment medical care.
Arrangements whereby an entity provides post-employment benefits are
post-employment benefit plans. An entity applies this Standard to all such arrangements whether or not they involve the establishment of a separate entity to receive contributions and to pay benefits.
Post-employment benefit plans are classified as either defined contribution plans or defined benefit plans, depending on the economic substance of the plan as derived from its principal terms and conditions.
Examples of cases where an entity's obligation is not limited to the amount that it agrees to contribute to the fund are when the entity has a legal or constructive
a plan benefit formula that is not linked solely to the amount of contributions and requires the entity to provide further contributions if
assets are insufficient to meet the benefits in the plan benefit formula;
a guarantee, either indirectly through a plan or directly, of a specified
return on contributions; or
those informal practices that give rise to a constructive obligation. For example, a constructive obligation may arise where an entity has a history of increasing benefits for former employees to keep pace with inflation even where there is no legal obligation to do so.
Under defined benefit plans:
the entity's obligation is to provide the agreed benefits to current and
former employees; and
actuarial risk (that benefits will cost more than expected) and investment
risk fall, in substance, on the entity. If actuarial or investment experience are worse than expected, the entity's obligation may be increased.
Paragraphs 32-49 explain the distinction between defined contribution plans
and defined benefit plans in the context of multi-employer plans, defined benefit plans that share risks between entities under common control, state plans and insured benefits.
An entity shall classify a multi-employer plan as a defined contribution
plan or a defined benefit plan under the terms of the plan (including any constructive obligation that goes beyond the formal terms).
If an entity participates in a multi-employer defined benefit plan, unless
paragraph 34 applies, it shall:
account for its proportionate share of the defined benefit
obligation, plan assets and cost associated with the plan in the
same way as for any other defined benefit plan; and
disclose the information required by paragraphs 135-148
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