I.

Employee Benefits:

Employee benefits" is a term like an umbrella that includes insurance programs, fully
compensated absences (vacations, holidays, sick leave), pensions, stock ownership plans, and
employer-provided services (such as child care) offered by employers to their employees.
Employee benefits are also referred to as fringe benefits. Yet other benefits sometimes are
treated by government as forms of income for tax purposes. These include bonuses, profit
sharing, and the provision of a leased vehicle or housing. All "fringes" are by definition
offered at the employer's option; thus employer contributions to Social Security, Medicaid,
basic Medicare, Workers' Compensation, and other programs are not viewed as fringe
benefits; they are required under law.
Certain categories of employee benefits may require that the employee pay a part of the cost
of the benefit in order to receive the employer's contribution. For this reason, employees who
have access to benefits outnumber employees who actually participate in the benefits offered.

II.

Types of employee benefits:

There are two broad categories of benefits offered by employers in today's work
environment: mandated and optional.

1. Mandated Benefits Programs

Mandated benefits are those required by law. These include federal or state sponsored
programs that aim to provide for the most essential needs of employees and / or their
families. Examples of three very important, and mandated, benefits include:

Social Security
Unemployment Insurance
Workers Compensation

2. Optional Benefits Programs

As the name implies, optional employee benefits includes a wide array of programs that
employers can choose to offer employees; typical programs include:

Health Care Insurance

Disability Insurance
Life Insurance

Employee Benefits : Recognition, Measurement and Disclosure

Retirement / Pension Plans

Flexible Compensation
Paid Leave

Employee Benefits : Recognition, Measurement and Disclosure

III.

Examples of employee Benefits:

1. Health Care and Wellness:

Medical Benefits
Dental Benefits
Vision Benefits
Health Care Flexible Spending Account

2. Future Investments:
Registered Pension Plan
RRSP Plans
Life and AD&D Insurance
3. Work/Life Benefits:
Adoption Assistance
Auto & Homeowners Insurance
Banking
Employee Discounts
Telecommuting
Tuition Assistance Program
4. Time Away:
Company Paid Holidays
Vacation
Sick Time

IV.

Pros. and Cons. of Employee Benefits (optional

benefits):
Like most business decisions, there are pros and cons to consider when offering benefits.
Pros: There are many advantages to offering benefits, including:

Tax advantages. Entity may be able to deduct plan contributions.

Recruiting advantages. Entity can use benefits packages to attract good employees and
it can structure them in such a way to reward and thus retain your best employees.

Alternatives to pay. Sometimes employees will accept benefits in lieu of higher salaries.

Employee Benefits : Recognition, Measurement and Disclosure

 Cons: The biggest disadvantage of offering benefits is the cost. Benefits are costly to
large employers and that burden becomes even more significant for the small employer.
Specifically, conventional wisdom holds that smaller employers may encounter the
following challenges:

Pay higher rates than larger employers for group health care coverage because there are
fewer employees among who to spread risk.

Have more difficulty providing life insurance coverage to the employee group.

Have fewer design choices when offering a retirement plan because of high
administrative costs.

Be less likely to offer fringe benefits due to administrative complexity.

Employee Benefits : Recognition, Measurement and Disclosure

V.

Recognition, measurement and disclosure of Employee

Benefits:
International Accounting Standard 19 prescribes the Recognition, measurement and
disclosure by employers for employee benefits. It replaces IAS 19 Retirement Benefit Costs
which was approved in 1993.
International Accounting Standard 19 shall be applied by an employer in accounting for
all employee benefits. The employee benefits to which this Standard applies include
those provided:
I.
II.
III.

Under formal plans or other formal agreements between an entity and individual
employees, groups of employees or their representatives;
Under legislative requirements, or through industry arrangements, whereby entities
are required to contribute to national, state, industry or other multi-employer plans; or
By those informal practices that give rise to a constructive obligation. Informal
practices give rise to a constructive obligation where the entity has no realistic
alternative but to pay employee benefits.

IAS 19 identifies the following categories of employee benefits:

I.

Short term employee benefits being benefits that become due within 12 months after
the end of the period in which the employees render the related service. It includes
items such as wages, salaries and social security contributions, paid annual leave, paid
sick leave, profit sharing and bonuses;

II.

Post-employment benefits such as pensions, other retirement benefits, postemployment life insurance and post-employment medical care;

III.

other long-term employee benefits including long service leave or sabbatical leave,
jubilee or other long-service benefits, long term disability benefits, and if they are not
payable wholly within 12 months after the end of the period, profit sharing, bonuses
and deferred compensation;

IV.

Termination benefits;

Employee Benefits : Recognition, Measurement and Disclosure

a. Short-term employee benefits:

Short-term employee benefits are employee benefits which fall due wholly within twelve
months after the end of the period in which the employees render the related service.
Short-term employee benefits include items such as:
(a) Wages, salaries and social security contributions;
(b) Short-term compensated absences (such as paid annual leave and paid sick leave) where
the compensation for the absences is due to be settled within 12 months after the end of the
period in which the employees render the related employee service;
(c) profit-sharing and bonuses payable within twelve months after the end of the period in
which the employees render the related service; and
(d) Non-monetary benefits (such as medical care, housing, cars and free or subsidized goods
or services) for current employees.

1. Recognition and measurement:

All short-term benefits:
When an employee has rendered service to an entity during an accounting period, the entity
shall recognize the undiscounted amount of short-term employee benefits expected to be paid
in exchange for that service:
(a) As a liability (accrued expense), after deducting any amount already paid. If the amount
already paid exceeds the undiscounted amount of the benefits, an entity shall recognize that
excess as an asset (prepaid expense) to the extent that the prepayment will lead to, for
example, a reduction in future payments or a cash refund; and
(b) As an expense, unless another Standard requires or permits the inclusion of the benefits in
the cost of an asset.
Short-term compensated absences:
An entity shall recognize the expected cost of short-term employee benefits in the form of
compensated absences as follows:
(a) In the case of accumulating compensated absences, when the employees render
service that increases their entitlement to future compensated absences; and
(b) In the case of non-accumulating compensated absences, when the absences occur.
An entity may compensate employees for absence for various reasons including vacation,
sickness and short-term disability, maternity or paternity, jury service and military service.
Entitlement to compensated absences falls into two categories:
(a)

Accumulating and

(b)

Non-accumulating

Employee Benefits : Recognition, Measurement and Disclosure

Accumulating compensated absences are those that are carried forward and can be used in
future periods if the current periods entitlement is not used in full.
Non-accumulating compensated absences do not carry forward: they lapse if the current
periods entitlement is not used in full and do not entitle employees to a cash payment for
unused entitlement on leaving the entity.

2. Accounting treatment of short term employee benefits:

Balance sheet
Benefit Liability
Salaries payable
Vacation benefit payable

Assets
Prepaid benefit expenses (debit balance)

Liabilities
Accrued benefit liability
Stockholders Equity
*******

General Journal
Particulars
Debit
Short term employee
benefit expense
Ex: Salaries expenses
*****
Benefit liability
Ex: Salaries payable

Benefit Expense:
Vacation benefit expenses
Salaries expenses

Credit

*****

Income statement
Revenue
Expense:
Salaries expenses
Vacation benefit
expenses
Total expense

******
******
******
(****)

Net income

Employee Benefits : Recognition, Measurement and Disclosure

*****

Example: (Salary, wage)

Suppose A company pays its 100 employees every Thursday tk. 1800 (tk. 300 per day) each
for a six-day workweek that begins on Saturday. On Thursday, June 5 the company paid tk.
180000. This payment consists of tk. 30000 of salaries payable at May 31 plus tk. 150000 of
salaries expenses for June 1 to June 5. Therefore on June 5 the company will make following
entry:

June 05

Particulars

Debit

Salaries payable

30000

Salaries expenses

150000

cash

Credit

180000
To record June 5 payroll

At June 30 the salaries for the last 3 days of the month represents an accrued expenses and a
related liability. Thus accrued salaries at June 30 are tk. 90000.Pioneer will make the
following adjusting entry:

June 30

Particulars

Debit

Salaries expenses

90000

Salaries payable

Credit

90000

To record accrued salaries

After the company posts this adjusting entry, the accounts show below:
Salaries expenses
06/2
180000
6
Adj.
90000
06/3
0
06/3 Bal. 270000
0

Salaries payables
06/30 Adj.

90000

The fiscal year is ended on Wednesday, Dec 31.

Suppose salaries expenses showing a debit
balance of tk. 150000. So closing entry on Dec 31 will be the flowing:

Employee Benefits : Recognition, Measurement and Disclosure

Particulars
June 30

Income summary

Debit

Credit

150000

Salaries expenses

150000

Example: (vacation benefit)

Suppose ABC Companys employees are entitled for vacation benefits. If in a given month
the accrual for vacation benefits is $120000 then ABC Company will record the liability at
the end of the month by the following entry:

June 15

Particulars

Debit

Vacation benefit expenses

120000

Credit

Vacation benefit payable

120000

Later when the ABC Company will pay vacation benefits, it will debit vacation benefits
payable and credits cash. Suppose the company pay the Vacation benefit at July 15 then the
entry will be as follow:

July 15

Particulars

Debit

Vacation benefit payable

120000

Credit

Cash

120000

Employee Benefits : Recognition, Measurement and Disclosure

At the end of the fiscal year the company will close its Vacation benefit expenses account.
Assume that the company has an ongoing Vacation benefit expenses of tk.50000. So closing
entry on Dec 31 will be the flowing:

June 30

Particulars

Debit

Income summary

50000

Vacation benefit expenses

Credit

50000

3. Disclosure:
Although this Standard does not require specific disclosures about short-term employee
benefits, other Standards may require disclosures. For example, IAS 24 Related Party
Disclosures requires disclosures about employee benefits for key management personnel.
IAS 1 Presentation of Financial Statements requires disclosure of employee benefits expense.

Employee Benefits : Recognition, Measurement and Disclosure

10

b.

Post-employment benefits:

Post-employment benefits are employee benefits (other than termination benefits) which are
payable after the completion of employment. Post-employment benefit plans are formal or
informal arrangements under which an entity provides post-employment benefits for one or
more employees.
Post-employment benefits include, for example:
(a) Retirement benefits, such as pensions; and
(b) Other post-employment benefits, such as post-employment life insurance and postemployment medical care.
Post-employment benefit plans are classified as either defined contribution plans or defined
benefit plans.

b. 1. Post-employment benefits: defined contribution plans:

Defined contribution plans are post-employment benefit plans under which an entity pays
fixed contributions into a separate entity (a fund) and will have no legal or constructive
obligation to pay further contributions if the fund does not hold sufficient assets to pay all
employee benefits relating to employee service in the current and prior periods. Under
defined contribution plans:
(a) The entitys legal or constructive obligation is limited to the amount that it agrees to
contribute to the fund. Thus, the amount of the post-employment benefits received by the
employee is determined by the amount of contributions paid by an entity.
(b) In consequence, actuarial risk (that benefits will be less than expected) and investment
risk (that assets invested will be insufficient to meet expected benefits) fall on the
employee.

1. Recognition and Measurement:

IAS 19 requires entities to recognize the contributions payable to a defined contributions plan
in exchange for services rendered by an employee during the period:
(a) In the balance sheet as a liability (accrued expense) after deducting any contributions
already paid. If prepayments exceed the contribution due for service before the balance
sheet date, the excess should be recognized as an asset (prepaid expense) to the extent that
all prepayments are recoverable, for example, by a reduction in future payments or a cash
refund.
(b) In the income statement as an expense
The amount of contributions should be discounted if due more than 12 months after the end
of the period in which the employees render the related service.

Employee Benefits : Recognition, Measurement and Disclosure

11

2. Accounting treatment of defined contribution plans:

A company may report the pension plan asset, pension plan liability, and accumulated other
comprehensive income items, depending on the circumstances, on its balance sheet and
income statement as follow:

Balance sheet
Assets
Prepaid pension expense (debit balance)
Liabilities
Accrued pension liability (credit balance)
Stockholders Equity
General Journal
Particulars
Debit
Credit
Pension
expenses
*******
pension liability
******
Income statement
Revenue
*********
Expense:
Pension expenses
*******
*
Other expenses
*******
*
Total expense
(*******)
Net income
*******

Employee Benefits : Recognition, Measurement and Disclosure

12

Example: Defined Contribution Plan {pension 401 (k)}

Suppose a Company make a contribution on behalf of employee in its Defined Contribution Plan.

When company recognizes this contribution then it debits pension expense and credit pension
liability. If in a given month the Company recognizes a contribution of $5000 for pension fund
then Company will record the liability at the end of the month by the following entry:

June 30

Particulars

Debit

pension expenses

5000

Credit

pension liability

5000

Later when the ABC Company make this contribution then it debit pension liability and credit
cash as like follow:

July 15

Particulars

Debit

pension liability

5000

Credit

Cash

5000

3. Disclosure:

An entity shall disclose the amount recognized as an expense for defined contribution
plans.

Where required by IAS 24 Related Party Disclosures an entity discloses information

about contributions to defined contribution plans for key management personnel.

Employee Benefits : Recognition, Measurement and Disclosure

13

b. 2. Post-employment benefits: defined benefit plans:

Defined benefit plans are post-employment benefit plans other than defined contribution
plans. Under defined benefit plans:
(a) the entitys obligation is to provide the agreed benefits to current and former employees;
and
(b) Actuarial risk (that benefits will cost more than expected) and investment risk fall, in
substance, on the entity. If actuarial or investment experience are worse than expected, the
entitys obligation may be increased.

1. Recognition and measurement:

Accounting for defined benefit plans is complex because actuarial assumptions are required
to measure the obligation and the expense and there is a possibility of actuarial gains and
losses. Moreover, the obligations are measured on a discounted basis because they may be
settled many years after the employees render the related service.
Balance sheet:
IAS 19 requires entities to recognize in the balance sheet the net total of the following as the
defined benefit liability:
The present value (PV) of the defined benefit obligation (gross obligations before
deducting the fair value of plan assets);

Plus any actuarial gains(less any actuarial losses)

Minus any past service cost not yet recognized; and

Minus the fair value at the balance sheet date of plan assets (if any) out of which
obligations are to be settled directly.

If the net total (calculated in previous paragraph) is negative, the resulting asset recognized in
the balance sheet should be the lower of:
The net total calculated;

The net total of;

Any actuarial losses and past service costs not recognized as an expense; and

The present value (using the discount rate specified by the Standard) of any economic
benefits available in the form of refunds from the plan or reductions in future
contributions to the plan.

Employee Benefits : Recognition, Measurement and Disclosure

14

Income statement:
The enterprise should recognize in the income statement the net total of the following as
expense (or income), except to the extent that another IAS requires or permits their inclusion
in the cost of an asset:
Current service cost;
Interest cost;
The expected return on any plan assets and any reimbursement rights;
Actuarial gains and losses to the extent that they are recognized;
Past service cost to the extent required; and
The effect of any curtailment or settlement of the defined benefit plan.

2. Accounting treatment of defined benefit plans:

Net Pension Liability:

+PV of Pension Obligation
- FV of Pension Asset
+ Unrecognized Actuarial Gain / (Loss)
- Past Service Cost Not Yet Recognized
= Pension Liability / (Asset)

General Journal
Particulars
Debit
Pension
expenses
pension liability
******

Balance sheet
Assets
Prepaid pension expense(debit balance)
Liabilities
Pension liability
Stockholders Equity
*******

Credit

*****

Net Periodic Pension Expense:

Current Service
+Interest Cost
+(Return on Plan Assets)
+Amortization of Unrecognized Prior
Service Cost
+(Gains) or Losses (Unrecognized)
+Amortization of Existing Net
Obligation or Net Asset at
Implementation

Income statement
Revenue
Expense:
Pension expenses
Other expenses
Total expense

******
******
******
(****)

Net income

Employee Benefits : Recognition, Measurement and Disclosure

*****

15

3. Disclosure:
An entity shall disclose information that enables users of financial statements to evaluate the
nature of its defined benefit plans and the financial effects of changes in those plans during
the period.
An entity shall disclose the following information about defined benefit plans:
(a)

The entitys accounting policy for recognizing actuarial gains and losses.

(b)

A general description of the type of plan.

(c)
A reconciliation of opening and closing balances of the present value of the defined
benefit obligation showing separately, if applicable, the effects during the period attributable
to each of the following:
a. Current service cost
b. Interest cost
c. Contributions by plan participants
d. Actuarial gains and losses
e. Foreign currency exchange rate changes on plans measured in a currency different
from the entitys presentation currency,
f. Benefits paid,
g. Past service cost,
h. Business combinations,
i. Settlements.

Employee Benefits : Recognition, Measurement and Disclosure

16

c. Other long-term employee benefits:

Other long-term employee benefits are employee benefits (other than post-employment
benefits and termination benefits) which do not fall due wholly within twelve months after
the end of the period in which the employees render the related service.
Other long-term employee benefits include, for example:
(a)

Long-term compensated absences such as long-service or sabbatical leave;

(b)

Jubilee or other long-service benefits;

(c)

Long-term disability benefits;

(d)

Profit-sharing and bonuses payable twelve months or more after the end of the
period in which the employees render the related service; and

(e)

Deferred compensation paid twelve months or more after the end of the period
in which it is earned.

1. Recognition and measurement:

The amount recognized as a liability for other long-term employee benefits shall be the net
total of the following amounts:
(a)

The present value of the defined benefit obligation at the balance sheet date.

(b)

Minus the fair value at the balance sheet date of plan assets (if any) out of
which the obligations are to be settled directly.

For other long-term employee benefits, an entity shall recognize the net total of the following
amounts as expense or income, except to the extent that another Standard requires or permits
their inclusion in the cost of an asset:
(a)

Current service cost

(b)

Interest cost

(c)

The expected return on any plan assets and on any reimbursement right
recognized as an asset

(d)

Actuarial gains and losses, which shall all be recognized immediately;

(e)

Past service cost, which shall all be recognized immediately; and

(f)

The effect of any curtailments or settlements

Employee Benefits : Recognition, Measurement and Disclosure

17

2. Accounting treatment of Other long-term employee benefits:

Net long-term benefits liability:

present value of the defined benefit
obligation
- fair value of plan assets
= benefits Liability

General Journal
Particulars
Debit
benefit expenses
Ex: Sick day benefit
expenses
*****
Benefit liability

Balance sheet
Assets
Prepaid benefit expenses (debit balance)
Liabilities
Benefit liability
Stockholders Equity
*******

Credit

*****

Net long-term benefits

Expense:
Current service cost
+Interest cost
+The expected return on any plan assets
+Actuarial gains and losses
+Past service cost
+effect of any settlements

Income statement
Revenue
Expense:
Sick day benefit
expenses
Other expenses
Total expense

******
******
******
(****)

Net income

*****

3. Disclosure:
Although this Standard does not require specific disclosures about other long-term employee
benefits, other Standards may require disclosures, for example, where the expense resulting
from such benefits is material and so would require disclosure in accordance with IAS 1
Presentation of Financial Statements. When required by IAS 24 Related Party Disclosures,
an entity discloses information about other long-term employee benefits for key management
personnel.

Employee Benefits : Recognition, Measurement and Disclosure

18

d. Termination benefits:
Termination benefits are money paid to an employee whose employment has been terminated
because of a closedown or downsizing. Termination benefits are employee benefits payable
as a result of either:
(a) an entitys decision to terminate an employees employment before the normal retirement
date; or
(b) An employees decision to accept voluntary redundancy in exchange for those benefits.

1. Recognition and Measurement:

This Standard deals with termination benefits separately from other employee benefits
because the event which gives rise to an obligation is the termination rather than
employee service.

An entity shall recognize termination benefits as a liability and an expense when, and
only when, the entity is demonstrably committed to either:

(a) terminate the employment of an employee or group of employees before the normal
retirement date; or
(b) Provide termination benefits as a result of an offer made in order to encourage voluntary
redundancy.

Where an entity recognizes termination benefits, the entity may also have to account for a
curtailment of retirement benefits or other employee benefits.

Where termination benefits fall due more than 12 months after the balance sheet date,
they shall be discounted.

In the case of an offer made to encourage voluntary redundancy, the measurement of

termination benefits shall be based on the number of employees expected to accept the
offer.

2. Disclosure:
Where there is uncertainty about the number of employees who will accept an offer of
termination benefits, a contingent liability exists. As required by IAS 37 an entity discloses
information about the contingent liability unless the possibility of an outflow in settlement is
remote.

Employee Benefits : Recognition, Measurement and Disclosure

19

As required by IAS 1, an entity discloses the nature and amount of an expense if it is

material. Termination benefits may result in an expense needing disclosure in order to comply
with this requirement.

VI. Conclusion:
The accounting for employee benefits, for pensions in particular, is complex. The liabilities in
defined benefit pension plans are frequently material. They are long-term and difficult to
measure, and this gives rise to difficulty in measuring the cost attributable to each year.
Employee benefits are all forms of consideration given or promised by an entity in exchange
for services rendered by its employees. Recognition and measurement for short-term benefits
is relatively straightforward, because actuarial assumptions are not required and the
obligations are not discounted. However, long-term benefits, particularly post-employment
benefits, give rise to more complicated measurement issues. In June 2011, the International
Accounting Standards Board (IASB or the Board) issued revisions to IAS 19 Employee
Benefits (the revisions, IAS 19R or revised standard) that provide significant changes in
the recognition, presentation and disclosure of post-employment benefits. IAS 19R also
changes the accounting for termination benefits and short-term employment benefits, along
with a number of more minor clarifications and re-wording of the standard. The impact of
these revisions could range from significant to immaterial. Regardless of the magnitude,
employee compensation is a fundamental area of accounting and all entities need to be aware
of these changes and carefully consider the potential implications.

VII. References:
Pearcy L., Mersureau A., Tokar M. (2011) , First impression: Employee benefits, UK, KPMG
limited
Australian accounting standard board (2013), Defined Benefit Plans: Employee
Contributions, Publication no: 239, Australian government printing office.
Heckaboom W., 2011, Accounting for Pensions and Employee Benefits (IAS 19), 17, 03, 2014;
Website:http://whatheheckaboom.wordpress.com/2011/12/06/accounting-for-pensions-and-employeebenefits-ias-19/#comment-1126
Hamidi Ravari A., August 1, 2003, IAS 19: Employee Benefits A Summary

Employee Benefits : Recognition, Measurement and Disclosure

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