Summarizing Accounting Standards: IAS 19, IFRS 2, IAS 26

IAS 19: Employee Benefits

Employee Benefit:

IAS 19 Employee Benefits outlines the accounting requirements for employee benefits, including short-term benefits (e.g. wages and salaries, annual leave), post-employment benefits such as retirement benefits, other long-term benefits (e.g. long service leave), and termination benefits.

Short-Term Employee Benefits:

1. Benefits settled within 12 months are recognized in the period of service.

2. Compensated absences are recognized as employees rendering service.

Profit-Sharing and Bonus Payments:

1. Recognition occurs when a legal or constructive obligation arises with a reliable estimate.

Types of Post-Employment Benefit Plans:

Defined Benefit Plans (Obligation to provide agreed/ a specified level of benefits): Defined benefit plans are retirement plans where the employer commits to providing a specific level of retirement benefits to employees. The ultimate benefit is typically based on factors such as years of service and salary history. Example: A company promises to pay its employees a pension equal to 2% of their final salary for each year of service. Journal Entries:

1. Dr. Employee Benefit Expense (P&L) 
   Dr. Net Interest Cost (P&L)
   Cr. Benefit Obligation (Balance Sheet - Liability)

2. Dr. Employee Benefit Expense (OCI - Other Comprehensive Income)
   Cr.  Actuarial Gain or Loss (OCI)

3. Dr. Benefit Obligation (Balance Sheet - Liability)
   Cr. Cash        

Defined Contribution Plans (obligation limited to making specified contributions): Defined contribution plans are retirement plans where the employer makes fixed contributions to a separate fund, and the employee bears the investment risk. The future benefit is not guaranteed but depends on the investment performance of the fund. Example: A company contributes 5% of an employee's salary to a retirement savings account. Journal Entries:

1. Dr. Employee Benefit Expense (P&L)
   Cr. Pension Asset (Balance sheet)

2. Dr. Pension Asset (Balance Sheet - Asset)
   Cr. Cash (or Contribution Payable, if not yet paid)        

Recognition of Net Interest Cost:

IAS 19 introduces the concept of net interest cost, representing the change in the net defined benefit liability (or asset) due to the passage of time and the consumption of employee benefits. The formula for Net Interest Cost:

Net Interest Cost=Discount Rate× Beginning-of-Period Defined Benefit         

Obligation Example: Assume that a company has a defined benefit plan with a beginning-of-period defined benefit obligation of $1,000,000. The discount rate used to determine the present value of future benefits is 5%.

Net Interest Cost=0.05×$1,000,000 
Net Interest Cost=$50,000        

Actuarial Assumptions:

The standard requires the use of actuarial assumptions, such as discount rates, salary increases, and mortality rates, which can impact the calculation of the present value of defined benefit obligations.

Past Service Costs:

Recognition of past service costs related to changes in the pension plan that result in increased benefits for past service. These costs can be recognized immediately or amortized over the expected average remaining service period of employees.

Plan Amendments and Curtailments:

The standard provides guidance on accounting for plan amendments and curtailments, including the immediate recognition of gains or losses arising from such events.

Presentation of Actuarial Gains and Losses:

Actuarial gains and losses arising from changes in assumptions or experience adjustments can be recognized either in other comprehensive income or immediately in profit or loss.

Other Long-Term Benefits:

1. Modified application of the post-employment benefit model.

2. Surplus or deficit recognition consistent with defined benefit plans.

Termination Benefits:

1. Recognition of termination benefit liability when the entity can't withdraw the offer.

2. Measurement based on the nature of the benefit as short-term or other long-term.

Disclosure Requirements:

Extensive disclosure requirements, including information about the nature and risks of employee benefit plans, reconciliation of changes in the carrying amount of the obligation, and details about the fair value of plan assets.

Transition and First-time Adoption:

IAS 19 includes guidance on transitioning from previous accounting policies and the requirements for first-time adoption.

IFRS 2 - Share-based Payment:

Equity-settled and Cash-settled Transactions:

The standard distinguishes between equity-settled and cash-settled share-based payment transactions. Equity-settled transactions involve the issuance of equity instruments, while cash-settled transactions result in a cash payment based on the value of equity instruments.

Recognition of Equity-settled Transactions:

For equity-settled transactions, IFRS 2 requires entities to recognize the fair value of the goods or services received as an expense. The recognition is typically spread over the vesting period during which employees become entitled to the benefits.

Measurement of Equity-settled Transactions:

IFRS 2 provides guidance on measuring the fair value of equity instruments granted, considering factors such as exercise prices, expected volatility, and expected terms.

Modification of Terms and Conditions:

The standard addresses the accounting treatment when the terms and conditions of a share-based payment transaction are modified after the grant date.

Vesting Conditions:

Vesting conditions are criteria that must be satisfied for employees to become entitled to the share-based payments. IFRS 2 provides guidance on the treatment of vesting conditions and their impact on the recognition of expenses.

Cash-settled Transactions:

For cash-settled transactions, IFRS 2 requires entities to recognize a liability for the fair value of the obligation (share price) to make cash payments. Changes in the fair value of the liability are recognized in profit or loss.

Share-based Payment Transactions with Cash Alternatives:

IFRS 2 addresses transactions where an entity can choose to settle in either equity instruments or cash equivalents. The standard provides guidance on the accounting treatment for such transactions.

Tax Consequences:

The standard discusses the accounting for income tax consequences arising from share-based payment transactions.

Disclosures:

IFRS 2 includes extensive disclosure requirements, ensuring transparency about the nature and extent of share-based payment transactions and their impact on the financial statements.

Equity-settled Scenario:

Company A grants its employees stock options as part of their compensation. The options vest over a three-year period, and employees become entitled to exercise the options after the vesting period. Vesting Conditions: IFRS 2 addresses vesting conditions, specifying that the fair value of the options should be recognized over the vesting period. Recognition: The fair value of the options is recognized as an expense in the income statement over the vesting period. Measurement: The fair value of the options is determined at the grant date, taking into account factors such as exercise price, expected volatility, and expected term. Journal Entries: Dr. Share-based Payment Expense (P&L) Cr. Share-based Payment Reserve (Equity)

An illustration of a cash settlement transaction scenario has been presented in the accompanying image.

IAS 26: Accounting and Reporting by Retirement Benefit Plans

IAS 26 applies to retirement benefit plans, regardless of whether they are administered by an entity or by a separate trustee.

Defined Contribution Plans: For defined contribution plans, the focus is on disclosing contributions made to the plan during the period and any amounts recognized in the financial statements of the sponsoring employer.

Defined Benefit Plans: For defined benefit plans, IAS 26 prescribes detailed disclosure requirements related to the actuarial present value of promised retirement benefits, fair value of plan assets, reconciliation of the present value of the defined benefit obligation, and other relevant information. (Relevant with IAS 19)

Actuarial Assumptions: The standard requires disclosure of the significant actuarial assumptions used in the valuation of the defined benefit obligation and the fair value of plan assets.

Treatment of Surpluses or Deficits: If there is a surplus or a deficit in a defined benefit plan, IAS 26 provides guidance on how such surpluses or deficits should be treated in the financial statements.

Example: Company XYZ sponsors a defined benefit pension plan for its employees. At the reporting date, the fair value of plan assets is $150 million, and the present value of the defined benefit obligation is $130 million, resulting in a surplus of $20 million.

1. Refundable Surplus: 
Dr. Surplus on the Pension Plan (Asset)????? $20 million 
Cr. Other Comprehensive Income (OCI)???????? $20 million 

2. Non-refundable Surplus: 
Dr. Other Comprehensive Income (OCI)???????? $20 million 
Cr. Liability for Pension Obligations??????? $20 million        

Treatment of Changes in Actuarial Assumptions: IAS 26 specifies that changes in actuarial assumptions should be recognized immediately in the statement of changes in net assets available for benefits.

Presentation of Financial Statements: The standard outlines the minimum content and format for the financial statements of retirement benefit plans, including a statement of net assets available for benefits and a statement of changes in net assets available for benefits.

Disclosure Requirements: IAS 26 includes extensive disclosure requirements for both defined contribution and defined benefit plans. These disclosures cover information such as the nature and extent of the risks associated with the plans, details of contributions, a summary of significant actuarial assumptions, and information about the fair value of plan assets.

Reporting by Sponsoring Employers: If a sponsoring employer accounts for its contribution to a defined contribution plan using accrual accounting, the financial statements should include information about the employer's obligation.

Consistency in Presentation: IAS 26 emphasizes the importance of consistency in the presentation of financial statements from one period to the next.