IAS 19 Employee Benefits Issues - Report Example

IAS 19: Employee Benefits History International Accounting Standards (IAS) emerged in 1975 with publication of IAS 1and 2 on disclosure of accounting policies and valuation as well as the presentation of inventories using the historical cost system (Deloitte 2010a). Thereafter, IAS 3-18 was published between 1976 and 1982. IAS 19 was published in 1983 and has undergone series of revisions and amendments to date. The first publication of IAS 19 in 1983 described how employee retirement benefits are accounted for in the employers’ financial statements. IAS 19 was revised on 1993 and the revision was on review of retirement pension overheads. In 1998 and 2000, other revisions on worker remuneration were effected. There was a proposition in 2002 to modify employee share based compensation. Actuarial gains and losses concerning employee benefits were acknowledged in 2004. In 2007, ceilings were introduced into defined benefit assets and funding requirements. In 2009, the ceilings on defined benefit assets and funding requirements were published as exposure drafts and discount rate for employee benefits using market yield corporate bonds was proposed. IAS 19 final interpretations were also published in 2009. The objective The objective of IAS 19 Employee Benefits is to provide guidelines to both business and non-business organizations on how to measure, present and disclose the expenses of providing employee benefits. IAS 19 covers all known employee related expenditures. The employee benefits are expenses incurred by entities in exchange of services rendered by their employees. They include salaries and wages, profit sharing plans, compensated absences, leaves, deferred compensation programs, bonuses and free or subsidized good or services given to employees. It also covers various benefits paid to employees. The benefits are medical and life insurance benefits, pensions, house benefits, jubilee benefits, post employment medical and life insurance as well as termination benefits (Deloitte 2010c). Underlying rational and relation with IASB’s conceptual framework IAS 19: Employee benefits suggest that organizations should acknowledge a liability or an expense resulting from consuming the service of an employee in the year in which the service was consumed. Therefore, IASB and IAS 19 recognize expenses incurred on the employee benefits on the year in which it occurred. The measurements, presentation and disclosures covers definite accounting period only. Measurement Measurement is defined as an action to obtain a magnitude of a given item or process. Therefore, employee benefits measurement is an attempt to assign value to what employees receives for rendering their services to an organization. There are many approaches that are used to measure employee benefits value. However, International Accounting Standards applies fair value pricing approach. This is because the price reflects the actual amount of value within a given environment. Fair value is the price that the organizations and employees have willingly agreed to under the current circumstances. Presentation Presentation is defined as showing, describing and explaining a content of a given activity or subject. In this case, it is showing and explaining financial statements as well as other relevant information on employee benefits as required by the organization. The financial information is presented in the balance sheets, profit and loss and cash flow statements of the organization. All the financial reports are presented at the end of a financial period of the company. The statements show total employee benefits within a financial a period. The financial statements indicate individual benefits received by employees. They include total salaries, wages, house allowances and any other benefits that the employees receive in an organization (IFRS 2008). Disclosure details Disclosure is defined as disseminating complete and appropriate information about organizational financial performance within a given accounting period. The information is provided to the organization’s key stakeholders as well as relevant government agencies or departments. Therefore, it is important for all the disclosing organizations to identify the type of data that is required for the complete disclosure of organizational activities. Furthermore, the information provided should be clear and straightforward to promote understanding. According to Alexander and Archer (2008), disclosures are important because it allows the information users to assess and make conclusion about the organizational performance. The disclosure is provided in three ways. The first one is through use of primary financial statements, the second is use of statement notes and the third is via other additional information statements. According to IAS 19, defined benefit obligations must be recognized after subtracting the plan assets. This make it possible for the net liability to be reported in the balance sheet of the organization. According to (Deloitte 2010b), the information that should be disclosed include financial statement showing the net assets available for payment of employee benefits at the end of organization’s financial period, the basis used to value the employee benefits and any investment above 5% of the net assets. According to IAS 26, the information to be disclosed includes all the contributions made by both the employee and the employer. Others are income from investments, descriptions of all expenses incurred by the company, income taxes, gains or losses on disposals, fair value changes as well as any transfers to or from other plans Funding policies and actuarial present values as well as promised benefits should be fully described. Actuarial assumptions as well as methods of computing them should be fully described (United Nations Conference on Trade and Development 2007). Comparison between IFSR and US GAAP Comparison of International Accounting Standards and the US Generally Accepted Accounting Practice were as follows. According to Deloitte (2010c), there are differences between IAS19 and US GAAP on employee termination benefits. For IFRS (IAS 19), all termination benefits are treated equally and is acknowledge when an employers show commitment to pay. On the other hand, US GAAP distinguishes between general and special termination benefits. Special benefits are one-time termination benefits that can be estimated reasonably and employees accept voluntarily. Secondly, IFRS recognize immediately vested employee benefits on past service rendered to the entity while US GAAP amortized it over remaining period of service. Thirdly, IFRS defines multi-employer defined benefit plan as either defined benefit plan or defined contribution plan depending on the information available. US GAAP defines multi-employer plan as a defined contribution plan. Fourthly, IFRS do not require minimum liability for defined benefit plans benefits (Deloitte 2004). However, US GAAP has a minimum liability on unfunded accumulated benefits. The fifth difference is that, IFSR do not recognise excess pension asset of service that was unrecognised in the past while US GAAP do not limit them. According to IFRS, curtailment losses or gains are acknowledged when an entity shows commitment and announce it thereafter but US GAAP do not recognize them until such a time when affected employees terminates, suspends or amends the curtailments (Epstein and Jermakowicz 2010). The sixth contrast between IFRS and US GAAP arises on the measurement of a curtailment. For IFRS, curtailment losses or gains arise from any change in the present value and fair value of defined benefits of the employees. On the other hand, US GAAP does not recognise changes arising following a transition (Rodgers 2007). Example from annual reports United Health Insurance Group has indicated various benefits that it has given to its employees to motivate and ensure that they remain in the company. The first benefit is shared based compensation benefit. The company grants stock related benefit such as stock options and other stock related awards to qualified employees and non-employee directors as from May 15, 2002. 63.5 million Shares were available as at December 31, 2009 to be granted in future to qualifying employees and non-employee directors. The employees purchased the stock of the company at a discounted price of 85% lower than the market price. 8.5 million Shares were sold to employees between 2007 and 2009. The compensation expenses was recognized on a straight-line basis over employee service period or employee retirement date. The compensation expense recognized under the share-based compensation plan was $1.144 billion ($747 million net of tax effects) for the years 2007, 2008 and 2009. In addition to the stock based awards, the company offers 401(k) plan for all the company’s employees. The company also grants non-defined benefit plan (Supplementary Executive Retirement Plan benefits) for Chief Executive Officer and selected non-executive personnel. Supplementary Executive Retirement Plan benefits fall under the category of non-contributory and unfunded benefits (UGI 2009). Discussions IAS 19 has evolved for a long period and it continues to evolve. The amendments that arise are good because it brings better ways of applying it. IAS 19 is a practical accounting standard that is applicable to all organizations. It provides a systematic way of accounting, presenting and disclosing all information relevant to employee benefits. The standard uses the fair value approach allocating values to organizational assets and liabilities. However, the method is possible only when there is adequate information in the market or in the organization. Without adequate information, the prices of goods and services will be difficult to ascertain. The board should move first and implement the use of market yield corporate bonds for discounting purposes. This will achieve reliability and comparability in the organizations especially during hard economic times. Therefore, IAS 19 is becoming an important accounting standard for liabilities and assets of the all organizations globally. References Alexander, D. and Archer, S., 2008, International Accounting/Financial Reporting Standards Guide, CCH, U.S.A Deloitte, 2004, IAS Plus: Key Difference between IFRSs and US GAAP, Viewed 22 March 2010, . Deloitte, 2010a, Chronology of the IASC and the IASB: Pre-1973 Events Leading to Formation of IASC. Viewed 22 March 2010, . Deloitte, 2010b, Summaries of International Financing Reporting Standards, IAS 26 Accounting and Reporting by Retirement Benefit Plan, Viewed 22 March 2010, . Deloitte, 2010c, Summaries of International Financial Reporting Standards: IAS 19 Employee Benefits, Viewed 22 March 2010, . Epstein, B. and Jermakowicz, E., 2010, Wiley IFRS 2010: Interpretation and Application of International Financial Reporting Standard. 7th Edition, John Wiley and Sons, New York International Accounting Standards Board, 2008, International Financial Reporting Standards IFRS 2008, Kluwer. Netherlands Rodgers, P. 2007, International Accounting Standards: From UK Standards to IAS, an International Accounting Accelerated Route to Understanding the Key Principles of International Accounting Rules management, Elsevier, Oxford UGI, 2009, 2009 Annual Report. Unitedhealth Group Incorporated Viewed 22 March 2010, United Nations Conference on Trade and Development, 2007, International Accounting and Reporting Issues: 2006 Review ISSUES, United Nations Publications, Geneva Read More