The IAS 19 Framework - Research Paper Example

?International Accounting Standard 19, Employee Benefits Affiliation with more information about affiliation, research grants, conflict of interest and how to contact Topic:  International Accounting Standard 19, Employee Benefits Introduction The aim of this research paper is to conduct an in-depth study of a subject related to International Accounting Standard 19, Employee Benefits. It also attempts a structured research to identify the advantages and disadvantages of the IAS 19 standards regarding the employee benefit scheme. International Accounting standards (IAS) 19 comprise the topic of employment benefits. It was issued in February 1998. This paper will also focus on how to improve the financial reporting regarding the pension benefits and identify the main problems in the current financial reporting system for pension. IAS has issued several directives on employee benefits. Employee benefits can be subdivided into short term, long term, post-employment and termination benefits. The new IAS 19 is a great achievement because it offers many advantages to the employees. On the other hand, it also suffers from certain disadvantages, which can be mitigated in due course of time with suitable amendments. Roadmap: The paper first deals with the IAS 19 frameworks and explains the standards of IAS 19 relating to employee benefits. IAS 19 is the framework for evaluating the employee benefits. Then the paper takes up the controversies in IAS 19 standards relating to various schemes especially pension related issues. The next discussion segment in the paper is the old IAS 19 standards and the latest IAS 19 standards. The last discussion segment is the latest amendments made in the IAS 19 standards. The papers dwell not only on the latest amendments but also such amendments which have been proposed to be implemented. All specific points relating to the IAS 19 have been stated considered in the paper. Evidences taken to support the ideas projected in the paper have been provided as references. Lastly, appropriate conclusions have been drawn and stated in the paper. Subheadings with specific points supported by evidence The IAS 19 framework: Under the wide term of IAS 19 come all employee benefits which include short term, long term, post employment, retirement, termination and compensation benefits. The short term employee benefits can be categorized as salary and bonus payments, paid and unpaid leaves and other short term non monetary benefits like medical and housing facility etc. The long term benefits include the employee’s long term leave and service benefits. The main aspect in IAS 19 is the post employment benefit section or to be more specific, the subject of pension. IAS 19 is the direction provider to post employment and post retirement benefits and pension benefit is one of the most important post employment benefits. Controversies in IAS 19: IAS 19 became a controversial standard and one of the main reasons for this was that the accounting standard for pension was not correctly adhered to. IAS 19 is an accounting standard which covers the reporting of all employee benefits and the most debated topic is the discussion on pensions, especially the employer sponsored, defined benefit pension plans. Pension plans can basically be divided into two categories. It can either be a defined contribution or a defined benefit plan. In the defined contribution plan the employer has to bear a lot of expenses because the unfunded benefits are usually recorded as a liability in the balance sheet. “Under IAS 19 recommendations, unfunded benefits are to be recorded, as a general rule, as liabilities in the balance sheet of the sponsoring employer. In defined contribution plans, the employer’s annual contribution under the terms of the occupational plan should be recognized as an expense.” (Yermo& Stewart, 2007, P.48). IAS 19 has been subjected to several amendments but still organizations have been incurring high losses due to several reasons. IAS 19 has several problems which need to be addressed carefully in order to avoid losses to organizations. The pension fund according to IAS 19 does not give out a correct picture in the balance sheet of the organization. “The impact of IAS 19 on the balance sheet was limited to an asset or liability representing the accrued difference between these costs and the amount funded. In other words the balance sheet would not include the defined benefit obligation, or the value of any plan assets, although disclosure of both items was required.” (Camfferman& Zeff, 2007, P.395).Another major issue is that IAS pension is not valued according to market values and, thus, the surplus is not recorded appropriately in the company’s financial statements. “Under IAS 19 and FRS 17, pension assets are measured by market values. If there is net surplus in the pension fund IAS 19 limits to the amount that would be recoverable by the sponsor through a refund or a reduction of future contributions.” (OECD, 2005, P.90). This will affect the steadiness of the company. The company’s evaluation and estimation trend for its business will be highly affected and its market price will also remain influenced. The capital, liability and profit reports calculated under the IAS 19 are responsive to the assumptions made from time to time which include economic changes like inflation rate, rate of interest and the return on investment etc. New IAS 19 over the old IAS 19: Old IAS 19 only dealt with the retirement and post employment benefits while the new amendments made in IAS 19 deal with whole packages of employment benefits. The new IAS 19 is not restricted to retirement benefits but is concerned with the total employment benefits. The most significant feature of the new IAS 19 is that it uses a market based approach in measuring employee benefits. All plan assets are measured at its fair price and the discount rate is entirely based on market yields on the date of preparation of the balance sheet. According to the new IAS 19 “an entity should attribute benefit to periods of service following the plan’s benefit formula, but the straight line basis should be used if employee service in later years leads to a materially higher level of benefit than in earlier years.” (International Accounting Standards Committee Foundation, & International Accounting Standards Board, 2008, P.1292). Amendments made in IAS 19 Many amendments have been proposed because of some complaints, especially from the European Union and as results of comparison of IAS with the IFRS. Some amendments have also been made with respect to the treatment of group of entities for the defined benefit pension plans in the financial statements of individual. Specific rules have been stated for the treatment of defined benefit pension plans. The amendment also requires companies and individuals to give additional disclosures for improving the calculation of pension costs. Amendments made in December 2004: “The IASB has decided to allow the option of recognizing actuarial gains and losses in full in the period in which they occur, outside profit or loss, in a statement of recognized income and expense. Under the amendment, entities that at present spread the gains and losses are not required to change their approach, but are now free to choose to do so. In particular, the amendment allows companies that are already showing the surplus or deficit in full under FRS 17 to continue with their present policy. The IASB has previously signaled its intention to undertake a comprehensive project on post-employment benefits, looking at fundamental aspects of measurement and recognition.” (IASB issues amendments to pension cost standard, 2004). Proposed amendment in April 2010 Thus, IAS 19 is making many amendments especially in pension standards. The latest amendment proposed to the IAS 19 is the “Immediate recognition of all estimated changes in the cost of providing defined benefits and all changes in the value of plan assets. This would eliminate the various methods currently in IAS 19, including the 'corridor' method, that allow deferral of some of those gains or losses” (Summaries of International Financial Reporting Standards, 2010). This amendment is the latest and has been proposed in the month of April 2010. Yet, IAS 19 standards have been highly praised for bringing a clear idea of the accounting standards relating to employee benefits. It is the most accepted standard regarding employee benefits. Summarizing conclusion: IAS 19 is the standard for the treatment of the discussion on the employee benefits, and it caters to all standards relating to employee benefits. But IAS 19 has certain defects and controversies due to which many amendments have been proposed. The major opposition of IAS 19 derives from the European Union. Amendments have been made in December 2004 relating to the pensions plans and the defined benefit plan has been strengthened to best benefit both companies as well as individuals. By recognizing actuarial gains and losses, IAS 19 standard aims to increase the profits of companies while safeguarding the interests of employees. The latest amendment is during April 2010 relating to the pension plan. IAS 19 is the standard for dealing with employee related matters. The previous version of the IAS 19 deals with only retirement benefits while the amended version of IAS 19 deals with all employee benefit related matters. IAS 19 aims to increase the stability of business and companies on one hand, and on the other hand, it aims to protect entities from suffering losses. Reference List Camfferman, K., & Zeff, S. A (2007).Financial reporting and global capital markets: a history of the International Accounting Standards Committee, 1973-2000. Oxford University Press, P.395 Retrieved February 24, 2011, from http://books.google.co.in/books?id=bj7ElLE4eVIC&pg=PA395&dq=ias+19+pension+accounting&hl=en&ei=hxvmTN_BDo-0vgOC5ZDDCA&sa=X&oi=book_result&ct=result&resnum=3&ved=0CDwQ6AEwAg#v=onepage&q=ias%2019%20pension%20accounting&f=false International Accounting Standards Committee Foundation, & International Accounting Standards Board. (2008). A Guide through International Financial Reporting Standards. Kluwer, P.1292 Retrieved February 24, 2011, from http://books.google.co.in/books?id=-poFB8m-GjMC&pg=PA1290&dq=ias+19's+latest+amendments&hl=en#v=onepage&q&f=false IASB issues amendments to pension cost standard. (2004). International Accounting Standards Board® Press Release. Retrieved February 24, 2011, from http://www.iasplus.com/pressrel/0412ias19.pdf OECD, (2005).Financial Market Trends: Ageing and Pension System Reform: Implications for Financial Markets and Economic Policies. OECD Publishing, P.90 Retrieved February 24, 2011, from http://books.google.co.in/books?id=IHujjhJ_RcAC&pg=PA89&dq=ias+19+pension+accounting&hl=en&ei=hxvmTN_BDo-0vgOC5ZDDCA&sa=X&oi=book_result&ct=result&resnum=5&ved=0CEcQ6AEwBA#v=onepage&q=ias%2019%20pension%20accounting&f=false Summaries of International Financial Reporting Standards. (2010). Deloitte. Retrieved February 24, 2011, from http://www.iasplus.com/standard/ias19.htm#1004ed Yermo, J., & Stewart, F. (2007).Private Pensions Series Protecting Pensions: Policy Analysis and Examples from OECD Countries. OECD Publishing, P. 48 Retrieved February 24, 2011, from http://books.google.co.in/books?id=BOMI1k52DPoC&pg=PA48&dq=ias+19+pension+accounting&hl=en&ei=hxvmTN_BDo-0vgOC5ZDDCA&sa=X&oi=book_result&ct=result&resnum=10&ved=0CGEQ6AEwCQ#v=onepage&q=ias%2019%20pension%20accounting&f=false Read More