AASB 119 'Employee Benefits' Summary

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					          AASB 119 ‘Employee Benefits’ Summary

OVERVIEW
AASB 119 replaces the current AASB 1028 ‘Employee Benefits’ with additional
recognition, measurement and disclosure requirements relating to defined benefit
superannuation plans.

AASB 119 differs from AASB 1028 in the following key areas:

•   AASB 119 applies to all employee benefits provided by an employer (entity).1
    AASB 1028 excludes those post-employment benefits that are superannuation or
    medical benefits from its scope, other than disclosures for defined benefit
    superannuation plans (such as the GESB Pension and Gold State Superannuation
    schemes). These post-employment benefits are currently accounted for under
    existing GAAP, such as SAC 4 and other guidance;

•   Post-employment benefits (particularly the recognition, measurement and
    disclosures concerning defined benefit superannuation plans) are specifically
    covered under the scope of AASB 119;

•   Those employee benefits, such as wages and salaries, annual leave, sick leave and
    non-monetary benefits, that are payable 12 months or more after the end of the
    reporting period are to be measured on a discounted basis rather than at nominal
    amounts;

•   AASB 119 uses the terms “short-term” and “long-term” in the context of
    recognition and measurement of employee benefits and does not distinguish
    between “current” and “non-current” for presentation purposes. AASB 101
    ‘Presentation of Financial Statements’ requires assets and liabilities to be classified
    as current and non-current subject to defined criteria.              Consequently, all
    unconditional leave entitlements (such as annual leave and unconditional long
    service leave) would be classified as current liabilities in the balance sheet. Subject
    to materiality, this would also include pre-conditional and conditional long service
    leave expected to become unconditional within twelve months of the reporting
    date. AASB 1028 required the identification of current and non-current portions for
    employee benefits recognised in the financial statements; and

•   The Australian Guidance accompanying AASB 119 on employee on-costs, such as
    payroll tax and workers’ compensation insurance, mentions that these on-costs are
    not employee benefits and should not be classified as such. Superannuation
    contributions are regarded as employee benefits and are not on-costs. To the extent
    that it is expected that settlement of leave will give rise to the payment of

1 Employee benefits provided under AASB 2 ‘Share-based Payment’ are excluded from the scope of AASB 119. Also,
this summary does not discuss equity compensation benefits and profit sharing and bonus plans, as these benefits have
a limited impact on the public sector.
       superannuation contributions, these contributions should be accrued as part of the
       provision for leave.

It is worth noting that the discount rate to be used in measuring long-term employee
benefit liabilities shall be by reference to market yields on government bonds.2

AASB 119 is expected to impact on those agencies that separately recognise unfunded
defined benefit superannuation liabilities and agencies that currently recognise certain
long-term employee benefits on an undiscounted basis. Those agencies that are
required to recognise superannuation liabilities in their balance sheets will be subject to
more extensive financial reporting requirements than under existing GAAP and
AASB 1028. There will be no financial reporting impact on superannuation regarding
departments and budget funded statutory authorities that have their superannuation
liabilities assumed by the Treasurer.


INTRODUCTION
AASB 119 replaces the current AASB 1028 ‘Employee Benefits’ with additional
recognition, measurement and disclosure requirements relating to defined benefit
superannuation plans.

The objective of AASB 119 is to prescribe the accounting and disclosure requirements
for employee benefits provided by an employer (entity).

The key differences between current AASB 1028 and AASB 119 is in relation to the
recognition, measurement and disclosures of post-employment benefits, together with
some aspects of disclosures concerning equity-based compensation benefits.3 There are
also some changes surrounding the measurement of employee benefits such as wages
and salaries, annual leave, sick leave and non-monetary benefits that are payable 12
months or more after the end of a reporting period.            Australian Guidance
accompanying AASB 119 has been introduced clarifying that employee on-costs are not
employee benefits and should not be classified as such. Superannuation contributions
are regarded as employee benefits and are not on-costs.

It is worth noting that the discount rate to be used in measuring long-term employee
benefit liabilities shall be by reference to market yields on government bonds.4

AASB 119 addresses the broad categories of employee benefits arising from short-term
employee benefits (payable within 12 months), post-employment benefits (payable
after the completion of employment), other long-term employee benefits (payable later
than 12 months) and termination benefits.

AASB 119 uses the terms “short-term” and “long-term” in the context of recognition
and measurement of employee benefits and does not distinguish between “current”
and “non-current” for presentation purposes. AASB 101 ‘Presentation of Financial

2   The AASB has included a paragraph in AASB 119 clarifying the appropriate discount rate to be used.
3   Not discussed in this summary.
4   The AASB has included in AASB 119 (paragraph Aus78.1) clarifying the appropriate discount rate to be used.



AASB 119                                                                                                     2 of 16
Statements’ requires assets and liabilities to be classified as current and non-current
subject to defined criteria. Consequently, all unconditional leave entitlements (such as
annual leave and unconditional long service leave) would be classified as current
liabilities in the balance sheet. Subject to materiality, this would also include pre-
conditional and conditional long service leave expected to become unconditional
within twelve months of the reporting date. AASB 1028 required the identification of
current and non-current portions for employee benefits recognised in the financial
statements.


APPLICATION DATE
AASB 119 will apply from the first annual reporting period beginning on or after
1 January 2005.


TRANSITIONAL ISSUES
All first-time adopters must follow the provisions of AASB 1 ‘First-time Adoption of
Australian Equivalents to International Financial Reporting Standards’.

Under AASB 1, agencies with a 30 June year-end must produce an opening balance
sheet at 1 July 2004 (unpublished) that is compliant with Australian Equivalents to
International Financial Reporting Standards (IFRSs).

Employee on-costs are not employee benefits and will need to be classified as part of
other provisions in the opening IFRS balance sheet.


KEY DIFFERENCES                            FROM           THE        EXISTING             AUSTRALIAN
STANDARD

Scope

The current AASB 1028 prescribes the recognition and measurement requirements for
employee benefits, other than certain equity-based compensation benefits and
post-employment benefits that are superannuation or medical benefits. Employees are
defined as ‘natural persons’ (including a director) and, in respect of public sector
entities, include elected representatives. The recognition and measurement of defined
benefit superannuation plans are currently accounted for under existing GAAP, such
as SAC 4 and other guidance.

AASB 119 prescribes the accounting treatment and disclosure requirements for
employee benefits provided by an employer (entity) to an employee.5 Employees
include individual employees or their dependants, directors and other management
personnel.



5   Employee benefits provided under AASB 2 ‘Share-based Payment’ are excluded from the scope of AASB 119.



AASB 119                                                                                                 3 of 16
Although there are differences in scope between the two standards, the outcome from a public
sector perspective is the same.

Short-term Employee Benefits

Measurement

AASB 1028 requires wages and salaries, non-monetary benefits, annual leave and sick
leave to be measured at nominal amounts regardless of whether they are expected to
be settled within 12 months or otherwise.

AASB 119 defines short-term employee benefits as employee benefits (other than
termination benefits) that fall due wholly within 12 months after the end of the period
in which the employee rendered services in exchange for those benefits. Short-term
employee benefits include items such as wages, salaries, compensated absences (paid
annual leave and paid sick leave), and non-monetary benefits (such as medical care,
housing, cars and free or subsidised goods or service) for current employees.
Liabilities for all short-term employee benefits are measured at nominal amounts.

However, where wages and salaries, non-monetary benefits, annual leave and sick
leave are expected to be settled beyond 12 months after the reporting date they are to
be measured on a present value (PV) basis (also refer to the section on ‘Other Long-
term Employee Benefits’).

The measurement of wages and salaries including non-monetary benefits, annual leave and sick
leave expected to be settled beyond 12 months of the previous reporting date may require
agencies to make adjustments to their reported values at the date of transition to Australian
equivalents to IFRSs.

Flexi leave that is banked, but does not vest to the employee and is not paid on
termination, resignation or transfer to another agency is a form of short-term
compensated absence that has an accumulating component and a non-accumulating
component (i.e. excess hours over the set ceiling are lost). Subject to materiality,
agencies with this type of employee entitlement would be required to recognise and
measure the liability under AASB 119.

It is worth noting that AASB 119 provides an example illustrating the way in which
accumulating non-vesting sick leave is recognised and measured. This example may
also be applied by analogy to flexi leave that is banked.

Disclosure

AASB 119 (paragraph 23) does not specifically require disclosures regarding short-term
employee benefits, however AASB 101 ‘Presentation of Financial Statements’ requires
the disclosure of ‘employee benefits expense’.




AASB 119                                                                             4 of 16
Commentary

There is detailed commentary on the different types of non-monetary benefits in the
current AASB 1028, paragraphs 4.2.2 to 4.2.4 and has been carried over to accompany
AASB 119 as Australian Guidance (see paragraphs G1 to G3).

The AASB has introduced Australian Guidance (see paragraph G15) to accompany
AASB 119 relating to non-salary components being included in measuring employee
benefit liabilities. The example given is in relation to leave liability where in measuring
the liability employer superannuation contributions would be included (to the extent
that they are not otherwise recognised as a liability). Superannuation contributions are
regarded as employee benefits and are not on-costs.

The AASB has also introduced Australian Guidance (see paragraphs G16 and G17) to
accompany AASB 119 on employee benefit on-costs. The effect of the guidance is that
these on-costs are not employee benefits and accordingly should not be included as
part of an entity’s ‘employee benefits expense’. The guidance encourages entities to
separately disclose these on-costs to assist users in calculating the total employee
expense. By implication the liability for these on-costs should not be included in the
entity’s employee benefit liabilities.

Long-term Employee Benefits - Post-Employment Benefits: General

A key difference between the current AASB 1028 and AASB 119 is that AASB 1028
does not prescribe recognition requirements for post-employment benefits that are
superannuation benefits. AASB 119 contains extensive recognition and measurement
requirements for superannuation plans that are classified as defined benefit plans.
AASB 119 also prescribes more extensive disclosure requirements for defined benefit
superannuation plans than is required under the current AASB 1028.

An agency that provides post-employment benefits is to apply AASB 119 to all such
arrangements whether or not they involve the establishment of a separate entity to
receive contributions and to pay benefits.

Distinction between Defined Contribution Plans and Defined Benefit Plans

The current AASB 1028 requires disclosures for defined benefit superannuation plans
sponsored by the employer.

AASB 119 distinguishes between superannuation plans that are to be classified as
either defined contribution plans or defined benefit plans. This classification is further
distinguished in the context of ‘multi-employer plans’ and ‘state plans’ (see
paragraphs 29 to 42). The GESB schemes are ‘state plans’ and must be accounted for in
the same way as a ‘multi-employer plan’ (see paragraph 36). The classification of a
plan in this context determines whether defined benefit accounting or defined
contribution accounting is used together with any related disclosure requirements.
There is also a qualifying exemption for ‘multi-employer plans’ and ‘state plans’ that




AASB 119                                                                           5 of 16
are defined benefit plans where sufficient information is not available to use defined
benefit accounting (see paragraph 30).

AASB 119 requires post-employment benefit plans to be classified as either defined
contribution plans or defined benefit plans, depending on their economic substance
(paragraph 25).

The accounting treatment for defined contribution plans is the same as the existing
treatment under GAAP.

The accounting treatment for defined benefit plans is more complex and will impact on
those agencies that recognise these types of plan in their statement of financial position
(balance sheet). The difference in treatment from existing GAAP relates to the
underlying methodology in arriving at the net superannuation liability to be
recognised in the balance sheet. The disclosure requirements in AASB 119 are more
extensive than under AASB 1028 for defined benefit superannuation plans (see
paragraphs 120 to 125).

Post-Employment Benefits: Defined Contribution Plans

In AASB 119, defined contribution plans are defined as, ‘post-employment benefit
plans under which an entity pays fixed contributions into a separate entity (a fund)
and will have no legal or constructive obligation to pay further contributions if the
fund does not hold sufficient assets to pay all employee benefits relating to employee
service in the current and prior periods.’         Generally an accumulation type
superannuation scheme, such as the GESB West State Super scheme (WSS) is classified
as a defined contribution scheme as there is no further obligation to the agency once
the contribution has been paid to the fund.

The GESB Gold State Super scheme (GSS) is classified as a defined benefit scheme at
the overall plan and whole of government levels. However, at an agency level the GSS
possesses aspects of both defined contribution and defined benefit plans under the
terms of the scheme. This ‘hybrid’ plan (from an agency perspective, where
applicable) can be divided into two components: the defined contribution component
and the defined benefit component (i.e. pre-transfer benefit - see below under the
heading of ‘Post-Employment Benefits: Defined Benefit Plans’). Those agencies that
concurrently fund the GSS have no further obligation to those employees (past and
present) because any actuarial risk or investment risk is borne by the state government
centrally. Under this circumstance these agencies would classify that component of the
GSS as a defined contribution plan.

Recognition and Measurement

The accounting treatment for defined contribution plans under AASB 119 is to
recognise a contribution payable (measured on an undiscounted basis) to the plan.
This is determined when an employee renders service to an employer (agency) during
a period in exchange for that service. The agency recognises an expense in the income
statement.



AASB 119                                                                          6 of 16
This is consistent with current reporting requirements for defined contribution plans.

Disclosure

AASB 119 requires the disclosure of the amount recognised as an expense for defined
contribution plans.

Post-Employment Benefits: Defined Benefit Plans

In AASB 119, defined benefit plans are defined as, ‘post-employment benefit plans
other than defined contribution plans.’ An example of a defined benefit scheme is the
GESB Pension scheme, where there is an obligation on an agency and at whole of
government level to fund any shortfall in meeting the employee benefits when they are
due and payable.

The GSS is a defined benefit scheme at the overall plan and whole of government
levels. At an agency level the GSS can be separated into two components (as discussed
above under the heading of ‘Post Employment Benefits: Defined Contribution Plans’).
Those agencies that carry GSS unfunded superannuation liabilities relating to the ‘pre-
transfer benefit’ would classify that component of the GSS as a defined benefit plan.

AASB 119, Appendix A provides an illustrative example of a funded defined benefit
plan which provides steps in determining the amounts to be recognised and certain
disclosures required in the balance sheet and income statement.

Recognition and Measurement: General

The accounting treatment for defined benefit schemes under AASB 119 requires the use
of actuarial assumptions to measure the defined benefit obligation and the expense, in
addition to the possibility of actuarial gains and losses arising. These obligations are
measured on a discounted basis.

The accounting treatment under AASB 119 for defined benefit plans ultimately
depends on the entity’s obligations to provide the agreed benefits to current and
former employees and that the associated actuarial and investment risk is borne by the
entity.

Those agencies that have their unfunded superannuation liabilities assumed by the
Treasurer will not need to apply the extensive recognition, measurement and
disclosures required by AASB 119. The implication for budget-funded statutory
authorities is from 30 June 2004 the requirements are the same as for departments,
where superannuation expense for the Pension scheme and the lump sum scheme –
pre-transfer benefit will be offset by a notional revenue called ‘Liabilities assumed by
the Treasurer’.

This arrangement substantially reduces the compliance burden for both departments and
budget-funded statutory authorities under AASB 119.




AASB 119                                                                                 7 of 16
Where a plan has been classified as a defined benefit plan the entity must, as per
AASB 119 paragraph 29:

•   account for its proportionate share of the defined benefit obligation, plan assets
    and costs associated with the plan; and

•   disclose the information required by paragraph 120 (see below under the sub-
    heading ‘Disclosures’).

Where sufficient information is not available, the entity is to use defined contribution
accounting instead, together with added disclosure requirements to explain the
particular circumstances (paragraph 30). This particular issue is currently the subject
of an Urgent Issues Group (UIG) Issues Paper and an IFRIC Draft Interpretation (D6)
on ‘Multi-employer Plans’. The preliminary view is that entities should not simply
assume that because they participate in a multi-employer plan/s (or a state plan/s –
e.g. GESB plans) the necessary information will not be available – entities must do their
best to obtain the necessary information. There are also further developments regarding
multi-employer plans and state plans that could have implications for the way in
which defined benefit plans are treated if these developments flow through to
AASB 119. Recent international developments have emerged where IFRIC has now
agreed not to proceed with the current form of the Draft Interpretation. However,
IFRIC may yet deal with State plans in due course. These issues are currently being
monitored and DTF will advise agencies or update this summary where necessary.

Agencies that are required to account for their proportionate share of each defined
benefit plan under AASB 119 should be recognising a liability in the balance sheet
being the net total of:

•   the present value (PV) of the defined benefit obligation as at reporting date; less

•   the fair value (FV) of the plan assets (if any) as at reporting date.

The net liability would be classified as ‘employee benefit obligations’ or similar.

It is worth noting that the PV of the defined benefit obligation is the gross obligation,
before deducting the FV of the plan assets (paragraph 55). If applicable, any future
taxes must be taken into account when determining the defined benefit obligation
(paragraph Aus55.1).

Similarly, agencies should be recognising in the income statement the net total of:

•   current service cost;

•   interest cost (unwinding of the discount);

•   the expected return on any plan assets;

•   actuarial gains and losses;

•   past service cost (if applicable); and




AASB 119                                                                              8 of 16
•   the effect of any curtailments or settlements.

The net total of the above would be classified as ‘employee benefits expense’ or similar
in the income statement.

It should be noted that there is an inconsistency between the requirement in AASB 119
to include interest cost (unwinding of the discount) in the calculation of employee
benefits expense in contrast to the requirement in AASB 137 ‘Provisions, Contingent
Liabilities and Contingent Assets’ to include the interest cost as a borrowing cost.

AASB 119 encourages an entity to involve a qualified actuary in the measurement of
all material post-employment benefit obligations.

Agencies affected should liaise with their actuary and GESB (or other relevant superannuation
organisation) to obtain the necessary information to comply with the Standard.

Recognition and Measurement: PV of Defined Benefit Obligations and Current
Service Cost

AASB 119 prescribes that the actuarial method to be used in determining the PV of the
defined benefit obligation and the related current service cost (and where applicable
past service cost) must be the Projected Unit Credit Method.6

Actuarial assumptions will need to be made in order to calculate the best estimates of
those variables that will determine the ultimate cost in providing post-employment
benefits. The actuarial assumptions must be unbiased and mutually compatible, and
comprise the following:

•   demographic assumptions (e.g. mortality rates, employee turnover); and

•   financial assumptions (e.g. discount rate, future salary levels, expected rate of
    return on plan assets).

Discount Rate

The discount rate used to calculate the PV of the gross defined benefit obligations is to
be determined by reference to market yields at reporting date on government bonds
(paragraph Aus78.1).

Recognition and Measurement: Plan Assets

The FV of any plan assets is deducted from the gross defined benefit obligation in
determining the amount that should be recognised in an entity’s balance sheet (see
AASB 119, paragraph 54). If there is no market price available, the FV of the plan
assets is to be estimated. An estimate can be made by discounting the expected future


6 Sometimes known as the accrued benefit method pro-rated on service or as the benefit/years of service method. This

method sees each period of service as giving rise to an additional unit of benefit entitlement and measures each unit
separately to build up the final obligation (see AASB 119, paragraphs 64 – 66). The requirement to apply this method
serves to confirm why AASB 119 encourages an entity to involve a qualified actuary in measuring material post-
employment benefit obligations.



AASB 119                                                                                                   9 of 16
cash flows at a discount rate that reflects both the risk and the maturity profile of those
assets.

The expected rate of return on the plan assets is incorporated into the expense
recognised in the entity’s income statement (see AASB 119, paragraph 61). The
difference between the expected return on plan assets and the actual return on plan
assets is an actuarial gain or loss. The actuarial gains and losses are incorporated into
the expense recognised in the entity’s income statement (see AASB 119, paragraph 61).

The expected rate of return on plan assets is based on market expectations.

Agencies that recognise unfunded superannuation liabilities for the GESB Pension
scheme and the GESB GSS lump sum pre-transfer benefit need to account for their
proportionate share of plan assets, if any. It is considered that these agencies would
have either a proportionate share of assets that would not be material or not have any
proportionate share of plan assets underlying their proportionate share of the defined
benefit obligations for both the GESB Pension scheme and the GESB GSS lump sum
pre-transfer benefit.

Disclosure

AASB 1028 provides for disclosures in respect of defined benefit superannuation plans
sponsored by the employer, other than those entities that have their defined benefit
superannuation liabilities assumed centrally. These disclosures are required to be
made in terms of AAS 25 ‘Financial Reporting by Superannuation Plans’.

AASB 119 requires more extensive disclosures about defined benefit plans in
determining the amounts required to be disclosed.

AASB 119 disclosure requirements include:

•   the accounting policy for recognising actuarial gains and losses;

•   a general description of the type of plan;

•   a reconciliation of the assets and liabilities recognised in the balance sheet;

•   a reconciliation showing the movements during the period in the net liability (or
    asset) recognised in the balance sheet;

•   the total expense recognised in the income statement for each category of expense
    (such as interest cost, current service cost, actuarial gains and losses and other
    components) and the line item of the income statement in which they are included;

•   the actual return on plan assets; and

•   the principal actuarial assumptions used at reporting date.

Paragraph Aus121.1 requires further disclosures relating to details of arrangements for
employer contributions for funding of each defined benefit plan, such as:




AASB 119                                                                              10 of 16
•   the surplus or deficit measured as the difference between accrued benefits and the
    net market value of plan assets determined in accordance with AAS 25 ‘Financial
    Reporting by Superannuation Plans’ and which, in the absence of more recent
    information, has been determined as at the date of the most recent financial report
    of the superannuation plan;

•   the current contribution recommendations;

•   details of the funding method used to make the contribution recommendation; and

•   the economic assumptions used to make funding recommendations.

Furthermore, details are required of the nature of any asset or liability recognised in
the balance sheet, including any legal liability to make up a deficit or the manner in
which the employer may benefit from any surplus (paragraph Aus121.2).

AASB 119, Appendix B provides some illustrative disclosures on employee benefit
obligations.

Agencies will need to be mindful of other disclosure requirements in other standards
that may have an impact in the context of defined benefit plans (e.g. disclosures of
contingent liabilities if required under AASB 137).

Other Long-term Employee Benefits

AASB 1028 measures all wages and salaries, non-monetary benefits, sick leave and
annual leave payable later than 12 months at their nominal (undiscounted) amounts
whereas AASB 119 measures these items at their discounted amount (i.e. present
value).

AASB 119 provides examples of other long-term employee benefits as being long-term
compensated absences such as long-service or sabbatical leave, jubilee or other
long-service benefits, long-term disability benefits, and deferred compensation paid 12
months or more after the end of the period in which it is earned.

The liability recognised for other long-term employee benefits is the net total of the PV
of the defined benefit obligation minus the fair value of related plan assets (if any) at
balance sheet date (paragraph 128).

The expense (or income) to be recognised is the net total of current service cost, interest
cost, expected return on any plan assets (if any), actuarial gains and losses, past service
cost, and effect of any curtailments or settlements (paragraph 129). The net total would
be classified as ‘employee benefits expense’ or similar in the income statement.

The major change between the AASB 1028 and AASB 119 is the inclusion of wages and
salaries, non-monetary benefits, annual leave, sick leave and the deferred salary scheme that are
payable 12 months or more after the reporting date to be calculated on a PV basis rather than on
a nominal basis.




AASB 119                                                                               11 of 16
AASB 119 uses the terms “short-term” and “long-term” in the context of recognition
and measurement of employee benefits and does not distinguish between “current”
and “non-current” for presentation purposes. AASB 101 ‘Presentation of Financial
Statements’ requires assets and liabilities to be classified as current and non-current
subject to defined criteria. Consequently, all unconditional leave entitlements (such as
annual leave and unconditional long service leave) would be classified as current
liabilities in the balance sheet. Subject to materiality, this would also include pre-
conditional and conditional long service leave expected to become unconditional
within twelve months of the reporting date. AASB 1028 required the identification of
current and non-current portions for employee benefits recognised in the financial
statements.

AASB 101 paragraph 60(d) requires liabilities to be classified as current unless there is
an unconditional right to defer the settlement of a liability for at least twelve months
after the reporting date. This will impact unconditional employee leave liabilities as
determined under AASB 119. For example, annual leave and unconditional long
service leave may be recognised and measured under AASB 119 in terms of “short-
term” and “long-term”, but would be classified as a current liability under AASB 101.

Discount Rate

AASB 1028 requires the discount rate to be the market yields as at the reporting date
on national government bonds. AASB 119 requires the discount rate to be the same as
that used to discount post-employment benefit obligations (see paragraphs 128, 78 and
Aus78.1). Therefore, the discount rate used to calculate the PV of other long-term
employee benefits is to be determined by reference to market yields at reporting date
on government bonds.

Commentary

AASB 1028 (paragraphs 4.4.9 to 4.4.13) provides extensive commentary about long
service leave entitlements discussing entitlement categories and accounting treatment
required of employers participating in industry-based long service leave schemes. This
commentary has been carried over as Australian Guidance in AASB 119 (paragraphs
G4 to G8).

The AASB has introduced Australian Guidance (see paragraph G15) to accompany
AASB 119 relating to non-salary components being included in measuring employee
benefit liabilities. The example given is in relation to leave liability where in measuring
the liability employer superannuation contributions would be included (to the extent
that they are not otherwise recognised as a liability). Superannuation contributions are
regarded as employee benefits and are not on-costs.

Disclosures

Paragraph 6.2 of AASB 1028 states the financial report must disclose the aggregate
liability and the aggregate asset arising from employee benefits and related on-costs
and distinguishes between current and non-current portions where applicable.


AASB 119                                                                          12 of 16
AASB 119 does not require specific disclosures about other long-term employee
benefits, but it does point out that other Australian Accounting Standards may require
disclosures, such as AASB 101 ‘Presentation of Financial Statements’ which requires
the disclosure of ‘employee benefits expense’.

The AASB has introduced Australian Guidance (see paragraphs G16 and G17) to
accompany AASB 119 on employee benefit on-costs. The effect of the guidance is that
these on-costs are not employee benefits and accordingly should not be included as
part of an agency’s ‘employee benefits expense’. The guidance encourages entities to
separately disclose these on-costs to assist users in calculating the total employee
expense. By implication the liability for these on-costs should not be included in an
agency’s employee benefit liabilities.

Termination Benefits

The definition of what constitutes termination benefits is the same under both the
existing Standard and AASB 119. The accounting treatment is generally the same
under the two standards.

AASB 1028, paragraph 4.7 states that the entity is presently obliged to provide
termination benefits when the entity has developed a detailed formal plan (slightly
different minimum requirements from AASB 119) for the termination and has raised a
valid expectation in those employees affected that it will carry out the terminations.

Under AASB 119, the entity is demonstrably committed to a termination when, and
only when, the entity has a detailed formal plan (with specified minimum
requirements) for the termination and is without realistic possibility of withdrawal (see
paragraphs 133 and 134).

Both AASB 1028 and AASB 119 require termination benefits to be expensed
immediately as they do not provide an entity with future economic benefits. However,
where they fall due more than 12 months after balance sheet date, the liability should
be discounted using the same rate as for long-term employee benefits. AASB 119
(paragraph 140) requires that in the case of any offer made to encourage voluntary
redundancy, the measurement of termination benefits should be based on the number
of employees expected to accept the offer.

AASB 1028 (paragraph 6.2) has general disclosure requirements regarding details of
those amounts recognised in the financial statements. AASB 119 does not have specific
disclosure requirements other than those that would be required by other standards.
However, AASB 119 does provide for relevant circumstances that would require
disclosures under those other standards, such as where there is uncertainty about the
number of employees who will accept an offer of termination benefits of which a
contingent liability would exist. AASB 137 requires certain disclosures to be made in
this instance. Termination benefits may also need to be disclosed under AASB 101
‘Presentation of Financial Statements’ to explain the impact of the expense on the
performance of the entity for the period.




AASB 119                                                                        13 of 16
Some commentary from AASB 1028 has been carried over as Australian Guidance in
AASB 119 (paragraphs G9 to G14).

Unlike in paragraphs 4.9 to 4.11.3 of AASB 1028, AASB 119 does not deal with
liabilities for termination benefits recognised as a part of an acquisition of an entity or
operation.

There is a slight change in the liability recognition criteria for termination benefits, but this is
not expected to have a material impact on agencies.


IMPACT OF DIFFERENCES

Effect on general reporting in the public sector

Agencies that have employee benefits such as wages and salaries, non-monetary
benefits, sick leave, annual leave and the deferred salary scheme that are expected to be
payable later than 12 months are required by AASB 119 to measure these liabilities at
their discounted amount. This is not the case under the existing Standard.

Employee on-costs are not employee benefits and accordingly should not be included
as part of an agency’s ‘employee benefits expense’. Similarly, agencies will need to
classify the liability relating to employee on-costs as part of other provisions in the
notes to the balance sheet.

Departments

The application of AASB 119 to government departments is expected to have a limited
impact on financial reporting obligations when compared with the existing
requirements for employee benefits.

Budget funded statutory authorities

The application of the AASB 119 to budget funded statutory authorities is expected to
have a limited impact on financial reporting obligations when compared with the
existing requirements for employee benefits. This is predominantly due to the
unfunded superannuation liabilities assumed by the Treasurer on 30 June 2004.

Other statutory authorities

The application of AASB 119 to other statutory authorities is expected to impact on
those that recognise unfunded superannuation liabilities that meet the definition of a
defined benefit plan. This will result in more extensive recognition, measurement and
disclosure requirements than under the existing Standard.

The GESB Pension scheme is classified as a defined benefit plan at the overall plan
level. The Pension scheme places an obligation on an agency to fund any shortfall in
meeting the employee benefits when they are due and payable. This means that the
actuarial risk and investment risk is borne by the agency.




AASB 119                                                                                  14 of 16
The GSS is classified as a defined benefit plan at the overall plan level. From an agency
perspective this ‘hybrid’ plan can be divided into two components: the defined
contribution component and the defined benefit component. Those agencies that carry
the GSS unfunded superannuation liabilities relating to the ‘pre-transfer benefit’ would
classify that component of the GSS as a defined benefit plan. Those agencies that
concurrently fund the GSS have no further obligation to those employees (past and
present) because any actuarial risk or investment risk is borne by the state government
centrally. Under this circumstance these agencies would classify that component of the
GSS as a defined contribution plan.

Any agencies affected should consult with GESB and their actuary.

Effect on Treasurer’s Instructions (TIs) and Model Financial Statements

The TIs will be reviewed and updated in order to be consistent with AASB 119,
together with guidance and/or additional disclosures where considered appropriate.

TI 521 ‘Portability of Employer’s Unfunded Liability for Superannuation under
Schemes Administered by the Government Employees Superannuation Board’ is to be
amended to reflect the decision of the Treasurer assuming the superannuation
liabilities for pensions and pre-transfer benefits of budget funded statutory authorities
at 30 June 2004. This amended TI is to be released soon and will also provide guidance
on those superannuation liabilities assumed by the Treasurer.

The Model Financial Statements will be updated to reflect the applicable requirements
of AASB 119. In particular, the Models for commercial agencies will be updated to
reflect the requirements for defined benefit plans. In addition, the Models for net cost
of services statutory authorities will be updated to reflect the change where the
superannuation liabilities assumed by the Treasurer is to show a superannuation
expense for the Pension scheme and the lump sum scheme – pre-transfer benefit offset
by a notional revenue called ‘Liabilities assumed by the Treasurer’.

The Model Financial Statements will also be updated to reflect the guidance
accompanying AASB 119 in respect of employee on-costs.

The requirements of AASB 101 in presenting provisions for employee benefits separate
to other provisions in the notes to the balance sheet will also be incorporated into the
Model Financial Statements.


FREQUENTLY ASKED QUESTIONS
What do I do if my agency has unfunded superannuation liabilities into the future?

The existing Standard requires the disclosure of specific information in the notes to the
financial statements in respect of defined benefit superannuation plans sponsored by
the employer. This means that the recognition and measurement of agencies’
unfunded superannuation liabilities are specifically excluded from the scope of the




AASB 119                                                                             15 of 16
existing Standard. However, agencies do recognise these liabilities through the general
application of existing Australian GAAP and other guidance.

Agencies that currently recognise and will continue to recognise unfunded
superannuation liabilities will have to apply the recognition and measurement
requirements for post-employment benefit plans (i.e. defined benefit plans) as specified
under AASB 119.

What do I do if my agency has wages and salaries, non-monetary benefits, annual leave, sick
leave and deferred salary schemes that are payable in 12 months or more?

Under the existing Standard you are required to record these liabilities at nominal
amounts, but under AASB 119 you will need to discount them using present value
methodology as prescribed (see the next FAQ).

Which discount rate should I use to measure defined benefit plan obligations and other
long-term employee benefit liabilities?

AASB 119 requires you to discount defined benefit plan obligations and other
long-term employee benefit liabilities by reference to market yields at balance sheet
date on government bonds.

What if my agency has its superannuation liabilities relating to pensions and pre-transfer
benefits assumed by the Treasurer?

The recognition and measurement requirements of AASB 119 would not apply,
however there will be a requirement to reflect actuarial movements in liability balances
to be reported in agencies’ income statements matched by notional revenue in the form
of liabilities assumed by the Treasurer. There may also be disclosure requirements
resulting from any amendments to the TIs.

How do I classify long-term annual leave and long-term unconditional long service leave
entitlements, measured in accordance with AASB 119, for presentation in the balance sheet?

AASB 119 uses the terms “short-term” and “long-term” in the context of recognition
and measurement of employee benefits. AASB 101 uses the terms “current” and “non-
current” in the context of balance sheet presentation. Therefore, under the new
international accounting standards regime the terms “short-term” and “long-term” will
not always be consistent with “current” and “non-current”.

Agencies must present long-term annual leave and long-term unconditional long
service leave as a current liability in the balance sheet. Agencies should also bear in
mind that, if material, pre-conditional and conditional long service leave that is
expected to become unconditional within twelve months of the reporting date must be
classified as a current liability.




AASB 119                                                                          16 of 16

				
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Description: AASB 119 'Employee Benefits' Summary