Termination and short-term employee benefits

• What are employee benefits?
• Short-term employee benefits
• Termination benefits
• Presentation and disclosure

What are employee benefits?


Employee benefits are those benefits an entity gives in exchange for services rendered by employees [IAS19R.7] . Employee benefits are usually exchanged for employee's service, although the obligation to pay benefits may also arise from the termination of employment [IAS19R.132]. The obligation to pay employee benefits arises from contractual arrangements between the entity and employee, legislative requirements, industry practice and business practice. An entity usually settles employee benefits with cash payment or non-monetary benefits such as goods and services. Employee benefits may be paid in the period, or in the future, for example, post-employment benefits [IAS19R.24].

Short-term employee benefits


Short-term employee benefits are those that the entity expects to pay within twelve months after the end of the period in which the employees render the related service [IAS19R.7]. They include wages, salaries, national pension and insurance contributions, paid annual and parental leave, paid sick leave, and non-monetary benefits, for example medical care, housing, and car allowances. Short-term employee benefits include profit-sharing and bonus payments payable within twelve months after the employee provides the service [IAS19R.8]. Benefits payable after this period are accounted for as post-employment employee benefits or other long-term employee benefits . Certain benefit plans provide employers with equity instruments of the entity or cash payments based on appreciation in the entity's shares. The recognition and measurement issues for these plans are dealt with in section 104 .

Initial recognition
The accounting for short-term employee benefits is generally straightforward because no actuarial assumptions are required to measure the obligation or cost [IAS19R.9]. Employee benefits usually accrue with service, that is, when the employees render services their entitlement to the benefit is increased . An entity should recognise the cost of providing short-term employee benefits when an employee has rendered a service to the entity, regardless of whether the benefit is paid in the period [IAS19R.11(a)]. Certain benefits may not accumulate with service (non-accumulating benefits) and lapse if not used in a given period. This may be the case for sick pay and parental leave. Recognition on the basis of employee service is therefore not appropriate, and the entity should recognise the cost of these benefits at the time the employee uses them [IAS19R.11(b)] .

Other forms of short-term employee benefits arise from profit-sharing plans between the entity and the employee, and employee bonuses. Profit-sharing plans usually provide for employees to receive a share of profit if they remain with the entity for a specified period, or meet specific performance criteria [IAS19R.18]. The entity should recognise the cost of providing such benefits when it has a present obligation, either legal or constructive, that it can measure reliably [IAS19R.17]. Benefits provided under profit-sharing and bonus schemes are often more a matter of common practice than legal obligation. An entity that has an established practice of profit-sharing and bonus payments often has no realistic alternative but to compensate employees under these schemes, and has a constructive obligation [IAS19R.19]. The obligation arises as the employees meet a service requirement or, for a performance-based plan, the performance criteria .

The entity should recognise the cost of providing employee benefits as an expense in the period, or as an asset where the cost forms part of getting an asset ready for use [IAS2R.12] [IAS16R.17] . Any unpaid amounts should be recognised as a liability (accrued expense).

Initial measurement
Initial measurement of short-term benefits is the undiscounted amount of short-term benefits that the entity has paid or expects to pay to the employee [IAS19R.10]. These amounts are easily established for wages and salaries. The cost of accumulating benefits such as short-term compensated absences is the additional amount that an entity expects to pay as a result of any unused entitlement outstanding at balance date [IAS19R.14] .

An entity can usually make a reliable estimate of a legal or constructive obligation under a profit-sharing or bonus scheme when the terms of the plan contain a formula for determining the amount of the benefit [IAS19R.20(a)]. Alternatively, the amount of a constructive obligation can be estimated from announcements the entity has made [IAS19R.20(b)], or from past practice that is indicative of the amount the entity will offer employees in the current period [IAS19R.20(c)] .

An entity can usually measure reliably the amount of benefits under profit-sharing and bonus schemes when: there is a formal plan; management has made a formal announcement about a plan's terms and conditions; or when past practice is highly indicative of the conditions of a current plan [IAS19R.18] [IAS19R.20] .

Subsequent measurement
An entity should re-measure the liability for short-term benefits to take account of:

a)	amounts paid to employees;
b)	amounts that accrue, for accumulating benefits as an employee provides a service; and
c)	a change in the estimated amount of employee benefits.

An entity's estimate of its obligation for employee benefits should be reviewed periodically. Changes in wage rates for example may impact on the obligation for compensated absences such as annual leave. Employee turnover rates that vary from the original estimate will impact on payments under profit-sharing and bonus schemes.

Initial recognition
The obligation for short-term employee benefits accrues as the entity consumes employee services [IAS19R.10]. The obligation for termination benefits arises from the termination of those services.

An entity should recognise the cost of termination benefits as a liability when it has a present obligation to terminate the employees' services that it can measure reliably. An obligation exists when an entity is demonstrably committed to either: terminate the employment of employees before the normal retirement date; or provide termination benefits to employees who accept an offer of voluntary redundancy [IAS19R.133].

The criteria that determine whether an entity is demonstrably committed to a termination are similar to those for a restructuring [IAS37R.70]. The entity must have a detailed formal plan for the termination from which it cannot realistically withdraw. An entity cannot usually withdraw when it has an obligation imposed by legislation or contractual agreement, or a constructive obligation as a result of management's commitments and practices. The plan should include the location, function and number of employees whose services are to be terminated, the termination benefits for each job classification or function, and the time the plan will be implemented [IAS19R.134] .

The cost of termination should be recognised as an expense in the period in which the obligation arises.

Initial measurement
An entity should measure the amounts of the obligation for termination benefits on the basis of the number of employees that are expected to receive them [IAS19R.140]. The obligation is easily established for involuntary termination plans where the entity establishes the number of employees whose services will be terminated. The measurement of the entity's obligation for termination payments in the case of an offer made to encourage voluntary termination should be based on the number of employees expected to accept the offer or, where management intends to reduce staff numbers by a given amount, the cost of doing so .

Where termination benefits fall due more than twelve months after the balance sheet date they should be discounted using the same methodology as described for provisions generally [IAS19R.139] .

Subsequent measurement
An entity's estimate of its obligation for termination benefits should be reviewed periodically and re-measured where appropriate, in particular for benefits provided under voluntary termination schemes.

a)	in the notes to the financial statement, the amount of short-term employee benefits and termination benefits for key management personnel; [IAS24.16(a), 24.16(d)] [IAS19R.143];
b)	on the face of the income statement or in the notes, employee benefits costs [IAS1R.91,93].