Employee benefits

Employee benefits are all forms of consideration given by an entity in exchange for service rendered by employees, including directors and management. Section 28 applies to all employee benefits, except for share-based payment transactions, which are covered by Section 26 Share-based Payment.

Employee benefits covered by this section will be one of the following four types:        

1. Short-term employee benefits, which are employee benefits (other than termination benefits) that are expected to be settled wholly before twelve months after the end of the reporting period in which the employees render the related service;
2. Post-employment benefits, which are employee benefits (other than termination benefits and short-term employee benefits) that are payable after the completion of employment;
3. Other long-term employee benefits, which are all employee benefits, other than short-term employee benefits, post-employment benefits and termination benefits; or
4. Termination benefits, which are employee benefits provided in exchange for the termination of an employee’s employment as a result of either an entity’s decision to terminate an employee’s employment before the normal retirement date; or an employee’s decision to accept voluntary redundancy in exchange for those benefits.        

How are employee benefits recognised?

Entities must recognise the cost of all employee benefits to which employees have become entitled as a result of service rendered to the entity during the reporting period:        

1. As a liability, after deducting amounts that have been paid either directly to the employees or as a contribution to an employee benefit fund. If the amount paid exceeds the obligation arising from service before the reporting date, an entity shall recognise that excess as an asset to the extent that the prepayment will lead to a reduction in future payments or a cash refund; and
2. As an expense, unless another section of FRS 102 requires the cost to be recognised as part of the cost of an asset such as inventories or property, plant and equipment.        

How are short-term employee benefits measured?

Short-term employee benefits include items such as the following, if expected to be settled wholly before 12 months after the end of the annual reporting period in which the employees render the related service:

• wages, salaries and social security contributions;
• paid annual leave and paid sick leave;
• profit-sharing and bonuses; and
• non-monetary benefits (such as medical care, housing, cars and free or subsidised goods or services) for current employees.

When an employee has rendered service to an entity during the reporting period, the entity shall measure the amounts recognised at the undiscounted amount of short-term employee benefits expected to be paid in exchange for that service.

An entity may compensate employees for absence for various reasons including annual leave and sick leave. Some short-term compensated absences accumulate. They can be carried forward and used in future periods if the employee does not use the current period’s entitlement in full. Examples include annual leave and sick leave. Entities must recognise the expected cost of accumulating compensated absences when the employees render service that increases their entitlement to future compensated absences.

[[[Entities must recognise the expected cost of accumulating compensated absences when the employees render service that increases their entitlement to future compensated absences.]]]

An entity shall recognise the cost of other (non-accumulating) compensated absences when the absences occur. The entity shall measure the cost of non-accumulating compensated absences at the undiscounted amount of salaries and wages paid or payable for the period of absence.

An entity shall recognise the expected cost of profit-sharing and bonus payments only when the entity has a present legal or constructive obligation to make such payments as a result of past events (this means that the entity has no realistic alternative but to make the payments); and a reliable estimate of the obligation can be made.

What about post-employment benefits such as pensions?

Post-employment benefit plans are classified as either defined contribution plans or defined benefit plans, depending on their principal terms and conditions (in much the same way as under old GAAP).

Defined contribution accounting is straightforward and is unchanged from old GAAP.

There are more extensive changes to the way in which defined benefit plan assets and liabilities (and the movements in these) are measured and presented, although the principles are largely similar to those set out in FRS 17.

One area of change concerns multi-employer plans. FRS 102 maintains the position (from FRS 17) that where such plans are defined benefit plans but the entity does not have sufficient information to calculate its share of the plan assets and liabilities, it should account as if the plan were a defined contribution plan and make suitable disclosure of this situation. However if the entity has entered into an agreement with the multi-employer plan that determines how the entity will fund a deficit, the entity must now recognise a liability for the contributions payable that arise from the agreement (to the extent that they relate to the deficit) and the resulting expense in profit or loss (whereas previously the entity may have simply increased its annual expense for the additional annual contribution).

Group plans (where the entities are under common control) are now distinguished from other multi-employer plans and are treated differently. If there is a contractual agreement or stated policy for charging the net defined benefit cost of a defined benefit plan as a whole to individual group entities, the entity shall, in its individual financial statements, recognise the net defined benefit cost of a defined benefit plan so charged. If there is no such agreement or policy, the net defined benefit cost of a defined benefit plan shall be recognised in the individual financial statements of the group entity which is legally responsible for the plan. The other group entities instead recognise a cost equal to their contribution payable for the period.

[[[Group plans (where the entities are under common control) are now distinguished from other multi-employer plans and are treated differently.]]]

What about other long-term employee benefits?

Other long-term employee benefits include items such as the following, if not expected to be settled wholly before 12 months after the end of the annual reporting period in which the employees render the related service:

• long-term paid absences such as long-service or sabbatical leave;
• other long-service benefits;
• long-term disability benefits;
• profit-sharing and bonuses; and
• deferred remuneration.

An entity shall recognise a liability for other long-term employee benefits measured at the present value of the benefit obligation at the reporting date; minus the fair value at the reporting date of plan assets (if any) out of which the obligations are to be settled directly.        

An entity shall recognise the change in the liability in profit or loss, except to the extent that FRS 102 requires or permits their inclusion in the cost of an asset.

What about termination benefits?

An entity may be committed, by legislation, by contractual or other agreements with employees or their representatives or by a constructive obligation based on business practice, custom or a desire to act equitably, to make payments (or provide other benefits) to employees when it terminates their employment. Such payments are termination benefits.

Because termination benefits do not provide an entity with future economic benefits, an entity shall recognise them as an expense in profit or loss immediately. When an entity recognises termination benefits, the entity may also have to account for a curtailment of retirement benefits or other employee benefits.

[[[Because termination benefits do not provide an entity with future economic benefits, an entity shall recognise them as an expense in profit or loss immediately.]]]

An entity shall recognise termination benefits as a liability and an expense only when the entity is demonstrably committed either to terminate the employment of an employee or group of employees before the normal retirement date; or to provide termination benefits as a result of an offer made in order to encourage voluntary redundancy.

An entity shall measure termination benefits at the best estimate of the expenditure that would be required to settle the obligation at the reporting date.