Attributing Benefit to Periods of Service (IAS 19)

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Marek Muc
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Attributing Benefit to Periods of Service (IAS 19)

Post by Marek Muc »

This one caught my eye:
https://www.ifrs.org/news-and-events/up ... er-2020/#2

In Poland, the retirement benefit is paid to each employee that leaves a company because of the retirement. It equals to monthly salary irrespective of the seniority. As I read the agenda decision linked to above, I would say that I should not recognise the retirement benefit until one month before the retirement, so this basically means that I recognise it on a cash basis. What is your opinion?

The practice in Poland is different, the actuarial provision for the retirement benefit is built up from the very day when employee joins the company (after taking expected turnover into account).

How are the retirement benefits determined in your country and what is the practice for accounting for them?
pub_acco
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Re: Attributing Benefit to Periods of Service (IAS 19)

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I think in the agenda decision case, the employees are entitled to receive payments in proportion of their service years up to 16, so the obligations are spread over the 16 years. It sounds like in your Poland case, employees receive the monthly salary irrespective of their service years, so the obligations have to be spread over the expected years of service, maybe?

In my country, more and more companies switch to DC plans but in the good old days, employees got entitled every year to a portion (usually monthly salary times a variable coefficient depending on age, performance, etc.) of retirement benefits. The employees were able to receive the benefits at retirement or voluntary quit, and if at retirement, they could choose to receive the benefits as a lump payment or as lifetime pensions. So the accounting does need complex actuarial calculations and actuaries earn decent money.
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Re: Attributing Benefit to Periods of Service (IAS 19)

Post by JRSB »

In the UK, at least in my experience, such schemes are old fashioned and avoided like the plague. Where they do appear absolutely everything is done by an actuary who gives the accounting entries on a plate... :lol:
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Marek Muc
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Re: Attributing Benefit to Periods of Service (IAS 19)

Post by Marek Muc »

@pub_acco, I note what IFRIC wrote:
if an employee joins the entity before the age of 46 (ie there are more than 16 years before the employee’s retirement age), any service the employee renders before the age of 46 does not reduce the amount of future service the employee will have to render in each successive reporting period before becoming entitled to the retirement benefit. Employee service before the age of 46 affects neither the timing nor the amount of the retirement benefit. Accordingly, the entity’s obligation to provide retirement benefits arises only from the age of 46.
so in my example, I can say that if an employee joins the entity before his retirement age minus one month, any service the employee renders before that age does not reduce the amount of future service the employee will have to render in each successive reporting period before becoming entitled to the retirement benefit

PS. apart from this retirement benefit paid by employer, there is a state-wide defined contribution plan. I guess this benefit worth one month's salary is to finance the retirement party :)
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Re: Attributing Benefit to Periods of Service (IAS 19)

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this case bugged me and I see that IAS 19 has the answer in para. 73 with the following example:
A plan pays a lump sum retirement benefit of CU2,000 to all employees who are still employed at the age of 55 after twenty years of service, or who are still employed at the age of 65, regardless of their length of service.[...]

For an employee who joins at the age of 55, service beyond ten years will lead to no material amount of further benefits. For this employee, the entity attributes benefit of CU200 (CU2,000 divided by ten) to each of the first ten years.
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Re: Attributing Benefit to Periods of Service (IAS 19)

Post by pub_acco »

Getting confused too in particular about the relationship between the IFRIC decision and para 72 :? Para 72 says the obligations have to be also allocated to the periods before "vesting" conditions are met. So in your Poland case, because even 20-year-old employees may become eligible for the retirement payments decades later at a certain probability (though close to zero percent), I think a very small portion of the obligations have to be allocated to their 20s. But I’m not sure enough why this logic doesn’t apply to the agenda decision case. Maybe because of the difference between formal vs. constructive obligations?

Btw the good old day DB plans are totally old fashioned in my country too ;) But the complex accounting goes on as the obligations continue to exist :(
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Re: Attributing Benefit to Periods of Service (IAS 19)

Post by Marek Muc »

I guess this sentence from par.73 is the key:
However, if an employee’s service in later years will lead to a materially higher level of benefit than in earlier years, an entity attributes benefit on a straight‑line
basis until the date when further service by the employee will lead to no material amount of further benefits.
My Polish example satisfies this 'test' and therefore is treated as a kind of exception to general rule of attributing benefit to periods of service
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Re: Attributing Benefit to Periods of Service (IAS 19)

Post by pub_acco »

Makes sense.
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