Introduction to Employee Benefits under IAS 19

When a company hires staff, the employee provides services to the employer in the form of work. In this article we’ll also take a quick look at some of the journal entries you should be aware of.

The employer then provides the employee with benefits, in the form of a basic wage or salary, but often provides other entitlements, some of which are required under law, these include:

  • Annual holidays
  • Cash bonuses
  • Health insurance
  • Pension benefits

Which accounting standards apply to employee benefits?

IAS 19 Employee Benefits provides guidance on the accounting treatment for these employee benefits. The standard matches the cost of providing employee benefits with the period in which the employees earn the benefits, this may be different to when they actually take the benefit.

Some employees also receive share options under a share ownership scheme, but these are covered by IFRS 2 – Share Based Payments.

The four categories of employee benefits we’ll look at are:

  • Short term employee benefits (Current employees, within 12 months)
  • Post employment benefits (after employee finishes, not termination payments)
  • Other long-term employee benefits
  • Termination benefits (before retirement)

Under IAS 19 – Employee Benefits, an entity must recognise:

  • a liability when an employee has provided a service in exchange for a benefit that will be paid in the future, and
  • an expense when the entity uses the service provided by the employee in exchange for employee benefits.

We’ll look at some detailed journal entries later on, but for now the basic entries that you’ll come across will be:

DR Employment cost (expense) XX
CR   Employee benefits (liability) XX

Short term employee benefits

Short term employee benefits are those benefits which are paid within twelve months after the end of the accounting period in which the employee provides their services.

These are accrued and recognised as a short-term liability in the financial statements.

Short term employee benefits include:

  • wages, salaries and social security contributions
  • paid annual leave and sick leave
  • profit-sharing payments and bonuses
  • other non-monetary benefits (e.g. health insurance, company car, subsidised goods)

How to account for short term employee benefits

In this example a company allows their employees 20 paid annual leave days per year. At the end of the year, any unused annual leave may be rolled over for one more year.

If any employees have unused annual leave at the end of the year, the company must recognised a liability for the monetary value of this unused leave and expense this amount in the period the leave is accrued but not taken.

For example, if Roscommon Limited paid wages and salaries of €400,000 in the year to 31 December 2013, and there were 100 days annual leave not taken in the period, the financial cost of this will be €15,000.

The basic journal entries for this will be:

DR Wages and salaries (expense) €415,000
CR   Bank €400,000
CR   Accrued Expenses (SOFP) €15,000

What if the company has a policy that unused annual leave will be forfeited after a certain period of time?

If this happens, the amount of the accrued expense for the forfeited leave will be reduced.

Exceptions to the rule: employment on qualifying assets

Keep an eye out that another accounting standard doesn’t govern the accounting treatment of employee expenses.

For example, if a group of employees is engaged to build a qualifying asset for the company, the costs should be included as part of the cost of the asset, not expensed. This is in accordance with IAS 23 – Borrowing Costs.

A basic journal entry for this will be:

DR Qualifying Asset (SOFP) XX
CR   Bank (payment of wages) XX

Accounting for profit sharing plans

Some companies have bonus schemes or profit sharing plans in place, where employees can get extra pay for meeting certain targets.

If these are in place, the entity should recognise the expected cost of the plan if:

  • there is a present obligation to make the payments as a result of past events, and
  • a reliable estimate of the obligation can be made.

The present obligation may arise from either a legal obligation, usually a written agreement, or a constructive obligation, which could arise from previous practice and custom.

The journal entries for a bonus scheme like this will be:

DR Wages and Salaries (expense) XX
CR   Accred Expenses (liability) XX