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                                                             IAS 19 Employee benefits

                                                                                           2011
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                                                                                                                                   IAS 19 Employee benefits

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Visiting Professor of the Siberian Academy of Finance and Banking                                  Moscow, Russia         2011 Updated




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CONTENTS                                                                         months and non-cash benefits such as medical care,
                                                                                 housing, cars and free or subsidised goods or services for
1. STAFF BENEFITS – INTRODUCTION                                     3           current staff.
2. DEFINITIONS                                                       5
                                                                          ii     post-employment benefits such as pensions, other
3. RECOGNITION AND MEASUREMENT                                       6           retirement benefits, post-employment life insurance and
4. ADOPTION OF IAS 19                                                33          post-employment medical care.
5. MULTIPLE CHOICE QUESTIONS                                         39
                                                                          iii    other long-term staff benefits, including long-service or
6. ANSWERS TO MULTIPLE CHOICE QUESTIONS                              47          sabbatical leave, jubilee or other long-service benefits, long-
                                                                                 term disability benefits and, if they are payable twelve
                                                                                 months or more after the end of the period, profit-sharing,
                                                                                 bonuses and deferred compensation.

                                                                          iv     termination benefits. See below
1. Staff Benefits – Introduction
OVERVIEW                                                                  Termination benefits.
Aim                                                                       An obligation arises from the termination rather than staff service,
                                                                          so termination benefits are recognised, only when it is a
The aim of this workbook is to facilitate understanding of IAS 19,
                                                                          commitment to either:
Staff Benefits. Much of IAS 19 is devoted to payments for
                                                                               terminate employment before the normal retirement date
retirement plans (pensions).
                                                                               accept voluntary redundancy in exchange for benefits
IAS 26 Accounting and Reporting by Retirement Benefit Plans
provides guidance for the accounting of the retirement plans and          An undertaking is committed to a termination only when it has a
complements IAS 19.
                                                                          detailed formal plan for the termination and the plan is without
Introduction
                                                                          realistic possibility of withdrawal.
IAS 19 identifies four categories of staff benefits:
                                                                          Where termination benefits fall due more than 12 months after the
i      short-term staff benefits, such as salaries and social             balance sheet date, they should be discounted.
       security contributions, paid annual leave and paid sick leave,
       profit-sharing and bonuses expected to be paid within twelve
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                                                                                                          IAS 19 Employee benefits
In the following examples, I/B refers to Income Statement and           Scope
Balance Sheet (SFP).                                                    IAS 19 applies to all staff benefits (except those to which IFRS 2
                                                                        Share-based Payments applies), including those provided:
EXAMPLE - Termination benefits fall due more than 12                          1. under formal plans and agreements
months                                                                        2. under legislative requirements, or industry arrangements
Due to catastrophic trading, your firm must make half of the                  3. by informal practices that give rise to a constructive
workforce redundant. Redundancy pay will be in 4 instalments,                    obligation
the first now and the last in 18 months time. All payments will be
discounted if the last payment is more than 12 moths after the          EXAMPLE- constructive obligation
balance sheet date. The total cost will be $56m. The present            A constructive obligation is where a change in the undertaking's
value of the payments is $53m, and this figure will be used for the     informal practices would cause unacceptable damage to its
provision.                                                              relationship with staff.
                                       I/B       DR         CR          If it has been the practice to pay for illness, or disability, for a
Staff costs- redundancy                  I     $53m                     specific period of time, despite no written commitment, staff would
Redundancy provision                    B                  $53m         assume that this practice would continue.
Provision for redundancy, using a
discounted figure.                                                      Staff benefits include benefits provided to either staff, or their
                                                                        dependants, and may be settled by payments made either directly
Objective                                                               or to others, such as insurance companies.
The objective of IAS 19 is to prescribe the treatment disclosure of
staff benefits. IAS 19 requires an undertaking to record:               EXAMPLE- benefits provided to dependants
       1. a liability when staff has provided service for benefits to   Your pension will be paid to you during your lifetime and afterwards
          be paid in the future;                                        to your surviving spouse.
       2. an expense when the service is provided.
                                                                        Staff may provide services on a full-time, part-time, permanent,
EXAMPLE –staff benefits bookkeeping                                     casual or temporary basis. Staff includes directors and other
At each year-end, your firm pays a loyalty bonus based on               management personnel.
service during the year. The bonus should be accrued each
month.
                                                                        EXAMPLE- exceptions to the definition of staff
                                    I/B    DR       CR                  You outsource your computer support services to a specialist firm.
Staff costs-loyalty bonus             I     $1m                         The firm takes responsibility for your computer staff, although they
Loyalty bonus provision              B                $1m               remain on your premises. After the transfer of staff to the new firm,
Monthly provision for loyalty bonus
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                                                                                                            IAS 19 Employee benefits
they are no longer members of your staff. Their costs are service-           (ii)  the amount of the undertaking's obligation to staff
supplier costs rather than staff costs.                                            depends on the future price of shares issued by the
                                                                                   undertaking.
2. Definitions                                                            (These are covered in IFRS 2 Share-based Payments)

Staff benefits are all forms of payment given for service rendered        Equity compensation plans are formal or informal arrangements
by staff.                                                                 under which an undertaking provides equity compensation benefits
                                                                          for staff.
Short-term staff benefits are benefits other than termination
benefits and equity compensation benefits that are expected be              Fair value The price that would be received to sell an asset, or
paid in full within twelve months after the end of the period in which                 paid to transfer a liability, in an orderly transaction
the staff render the related service.                                                  between market participants at the measurement
                                                                                       date. (IFRS 13)
Other long-term staff benefits are benefits other than post-
employment benefits, termination benefits and equity compensation         Short-term staff benefits
benefits that will not be paid in full within twelve months, after the    Short-term staff benefits include items such as:
end of the period in which the staff render the related service.            (i)     salaries and social security contributions.
                                                                            (ii)    short-term paid absences, such as paid annual leave and
Post-employment benefits are pensions, other retirement                             paid sick leave, where the absences are expected to
benefits, post-employment life insurance and post-employment                        occur within twelve months after the end of the period in
medical care.                                                                       which the staff render the related staff service
                                                                            (iii)   profit-sharing and bonuses payable within twelve months
Termination benefits are staff benefits payable as a result of                      after the end of the period in which the staff render the
either:                                                                             related service. and
    (i)  an undertaking's decision to terminate employment                  (iv)    non-cash benefits such as medical care, housing, cars
         before the normal retirement date                                          and free or subsidised goods or services for current staff.
    (ii) a decision to accept voluntary redundancy, in exchange
         for those benefits.                                              No actuarial assumptions are required to measure the obligation or
                                                                          the cost and there is no possibility of any actuarial gain or loss.
Equity compensation benefits are staff benefits where:                    Short-term staff benefit obligations are measured on an
  (i)    staff are entitled to receive shares of the undertaking or its   undiscounted basis.
         parent


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                                                                                                           IAS 19 Employee benefits
Vested staff benefits are staff benefits that are not conditional on    Cash                                      B                   $12.0m
future employment.                                                      Payment of salaries
                                                                        Inventory                                 B        $3,5m
                                                                        Staff costs-salaries direct labour        I                     $3.0m
3. Recognition and Measurement                                          only
                                                                        Staff costs-social security direct         I                    $0,2m
                                                                        labour only
All Short-term Staff Benefits                                           Staff costs-pensions direct labour         I                    $0,3m
When staff has rendered service during an accounting period, the        only
                                                                        Allocation of direct labour costs to
undertaking should recognise the undiscounted amount of short-          inventory

term staff benefits expected to be paid in exchange for that service:   Short-term Paid Absences
                                                                        An undertaking should recognise the expected cost of paid
   (i)    as a liability, an accrued expense net of any amount          absences as follows:
          already paid.                                                    (i)   accumulating paid absences: when the staff render
                                                                                 service that increases their entitlement to future paid
          If the amount already paid exceeds the benefits, the                   absences
          excess is recognised as an asset up to a maximum of the          (ii)  non-accumulating paid absences: when the absences
          reduction in future payments, or a cash refund.                        occur.

   (ii)   as an expense, unless another Standard permits the            An undertaking may pay staff for absence for various reasons
          capitalisation into the cost of an asset.                     including vacation, sickness and short-term disability, maternity or
          For example, IAS 2 Inventories and IAS 16 Property,           paternity, jury service and military service.
          Plant and Equipment.

EXAMPLE –staff benefits capitalisation into the cost of
inventory                                                               EXAMPLE- Accumulating paid absences
Direct labour costs are booked to inventory - see IAS 2                 Staff is entitled to be paid for 6 days’ sick leave each year. If they
                                       I/B       DR     CR              take less than 6 they can receive the money in cash at the end of
Staff costs-salaries                     I      $10.0m                  the year.
Staff costs-social security              I       $1.0m                  Each month, the company will accrue half a day’s salary for each
Staff costs-pensions                     I       $2.0m                  employee who has not been sick during the previous month.

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                                                                                                           IAS 19 Employee benefits
                                         I/B     DR           CR        An undertaking should measure the expected cost of accumulating
Staff costs-sickness bonus                 I    $0,1m                   paid absences as a result of the unused entitlement at the balance
Sickness bonus provision                  B                   $0,1m     sheet date.
Monthly provision for sickness
bonus                                                                   An undertaking may not need to make detailed computations if
                                                                        there is no material obligation for unused paid absences.
Entitlement to paid absences is either accumulating or non-
accumulating.                                                           For example, a sick leave obligation is likely to be material only if
Accumulating paid absences are those that are carried forward and       unused paid sick leave may be taken as paid vacation.
can be used in future periods, if the current period's entitlement is
not used in full.                                                       Example-Sick leave, accumulating LIFO basis
                                                                        An undertaking has 300 staff, each entitled to seven days of paid
Accumulating paid absences may be either:                               sick leave for each year. Unused sick leave may be carried forward
                                                                        for one year.
   (i)    vesting: staff are entitled to a cash payment for unused
          entitlement on leaving the undertaking or                     Sick leave is taken first out of the current year's entitlement and
   (ii)   non-vesting, when staff are not entitled to a cash            then from any balance brought forward from the previous year.
          payment for unused entitlement on leaving.
                                                                        At 31 December 2XX5, the average unused entitlement is three
EXAMPLE- Accumulating paid absences - non-vesting                       days for each staff member. The undertaking expects that 292 staff
Your staff is entitled to 6 days’ paid sick leave for each year of      members will take no more than seven days of paid sick leave in
service.                                                                2XX6 and that remaining eight staff will take an average of nine and
If the sick leave is not taken in full in one year the balance may be   half days each.
carried forward.                                                        Year A. Entitled      B. Taken Estimated          A-B Liability
No cash is paid, when employment ceases, for any sick leave that        2XX5 300x7=2100 300x4=1200                        900 (carried
remains so this is classified as a non vesting scheme.                                                                    forward)
                                                                        2XX6                  292x7=2044 +8x9.5=76
An obligation arises when staff render services that increases their
entitlement to future paid absences. This applies even if it is non-            300x7=2100 =2120                            -20
vesting (where staff may leave before they use an accumulated
non-vesting entitlement without payment).
                                                                        The undertaking expects that it will pay an additional 20 days from
                                                                        the unused entitlement for 2XX5 (2.5x8=20).
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                                                                                                             IAS 19 Employee benefits
                                                                          EXAMPLE-Profit sharing plan calculations
Therefore, the undertaking recognises a liability equal to 20 days of     A profit-sharing plan requires an undertaking to pay a specified
sick pay.
                                                                          proportion of its net profit for the year to staff who serve
Non-accumulating paid absences do not carry forward: they lapse if
the current period's entitlement is not used in full and do not entitle   throughout the year. If no staff leave during the year, the total
staff to a cash payment for unused entitlement.
                                                                          profit-sharing payments for the year will be 7% of net profit. The
This is commonly the case for sick pay to the extent that unused
past entitlement does not increase future entitlement. Other              undertaking estimates that staff turnover will reduce the
examples of non-accumulating paid absences include maternity or
paternity leave, jury service or military service.                        payments to 5,5% of net profit of 10 million.

For non-accumulating paid absences, an undertaking recognises             The undertaking recognises a liability and an expense of 5,5% of
no liability nor expense until the time of the absence, because staff     net profit.
service does not increase the amount of the benefit.                                                              I/B     DR        CR
                                                                          Staff costs-profit-sharing plan           I   $0,55m
Profit-sharing and Bonus Plans
                                                                          Profit-sharing plan provision            B               $0,55m
An undertaking should recognise the expected cost of profit-sharing       Provision for profit-sharing plan
and bonus payments only when:
                                                                          An undertaking may have no legal obligation to pay a bonus but
   (i)    the undertaking has a legal or constructive obligation to       has a practice of paying bonuses. This creates a constructive
          make such payments as a result of past events                   obligation.
   (ii)   a reliable estimate of the obligation can be made.
                                                                          An undertaking can make a reliable estimate of its legal or
Under some profit-sharing plans, staff receive a share of the profit      constructive obligation under a profit-sharing or bonus plan only
only if they remain with the undertaking for a specified period. Such     when:
plans create a constructive obligation as service rendered                   (i)    the plan contains a formula for determining the amount of
increases the amount to be paid if they remain in service until the                 the benefit.
end of the specified period.                                                 (ii)   the undertaking determines the amounts to be paid
                                                                                    before the financial statements are authorised for issue
Measurement reflects the possibility that some staff may leave               (iii)  past practice gives evidence of the amount of the
without receiving profit-sharing payments.                                          obligation.
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                                                                                                            IAS 19 Employee benefits
An obligation under profit-sharing and bonus plans results from staff     Other Long-term Staff Benefits
                                                                          Other long-term staff benefits include, for example:
service so an undertaking recognises the cost not as a distribution
                                                                             (i)     long-term paid absences such as long-service, or
of net profit but as an expense.                                                     sabbatical, leave.
                                                                             (ii)    long-service benefits.
EXAMPLE-Profit sharing plan – expense, not a distribution                    (iii)   long-term disability benefits.
A profit-sharing plan requires an undertaking to pay a 10% of                (iv)    profit-sharing and bonuses payable twelve months or
post-tax profit to staff. This is an expense, not a distribution of net              more after the end of the period in which the staff render
profit. Staff Income Tax is 24% and the bonus is treated as an                       the related service.
expense for corporation tax. Corporation tax rate is 30%.The                 (v)     deferred compensation paid twelve months or more after
profits are $1m.                                                                     the end of the period in which it is earned.
                                          I/B      DR           CR
Staff costs-profit-sharing plan             I   $100.000                  The measurement of other long-term staff benefits is not usually
Profit-sharing plan provision              B                  $76.000     subject to the same degree of uncertainty as the measurement of
Income Tax payable                         B                  $24.000     post-employment benefits.
Corporation Tax payable                    B     $30.000
                                                                          IAS 19 requires a simplified method of accounting for other long-
Corporation tax for year                    I                 $30.000
                                                                          term staff benefits which differs from the accounting required for
Provision for profit-sharing plan and
                                                                          post-employment benefits as follows:
the reduction of tax
                                                                             (i)     actuarial gains and losses are recognised immediately
                                                                                     and no 'corridor' (see ‘pensions’ below) is applied.
If profit sharing and bonus payments are not due wholly within
                                                                             (ii)    all past service cost is recognised immediately.
twelve months after the end of the period in which the staff render
the related service, those payments are ‘other long-term staff
                                                                          Recognition and Measurement
benefits’.
                                                                          The amount recognised as a liability for other long-term staff
Disclosure                                                                benefits should be the net total of the following amounts:
                                                                             (i)    the present value of the obligation at the balance sheet
Although IAS 19 does not require specific disclosures about short-                  date,
term staff benefits, other Standards require disclosures:                    (ii)   minus: the fair value at the balance sheet date of plan
    (i)    IAS 24 Related Parties an undertaking discloses                          assets that will be used to directly settle obligations.
           information about benefits for key personnel.
    (ii)   IAS 1 Presentation of Financial Statements requires the
           disclosure of staff costs.
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                                                                                                         IAS 19 Employee benefits
EXAMPLE- Liability for other long-term staff benefits                    (v)    past service cost, which should all be recognised
You have a paid sickness and disability scheme that has just                    immediately.
                                                                         (vi)   the effect of any curtailments or settlements.
started before year-end.
                                                                      Long-term disability
                                                                      If benefits depend on service, accruals are made based on the
At the year-end, the present value of the obligation is $3,5m. You
                                                                      probability of payments within the undertaking / industry.
have paid $0,2m for an insurance policy plan asset that will cover
$1m of claims.
                                                                      If the level of benefit is the same for any disabled staff regardless of
The liability will be $2,5m.
                                                                      years of service, the expected cost of those benefits is recognised
                                        I/B       DR         CR
                                                                      when an event occurs that causes a long-term disability.
Staff costs- Liability for other long-    I   $200.000
term staff benefits insurance
                                                                      EXAMPLE- long-term disability, regardless of years of
premium
                                                                      service
Cash                                     B                 $200.000
                                                                      Long-term disability is rare in your business. Your scheme
Staff costs- long-term staff benefits     I     $2,5m                 provides a benefit that is the same for any disabled staff. You do
Long term staff benefits insured         B      $1.0m                 not make a provision for anticipated costs until a qualifying
element                                                               disability occurs. When a qualifying disability occurs, a provision
Provision- Liability for other long-     B                  $3,5m     is made.
term staff benefits                                                                                           I/B      DR          CR
Provision for liability of staff                                      Staff costs- long-term disability         I    $50.000
sickness and disability scheme                                        Cash                                     B                $50.000
                                                                      Recording provision for long-term
For other long-term staff benefits, an undertaking should recognise   disability when a qualifying disability
the net total of the following amounts as expense or income or in     occurs.
the cost of an asset, see IAS 2 and IAS 16:
   (i)     current service cost.
                                                                      Disclosure
   (ii)    interest cost.
                                                                      Although IAS 19 does not require specific disclosures about other
   (iii)   the expected return on any plan assets and on any
                                                                      long-term staff benefits, other Standards require disclosures, for
           reimbursement right such as insurance recognised as an
                                                                      example, where the expense may explain a corresponding change
           asset.
                                                                      in performance for the period (see IAS 1).
   (iv)    actuarial gains and losses, which should all be
           recognised immediately.

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                                                                                                         IAS 19 Employee benefits
EXAMPLE-IAS 1 reporting                                                EXAMPLE-Termination benefits
You have introduced long-term benefit schemes to retain staff. The     You close a division and offer $3.000 to those who take voluntary
expense has increased staff costs by 10% in the period. This           redundancy. 50 workers accept the offer but you find that 10
explanation should be included in the financial statements per IAS     more staff will have to be made redundant at a cost of $2.000
1.                                                                     each. The money paid to all 60 redundant staff is classified as
                                                                       termination benefits.
Where required by IAS 24 Related Parties, an undertaking must

disclose information about other long-term staff benefits for key                                             I/B     DR           CR
                                                                       Staff costs- termination benefits        I   $170.000
personnel.                                                             Cash                                    B                $170.000
                                                                       Recording payment of termination
                                                                       benefits
Termination Benefits
                                                                       An undertaking is demonstrably committed to a termination only
IAS 19 deals with termination benefits separately from other staff     when the undertaking has a detailed formal plan for the termination
benefits as the event which gives rise to an obligation is the         and is without realistic possibility of withdrawal.
termination rather than staff service.
                                                                       The detailed plan should include as a minimum:
Recognition                                                               (i)    the location, function and approximate number of staff
An undertaking should record termination benefits as a liability and             whose services are to be terminated.
an expense only when the undertaking is demonstrably committed            (ii)   the termination benefits for each job classification or
to:                                                                              function.
    (i)  terminate employment before the normal retirement date.          (iii)  the timing the implementation.
    (ii) provide termination benefits as a result of an offer made
         to encourage voluntary redundancy.                            Implementation should begin as soon as possible and the period of

                                                                       time to complete implementation should be such that material

                                                                       changes to the plan are not likely.




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                                                                                                          IAS 19 Employee benefits
EXAMPLE- No commitment to termination                                    Some staff benefits are payable regardless of the reason for the
Your board decides that a factory will either be sold within 6 months    staff's departure. The payment of such benefits is certain subject to
or staff numbers will be cut to sustain profitability.                   any vesting or minimum service requirements but the timing of their
Your firm is not yet ‘demonstrably committed to a termination’ as no     payment is uncertain.
detailed plan is available and the staff cuts will not be made if the
factory is sold.                                                         EXAMPLE- Benefits payable regardless of the reason for
                                                                         departure
No provision should be made for termination costs until the detailed     On leaving employment, all staff in your company are entitled to 10
plan is in place and is unlikely to be changed.                          company shares for each month of service.
                                                                         These shares are accounted for under IFRS 2. They are post-
Termination benefits are often lump-sum payments but sometimes           employment benefits, not termination benefits.
also include:                                                            Although such benefits are described in some countries as
   (i)     improvement of retirement benefits or of other post-          termination indemnities or termination gratuities, they are post-
           employment benefits, either via a pension plan or directly.   employment benefits, rather than termination benefits and an
   (ii)    salary until the end of a specified notice period if the      undertaking accounts for them as post-employment benefits.
           member of staff renders no further service that provides
           benefits to the undertaking.                                  Some undertakings provide a lower level of benefit for voluntary
                                                                         termination at the request of the staff in substance, a post-
EXAMPLE-Termination benefits other than lump sum.                        employment benefit than for involuntary termination at the request
You relocate your office to another region. All the staff, but one,      of the undertaking. The additional benefit payable on involuntary
                                                                         termination is a termination benefit.
move to the new office. The remaining worker is made redundant.
                                                                         EXAMPLE- Voluntary termination at the request of the staff
                                                                         Staff who request early retirement receive $2.000 as a payment
He will be paid his salary of $1.000 for 3 more months and
                                                                         to their pension fund. This is a post-employment benefit.
$2.000 will be contributed to his pension. These payments are
                                                                         Those whom are made redundant by the firm receive $3.000. The
termination benefits.
                                                                         first $2.000 is a post-employment benefit. The remaining $1.000
                                      I/B     DR       CR
                                                                         is a termination benefit.
Staff costs- termination benefits       I   $5.000
                                                                                                                 I/B     DR         CR
Salary accrual                         B             $3.000
                                                                         Staff     costs-    post-employment       I    $2.000
Pension fund accrual                   B             $2.000
                                                                         benefits
Recording accruals of termination
                                                                         Pension fund accrual                     B                $2.000
benefits

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                                                                                                        IAS 19 Employee benefits
Recording      a    voluntary    early                               Where termination benefits fall due more than 12 months after the
retirement                                                           balance sheet date, they should be discounted using an appropriate
Staff costs- termination benefits         I     $1.000               discount rate.
Staff    costs-     post-employment       I     $2.000
benefits                                                             For voluntary redundancy, the measurement of termination benefits
Cash                                     B                  $3.000   should be based on the number of staff expected to accept the
Recording         a       compulsory                                 offer.
redundancy
                                                                     EXAMPLE -Voluntary redundancy number of staff
Termination benefits do not provide future benefits and are          Your firm wishes to make 500 staff redundant. You offer $10.000
recognised as an expense immediately.                                to each member of staff that accepts voluntary redundancy. You
                                                                     believe that only 200 staff will accept voluntary redundancy. The
Where an undertaking recognises termination benefits it may also     termination benefit provision is
have to account for a curtailment of retirement benefits or other    $2m (200 * $10.000). Further provisions may be made if
staff benefits.                                                      compulsory redundancies follow.
                                                                                                              I/B     DR        CR
EXAMPLE-termination benefits- curtailment of retirement              Staff costs-voluntary redundancy           I     $2m
benefits                                                             Redundancy provision                      B                $2m
In return for a termination bonus of $10.000, an employee agrees     Provision for voluntary redundancy
to a reduction in his pension entitlement. The credit to the
pension costs is $3.000.                                             Disclosure
                                        I/B      DR        CR        Where there is uncertainty about the number of staff who will
Staff costs- termination benefits         I   $10.000                accept an offer of termination benefits, a contingent liability exists.
Cash                                     B              $10.000      As required by IAS 37, an undertaking discloses information about
Staff    costs-      post-employment      I              $3.000      the contingent liability, unless the possibility of an outflow in
benefits                                                             settlement is remote.
Pension fund accrual                     B     $3.000
Recording termination benefits and                                   As required by IAS 1, an undertaking discloses the nature and
a reduction in retirement benefits                                   amount of a termination benefit, if it is of such size or nature that its
                                                                     disclosure is relevant to explain the performance for the period.
Measurement
                                                                     Where required by IAS 24 Related Parties, an undertaking
                                                                     discloses information about termination benefits for key personnel.

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                                                                                                        IAS 19 Employee benefits
Equity Compensation Benefits                                         (i)   service cost and net interest in profit or loss; and
Equity compensation benefits include benefits in such forms as:
   (i)   shares, share options and other equity instruments,         (ii) remeasurements (actuarial gains and losses) in other
         issued to staff at less than fair value.                    comprehensive income.
   (ii)  cash payments, based on the future market price of the
         undertaking's shares.                                       This will end the “corridor” system of spreading changes over a
                                                                     number of years (see below).
Recognition and Measurement
IFRS 2 specifies recognition and measurement requirements for        The net Interest Cost will use the discount rate by reference to
equity compensation benefits, and they have therefore been           market yields at the end of the reporting period on high quality
excluded from IAS 19.                                                corporate bonds (or, in countries where there is no deep market in
                                                                     such bonds, government bonds) of a currency and term consistent
Pensions and other post-employment benefits                          with the currency and term of the post-employment benefit
                                                                     obligations.
Post-employment benefits include, for example:
   (i)   pensions.                                                   The Current Service Cost will include any Curtailments and
   (ii)  other post-employment benefits, such as life insurance      Settlement gains and losses.
         and medical care.
                                                                     The current rules are listed below for those using the pre-2013
Post-employment benefit plans are classified as either:              standard:
          defined contribution plans
          defined benefit plans


IAS 19 also gives guidance on the classification of multi-employer
plans, state plans and plans with insured benefits.

The 2011 update of IAS 19 is effective from 2013:

In relation to defined benefit schemes:

All changes in the net defined benefit liability (asset) will be
recognised when they occur:
                                                                     Overview of the main types of Pension Plan
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                                                                                                            IAS 19 Employee benefits
                                                                         Post-employment benefit plans are formal or informal
  Defined      State plan        Insured       Multi-        Defined     arrangements under which an undertaking provides post-
contribution                     benefits    employer        benefit     employment benefits for staff.
   plan                            fund         plan           plan
   Make agreed payments to fund.            May be         Promise       Defined contribution plans are post-employment benefit plans
           No further liability.            either         specific      under which an undertaking pays fixed contributions into a fund and
                                            defined        benefits.     will have no legal nor constructive obligation to pay further
                                            contribution   Pay as        contributions.
                                            plan or        directed by
                                            defined        the           Defined benefit plans are post-employment benefit plans other
                                            benefit plan   actuary.      than defined contribution plans.
Pensioners      Pensioners Pensioners                      Pensioners
receive the     receive thereceive                         receive       Multi-employer plans are plans other than state plans that:
returns on      pension    amounts                         amounts         (i)    pool the assets contributed by various undertakings.
the funds       determined determined                      determined      (ii)   use those assets to provide benefits to staff of
invested        by the     by the                          by the                 undertakings.
                State      fund.                           fund.
Risk:           Risk:      Risk:                           Risk:         Contribution and benefit levels are determined without regard to the
Pensioners      State      Insurance                       Company
                           company                                       identity of the undertaking that employs the staff concerned.
Actuaries:     State       Insurance                     Company
no             Actuaries:  Company                       Actuaries:      Current service cost is the increase in the present value of the
               yes         Actuaries:                    yes             defined benefit obligation resulting from staff service in the current
                           yes                                           period.
   All funds may provide medical and disability aid to pensioners.
                                                                         A qualifying insurance policy is a policy issued by an insurer that
Definitions- Pensions                                                    is not a related party as defined in IAS 24, if the proceeds of the
Post-employment benefits are benefits other than termination             policy:
benefits and equity compensation benefits payable after the                   (i)     can be used only to finance staff benefits under a
completion of employment.                                                             defined benefit plan
                                                                              (ii)    are not available to the undertaking's own creditors
                                                                                      even in bankruptcy and cannot be paid to the
                                                                                      undertaking, unless either:
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                                                                                                          IAS 19 Employee benefits
          (1) the proceeds represent surplus assets that are not           (ii)   are available to be used only to pay or fund staff benefits,
              needed for benefit obligations.                                     are not available to the undertaking's own creditors even
          (2) the proceeds are returned to the undertaking to                     in bankruptcy and cannot be returned to the reporting
              reimburse it for benefits already paid.                             undertaking unless:
                                                                                      (1) the remaining assets of the fund are sufficient to
Past service cost is the increase in the present value of the                             meet the obligations of the plan or the undertaking
obligation for staff service in prior periods. This cost results from                 (2) the assets are returned to the undertaking to
changes to pensions or other long-term staff benefits in the current                      reimburse it for benefits already paid.
period.
                                                                        The return on plan assets is interest, dividends and other revenue
Past service cost may be either positive where benefits are             earned by the plan assets, together with realised and unrealised
introduced or improved, or negative where benefits are reduced.         gains or losses on the plan assets, less any costs of administering
                                                                        the plan and less any tax payable by the plan itself.
Vested staff benefits are benefits that are not conditional on
future employment.                                                      Actuarial gains and losses comprise:
                                                                           (i)    experience adjustments which are the differences
The present value of a defined benefit obligation is the present                  between actuarial assumptions and what has actually
value of expected future payments required to settle the obligation               occurred.
without deducting any plan assets. This results from staff service in      (ii)   changes in actuarial assumptions.
the current and prior periods.
                                                                        Defined Benefit Plans
Interest cost is the increase during a period in the present value of   Examples of defined benefit plans:
an obligation that arises because the benefits are one period closer       (i)   a plan benefit formula that is not linked solely to the
to settlement.                                                                   amount of contributions.
                                                                           (ii)  a guarantee of a specified return on contributions.
Plan assets comprise:                                                      (iii) informal practices that give rise to a constructive
   (i)   assets held by a long-term fund                                         obligation.
   (ii)  qualifying insurance policies
                                                                        EXAMPLE- A constructive obligation based on company
                                                                                practice
Assets held by a long-term fund are assets that:                        A constructive obligation may arise where an undertaking has a
  (i)    are held by a fund that exists solely to finance staff         history of increasing benefits for former staff to keep pace with
         benefits.                                                      inflation, even where there is no legal obligation to do so.

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                                                                                                           IAS 19 Employee benefits
Under defined benefit plans:                                             Pension fund accrual                     B                 $11.000
                                                                         Cash payments to staff net of            B                 $96.000
   (i)     the undertaking's obligation is to provide the agreed         pension
           benefits to current and former staff.                         Recording salary and pension
   (ii)    actuarial risk and investment risk fall on the undertaking.   contributions
           If actuarial or investment returns are worse than
           expected, the undertaking's obligation will be increased.     An undertaking recognises contributions to a defined contribution
                                                                         plan when staff have rendered service in exchange for those
Defined Contribution Plans                                               contributions.

Under defined contribution plans, an undertaking pays fixed              All other post-employment benefit plans are defined benefit plans.
                                                                         Defined benefit plans may be unfunded, partly or wholly funded.
contributions into a separate fund and will have no obligation to
                                                                         Accounting for defined contribution plans is straightforward because
pay further contributions.                                               the obligation for each period is determined by the amounts to be
                                                                         contributed for that period.
The fund will be invested and pensions will be paid from the fund. If    No actuarial assumptions are required to measure the obligation,
                                                                         nor the expense and there is no possibility of any actuarial gain or
the fund is unable to pay pensions in full, the staff will suffer the    loss.
loss and the undertaking will not have to provide further funds to       The obligations are measured on an undiscounted basis, except
                                                                         where they do not fall due wholly within twelve months after the end
eliminate the loss.                                                      of the period in which the staff render the related service.

EXAMPLE-Defined contribution plan
You contribute 7% of the total salary amount to a company                Recognition and Measurement
pension plan.                                                            When staff has rendered service during a period, the undertaking
The company has no further obligation                                    should record the contribution payable to a defined contribution
Staff contribute 4% of their salary.                                     plan in exchange for that service:
                                      I/B   DR      CR
Staff costs- salaries                   I $100.000                               (i) as an accrued expense, after deducting any contribution
Staff costs- pensions                   I   $7.000                              already paid.

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                                                                                                         IAS 19 Employee benefits
       If the contribution already paid exceeds the contribution due   Defined Benefit Plans
       for service before the balance sheet date, an undertaking
       should recognise that excess as a prepaid expense to the        Defined benefit plans provide pensioners with a specific pension
       extent that the prepayment will lead to a reduction in future   (the defined benefit) normally based on the years of service and
       payments or a cash refund                                       their final salary.

       EXAMPLE-pensions-prepaid expense                                For example, a defined benefit plan may offer a pension 1/60 of
       You decide to pay pensions for 3 months in advance to           final salary for each year of service. A member of staff who serves
       secure a tax deduction. You show it as a prepayment.            the undertaking for 40 years will receive a pension of 2/3 of final
                             I/B           DR             CR           salary.
       Pensions-              B         $45.000
       prepaid                                                         Having set up a defined benefit plan, all the risks are with the
       expense                                                         undertaking.
       Cash                   B                         $45.000
       Recording                                                       The promise to pay a future pension creates a liability.
       pension
       prepayments                                                     The undertaking (normally helped by actuaries) will calculate its
                                                                       obligation to pensioners.
        (ii) as an expense, unless another Standard requires or
        permits the inclusion of the contribution in the cost of an    Factors to be taken into account include:
        asset see IAS 2 Inventories and IAS 16 Property, Plant and     -current age of each member of staff who qualifies
        Equipment.                                                     -the impact of staff who will leave before reaching pensionable age
                                                                       -retirement age
Where contributions to a defined contribution plan do not fall due     -expected years of service at retirement age
wholly within twelve months after the end of the period in which the   -expectancy of the number of years of life after retirement
staff render the related service, they should be discounted.           - the impact of paying pensions to pensioners’ partners after the
                                                                       death of the pensioner.
Disclosure
An undertaking should disclose the amount recognised as an             Having estimated the obligation, the company must decide how to
expense for defined contribution plans. Contributions for key          fund the scheme. Members of staff may also be required to
personnel must be disclosed separately (see IAS 24 Related             contribute to benefit from the plan.
Parties).
                                                                       Unfunded Scheme. The undertaling may decide to finance the
                                                                       liability from current cash flows when the pensions need to be paid.
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                                                                                                          IAS 19 Employee benefits
This would be an unfunded scheme. Such a scheme tends to be             obligations. It estimates the different returns on the fund assets to
less popular with staff as the undertaking may not have the cash to     know how much capital to invest.
pay future pensions, or may even cease to exist.
                                                                        Most funds have a range of assets (a portfolio) which have different
EXAMPLE-Defined benefit plan-unfunded                                   risks and returns in order to spread the risk. The cash flows to meet
Your firm undertakes to pay pensions to former staff. Pensions          the obligation will be spread over a number of years as each
                                                                        pension payment becomes due.
are a guaranteed a portion of their final salary.                       The fund will be looking to liquidate assets to match these
                                                                        payments.
You have no pension fund. You are paying pensioners directly
                                                                        Partially-funded Scheme. The undertaking has a third option to
from the company funds.
                                                                        partially fund the obligation. (The fund is therefore partially-
                                                                        unfunded.) This is often a step towards full funding at a future date
Each month you pay money to current pensioners and accrue
                                                                        when current cash flows do not permit it to be achieved in the
liabilities for current staff.
                                                                        current period.
                                    I/B   DR       CR
Staff costs - pensions for current    I $68.000
                                                                        Where the obligation is partially funded, the undertaking has to
staff
                                                                        make up the deficit as pension payments fall due.
Pension fund accrual                 B           $68.000
Pension fund accrual for pensioners  B  $37.000                         Past Service Cost
Cash payments to pensioners          B           $37.000
Recording pension accrual and                                           Past service cost arises when an undertaking introduces a defined
payments                                                                benefit plan or changes the benefits payable under an existing
                                                                        defined benefit plan.
Funded Scheme. The undertaking may set up a scheme that fully
funds the obligation. This is called the pension fund, or plan.         Past service cost relates to service given by staff and former staff in
The undertaking pays money every year into the pension fund. The        earlier periods and is measured as the change in the liability
fund invests in various stocks and bonds. The fund will pay the         resulting from the change.
pension liabilities from the return it makes from its assets and from
its capital.                                                            An undertaking should recognise past service cost as an expense
                                                                        on a straight-line basis over the average period until the benefits
The undertaking has estimated the obligation. It now calculates the     become vested.
cash that it must pay each year into the fund to match these

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                                                                                                        IAS 19 Employee benefits
EXAMPLE- Past service cost-unvested                                   An undertaking establishes the amortisation schedule for past
Your pension plan has no pensioners yet, only current staff.          service cost when the benefits are introduced or changed. An
Improvements to your pension plan incur a past service cost of        undertaking updates the amortisation schedule only if there is a
$45m.                                                                 curtailment or settlement.
The average remaining working life of staff is 15 years. The past     Where an undertaking reduces benefits payable under a defined
service cost should be charged at $3m per year.                       benefit plan, the resulting reduction in the liability is recorded as
                                       I/B       DR         CR        negative past service cost. It is calculated over the average period
Staff costs- pensions past service       I       $3m                  until the reduced portion of the benefits becomes vested.
cost
Pension provision                       B                   $3m       Past service cost excludes:
Recording annual past service cost
each year for the next 15 years                                            i. the impact of differences between actual and previously-
                                                                           forecast salary increases on the obligation to pay benefits for
To the extent that the benefits are already vested immediately             service in prior years (there is no past service cost because
                                                                           actuarial assumptions allow for projected salaries);
following the introduction of or changes to, a defined benefit plan
                                                                           ii. under and over estimates of discretionary pension increases
and undertaking should record past service cost immediately.               where an undertaking has a constructive obligation to grant
                                                                           such increases (there is no past service cost because actuarial
                                                                           assumptions allow for such increases);
EXAMPLE- Past service cost-vested immediately
You improve your pension payments. Current pensioners will                 iii. estimates of benefit improvements that result from actuarial
receive an additional $1m (the discounted cash flow amount) in             gains that have already been recognised in the financial
additional benefits. As pensioners, they have completed the                statements if the undertaking is obliged to use any surplus in
service, so the benefits become vested immediately. The costs              the plan for the benefit of plan participants, even if the benefit
should be recorded immediately, even though the payments will              increase has not yet been formally awarded (the resulting
be paid over a period of years.                                            increase in the obligation is an actuarial loss and not past
                                        I/B     DR         CR              service cost);
Staff costs- pensions past service        I     $1m
cost                                                                       iv. increases in vested benefits when, in the absence of new or
Pension provision                        B                $1m              improved benefits, employees complete vesting requirements
Recording past service cost for                                            (there is no past service cost because the estimated cost of
vested benefits                                                            benefits was recognised as current service cost as the service
                                                                           was rendered); and
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                                                                                                        IAS 19 Employee benefits
                                                                       Accounting for defined benefit plans requires actuarial assumptions
     v. the effect of plan changes that reduce benefits for future     to measure the obligation and the expense and there is a possibility
     service (a curtailment).                                          of actuarial gains and losses. Also, the obligations are measured
                                                                       on a discounted basis, as they may be settled many years after the
Where an undertaking reduces benefits payable under an existing        staff render the related service.
defined benefit plan, the resulting reduction in the defined benefit
liability is recognised as (negative) past service cost over the       The major risk of defined benefit plans is that the return on the
average period until the reduced portion of the benefits becomes       assets is below that originally estimated and the undertaking has to
vested.                                                                finance the shortfall.

Where an undertaking reduces benefits payable under an existing        Under IAS 19, these shortfalls (liabilities to pension funds) appear
defined benefit plan and, at the same time, increases other benefits   on the balance sheet (see below). Most countries did not have this
payable under the plan for the same employees, the undertaking         requirement prior to adoption of IAS 19 and any shortfall did not
treats the change as a single net change.                              appear in the undertaking’s financial statements, unless it wished to
                                                                       provide the information voluntarily.
Matching the obligation and the plan’s investment
performance                                                            The recognition of these liabilities has been the most dramatic
                                                                       impact of IAS 19. Many defined benefit plans of large organisations
The large number of estimates to be made for both the obligation       have been closed to new members, some benefits reduced and
and the investment performance of the plan requires extensive          some schemes have been redesigned as defined contribution
actuarial knowledge and application. The result of these               schemes to limit liabilities.
calculations is the undertaking’s monthly payment required to meet
the obligation.                                                        Recognition and Measurement
                                                                       The payment of benefits depends on:
Surpluses and deficits that arise in the pension fund are called              the financial position of the fund,
actuarial gains and losses.                                                   the investment performance of the fund,
                                                                              an undertaking's ability and willingness to provide
The estimates require updating at least annually, and whenever                  additional money for any shortfall in the fund's assets.
there are any changes to the pensions.
                                                                       The undertaking is underwriting the actuarial and investment risks
(To further complicate the calculations, some defined benefit plans    of the plan. Thus, the expense recognised for a defined benefit
include medical insurance and/or life assurance.)                      plan is not necessarily the amount of the contribution due for the
                                                                       period.

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                                                                                                       IAS 19 Employee benefits
EXAMPLE- Expense recognised may differ from the period                                                       I/B      DR          CR
contribution                                                         Staff costs- pensions current             I      $2m
The contribution for pensions is $6m in the period. However, the     service cost increase
plan assets have provided lower investment returns and there is      Pension provision                        B                  $2m
an actuarial loss of $1m for the period. The expense recognised      Staff costs- pensions past service       I      $17m
for the period will be $7m.                                          cost
                                         I/B     DR        CR        Pension provision                        B                  $17m
Staff costs- pensions                      I    $7m                  Recording pension increases for
Cash                                      B               $6m        current year and past service cost
Pension provision                         B               $1m
Recording pension payments and                                       Where a plan has been curtailed or settled, the resulting gain or
actuarial loss                                                       loss should be determined.

An undertaking must determine how much benefit is attributable to    EXAMPLE-Curtailment of a plan
                                                                     Your group decides to rationalise the number of pension plans
the current and prior periods and to make actuarial assumptions      and transfer all current staff to a group plan. Your current staff
                                                                     move from your plan to the group plan but your pensioners do not
about demographic and financial variables such as future increases   move. Your actuary calculates that your plan needs another $3m
                                                                     to finance benefits to your pensioners.
in salaries and medical costs that will influence the cost of the                                              I/B      DR          CR
                                                                     Staff costs- pensions closure of            I     $3m
benefit. Professional actuaries are normally involved in this        company plan
                                                                     Pension provision                          B                  $3m
process.                                                             Recording pension increases for
                                                                     current year and past service cost
Where a plan has been introduced or changed, the undertaking
must determine the resulting past service cost.                      Where an undertaking has more than one defined benefit plan, the
                                                                     undertaking applies these procedures for each material plan
EXAMPLE-Change to a plan: resulting past service cost                separately.
You decide to increase payments to pensioners by 10%. This
applies to both current and future pensioners. This will increase    Accounting for the Constructive Obligation
the charge for the current year’s service by $2m and previous        Informal practices give rise to a constructive obligation where the
years’ contributions will need to be increased by $17m.              undertaking has no realistic alternative but to pay staff benefits.
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                                                                                                             IAS 19 Employee benefits
It is assumed that an undertaking which is currently promising            Actuarial gains and losses
specific benefits will continue to do so over the remaining working
lives of staff and that those benefits will be provided in their          Actuarial gains and losses may result from changes in either the
retirement.                                                               present value of a defined benefit obligation, or the fair value of any
                                                                          related plan assets.
Defined Benefit Plans -Procedures
                                                                          Causes of actuarial gains and losses include, for example:
IAS 19 requires an undertaking to:
                                                                                 i. unexpectedly high or low rates of staff turnover, early
i. use actuarial techniques to make a reliable estimate of the                   retirement or mortality or of increases in salaries, benefits or
   amount of benefit that staff have earned in return for their service          medical costs;
   in the current and prior periods and to make actuarial
   assumptions about demographic variables (such as staff turnover               ii. changes in estimates of future employee turnover, early
   and mortality) and financial variables (such as future increases in           retirement or mortality or of increases in salaries, benefits or
   salaries and medical costs) that will influence the cost of the               medical costs;
   benefit;
                                                                                 iii. changes in the discount rate; and
ii. discount that benefit using the Projected Unit Credit Method (see
   below) in order to determine the present value of the defined                 iv. differences between the actual return and the expected
   benefit obligation and the current service cost;                              return on plan assets.

iii. determine the fair value of any plan assets;                         Over time, actuarial gains and losses may offset one another. Thus,
                                                                          estimates of post-employment benefit obligations may be viewed as
iv. determine the total actuarial gains and losses and the amount of      a range (or ‘corridor') around the best estimate. An undertaking is
  those actuarial gains and losses to be recognised (see below);          permitted, but not required, to recognise actuarial gains and losses
v. . where a plan has been introduced or changed, determine the           that fall within that range.
     resulting past service cost; and
                                                                          IAS 19 requires an undertaking to recognise, as a minimum, a
vi. where a plan has been curtailed or settled, determine the             specified portion of the actuarial gains and losses that fall outside a
     resulting gain or loss.                                              ‘corridor' of plus or minus 10%.

Where an undertaking has more than one defined benefit plan, the          The Standard also permits systematic methods of faster
undertaking applies these procedures for each material plan               recognition. Such permitted methods include, for example,
separately.
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                                                                                                               IAS 19 Employee benefits
immediate recognition of all actuarial gains and losses, both within   An undertaking may adopt any systematic method that results in
and outside the ‘corridor'.                                            faster recognition of actuarial gains and losses, provided that the
                                                                       same basis is applied to both gains and losses and applied
An undertaking must record the net cumulative actuarial gains and      consistently from period to period.
losses that exceed the greater of:
                                                                       If an undertaking adopts a policy of recognising actuarial gains and
           1. 10% of the present value of the defined benefit          losses in the period in which they occur, it may recognise them
              obligation before deducting plan assets.                 outside the income statement, in, providing it does so for:
           2. 10% of the fair value of any plan assets.
              This is the ‘10% corridor’.                                         i. all of its defined benefit plans; and
                                                                                  ii. all of its actuarial gains and losses.
The actuarial gains and losses to be recorded for each defined
                                                                       Actuarial gains and losses recognised outside the income
benefit plan is the excess that is outside the 10% 'corridor' at the   statement shall be presented in a statement of changes in equity
                                                                       titled ‘statement of recognised income and expense' .
previous reporting date, divided by the expected average remaining
                                                                       On first adopting IAS 19, an undertaking may recognise any
working lives of the staff participating in that plan.                 resulting increase in its liability for post-employment benefits over
                                                                       not more than five years.
                                                                       If the adoption of IAS 19 results in decreases, the decreased
 EXAMPLE-Actuarial gains and losses, using the 10% corridor
                                                                       liability must be recorded immediately.
Present value of the defined benefit obligation             $150m
                                                                       Balance Sheet
before deducting plan assets: previous reporting date
                                                                       The amount recognised as a defined benefit liability should be the
Fair value of plan assets:        previous reporting        $200m
                                                                       net total of the following amounts:
date
Net cumulative actuarial gain excess                         $50m         (i)        the present value of the obligation at the balance sheet
          The plan assets are greater than the obligation                            date.
10% of the value of the plan assets the ‘10% corridor’       $20m         (ii)       plus any actuarial gains less any actuarial losses not
Excess that fell outside the 10% corridor $50m-$20m          $30m                    recognised.
Expected average remaining working lives of the staff     10              (iii)      minus any past service cost not yet recognised.
                                                          years           (iv)       minus the fair value at the balance sheet date of plan
Actuarial gain for the period $30m / 10 years                 $3m                    assets if any out of which the obligations are to be settled
                                                                                     directly.

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                                                                                                          IAS 19 Employee benefits
The present value of the obligation is the gross obligation, before               refund, either directly to the undertaking or indirectly to
                                                                                  another plan.
deducting the fair value of any plan assets.
                                                                       EXAMPLE – Over-funded plan
EXAMPLE- amount recognised as a defined benefit liability              You have halved your workforce. Your actuary identifies a surplus
Present value of the defined benefit obligation        -$200m
                                                                       in the pension plan as a result. You can:
Actuarial gains less any actuarial losses not           +$10m
recognised         +
Past service cost not yet recognised                     -$8m          1. reduce further payments to the pension plan.
-                                                                      2. have a cash refund.
Fair value of plan assets out of which the obligations  -$15m          3. transfer the surplus to another fund.
are to be settled directly.
-                                                                      Income Statement
                                                                       An undertaking should recognise the net total of the following
                                                                       amounts as expense or income:
Amount recognised as defined benefit liability              -$213m
                                                                          (i)     current service cost.
An undertaking may request a qualified actuary to carry out a             (ii)    interest cost.
valuation of the obligation as at the balance sheet date.                 (iii)   the expected return on any plan assets and on any
                                                                                  reimbursement rights.
A surplus is an excess of the fair value of the plan assets over the      (iv)    actuarial gains and losses.
present value of the defined benefit obligation.                          (v)     past service cost.
                                                                          (vi)    the effect of any curtailments, or settlements.
An asset may arise where a plan has been over funded or in certain
cases where actuarial gains are recorded. An undertaking               Other Standards require the inclusion of certain staff costs within
recognises an asset in such cases as:                                  the cost of assets (see IAS 2 Inventories and IAS 16 Property, Plant
   (i)   the undertaking controls a surplus that can be used to        and Equipment workbooks).
         generate future benefits.
   (ii)  control is a result of past events - contributions paid by    Recognition and measurement: present value of defined
         the undertaking and service rendered by the staff.            benefit obligations and current service cost
   (iii) future benefits are available to the undertaking in the
         form of a reduction in future contributions or a cash         The cost of a defined benefit plan may be influenced by many
                                                                       variables, such as final salaries, staff turnover and mortality,
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                                                                                                              IAS 19 Employee benefits
medical cost trends and, for a funded plan, the investment earnings         2. the undertaking-specific credit risk borne by the undertaking's
on the plan assets.                                                            creditors
                                                                            3. the risk that future experience may differ from actuarial
The total cost of the plan is uncertain and this uncertainty is likely to      assumptions.
continue over a long period of time. To measure the present value
of the post-employment benefit obligations and the related current          The discount rate reflects the estimated timing of benefit payments.
service cost, it is necessary to:                                           In practice, an undertaking often achieves this by applying a single
                                                                            weighted-average discount rate that reflects the estimated timing
       i. apply an actuarial valuation method;                              and amount of benefit payments and the currency in which the
       ii. attribute benefit to periods of service; and                     benefits are to be paid.
       iii. make actuarial assumptions.
                                                                            EXAMPLE –Discount rate that reflects the estimated timing
 Actuarial Valuation Method                                                 You have a young workforce that will require pension payments in
An undertaking should use the Projected Unit Credit Method to               20-40 years time. You consider using a 30-year bond as your
determine the present value of its defined benefit obligations and          benchmark, and take its yield as your discount rate.
the related current service cost and, where applicable, past service
cost. Actuaries are likely to be needed to compute this.                    Interest cost is computed by multiplying the discount rate at the
                                                                            start of the period by the present value of the obligation throughout
The calculations involved in the Projected Unit Credit Method are           that period, taking account of any material changes in the
beyond the scope of this workbook.                                          obligation.
                                                                            EXAMPLES –Interest cost
Actuarial Assumptions: Discount Rate                                        At January 1st, the present value of your pension obligation is
The rate used to discount post-employment benefit obligations               $60m. The system is a closed scheme. On December 31st, the
should be determined by reference to market yields at the balance           present value of the same obligation is $62m, as the payments
sheet date on high quality corporate bonds or if none, on                   have come closer, and the amount of discount is less. The interest
government bonds. The currency and term of the corporate bonds              cost is $2m.
or government bonds should be consistent with the currency and
estimated term of the post-employment benefit obligations.                   At January 1st, the present value of your pension obligation is
                                                                            $80m. A number of people leave the scheme during the year. On
The discount rate reflects the time value of money, but not:                December 31st, the present value of the obligation is $81m. This
                                                                            represents $4m of increased present value less $3m due to leavers
1. the actuarial or investment risk                                         no longer requiring payment.
                                                                            The interest cost is $1m.

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                                                                                                          IAS 19 Employee benefits
The present value of the obligation will differ from the liability      Where plan assets include qualifying insurance policies (see
recorded in the balance sheet, as the liability is recorded after       Definitions-Pensions above) that exactly match the amount and
deducting the fair value of any plan assets and because some            timing of some or all of the benefits payable under the plan, the fair
actuarial gains and losses and some past service cost, are not          value of those insurance policies is deemed to be the present value
recorded immediately.                                                   of the related obligations.

Recognition and Measurement: Plan Assets                                Reimbursements
Fair Value of Plan Assets                                               Only when it is virtually certain that another party will reimburse
The fair value of any plan assets is deducted in determining the        some or all of the expenditure, the undertaking should recognise
amount recognised in the balance sheet.                                 this as a separate asset measured at fair value.

When no market price is available, the fair value of plan assets is     In all other respects, an undertaking should treat that asset in the
estimated, for example, by discounting expected future cash flows       same way as plan assets. In the income statement, the expense
using a discount rate that reflects both the risk associated with the   relating to a plan may be presented net of the amount recognised
plan assets and the expected disposal date of those assets or, if       for a reimbursement.
they have no maturity, the expected period until the settlement of
the related obligation.                                                 EXAMPLE-Reimbursement
                                                                        You have purchased a company. The vendors undertake to pay
Plan assets exclude unpaid contributions due to the fund, as well as    50% of pension costs for the next 3 years for the staff that have
any non-transferable financial instruments issued by the                been transferred. At the end of the first year, you calculate the
undertaking and held by the fund.                                       reimbursement to be $6m. When you are sure that you will
                                                                        receive the reimbursement, it will be credited to pension costs.
EXAMPLE- Plan assets exclusion                                                                                    I/B      DR          CR
Your firm has issued bonds to the pension fund to reduce cash           Staff costs- pensions                       I                  $6m
payments.                                                               Accounts receivable                        B       $6m
There is no market for the bonds and the fund would have difficulty     Recording       reimbursement         of
finding a buyer. The bonds will be excluded from plan assets.           pension cost
                                                                        Sometimes, an undertaking is able to rely on another party, such as
Plan assets are reduced by any liabilities of the fund that do not      an insurer, to pay part or all of the expenditure required to settle a
relate to staff benefits, for example, trade and other payables and     defined benefit obligation. Qualifying insurance policies (see
liabilities resulting from derivative financial instruments.            Definitions-Pensions above) are plan assets.



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                                                                                                             IAS 19 Employee benefits
When an insurance policy is not a qualifying insurance policy, that        changes in the fair value of plan assets held during the period, as a
insurance policy is not a plan asset. The undertaking recognises           result of actual contributions paid into the fund and actual benefits
the insurance policy as a separate asset, rather than as a deduction       paid out of the fund.
in determining the defined benefit liability; in all other respects, the
undertaking treats that asset in the same way as plan assets.              In determining the expected and actual return on plan assets, an
                                                                           undertaking deducts expected administration costs, other than
If the right to reimbursement arises under an insurance policy that        those included in the actuarial assumptions used to measure the
exactly matches the amount and timing of some or all of the                obligation.
benefits payable under a defined benefit plan, the fair value of the
reimbursement right is deemed to be the present value of the               Business Combinations
related obligation.                                                        In an acquisition, an undertaking recognises assets and liabilities
                                                                           arising from pensions at the present value of the obligation, less the
Return on Plan Assets                                                      fair value of any plan assets.
The expected return on plan assets is one component of the
expense recorded in the income statement.                                  The present value of the obligation includes all of the following,
                                                                           even if the acquiree had not yet recognised them at the date of the
The difference between the expected return and the actual return           acquisition:
on plan assets is an actuarial gain or loss. It is included with the          (i)     actuarial gains and losses that arose before the date of
actuarial gains and losses in determining the net amount that is                      the acquisition whether or not they fell inside the 10%
compared with the limits of the 10% 'corridor'.                                       'corridor'.
                                                                              (ii)    past service cost that arose from benefit changes or the
EXAMPLE-Actuarial gain or loss                                                        introduction of a plan, before the date of the acquisition.
The expected return on your pension plan assets for the year is               (iii)   amounts of assets or liabilities that the acquiree had not
$4m.                                                                                  recognised.
This has been calculated by the actuary and is used to determine
the amount of money that you and your staff need to contribute to          Curtailments and Settlements
the fund in the period to finance the promised benefits.                   An undertaking should recognise gains or losses on the curtailment
                                                                           or settlement of a plan when they occur. The gain or loss on a
The actual return from the plan’s investments is $5m.                      curtailment or settlement should comprise:
The additional $1m $5m-$4m is the actuarial gain for the period.               (i)   any resulting change in the present value of the
The expected return on plan assets is based on market                                obligation.
expectations, at the beginning of the period, for returns over the             (ii)  any resulting change in the fair value of the plan assets.
entire life of the related obligation. The expected return reflects            (iii) any related actuarial gains and losses and past service
                                                                                     cost that had not previously been recognised.
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                                                                                                           IAS 19 Employee benefits
                                                                       Curtailments are often linked with a restructuring. So, an
Before determining the effect of a curtailment or settlement, an       undertaking accounts for a curtailment at the same time as for a
undertaking should remeasure the obligation and the related plan       related restructuring.
assets using current actuarial assumptions including current market
interest rates and prices.                                             A settlement occurs when an undertaking enters into a transaction
                                                                       that eliminates all further obligations for part or all of the benefits
A curtailment occurs when an undertaking either:                       provided under a plan, for example, when a lump-sum cash
   (i)    is demonstrably committed to make a material reduction       payment is made to plan participants in exchange for their rights to
          in the number of staff covered by a plan. or                 receive specified post-employment benefits.
   (ii)   changes the terms of a plan so that a material element of
          future service by current staff will no longer qualify for   In some cases, an undertaking acquires an insurance policy to fund
          benefits, or will qualify only for reduced benefits.
                                                                       some or all of the staff benefits relating to staff service in the current
A curtailment may arise from an isolated event, such as the closing
of a plant, discontinuance of an operation, or termination or          and prior periods.
suspension of a plan. An event is material enough to qualify as a
curtailment if the curtailment gain or loss would have a material
                                                                       EXAMPLE-Settlement
effect on the financial statements.
                                                                       Your pension plan is a defined benefit scheme. You decide that
                                                                       the company must limit its risk in providing the guaranteed
EXAMPLE- Curtailment-closing of a plant                                benefits. An insurance company agrees to run the scheme, with
The closing of a key manufacturing plant has a dramatic impact         no further recourse to the company, for a payment of $1m, plus
on your pension plan. Staff numbers are reduced by 37%.                the transfer of the plan’s assets.
Pensioners have been increased by 4% by early retirement. The
                                                                                                                I/B      DR        CR
company needs to pay an additional $5m to the pension plan to
                                                                       Staff costs- pensions settlement of        I      $1m
fund the resulting actuarial losses.
                                                                       company plan
                                      I/B       DR        CR
                                                                       Cash                                      B                 $1m
Staff costs- pensions curtailment of    I      $5m
                                                                       Recording payment to insurance
company plan
                                                                       company to settle a pension plan
Pension provision                      B                  $5m
Recording       pension       payment
                                                                       The acquisition of such a policy is not a settlement if the
increase for plan curtailment
                                                                       undertaking retains an obligation to pay further amounts, if the
                                                                       insurer does not pay the staff benefits specified.

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                                                                                                            IAS 19 Employee benefits
The termination of a plan is not a curtailment or settlement if the
plan is replaced by a new plan that offers benefits that are, in           Current / Non-current Distinction
substance, identical.                                                      IAS 19 does not specify whether an undertaking should distinguish
                                                                           current and non-current portions of assets and liabilities arising
EXAMPLE-Replacement plan not a settlement nor a                            from post-employment benefits.
curtailment
Your parent company’s pension plan takes over all the obligations          Financial Components of Post-employment Benefit Costs
                                                                           IAS 19 does not specify whether an undertaking should present
of the pension plans of its subsidiaries.
                                                                           current service cost, interest cost and the expected return on plan

                                                                           assets as components of a single item of income or expense on the
The transfers of their obligations and the closure of the individual
plans are not classified as settlements not curtailments.
                                                                           face of the income statement.
Where a curtailment relates to only some of the staff covered by a
plan or where only part of an obligation is settled, the gain or loss      Disclosure
includes a proportionate share of the previously unrecognised past         An undertaking should disclose the following information about
service cost and actuarial gains and losses. It may be appropriate         defined benefit plans:
to apply any gain arising on a curtailment or settlement of the same       a.    the undertaking's accounting policy for recognising actuarial
plan to first eliminate any unrecognised past service cost relating to           gains and losses.
the same plan.                                                             b.    a general description of the type of plan.
                                                                           c.    a reconciliation of opening and closing balances of the
Presentation                                                                     present value of the defined benefit obligation showing
                                                                                 separately, if applicable, the effects during the period
Offset                                                                           attributable to each of the following:
An undertaking should only offset an asset relating to one plan            i.    current service cost,
against a liability relating to another plan when the undertaking:         ii.   interest cost,
   (i)     has a right to use a surplus in one plan to settle              iii.  contributions by plan participants,
           obligations under the other plan                                iv.   actuarial gains and losses,
   (ii)    intends either to settle the obligations on a net basis, or     v.    foreign currency exchange rate changes on plans measured
           to realise the surplus in one plan, and settle its obligation         in a currency different from the undertaking's presentation
           under the other plan simultaneously.                                  currency,
                                                                           vi.   benefits paid,
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                                                                                                               IAS 19 Employee benefits
vii.    past service cost,                                                          between the reimbursement right and the related obligation);
viii.   business combinations,                                                      and
ix.     curtailments and                                                    v.      the other amounts recognised in the balance sheet.
x.      settlements.                                                        g.      the total expense recognised in profit or loss for each of the
d.      an analysis of the defined benefit obligation into amounts                  following, and the line item(s) in which they are included:
        arising from plans that are wholly unfunded and amounts             i.      current service cost;
        arising from plans that are wholly or partly funded.                ii.     interest cost;
e.      a reconciliation of the opening and closing balances of the         iii.    expected return on plan assets;
        fair value of plan assets and of the opening and closing            iv.     expected return on any reimbursement;
        balances of any reimbursement showing separately, if                v.      actuarial gains and losses;
        applicable, the effects during the period attributable to each      vi.     past service cost;
        of the following:                                                   vii.    the effect of any curtailment or settlement; and
i.      expected return on plan assets,                                     viii.   the effect of the limit.
ii.     actuarial gains and losses,                                         h.      the total amount recognised in the statement of recognised
iii.    foreign currency exchange rate changes on plans measured                    income and expense for each of the following:
        in a currency different from the undertaking's presentation         i.      actuarial gains and losses; and
        currency,                                                           ii.     the effect of the limit.
iv.     contributions by the employer,                                      i.      for undertakings that recognise actuarial gains and losses in
v.      contributions by plan participants,                                         the statement of recognised income and expense, the
vi.     benefits paid,                                                              cumulative amount of actuarial gains and losses recognised
vii.    business combinations and                                                   in the statement of recognised income and expense.
viii.   settlements.                                                        j.      for each major category of plan assets, which shall include,
f.      a reconciliation of the present value of the defined benefit                but is not limited to, equity instruments, debt instruments,
        obligation in (c) and the fair value of the plan assets in (e) to           property, and all other assets, the percentage or amount that
        the assets and liabilities recognised in the balance sheet,                 each major category constitutes of the fair value of the total
        showing at least:                                                           plan assets.
i.      the net actuarial gains or losses not recognised in the             k.      the amounts included in the fair value of plan assets for:
        balance sheet);                                                     i.      each category of the undertaking's own financial instruments;
ii.     the past service cost not recognised in the balance sheet;                  and
iii.    any amount not recognised as an asset, because of the               ii.     any property occupied by, or other assets used by, the
        limits;                                                                     undertaking.
iv.     the fair value at the balance sheet date of any                     l.      a narrative description of the basis used to determine the
        reimbursement right recognised as an asset in accordance                    overall expected rate of return on assets, including the effect
        with paragraph 104A (with a brief description of the link                   of the major categories of plan assets.
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                                                                                                          IAS 19 Employee benefits
m.     the actual return on plan assets, as well as the actual return    p.    the amounts for the current annual period and previous four
       on any reimbursement right recognised as an asset.                      annual periods of:
n.     the principal actuarial assumptions used as at the balance        i.    the present value of the defined benefit obligation, the fair
       sheet date, including, when applicable:                                 value of the plan assets and the surplus or deficit in the plan;
i.     the discount rates;                                                     and
ii.    the expected rates of return on any plan assets for the           ii.   the experience adjustments arising on:
       periods presented in the financial statements;                    a.    the plan liabilities expressed either as (1) an amount or (2) a
iii.   the expected rates of return for the periods presented in the           percentage of the plan liabilities at the balance sheet date
       financial statements on any reimbursement right recognised              and
       as an asset in accordance with paragraph 104A;                    b.    the plan assets expressed either as (1) an amount or (2) a
iv.    the expected rates of salary increases (and of changes in an            percentage of the plan assets at the balance sheet date.
       index or other variable specified in the formal or constructive   q.    the employer's best estimate, as soon as it can reasonably
       terms of a plan as the basis for future benefit increases);             be determined, of contributions expected to be paid to the
v.     medical cost trend rates; and                                           plan during the annual period beginning after the balance
vi.    any other material actuarial assumptions used.                          sheet date.
vii.   An undertaking shall disclose each actuarial assumption in
       absolute terms (for example, as an absolute percentage) and       An undertaking should disclose each actuarial assumption in
       not just as a margin between different percentages or other       absolute terms for example, as an absolute percentage and not just
       variables.                                                        as a margin between different percentages or other variables.
o.     the effect of an increase of one percentage point and the
       effect of a decrease of one percentage point in the assumed       A general description of the type of plan is required. Such a
       medical cost trend rates on:                                      description distinguishes, for example, flat salary pension plans
i.     the aggregate of the current service cost and interest cost       from final salary pension plans and from post-employment medical
       components of net periodic post-employment medical costs;         plans. Further detail is not required.
       and
ii.    the accumulated post-employment benefit obligation for            When an undertaking has more than one defined benefit plan,
       medical costs.                                                    disclosures may be made in total, separately for each plan or in
       For the purposes of this disclosure, all other assumptions        such groupings as are considered to be the most useful.
       shall be held constant. For plans operating in a high inflation
       environment, the disclosure shall be the effect of a              It may be useful to distinguish groupings by criteria such as the
       percentage increase or decrease in the assumed medical            following:
       cost trend rate of a significance similar to one percentage
       point in a low inflation environment.                             i.    the geographical location of the plans, for example, by
                                                                               distinguishing domestic plans from foreign plans; or
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                                                                                                         IAS 19 Employee benefits

ii.    whether plans are subject to materially different risks, for    Multi-employer plans are created by a group of employers pooling
       example, by distinguishing flat salary pension plans from       their pension schemes into one scheme to benefit from the
       final salary pension plans and from post-employment             economies of scale and to share the administration costs. The
       medical plans.                                                  scheme may be run by one of the undertakings, an independent
                                                                       pension organisation, or a trades union (if all the beneficiaries are
When an undertaking provides disclosures in total for a grouping of    members of that trade union).
plans, such disclosures are provided in the form of weighted-
averages or of relatively narrow ranges.                               EXAMPLE-Multi-employer plan
                                                                       You set up a pension and disability plan together with other
IAS 19 requires additional disclosures about multi-employer defined
benefit plans that are treated as if they were defined contribution    employers in the same trade. It covers all staff from the firms
plans.
                                                                       involved. Employers pay for their own staff, but share the running
Where required by IAS 24, an undertaking discloses information
about:                                                                 costs of the scheme.
   (i)   related party transactions with post-employment benefit
         plans. and
   (ii)  post-employment benefits for key personnel.
                                                                       If the multi-employer plan is a defined contribution scheme, the
Where required by IAS 37, an undertaking discloses contingent          main challenge is to run the scheme efficiently to provide optimal
                                                                       benefits for the beneficiaries at an acceptable cost to the
liabilities arising from post-employment benefit obligations.          employers. However, having made the agreed contributions, there
                                                                       is no further obligation for the employers.

On the initial adoption of IAS 19, the effect of the change in         If the multi-employer plan is a defined benefit scheme, it will have
accounting policy includes all actuarial gains and losses that arose   all the challenges and costs of a single-employer plan (see defined
in earlier periods, even if they fall inside the 10% 'corridor'.       benefit schemes above). In addition, if there is a deficit,
                                                                       participating undertakings are jointly liable to meet the deficit, so
Multi-employer Plans                                                   there is a risk that each undertaking will have to pay more than their
                                                                       share if one of the employers fails to pay for its portion.
Multi-employer plans are plans other than state plans that pool the
assets contributed by various undertakings and use those assets to     An undertaking should classify a multi-employer plan either as a
provide benefits to staff of undertakings.                             defined contribution plan or a defined benefit plan, according to the
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                                                                                                             IAS 19 Employee benefits
terms of the plan, including any constructive obligation. This            1. Contributions are set at a level that is expected to be sufficient to
differentiation is necessary to determine the accounting treatment.       pay benefits falling due in the same period.
                                                                          2. Future benefits earned during the current period will be paid out
Where a multi-employer plan is a defined benefit plan, an                 of future contributions.
                                                                          3. Staff benefits are determined by the length of their service.
undertaking should account for its proportionate share of the             4. The participating undertakings have no means of withdrawing
                                                                          from the plan without paying a contribution for the benefits earned
obligation, plan assets and costs as for any other defined benefit        by staff up to the date of withdrawal.

plan.                                                                     Such a plan creates actuarial risk for the undertaking. If the cost of
                                                                          benefits earned at the balance sheet date is more than expected,
                                                                          the undertaking will have to either increase its contributions, or
When sufficient information is not available to use defined benefit
                                                                          persuade staff to accept a reduction in benefits. Therefore, such a
accounting for a multi-employer plan that is a defined benefit plan,
an undertaking should:                                                    plan is a defined benefit plan.
   (i)   account for the plan as if it were a defined contribution
         plan                                                             Where sufficient information is available about a multi-employer
                                                                          plan, an undertaking accounts for its share of the defined benefit
   (ii)    disclose:                                                      obligation, plan assets and post-employment benefit cost, in the
           1. the fact that the plan is a defined benefit plan            same way as for other defined benefit plans.
           2. why sufficient information is not available to allow the
              undertaking to account for the plan as a defined            There may be a contractual agreement between the multi-employer
              benefit plan                                                plan and its contributing undertakings that determines how the
                                                                          surplus in the plan will be distributed to the contributing
   (iii)   if a surplus or deficit may affect the amount of future        undertakings (or the deficit funded).
           contributions, disclose in addition:
           (1)     any available information about that surplus or        A contributing undertaking in a multi-employer plan with such an
                   deficit.                                               agreement that accounts for the plan as a defined contribution plan
           (2)     the basis used to determine that surplus or deficit.   shall recognise the asset or liability that arises from the contractual
                   and                                                    agreement and the resulting income or expense in profit or loss.
           (3)     the implications, if any, for the undertaking.

EXAMPLE- Defined benefit multi-employer plan (i)
The plan is financed on a pay-as-you-go basis such that:
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                                                                                                              IAS 19 Employee benefits
EXAMPLE – Defined benefit multi-employer plan (ii)                         State Plans (including all plans run by or for national and local
An undertaking participates in a multi-employer defined benefit plan       governments)
that does not prepare plan valuations on an IAS 19 basis. It               An undertaking should account for a state plan in the same way as
therefore accounts for the plan as if it were a defined contribution       for a multi-employer plan.
plan.
                                                                           Many state plans are funded on a pay-as-you-go basis:
A valuation shows a deficit of $150 million in the plan. The plan has      contributions are set to be sufficient to pay the benefits falling due
agreed under contract a schedule of contributions with the                 in the same period. Future benefits earned during the current period
participating employers in the plan that will eliminate the deficit over   will be paid out of future contributions.
the next five years. The undertaking's total contributions under the
contract are $20 million.                                                  In most state plans, the undertaking has no obligation to pay those
                                                                           future benefits: its only obligation is to pay the contributions as they
The undertaking recognises a liability for the contributions adjusted      fall due. If the undertaking ceases to employ staff who are members
for the time value of money and an equal expense in profit or loss.        of the state plan, it will have no further obligation to pay their
                                                                           benefits.

If not, an undertaking accounts for the plan as if it were a defined       For this reason, state plans are normally defined contribution plans.
contribution plan.
                                                                           Insured Benefits
IAS 37 Provisions requires an undertaking to disclose contingent           An undertaking may pay insurance premiums to fund a post-
liabilities.                                                               employment benefit plan. The undertaking should treat such a plan
                                                                           as a defined contribution plan unless the undertaking will have
EXAMPLES- multi-employer plan: contingent liabilities                      directly or indirectly, an obligation to either:
Contingent liabilities may be:
i     actuarial losses relating to other participating undertakings           (i)    pay the staff benefits directly when they fall due.
      because each undertaking that participates in a multi-
      employer plan shares in the actuarial risks of every other              (ii)   pay further amounts, if the insurer does not pay all future
      participating undertaking.                                                     staff. benefits relating to staff service in the current and
ii    any responsibility under the terms of a plan to finance any                    prior periods.
      shortfall in the plan, if other undertakings cease to
      participate.                                                         If either of the above exceptions as (either a legal or constructive
                                                                           liability) applies, the undertaking will account for the plan as a
                                                                           defined benefit plan.

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                                                                                                          IAS 19 Employee benefits
The payment of fixed premiums under such contracts is the               asset or a liability, so treats such payments as contributions to a
settlement of the staff benefit obligation, rather than an investment   defined contribution plan.
to meet the obligation.
                                                                        Group Plans – Undertakings under Common Control.
Consequently, the undertaking no longer has an asset or a liability.
Therefore, an undertaking treats such payments as contributions to      Plans involving companies in the same group should be accounted
a defined contribution plan.                                            for as individual company plans, rather than multi-employer plans.
EXAMPLE-Plan run by an insurance firm
Your firm has asked an insurance firm to run a pension fund for         EXAMPLE-Group plan, not a multi-employer plan
your staff.                                                             To save costs, your parent company runs a pension plan for staff of
You will pay 8% of salaries and your staff will pay 4%, neither you
nor the staff having any further obligation. The insurance firm will    the parent and its subsidiaries. This should be treated as an
provide regular reports on the results of the fund and provide
pensions according to the returns of the plan’s investments.            individual company plan.
Where an undertaking funds a pension obligation by contributing to
an insurance policy under which the undertaking retains a legal or      Defined benefit plans that share risks between various undertakings
constructive obligation, the undertaking:                               under common control, for example, a parent and its subsidiaries,
                                                                        are not multi-employer plans.
      i. accounts for a qualifying insurance policy as a plan asset;
and                                                                     An undertaking participating in such a plan shall obtain information
                                                                        about the plan as a whole on the basis of assumptions that apply to
      ii. recognises other such insurance policies as                   the plan as a whole. If there is a contractual agreement or stated
reimbursement rights.                                                   policy for charging the net defined benefit cost for the plan as a
                                                                        whole to individual group undertakings, the undertaking shall, in its
Where an insurance policy is in the name of a specified plan
                                                                        separate or individual financial statements, recognise the net
participant or a group of plan participants and the undertaking does    defined benefit cost so charged.
not have any obligation to cover any loss on the policy, the
undertaking has no obligation to pay benefits to the staff and the      If there is no such agreement or policy, the net defined benefit cost
insurer has sole responsibility for paying the benefits.                shall be recognised in the separate or individual financial
                                                                        statements of the undertaking that is legally the sponsoring
The payment of fixed premiums under such contracts is the               employer for the plan. The other group undertakings shall, in their
settlement of the staff benefit obligation, rather than an investment   separate or individual financial statements, recognise a cost equal
to meet the obligation. Thus, the undertaking no longer has an          to their contribution payable for the period.
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                                                                                                              IAS 19 Employee benefits

Participation in such a plan is a related party transaction (see              (i)    immediately, under IAS 8. or
IAS24) for each individual group undertaking. An undertaking shall
therefore, in its separate or individual financial statements, make           (ii)   as an expense on a straight-line basis over up to five
the following disclosures:                                                           years from the date of adoption. If an undertaking
                                                                                     chooses this option, the undertaking should:
 i. the contractual agreement or stated policy for charging the net                  1. apply the limit in measuring any asset recognised in
 defined benefit cost or the fact that there is no such policy.                         the balance sheet.
                                                                                     2. disclose at each balance sheet date: (i) the amount of
 ii. the policy for determining the contribution to be paid by the                      the increase that remains unrecognised. and (ii) the
 undertaking.                                                                           amount recognised in the current period.

 iii. if the undertaking accounts for an allocation of the net defined               3. not recognise future actuarial gains until the
 benefit cost in, all the information about the plan as a whole as a                    transitional liability has been fully funded.
 defined benefit plan.
                                                                                     4. include the related part of the unrecognised
4. Adoption of IAS 19                                                                   transitional liability in determining any subsequent
On first adopting IAS 19, an undertaking should determine its                           gain or loss on settlement or curtailment.
transitional liability for defined benefit plans at that date as:
                                                                           If the transitional liability is less than the liability that would have
       (i)     the present value of the obligation at the date of          been recognised at the same date under the previous accounting
               adoption.                                                   policy, the undertaking should recognise that decrease immediately
                                                                           under IAS 8.
       (ii)    minus the fair value, at the date of adoption, of plan
               assets (if any) out of which the obligations are to be      On the initial adoption of IAS 19, the effect of the change in
               settled directly,                                           accounting policy includes all actuarial gains and losses that arose
                                                                           in earlier periods even if they fall inside the 10% ‘corridor'.
       (iii)   minus any past service cost that should be recognised
               in later periods.                                           Sample note: Express Dairies plc Report and Accounts 2003
                                                                           (extract)
If the transitional liability is more than the liability that would have   23. Pension commitments and other post retirement benefits
been recognised at the same date under the previous accounting
policy, the undertaking should make an irrevocable choice to               The group operates a defined benefit scheme (‘the Express
recognise that increase as part of its defined benefit liability:          Scheme’) providing members with benefits based on pay and
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                                                                                                     IAS 19 Employee benefits
service. This scheme was closed to new entrants at the end of                                %
January 2002.                                                                          Discount rate
                                                                                            6.25
The assets of the Express Scheme are held in trustee administered        Rate of increase in pensionable earnings
funds, separate from the finances of the company. The group also                            3.75
operates a defined contributions (‘stakeholder’) scheme for all                        Price inflation
members who joined after January 2002.                                                       2.5

The most recent valuation of the Express Scheme was carried out     Assets were valued at their market value.
as at 31 March 2002 when the market value of the Express
Scheme’s assets was £310.0m. These assets represented 83% of        The additional disclosures are set out below:
the value of accrued benefits allowing for future increases in      The information required for disclosure is based on the most recent
earnings.                                                           actuarial valuation as at 31 March 2002 and uses the projected unit
                                                                    method. The following financial assumptions have been used to
Employer contributions to the Express Scheme for the 10 months to   calculate liabilities.
31 January 2003 were 12% of pensionable earnings for existing
members at 1 April 2000 and 14.33% of pensionable earnings for                                                  2003      2002
new members joining the Express Scheme after that date.                                                           %         %
                                                                    Discount rate                                 5.5        6.0
With effect from 1 February 2003, the benefits payable under the    Salary increases                             3.25       3.75
Express Scheme were changed and from that date employer             Price inflation                               2.0        2.5
contributions for all members have been paid at 9.5% of
                                                                    Pension increases in payment                  2.0        2.5
pensionable pay. Additional payments of
                                                                    Pension increases in deferment                3.0        3.0
£6.3m were also made by the group in the year to 31 March 2003.
                                                                    The assets in the Express Scheme and the expected rate of return
The charge to the income statement in the current year in respect
                                                                    were:
of the Express Scheme was £12.6m (2002: £10.1m). The charge in
respect of the stakeholder scheme was £0.1m (2002: £nil).
                                                                                                     Long term
The pension cost relating to the Express Scheme was assessed in                                     rate of return      Value    Value
accordance with the advice of an independent qualified actuary                                        expected
using the projected unit method. The most significant assumptions                                  2003        2002     2003       2002
adopted as at 1 April 2002 were as follows:                                                         %           %        £m         £m
                                                                    Equities                         7.75        7.75   181.5      246.6
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                                                                                                         IAS 19 Employee benefits
Gilts and bonds                    4.70        5.36     29.2    34.0                                                                   £m
Property                           6.30        6.45     23.7    21.8   Actual return less expected return on assets (38.6%             (94.2)
Cash                               3.50        4.50      9.4     6.8   of scheme assets)
Other                              7.32        7.32        -     4.4   Experience gains and losses (4.3% of scheme                     (17.3)
Total market value of                                  243.8   313.6   liabilities)
assets                                                                 Change in assumptions                                           (10.8)
Present value of scheme                              (399.6) (356.1)   Actuarial loss recognised in STRGL (30.6% of                   (122.3)
liabilities                                                            scheme liabilities)
Deficit in the scheme                                (155.8) (42.5)    Analysis of movement in deficit during the year is as
Related deferred tax asset                              46.7    12.8   follows:
Net pension liability                                (109.1) (29.7)                                                                     £m
An analysis of the defined benefit cost of the Express Scheme for      Deficit at the start of the year                                (42.5)
the year ended 31 March 2003 is as follows:                            Movement in the year:
                                                                       Current service cost                                             (7.8)
                                          £m                           Contributions                                                     14.9
Current service cost                            (7.8)                  Financing credit                                                   1.9
Past service cost                                   -                  Actuarial loss                                                 (122.3)
Total operating charge                          (7.8)                  Deficit at the end of the year                                 (155.8)
Expected return on assets                        22.8                  Reconciliation to the balance sheet:
Interest on pension liabilities                (20.9)                  Fair value of assets                                             243.8
Total financing credit                            1.9                  Actuarial value of liabilities                                 (399.6)
Net income statement charge                     (5.9)                  Liability recognised in the balance sheet (before              (155.8)
                                                                       deferred tax credit)
As the Express Scheme is closed to new members, the current
service cost under the projected unit method can be expected to        The group also provides medical benefits for staff who retired
increase as members age and approach retirement.                       before 31 March 1999. The present value of these liabilities is not
                                                                       materially different to the provision shown in note 20. (end of note)
alysis of amount recognised in the Statement of Total Recognised
                                                                       5. Multiple choice questions
Gains and Losses (STRGL) is as follows:



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                                                                                                           IAS 19 Employee benefits
1. Termination benefits relate to :                                                    3   (i)-(iii)
      (i)    a commitment to terminate employment before the
             normal retirement date                                      5. IAS 19 requires an undertaking to record:
      (ii)   a commitment to accept voluntary redundancy in                     (i)    A liability when staff has provided service for benefits
             exchange for benefits                                              to be paid in the future.
      (iii)  pensions                                                           (ii)   An expense when the service is provided.
      (iv)   post-retirement medical benefits                                   (iii)  The names of the staff involved.
                                                                                       1. (i)
              1.   (i)                                                                 2. (i)-(ii)
              2.   (i)-(ii)                                                            3. (i)-(iii)
              3.   (i)-(iii)
              4.   (i)-(iv)                                              6. Staff includes:
                                                                                1. Those who provide services on a full-time, part-time,
2. An undertaking is committed to a termination:                                    permanent, casual or temporary basis.
      1. When the directors have made a decision.                               2. Directors and other management personnel.
      2. When there has been a public announcement.                             3. Workers of outsourced services.
      3. When it has a detailed formal plan for the termination and                    1. (i)
         the plan is without realistic possibility of withdrawal.                      2. (i)-(ii)
                                                                                       3. (i)-(iii)
3. Where termination benefits fall due more than 12 months
after the balance sheet date:
       1. They should be discounted to present value.
       2. They should be ignored.
       3. They should be excluded form staff costs.

4. Equity compensation benefits are staff benefits include
transactions where:
        (i) Staff are entitled to receive shares of the undertaking or
        its parent.
        (ii) The obligation depends on the future price of shares of
        the undertaking.
         (iii) Shareholders are awarded bonus shares.
                 1 (i)
                 2 (i)-(ii)
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                                                                                                         IAS 19 Employee benefits
7. Short-term staff benefits include items such as:                        (iv)   Profit-sharing and bonuses payable twelve months or
    (i)     Salaries and social security contributions.                           more after the end of the period in which the staff render
    (ii)    Short-term paid absences such as paid annual leave                    the related service.
          and paid sick leave where the absences are expected to           (v)    Deferred compensation paid twelve months or more after
          occur within twelve months after the end of the period in               the end of the period in which it is earned.
          which the staff render the related staff service                 (vi)   Pensions.
    (iii)  Profit-sharing and bonuses payable within twelve months                   1.     (i)
          after the end of the period in which the staff render the                  2.     (i)-(ii)
          related service. and                                                       3.     (i)-(iii)
    (iv)    Non-cash benefits such as medical care, housing, cars                    4.     (i)-(iv)
          and free or subsidised goods or services for current staff.                5.     (i)-(v)
    (v)   Pensions.                                                                  6.     (i)-(vi)
              1. (i)
              2. (i)-(ii)                                               10. IAS 19 requires a simplified method of accounting for other
              3. (i)-(iii)                                              long-term staff benefits which differs from the accounting
              4. (i)-(iv)                                               required for post-employment benefits as follows:
              5. (i)-(v)                                                    (i)   Actuarial gains and losses are recognised immediately
                                                                                  and no 'corridor' is applied.
8. An undertaking should recognise the expected cost of                    (ii)    All past service cost is recognised immediately.
profit-sharing and bonus payments when the following apply:                (iii)  No discounting to present value is used.
    (i)The undertaking has a present legal or constructive obligation      (iv)   Liabilities are shown as short-term.
    to make such payments as a result of past events.
    (ii)_A reliable estimate of the obligation can be made.                          1.     (i)
    (iii) A reliable estimate of the obligation cannot be made.                      2.     (i)-(ii)
                 1.     (i)                                                          3.     (i)-(iii)
                 2.     (i)-(ii)                                                     4.     (i)-(iv)
                 3.     (i)-(iii)

9. Other long-term staff benefits include, for example:

   (i)      Long-term paid absences such as long-service or
            sabbatical leave.
    (ii)    Long-service benefits.
    (iii)   Long-term disability benefits.
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                                                                                                   IAS 19 Employee benefits
11. For other long-term staff benefits, an undertaking should                1.   Are recognised as an expense immediately.
recognise the net total of the following amounts as expense or               2.   Should be included in pension figures.
income or in the cost of an asset:                                           3.   Should be included in short-term benefits.
   (i)    Current service cost.
   (ii)   Interest cost.                                            14. Multi-employer pension schemes are:
   (iii)  The expected return on any plan assets and on any                   1. Defined contribution schemes.
          reimbursement right such as insurance recognised as an              2. Defined benefit schemes.
          asset.                                                              3. Either.
   (iv)   Actuarial gains and losses, which should all be
          recognised immediately.                                   15. Most state pension schemes are:
   (v)    Past service cost, which should all be recognised                  1. Defined contribution schemes.
          immediately.                                                       2. Defined benefit schemes.
   (vi)   The effect of any curtailments or settlements.                     3. Either.
              1.    (i)
              2.    (i)-(ii)                                        16. Actuaries are needed for:
              3.    (i)-(iii)                                             1. Defined benefit schemes.
              4.    (i)-(iv)                                              2. State schemes.
              5.    (i)-(v)                                               3. Insured benefits funds.
              6.    (i)-(vi)                                              4. Defined contribution schemes.
                                                                                 1.    (i)
12. A detailed plan for termination benefits should include as a                 2.    (i)-(ii)
minimum:                                                                         3.    (i)-(iii)
   (i)    The location, function and approximate number of staff                 4.    (i)-(iv)
          whose services are to be terminated.
   (ii)   The termination benefits for each job classification or
          function.
   (iii)  The timing the implementation.
   (iv)   Staff names.
             1.     (i)
             2.     (i)-(ii)
             3.     (i)-(iii)
             4.     (i)-(iv)

13. Termination benefits:
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                                                                                                             IAS 19 Employee benefits
                                                                                      in bankruptcy and cannot be returned to the reporting
17. A qualifying insurance policy is a policy:                                        undertaking unless:
   (i)   Where the proceeds of the policy can be used only to                         a. the remaining assets of the fund are sufficient to meet
         finance staff benefits under a defined benefit plan                              the obligations of the plan or the undertaking
   (ii)  Where the proceeds of the policy are not available to the                    b. the assets are returned to the undertaking to
         undertaking's own creditors even in bankruptcy and                               reimburse it for benefits already paid.
         cannot be paid to the undertaking, unless either:                    (iii)   Any other assets.
         a. the proceeds represent surplus assets that are not                            1.    (i)
             needed for benefit obligations.                                              2.    (i)-(ii)
         b. the proceeds are returned to the undertaking to                               3.    (i)-(iii)
             reimburse it for benefits already paid.
                                                                           21. Defined benefit plans may be:
   (iii)   Provided by a related party.                                                 (i)   Unfunded.
              1.    (i)                                                                 (ii)  Partly funded.
              2.    (i)-(ii)                                                            (iii) Wholly funded.
              3.    (i)-(iii)                                                           1.    (i)
                                                                                        2.    (i)-(ii)
18. Past service cost:                                                                  3.    (i)-(iii)
      1. Is the increase in the present value of the obligation for
          employee service in prior periods.                               22. Interest cost is:
      2. Is the employment cost for previous years.                               1.      The increase during a period in the present value of
      3. Can only be positive.                                                            an obligation that arises because the benefits are
                                                                                          one period closer to settlement.
19. Vested staff benefits:                                                        2.      Finance charges incurred by the pension fund.
      1. Are benefits that are conditional on future employment.                  3.      Finance charges paid by the company for late
      2. Are benefits that are not conditional on future                                  payment.
         employment.
      3. Either 1 or 2.                                                    23. Actuarial gains and losses comprise:
                                                                              (i)   Experience adjustments which are the differences
20. Assets held by a long-term fund are assets that:                                between actuarial assumptions and what has actually
    (i)     are held by a fund that exists solely to finance staff                  occurred.
            benefits.                                                         (ii)  Changes in actuarial assumptions.
    (ii)    are available to be used only to pay or fund staff benefits,      (iii) Gains and losses made by the investments of the
            are not available to the undertaking's own creditors even               actuary.
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                                                                                                        IAS 19 Employee benefits
            1.    (i)                                                             1. Three years.
            2.    (i)-(ii)                                                        2. Five years.
            3.    (i)-(iii)                                                       3. Ten years.
24. Under defined benefit plans:
                                                                        27. Your parent company runs a pension plan for staff of the
       (i)     The undertaking's obligation is to provide the agreed
                                                                        parent and subsidiaries. This should be treated as:
               benefits to current and former staff.
       (ii)    Actuarial risk and investment risk fall on the
               undertaking. If actuarial or investment returns are            1. An individual company plan.
               worse than expected, the undertaking's obligation will         2. A multi-employer plan.
               be increased.                                                  3. A state plan.
       (iii)   The undertaking has to provide long-term medical
               benefits.                                                28. An undertaking may pay insurance premiums to fund a
               1.     (i)                                               post-employment benefit plan. The undertaking should
               2.     (i)-(ii)                                          normally treat such a plan as a:
               3.     (i)-(iii)                                               1. Defined contribution plan.
                                                                              2. Defined benefit plan.
                                                                              3. Multi-employer plan.
                                                                              4. State plan.
25. The ‘10% corridor’ is the net cumulative actuarial gains
and losses that exceed the ?????? of:                                   29. The payment of benefits of a defined benefit plan depends
             (i)    10% of the present value of the defined             on:
                    benefit obligation before deducting plan                        (i)   The financial position of the fund.
                    assets.                                                         (ii)  The investment performance of the fund.
             (ii)   10% of the fair value of any plan assets.                       (iii) An undertaking's ability and willingness to
The missing word is:                                                                      provide additional money for any shortfall in the
   1. greater                                                                             fund's assets.
   2. lesser                                                                        1.    (i)
   3. average                                                                       2.    (i)-(ii)
                                                                                    3.    (i)-(iii)
26. On first adopting IAS 19, an undertaking may recognise
any resulting increase in its liability for post-employment
benefits over not more than:
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                                                                                                          IAS 19 Employee benefits
30. For a defined benefit plan, the undertaking must:                  32. For a defined benefit plan, an undertaking should
                                                                       recognise the net total of the following amounts as expense or
                                                                       income:
       (i)     Determine the fair value of any plan assets.
       (ii)    Determine the total amount of actuarial gains and
                                                                             (i)     Current service cost.
               losses and the amount of those actuarial gains and
                                                                             (ii)    Interest cost.
               losses that should be recognised.
                                                                             (iii)   The expected return on any plan assets and on any
       (iii)   Where a plan has been introduced or changed,
                                                                                     reimbursement rights.
               determine the resulting past service cost.
                                                                             (iv)    Actuarial gains and losses.
       (iv)    Where a plan has been curtailed or settled, determine
                                                                             (v)     Past service cost.
               the resulting gain or loss.
                                                                             (vi)    The effect of any curtailments or settlements.
       (v)     Write the actuarial report.
                                                                             (vii)   Contributions refunded to the company.
               1.     (i)
                                                                                     1.     (i)
               2.     (i)-(ii)
                                                                                     2.     (i)-(ii)
               3.     (i)-(iii)
                                                                                     3.     (i)-(iii)
               4.     (i)-(iv)
                                                                                     4.     (i)-(iv)
               5.     (i)-(v)
                                                                                     5.     (i)-(v)
                                                                                     6.     (i)-(vi)
31. The amount recognised as a defined benefit liability,
                                                                                     7.        (i)-(vii)
should be the net total of the following amounts:
      (i)   the present value of the obligation at the balance
                                                                       33. The discount rate reflects the time value of money but not:
            sheet date.
      (ii)  plus any actuarial gains less any actuarial losses not
            recognised.                                                              (i)     The actuarial or investment risk.
      (iii) minus any past service cost not yet recognised.                          (ii)    The undertaking-specific credit risk borne by
      (iv)  minus the fair value at the balance sheet date of plan                           the undertaking's creditors.
            assets if any out of which the obligations are to be                     (iii)   The risk that future experience may differ from
            settled directly.                                                                actuarial assumptions.
            1.     (i)                                                               1.      (i)
            2.     (i)-(ii)                                                          2.      (i)-(ii)
            3.     (i)-(iii)                                                         3.      (i)-(iii)
            4.     (i)-(iv)



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                                                                                                         IAS 19 Employee benefits
34. An undertaking should recognise past service cost as an                           2.    (i)-(ii)
expense:                                                                              3.    (i)-(iii)
      1. Immediately.                                                                 4.    (i)-(iv)
      2. On a straight-line basis over the average period until the
         benefits become vested.                                         38. The gain or loss on a curtailment or settlement should
      3. Deferred until pensions are paid.                               comprise:
                                                                               (i)    Any resulting change in the present value of the
35. Where plan assets include qualifying insurance policies                           obligation.
that exactly match the amount and timing of some or all of the                 (ii)   Any resulting change in the fair value of the plan
benefits payable under the plan, the fair value of those                              assets.
insurance policies is deemed to be:                                            (iii)  Any related actuarial gains and losses and past
       1. Nil.                                                                        service cost that had not previously been recognised.
       2. The present value of the related obligations.                        (iv)   Any administration cost.
       3. Half of the present value of the related obligations.                       1.     (i)
                                                                                      2.     (i)-(ii)
36. The difference between the expected return and the actual                         3.     (i)-(iii)
return on plan assets is:                                                             4.     (i)-(iv)
      1. An actuarial gain or loss.
      2. Ignored.                                                        39. A curtailment may arise from an isolated event, such as:
      3. Repaid to the company.                                                       (i)   The closing of a plant.
                                                                                      (ii)  Discontinuance of an operation.
37. Business combinations. The present value of the obligation                        (iii) Termination of a plan.
includes all of the following, even if the acquiree had not yet                       (iv)  Suspension of a plan.
recognised them at the date of the acquisition:                                       (v)   Replacement of the plan with a new, similar
        (i)     Actuarial gains and losses that arose before the date                       plan.
                of the acquisition whether or not they fell inside the                1.    (i)
                10% 'corridor'.                                                       2.    (i)-(ii)
        (ii)    Past service cost that arose from benefit changes or                  3.    (i)-(iii)
                the introduction of a plan, before the date of the                    4.     (i)-(iv)
                acquisition.                                                          5.    (i)-(v)
        (iii)   Amounts of assets or liabilities that the acquiree had
                not recognised.
        (iv)    Goodwill.
                1.     (i)
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                                                                                                      IAS 19 Employee benefits
40. On first adopting IAS 19, an undertaking should determine                       2.    (i)-(ii)
its transitional liability for defined benefit plans at that date as:               3.    (i)-(iii)
       (i)    the present value of the obligation at the date of
              adoption.
       (ii)   minus the fair value, at the date of adoption, of plan    6. Answers to multiple choice questions
              assets if any out of which the obligations are to be
              settled directly.                                         Question     Answer
       (iii)  minus any past service cost that should be recognised     1.             2
              in later periods.                                         2.             3
              1.      (i)                                               3.             1
              2.      (i)-(ii)                                          4.             2
              3.      (i)-(iii)                                         5.             2
                                                                        6.             2
41. If the transitional liability is more than the liability that       7.             4
would have been recognised at the same date under the                   8.             2
previous accounting policy, the undertaking should make an
                                                                        9.             5
irrevocable choice to recognise that increase as part of its
                                                                        10.            2
defined benefit liability:
                                                                        11.            6
                                                                        12.            3
   (i)      Immediately, under IAS 8.
   (ii)     As an expense on a straight-line basis over up to five      13.            1
           years from the date of adoption. If an undertaking           14.            3
           chooses this option, the undertaking should:                 15.            1
                                                                        16.            3
           1.       apply the limit in measuring any asset recognised   17.            2
           in the balance sheet.                                        18.            1
                                                                        19.            2
           2.     disclose at each balance sheet date: 1 the            20.            2
           amount of the increase that remains unrecognised. and 2      21.            3
           the amount recognised in the current period.                 22.            1
                                                                        23.            2
   (iii)     Defer the expense until the scheme is curtailed or         24.            2
            settled.                                                    25.            1
                1.     (i)                                              26.            2
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                                                                                 IAS 19 Employee benefits
27.                 1
28.                 1
29.                 3
30.                 4
31.                 4
32.                 5
33.                 3
34.                 2
35.                 2
36.                 1
37                  3
38                  3
39                  4
40                  3
41                  2




Note: Material from the following PricewaterhouseCoopers publications has been
used in this workbook:

-Applying IFRS
-IFRS News
-Accounting Solutions




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