IMPLEMENTATION OF IFRS International Accounting Standard (IAS) 19
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Accountability and Accountancy Services Division Brigitte Worth Central Finance Group Rathgael House Balloo Road BANGOR BT19 7NA Tel No: 028 9185 8025 (x 68025) Fax No: 028 9185 8211 Email: firstname.lastname@example.org Copy Distribution List Below: TO: RESOURCE ACCOUNTING CONTACTS FROM: BRIGITTE WORTH DATE: 20 FEBRUARY 2009 IMPLEMENTATION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS): International Accounting Standard (IAS) 19 Employee Benefits Purpose 1. You will be aware that the Treasury Officer of Accounts agreed AASD would take the lead in agreeing a methodology and developing solutions to common issues. 2. The purpose of this letter is to advice you of the approach AASD has agreed with the Northern Ireland Audit Office (NIAO) regarding the implementation of IAS 19. Action 3. You are asked to note the contents of this letter and to circulate both the letter and the more detailed attachment to relevant officials, including those in agencies and arms length bodies, to assist with the implementation of IFRS in line with DAO (DFP) 06/08. Background 4. AASD produced an initial draft solution and circulated this amongst Resource Accounting Contacts in Departments, seeking comments. This was then discussed with the NIAO and further amendments made to the proposal. AASD provided regular updates to the Audit & Accountability Forum and IFRS Project Managers Working Group. A summary of the requirements of IAS 19 is included at Annex A. Summary of Agreed Approach – NICS1 5. AASD organised for NISRA to carry out a short internet based survey in January 2009 within each Department. The responses were analysed by NISRA and the average annual leave balances at 31 March 2008 determined for each Department. NISRA has also agreed to provide the average salary per grade for each Department. This information will be provided to Departmental contacts by AASD. 6. Departments and Agencies using the agreed approach should calculate any asset/liability in accordance with the methodology set out in Annex B Suggested Approach – Arms length bodies (ALB’s)2 7. A suggested method for ALB’s to which the FReM applies is set out in Annex C. As this is only a suggested methodology, bodies should discuss at an early stage with their auditors whether their methods are acceptable. AASD was unable to obtain agreement for a common approach for ALB’s as, due to the range of bodies and their sizes, NIAO felt these bodies would need to consider their own specific circumstances. 1 For the purposes of this paper NICS is deemed Government Departments and their Executive Agencies only. 2 Arms length bodies are defined for the purposes of this paper as bodies in the wider public sector that apply the FReM, other than Government Departments and their Executive Agencies. Contacts 8. Peter O’Sullivan and I are happy to discuss specific IFRS issues, although we would appreciate it if agencies and NDPBs would first contact their sponsor Departments. Please contact me on 028 9185 8025 (x68025), or email: Brigitte.Worth@dfpni.gov.uk or Peter on 028 9185 8133 (x68133) or email: Peter.O'Sullivan@dfpni.gov.uk. Brigitte Worth BRIGITTE WORTH FINANCIAL REPORTING AND ACCOUNTABILITY BRANCH cc: David Thomson Peter O’Sullivan Louise Mason Finance Directors ANNEX A – IAS 19 Summary Accrued Holiday Entitlements Methodology IAS 19 covers all forms of consideration in exchange for service rendered to an organisation. However, the methodologies in this document are primarily concerned with accrued holiday entitlements. It should be noted that organisations are not required to adopt one of these methodologies should they agree a more suitable alternative with their auditors. Similarly, organisations can recognise accruals for holiday entitlements where these are not material, should they choose to do so. Guidance provided in IAS 19 The Standard states: When an employee has rendered service to an entity during an accounting period, the entity shall recognise the undiscounted amount of short-term employee benefits expected to be paid in exchange for that service: 1. As a liability (after deducting any amount already paid) 2. As an expense, unless another Standard requires or permits the inclusion of the benefits in the cost of an asset (e.g. capitalisation under IAS 16) The standard further states that absences are categorised as either accumulating or non-accumulating, where non-accumulating benefits do not carry forward if an employee does not use them. No accrual is required for non-accumulating benefits and this will normally include sick pay. However, accruals do need to be recognised (where material) for accumulating benefits such as annual leave and flexi leave that has been earned by the year end, but has not yet been taken. Annex B sets out the agreed methodology for the NICS whilst Annex C sets out suggested methodologies for ALB’s to whom the FReM applies. ANNEX B - NICS Agreed Methodology The NISRA survey information was gathered by grade. Departments should calculate the year end accrual by applying average salaries for those grades to the average leave for each grade. The value per day should be calculated on the basis of a 365 day year (i.e. salary/ 12 /no of days in month multiplied by the number of days accrued). We have been informed that this is the rate at which leave would be paid on a member of staff leaving the service. Going forward, it is expected that the annual leave information will be obtained from HR Connect and the average salary information provided by NISRA will be applied to the HR Connect figures. Flexi Leave NIAO have agreed that flexi leave may be excluded on the basis that it is immaterial, but bodies should be mindful of the following points: NIAO expect to rely on systems in Departments to enforce the flexi rules, which will provide assurance as to the survey findings and also on the position going forward. Where a flexi balance is not included in the accounts NIAO will treat that as an unadjusted error in future IFRS audits which will therefore eat into the amount of error that they could live with in the account and not qualify. HR Connect will not provide information on flexi-leave and NISRA have indicated that it will not be feasible to undertake a similar survey in the future. Departments will therefore need to assess their own position on the inclusion of flexi leave. Where a department wants to include flexi leave, as for annual leave, the value should be calculated on the basis of a 365 day year (i.e. salary/ 12 /no of days in month multiplied by the number of days flexi accrued) One method that could be adopted to minimise the level of unadjusted error is to include a value for flexi leave based on the estimate of untaken flexi leave per person in the NISRA survey and adjust future years accruals for changes in average salary and employee numbers only. ANNEX C – ALB’s SUGGESTED METHODOLOGY 1 1. Compute the average salary per day per staff member. A simple example is where the total costs for the year is divided by the average persons employed throughout the year to give an average cost per employee. This can then be divided by 365 (days) to give an average costs per employee per day (ignore leap years). Caution should be taken when extracting salary costs from ledgers, to ensure that one off non recurrent payments are excluded e.g. one off pension contributions, compensation payments or overtime etc. 2. Estimate of outstanding leave balance at 31 March In the absence of computerised leave system, some form of sample can be used to determine outstanding leave balances at 31 March. The size of the sample will depend on a number of factors including the size of organisation and ability of the organisation to collect sufficient information. Regardless of the sample size, it should be representative of the organisation as a whole. 3. Determine the Estimated Accrual Multiply the average number of days leave outstanding by the number of employees and the average salary per day to determine the estimated accrual. SUGGESTED METHODOLOGY 2 1. Determine Likely Maximum Value of Untaken Leave This method can be used to demonstrate that the likely maximum amount of leave outstanding, when a value is placed on it, is not material to an organisation’s accounts. For example annual leave in the NICS the maximum number of days outstanding will be the maximum of 9 days carried forward at 31 January plus 5 days earned in February and March (assuming the maximum 30 day annual leave allowance) – i.e. 14 days. Bodies will need to apply their own limits/conditions where these differ from the NICS. This can then be multiplied by the average salary and number of employees determined above to obtain the likely maximum value of untaken leave. GENERAL ADVICE If, following discussions with the auditors it is determined that this amount is immaterial to the organisation’s accounts, then it will not be necessary to include an annual leave accrual. However organisations will wish to consider inclusion of an accrual to obtain the necessary technical adjustment on the implementation of IFRS. Further, as for Departments and agencies, it is likely that the value of a possible annual leave accrual will be included as an unadjusted error in future IFRS audits, which would therefore reduce the amount of error that could be present in the accounts without them being qualified. Regardless of the methodology an organisation plans to use, it would be sensible to confirm that their auditors are content with the proposed method and an early stage.