1. Section 21 Provisions and Contingencies Section 28 Employee Benefits
The IFRS for SMEs
Topic 3.1
Section 20 Leases
Section 21 Provisions and Contingencies
Section 28 Employee Benefits
© 2011 IFRS Foundation

2. 2
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The accounting requirements applicable to small and medium‑sized entities (SMEs) are set out in the International Financial Reporting Standard (IFRS) for SMEs, which was issued by the IASB in July 2009.
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3. The IFRS for SMEs 3
Section 20 Leases
© 2011 IFRS Foundation 3

4. Section 20 – scope 4
A lease is an agreement whereby the lessor conveys to the lessee in return for payment or a series of payments the right to use an asset for an agreed period of time
Section 20 covers accounting and reporting for most leases (see paragraphs 20.1–20.3 for exceptions and inclusions)
© 2011 IFRS Foundation 4

5. Section 20 – classification of leases5
A lease is classified
a finance lease if it transfers substantially all the risks & rewards incidental to ownership
an operating lease if it does not transfer substantially all the risks & rewards incidental to ownership
Use judgement considering all facts & circumstances to classify leases
operating lease if lessor retains significant risks & rewards of ownership
substance of finance lease is similar to the purchase of an asset on credit.
© 2011 IFRS Foundation 5

6. Section 20 – classification of leases continued6
Situations that individually or in combination normally indicate a finance lease:
lease transfers ownership of the asset to lessee
from inception lessee reasonably certain to exercise bargain purchase option
lease term is for the major part of asset’s economic life
at inception PV of MLPs = substantially all asset’s fair value
specialised asset (only lessee can use without major modifications)
© 2011 IFRS Foundation 6

7. Section 20 – classification of leases continued7
Situations that individually or in combination could indicate a finance lease
lessee can cancel the lease but compensates the lessor’s for associated losses
gains or losses from the fluctuation in the residual value of the leased asset accrue to the lessee
lessee can continue the lease for a secondary period at a rent that is substantially lower than market rent
© 2011 IFRS Foundation 7

8. Section 20 – lease classification Ex8
Ex 1: On 1/1/20X1 enter into 5-yr non‑cancellable lease over a machine.
Machine’s cash cost = 100,000, economic life = 10 yrs and residual value = 0.
Annual lease payments on 31/12: 4 × 23,000 & 23,539 at end of yr 5 when ownership transfers to the lessee.
The interest rate implicit in the lease is 5% p.a. which approximates lessee’s incremental borrowing rate.
© 2011 IFRS Foundation

9. Section 20 – lease classification Ex9
Ex 2: Same as Ex 1 except ownership of the machine does not automatically transfer to the lessee at the end of the lease. Instead, the lessee has an option to acquire the machine from the lessor on 1/1/20X6 for CU1.
Ex 3: Same as Ex 1 except economic life of the machine is five years and ownership of the machine does not transfer to the lessee at the end of the lease.
© 2011 IFRS Foundation

10. Section 20 – lease classification Ex10
Ex 4: Same as Ex 1 except ownership does not transfers to lessee at the end of the lease. Instead lessee has an option to continue the lease asset for a further 5 years at a rent of CU1 per year.
Ex 5: Same as Ex 1 except ownership transfers to the lessee at the end of the lease for a variable payment equal to the asset’s then fair value (instead of 23,539).
© 2011 IFRS Foundation

11. Section 20 – lease classification Ex11
Ex 6: Tripartite lease agreement.
Lessor transfers substantially all risks & rewards to 2 unrelated parties:
the lessee obtains the right of use of the leased asset for a period of time; and
the other party contracts to acquire the leased asset from the lessor at the end of the lease term at a fixed price.
© 2011 IFRS Foundation

12. Section 20 – lease classification Ex12
Ex 6 continued:
Lease classification:
lessor = finance lease
lessee = operating lease
other party has firm commitment to acquire asset
© 2011 IFRS Foundation

13. (finance lease & operating lease)
The IFRS for SMEs 13
Lessee
(finance lease & operating lease)
© 2011 IFRS Foundation 13

14. Section 20 – lessee: finance lease14
Initial recognition & measurement:
recognise assets (rights) & liabilities (obligations) at fair value of leased property or, if lower, the present value of the minimum lease payments
add to asset the lessee’s incremental costs that are directly attributable to negotiating & arranging a lease
© 2011 IFRS Foundation 14

15. Section 20 – lessee: finance lease continued15
Subsequent measurement:
apportion minimum lease payments between finance charge & liability using effective interest method
depreciate asset in accordance with relevant section (eg Section 17 PP&E)
© 2011 IFRS Foundation 15

16. Section 20 – lessee: finance lease Ex16
Ex 7: Same as Ex 1.
Finance lease obligation amortisation table:
1 Jan
Finance cost
Payment
31 Dec
20X1
100,000
5,000
(23,000)
82,000
20X2
4,100
63,100
20X3
3,155
43,255
20X4
2,163
22,418
20X5
1,121
(23,539) –
© 2011 IFRS Foundation

17. Section 20 – lessee: finance lease Ex17
Ex 7 continued:
1/1/20X1 (initial recognition) recognise:
asset (PP&E) 100,000; and
liability (finance lease obligation) 100,000
For the year ended 31/12/20X1 recognise:
allocate payment of 23,000 (5,000 finance cost in profit or loss & 18,000 repayment of finance lease obligation)
CU10,000 depreciation expense in profit or loss and as a reduction to the asset
© 2011 IFRS Foundation

18. Section 20 – lessee: finance lease continued18
Disclose:
For each class of asset, the net carrying amount at reporting date
Total FMLPs on reporting date, showing due (i) in < 1 year; (ii) > 1 year but < 5 yrs; (iii) in > 5 years
General description of significant leasing arrangements
Also see Sections 17, 18, 27 and 34.
© 2011 IFRS Foundation 18

19. Section 20 – lessee: operating lease19
Recognition & measurement:
expense lease payments on straight-line basis unless:
another systematic basis is more representative of the user’s benefit; or
payments are structured to increase in line with expected general inflation (based on published indexes or statistics).
© 2011 IFRS Foundation 19

20. Section 20 – operating lease examples
Ex 8: On 1/1/20X1 A entered into a 5-year non‑cancellable operating lease over a building.
Rentals X1–X4 = 0. Rental X5 = 5,000.
Ex 9: Same as Ex 8 except lessor agrees to pay the lessee’s relocation costs (ie 500) as an incentive to the lessee for entering into the new lease
Ex 10: Operating lease payments increase by expected CPI (10% p.a.) to compensate the lessor for expected inflation.
X1 = 1,000; X2 = 1,100; X3 = 1,210; etc
© 2011 IFRS Foundation

21. Section 20 – lessee: operating lease21
Disclose:
Total FMLPs for non-cancellable operating leases, showing due (i) in < 1 year;
(ii) > 1 year but < 5 years; (iii) in > 5 years
lease payments recognised as an expense
a general description of the lessee’s significant leasing arrangements
including for example, information about contingent rent, renewal or purchase options and escalation clauses, subleases, and restrictions imposed by lease arrangements
© 2011 IFRS Foundation 21

22. (finance lease & operating lease)
The IFRS for SMEs 22
Lessor
(finance lease & operating lease)
© 2011 IFRS Foundation 22

23. Section 20 – lessor: finance lease23
Initial recognition & measurement:
recognise assets held under a finance lease (a receivable) at an amount equal to the net investment in the lease (ie gross investment in the lease discounted at the interest rate implicit in the lease). The gross investment in the lease is the aggregate of:
(a) the minimum lease payments receivable by the lessor under a finance lease, and
(b) any unguaranteed residual value accruing to the lessor.
© 2011 IFRS Foundation 23

24. Section 20 – lessor: finance lease24
Subsequent measurement
recognise finance income—constant periodic rate of return on net investment in lease
apply lease payments against gross investment in the lease to reduce both the principal & the unearned finance income.
if indication that estimated unguaranteed residual value used in computing the lessor’s gross investment in lease has changed significantly, income allocation over lease term is revised, & reduction in respect of amounts accrued recognised immediately in profit/loss
© 2011 IFRS Foundation 24

25. Section 20 – lessor: finance lease25
Other issues:
Manufacturer or dealer lessors have 2 types of income:
profit or loss equivalent to the profit or loss resulting from an outright sale of the asset being leased, at normal selling prices, reflecting any applicable volume or trade discounts, and
finance income over the lease term.
Disclosures (see paragraph 20.23)
© 2011 IFRS Foundation 25

26. Section 20 – lessor: operating lease26
Recognition & measurement
lease payments as income on straight-line basis unless:
another systematic basis is more representative of the user’s benefit; or
payments are structured to increase in line with expected general inflation (based on published indexes or statistics)
recognise other costs incurred in earning the lease income (eg depreciation)
© 2011 IFRS Foundation 26

27. Section 20 – lessor: operating lease27
Examples
Ex 11: On 1/1/20X1 A entered into a 5-yr non‑cancellable operating lease over a building.
No rentals for 4 yrs. Rental for yr-5 = 5,000.
Ex 12: Same as Ex 11 except lease payments increase by expected CPI (10% p.a.) to compensate the lessor for expected inflation. X1 = 1,000; X2 = 1,100; X3 = 1,210; etc
© 2011 IFRS Foundation

28. Sale and lease-back transactions (finance lease & operating lease)
The IFRS for SMEs 28
Sale and lease-back transactions
(finance lease & operating lease)
© 2011 IFRS Foundation 28

29. Section 20 – sale and leaseback29
A sale and leaseback transaction involves the sale of an asset and the leasing back of the same asset.
the lease payment & the sale price are usually interdependent because they are negotiated as a package
the accounting treatment of a sale and leaseback transaction depends on the type of lease (finance or operating).
© 2011 IFRS Foundation 29

30. Section 20 – finance leaseback30
Recognition of sale & finance leaseback
the seller-lessee defers recognition of income (ie does not recognise any excess of sales proceeds over the carrying amount in profit or loss immediately)
Deferred income is recognised in profit or loss over the lease term
© 2011 IFRS Foundation 30

31. Section 20 – operating leaseback31
Recognition of sale & operating leaseback by seller-lessee
if at FV, recognise profit or loss immediately
if SP < FV & lease payments not adjusted, recognise profit or loss immediately
if SP < FV & lease payments are adjusted, defer & amortise such loss in proportion to the lease payments over the period for which the asset is expected to be used.
If SP > FV defer the excess over fair value and amortise it over the period for which the asset is expected to be used.
© 2011 IFRS Foundation 31

32. Section 20 – operating leaseback examples32
Ex 13: On 1/1/20X1 A sells a building (CA = 85,000) for 100,000 (fair value) & rents it back under a 3-yr operating lease.
Lease rentals = 9,500 (payable yearly in arrears).
On 31 January 20X1 the remaining economic life of the building was 25 years with nil residual value.
© 2011 IFRS Foundation

33. Section 20 – operating leaseback examples33
Ex 14: Same as Ex 13 except SP = 95,000 & rentals = 7,800.
Ex 15: Same as Ex 13 except SP = 80,000 & rentals = 2,800.
© 2011 IFRS Foundation

34. Provisions & Contingencies
The IFRS for SMEs 34
Section 21
Provisions & Contingencies
© 2011 IFRS Foundation 34

35. except those provisions covered by other sections including:
Section 21 – scope 35
Section 21 applies to accounting & reporting of provisions, contingent liabilities & contingent assets
except those provisions covered by other sections including:
leases (Section 20). However, Section 21 covers onerous operating leases
construction contracts (Section 23)
employee benefit obligations (Sec. 28)
income tax (Section 29)
© 2011 IFRS Foundation 35

36. A liability is a present obligation…
Section 21 – provisions 36
Provisions are liabilities of uncertain timing or amount.
A liability is a present obligation…
A present obligation may be either
–legal (binding contract or statutory requirement)
–constructive (derives from an entity’s actions which the entity has no realistic alternative to settling)
© 2011 IFRS Foundation 36

37. Section 21 – examples provisions37
Ex 1*: Waste from A’s factory contaminated the groundwater. Lawsuit: local community seek compensation for damages to health from contamination. A acknowledges wrongdoing. Court is deciding extent of the compensation. Lawyers expect ruling in +2 yrs & compensation in the range of CU1,000,000 to CU30,000,000.
* see example 1 in Module 21 of the IFRS Foundation training material
© 2011 IFRS Foundation 37

38. Section 21 – examples provisions continued38
Ex 2*: Waste from A’s factory contaminated the groundwater. Required by law to restore the environment. Estimates restoration cost between 1,000,000 & 15,000,000. Unsure of period to complete restoration.
Ex 3*: A manufacturer gives warranties to the purchasers of its goods. Warranty = make good, by repair or replacement, manufacturing defects that become apparent within 3 years of sale.
*see example with the same number in Module 21 of the IFRS Foundation training material
© 2011 IFRS Foundation 38

39. Section 21 – examples not provisions39
Ex 4*: ‘provision’ for self-insurance
Ex 5*: Ski-resort operator operates in a very cyclical business, with ‘good years’ and ‘bad years’ depending primarily on the weather. To reduce earnings volatility, it recognises ‘provisions’ in ‘good years’ to reverse in ‘bad years’.
Ex a: ‘provision’ for depreciation
Ex b: ‘provision’ for doubtful debts
* see example with the same number in Module 21 of the IFRS Foundation training material
© 2011 IFRS Foundation 39

40. Section 21 – example constructive oblig.40
Ex 12*: Waste from A’s factory contaminated the groundwater. A is not required by law to restore the contaminated environment & there is no court case. However, in the reporting period the entity publicly announced that it would restore the contaminated environment within the next 12 months.
* see example 12 in Module 21 of the IFRS Foundation training material
© 2011 IFRS Foundation 40

41. Section 21 – recognition of provisions41
Recognise a provision when:
the entity has an obligation at the reporting date as a result of a past event;
it is probable (ie more likely than not) that the entity will be required to transfer economic benefits in settlement; &
the amount of the obligation can be estimated reliably.
Use of estimates is essential part of preparing financial statements and does not undermine their reliability.
© 2011 IFRS Foundation 41

42. Section 21 – measurement of provisions42
Measure provision at best estimate of the amount required to settle the obligation at the reporting date = amount an entity would rationally pay to settle the obligation at the end of the reporting period or to transfer it to a third party at that time.
Review provisions at each reporting date & adjust them to reflect the current best estimate at that reporting date.
unwinding of the discount is a finance cost
© 2011 IFRS Foundation 42

43. Section 21 – best estimate43
If large population of items, best estimate reflects probability weighting of all possible outcomes.
If single obligation, best estimate = adjusted individual most likely outcome
Present value using pre-tax discount rate/s that reflect current market assessments of the time value of money (& risks specific to the liability if not already reflected in estimated cash flows).
© 2011 IFRS Foundation 43

44. Section 21 – examples measurement44
Ex 14*: A has 1,000 units of a product sold with active warranties (ie A will repair defects found up to 6 months after sale).
Probabilities & repair cost: major defect = 5% chance of CU400 repair; minor defect = 20% chance of CU100 repair; 75% chance of no defects.
Best estimate (expected value) = CU40,000
Calculation: (75% x 1,000 units x nil) + (20% x 1,000 units x CU100) + (5% x 1,000 units x CU400)
* see example 14 in Module 21 of the IFRS Foundation training material
© 2011 IFRS Foundation 44

45. Section 21 – examples measurement45
Ex 15*: Personal injury lawsuit brought by customer. Lawyers estimate 30% chance compensation = CU2,000,000 & 70% chance = CU300,000. Ruling expected in 2 years. Discount rate = 4% per year (ie 2‑year government bonds = 5% less 1% risks specific to liability).
Individual most likely outcome = CU300, Because only other possible outcome is higher, the best estimate to settle the obligation at 31/12/20X1 will be higher than PV of the most likely outcome of CU300,000, eg PV of CU810,000 at 4% = ±CU748,890
* see example 15 in Module 21 of the IFRS Foundation training material
© 2011 IFRS Foundation 45

46. Section 21 – example remeasurement46
Ex 25*: Provision for a lawsuit = CU40,000 at 31/12/20X1 & remeasured to CU90,000 at 31/12/20X2. CU3,000 of the increase = unwinding of the discount & the remainder is for better information becoming available.
The increase of CU50,000 will be recognised as an expense in the determination of the entity’s profit or loss for the year ended 31/12/20X2
CU3,000 = finance cost
CU47,000 = change in estimate
* see example 25 in Module 21 of the IFRS Foundation training material
© 2011 IFRS Foundation 46

47. Section 21 – provision disclosure47
For each class of provision, no comparatives
a reconciliation showing
CA opening & closing
additions, incl. measurement adjustments
charged against provision in period
unused amounts reversed in period
nature, expected payments (amount & timing)
indication of uncertainties (amount or timing)
amount of any expected reimbursement & amount recognised as an asset
© 2011 IFRS Foundation 47

48. Section 21 – contingent liabilities48
A contingent liability is either:
(i) a possible but uncertain obligation; or
(ii) a present obligation that is not recognised because it fails the recognition criteria in paragraph 21.4.
© 2011 IFRS Foundation 48

49. Section 21 – contingent liabilities49
Do not recognise a contingent liability as a liability (except contingent liabilities of an acquiree in a business combination).
Contingent liabilities are disclosed unless the possibility of an outflow of resources is remote.
When an entity is jointly and severally liable for an obligation, the part of the obligation that is expected to be met by other parties is treated as a contingent liability.
© 2011 IFRS Foundation 49

50. Section 21 – example contingent liability50
Ex 29*: Community is seeking compensation from A for damages to their health as a result of contamination believed to be caused by A’s plant.
It is doubtful whether A is the source of the contamination because
–many entities operate in the same area producing similar waste & it is unclear which entity is the source of the leak
–A has taken precautions to avoid leaks & is vigorously defending the case.
* see example 29 in Module 21 of the IFRS Foundation training material
© 2011 IFRS Foundation 50

51. Section 21 – example contingent liability51
Ex 29 continued: However, it is not certain that A did not cause the leak & the true offender will only become known after extensive testing has been performed.
A’s legal counsel expects a court ruling in approximately 2 years. If A loses the case, compensation is likely to be in the range of CU1,000,000 to CU30,000,000.
© 2011 IFRS Foundation 51

52. Section 21 – example contingent liability52
Ex 29 continued:
It may be uncertain whether the entity has a present obligation—this is the matter being determined by the court.
if taking account of all of the available evidence, it is probable that the entity will successfully defend the court case then the entity has a possible obligation & hence a contingent liability.
© 2011 IFRS Foundation 52

53. Section 21 – contingent liab disclosure53
For each class of contingent liability unless the possibility of any outflow is remote, disclose, a brief description of the nature of the contingent liability and, when practicable:
estimate of its financial effect (measured like a provision);
indication of uncertainties of amount or timing; &
possibility of any reimbursement.
If impracticable to make one or more of these disclosures, that fact shall be stated.
© 2011 IFRS Foundation 53

54. Section 21 – contingent asset54
Do not recognise a contingent asset as an asset.
Disclose a contingent asset when an inflow of economic benefits is probable.
However, when the flow is virtually certain, then the related asset is not a contingent asset, and its recognition is appropriate.
© 2011 IFRS Foundation 54

55. Section 21 – contingent asset disclosure55
If an inflow of economic benefits is probable (more likely than not) but not virtually certain, disclose:
a description of the nature of the contingent assets at the end of the reporting period, and
when practicable without undue cost or effort, an estimate of their financial effect (measured using the principles set out for measuring provisions).
If it is impracticable to make this disclosure, that fact shall be stated.
© 2011 IFRS Foundation 55

56. Section 21 – prejudicial disclosures56
In extremely rare cases, disclosure of some or all of the information required by para’s 21.14–21.16 can be expected to prejudice seriously the position of the entity in a dispute with other parties on the subject matter of the provision, C liab. or C asset.
In such cases, need not disclose the information, but must disclose the general nature of the dispute, together with the fact that, & reason why, the information has not been disclosed.
Note: no recognition & measurement exemption for provisions.
© 2011 IFRS Foundation 56

57. Section 28 Employee Benefits
The IFRS for SMEs 57
Section 28
Employee Benefits
© 2011 IFRS Foundation 57

58. Section 28 – scope 58
Employee benefits (EBs) are all forms of consideration given by an entity in exchange for service rendered by employees, including directors and management.
Section 28 applies to all EBs, except for share-based payment transactions, which are covered by Section 26 Share-based Payment.
© 2011 IFRS Foundation 58

59. Section 28 – types of employee benefits59
4 types of EBs:
short-term employee benefits
post-employment benefits
other long-term employee benefits
termination benefits
And equity compensation (see Section 26)
© 2011 IFRS Foundation 59

60. Section 28 – general recognition criteria60
Recognise cost of EBs to which employees have become entitled for service rendered to entity in reporting period
liability, after deducting amounts that have been paid. Asset if prepaid EB expense
expense, unless another section requires cost included in asset (for example inventories or PP&E)
© 2011 IFRS Foundation 60

61. Section 28 – short-term employee benefits61
Short-term employee benefits (S/TEBs) are wholly due within 12 months after the end of the period in which the employees render the related service (hereafter 12 month limitation).
but excludes termination benefits.
© 2011 IFRS Foundation 61

62. Section 28 – short-term employee benefits62
Examples of S/TEBs include:
wages, salaries & social security contrib;
S/T compensated absences (paid annual leave & paid sick leave) for absences expected to occur within 12 month limitation;
profit-sharing & bonuses payable within 12 month limitation; &
non-monetary benefits (such as medical care, housing, cars and free or subsidised goods or services) for current employees.
© 2011 IFRS Foundation 62

63. Section 28 – measurement of S/TEBs63
Measure S/TEBs that meet general recognition criteria (above)
at the undiscounted amount expected to be paid
© 2011 IFRS Foundation 63

64. Section 28 – examples S/TEBs64
Ex 10*: An employee is entitled to 5 days paid sick leave a year. Unused sick leave is carried forward for 1 calendar year. It is allocated on a FIFO basis. No sick leave is expected to lapse.
Employee 1 earns 400 per working day. Sick leave record: 4.5 days accumulated at 1/1/20X1; 2 days taken in 20X1. Salary increase = 5% effective 1/1/20X2.
31/12/20X1 liability = CU2,100 (ie CU400 wage rate × 1.05 increase × 5 (max) days due at 31/12/20X1 & expected to be taken in 20X2.
* see example 10 in Module 28 of the IFRS Foundation training material
© 2011 IFRS Foundation 64

65. Section 28 – examples S/TEBs65
Ex 13*: Same as Ex 10 except sick leave cannot be carried forward to the next calendar year & does not vest (ie is not paid out in cash).
No liability at 31/12/20X1 (no obligation).
Ex 10a: Similar to Ex 10 and Ex 13 except sick leave is paid out in cash in January 20X2 payroll at 20X1 salary rate.
31/12/20X1 liability = CU1,200 (ie CU400 wage rate × 3 (5 earned less 2 taken) days due at 31/12/20X1 & paid out in 20X2.
* see example 13 in Module 28 of the IFRS Foundation training material
© 2011 IFRS Foundation 65

66. Section 28 – examples S/TEBs66
Ex 17*: A pays 3% of year’s profit (before profit sharing) to employees who serve throughout the current year & who will continue to serve throughout the following year. A expects to save 10% through staff turnover. The bonus will be paid on 31/12/20X2.
Profit for 20X1 before profit sharing = CU1,000,000.
Liability at 31/12/20X1 & expense = CU27,000 (ie 3% × CU1,000,000 × 90%)
* see example 17 in Module 28 of the IFRS Foundation training material
© 2011 IFRS Foundation 66

67. Section 28 – post-employment benefits67
Post-employment benefits (PEBs) are employee benefits (other than termination benefits) that are payable after the completion of employment
Examples of PEBs include
retirement benefits, such as pension
other PEBs, such as post-employment life insurance and post‑employment medical care
© 2011 IFRS Foundation 67

68. Section 28 – post-employment benefits68
Arrangements whereby an entity provides PEBs are PEB plans.
2 types of PEB plans:
defined contribution plans (entity pays fixed contributions into a separate entity (a fund) and has no further obligations, ie all risks with employee).
defined benefit plans (actuarial & investment risk (if funded) with entity).
© 2011 IFRS Foundation 68

69. Section 28 – PEBs defined contribution69
Recognise the contribution payable for a period as an expense, unless another section requires the cost to be recognised as part of the cost of an asset (eg inventories or PP&E).
Ex 18*: On 8/1/20X2 a retailer paid 100 contribution to a defined contribution plan in part exchange for services performed by the entity’s employees in December 20X1.
At 31/12/20X1 recognise CU100 liability (accrual of PEBs) & CU100 expense in profit or loss.
* modified from example 18 in Module 28 of the IFRS Foundation training material
© 2011 IFRS Foundation 69

70. Section 28 – PEBs defined benefit plans70
Apply general recognition principle, recognise:
a liability for its obligations under defined benefit plans net of plan assets—its ‘defined benefit liability’ (see paragraphs 28.15–28.23).
the net change in that liability during the period as the cost of its defined benefit plans during the period (see paragraphs 28.24–28.27).
© 2011 IFRS Foundation 70

71. Section 28 – defined benefit liability71
Measure defined benefit liability at net of:
PV of defined benefit obligation (DBO)
FV of plan assets (if any) out of which the obligations are to be settled directly
paragraphs 11.27–11.32 provide guidance on fair value measurement).
If PV of DBO < FV of plan assets, plan has a surplus. Recognise surplus as asset only to extent recoverable through reduced future contributions or through refunds from the plan.
© 2011 IFRS Foundation 71

72. Section 28 – defined benefit obligation (DBO)72
PV of DBO reflects estimated amount of benefit that employees have earned in return for their service in the current & prior periods
including benefits that are not yet vested
including the effects of benefit formulas that give employees greater benefits for later years of service (eg final salary).
Significant judgements in measuring DBO include actuarial assumptions.
© 2011 IFRS Foundation 72

73. Section 28 – DBO actuarial assumptions73
Actuarial assumptions comprise:
demographic assumptions, eg: (i) mortality during & after employment; (ii) employee turnover, disability & early retirement; (iii) proportion of plan members with dependants who will be eligible for benefits; & (iv) claim rates under medical plans;
financial assumptions, eg: (i) discount rate; (ii) future salary & benefit levels; (iii) for medical benefits—future medical costs, including cost of administering claims and benefit payments.
© 2011 IFRS Foundation 73

74. Section 28 – DBO valuation method74
Measure DBO using projected unit credit method (PUC). However, if undue cost or effort use simplified calculation.
Under simplified calculation:
ignore estimated future salary increases;
ignore future service of current employees (ie assume closure of the plan for existing as well as any new employees); &
ignore possible in-service mortality of current employees (however, consider mortality after service (ie life expectancy)).
© 2011 IFRS Foundation 74

75. Section 28 – DBO PUC valuation method75
Ex 30*: Lump sum benefit payable on retirement = 1% of final salary for each year of service. Salary in Y1 = 10,000 (increase at 7% pa). Discount rate = 10% pa. Employee expected to retire at end of Y5.
Shows how the obligation builds up:
assuming that there are no changes in actuarial assumptions.
for simplicity, this example assumes employee will stay until end of Y5.
* see example 30 in Module 28 of the IFRS Foundation training material
© 2011 IFRS Foundation 75

76. Section 28 – DBO PUC valuation method76
Year 1 2 3 4 5
Attributed to:
– prior years -
131
262
393
524
– current year (1% of final salary)
– current and prior years
655
Opening obligation 89
196
324
476
Interest at 10% 9 20 33 48
Current service cost 98
108
119
Closing obligation
© 2011 IFRS Foundation 76

77. Section 28 – DBO PUC valuation method77
Notes on PUC calculations:
Current service cost is the present value of benefit attributed to the current year eg Y1—CU131 × 1/(1.1)4 = CU131 ÷ = CU89.47
The closing obligation is the present value of benefit attributed to current and prior years.
© 2011 IFRS Foundation 77

78. Section 28 – DBO simplified method78
Ex 33*: Same as Ex 30, except use simplified method of calculation.
* see example 33 in Module 28 of the IFRS Foundation training material
© 2011 IFRS Foundation 78

79. Section 28 – DBO simplified method79
Year 1 2 3 4 5
1% of current salary (increase at 7% per year)
100
107
114
123
131
Years service at end of year
FV of obligation
214
343
490
655
Discount factor (10%)
0.6830
0.7513
0.8264
0.9091
PV of obligation 68
161
284
445
Opening obligation –
Interest (10%) 7 16 28 45
Current service cost 80 95
111
Actuarial gain or loss (balancing figure) 12 22 34
Closing obligation
© 2011 IFRS Foundation 79

80. Section 28 – DBO simplified method80
Notes on simplified method calculations
Current service cost = PV of benefit attributed to the current year
Calculation Y1: CU100 salary × 1/(1.1)4 = CU68.30
Closing obligation = PV of benefit attributed to current & prior years
Calculation Y1: CU100 × 1 year’s service ÷ 1/(1.1)4 = CU68.30
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81. Section 28 – defined benefit expense81
Recognise net change in defined benefit liability in the period (other than benefits paid to employees or contributions from the employer) as the cost of its defined benefit plans during the period.
Recognise cost either (accounting policy)
entirely in profit or loss as an expense, or
partly in profit or loss & partly as an item of OCI (only actuarial gains & losses can be in OCI)
unless part of the cost of an asset (eg see Section 17 PP&E).
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82. Section 28 – defined benefit expense Ex82
Ex 39*: A recognises actuarial gains & losses in profit or loss. Employees promised a pension of 0.2% of final salary for each year of service. The pension is payable from the age of 65. The plan is unfunded.
At 31/12/20X1 CA of the plan obligation = CU1,000 (20X0: CU900).
In 20X1 A paid pensions of CU40 to its past employees.
* see example 39 in Module 28 of the IFRS Foundation training material
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83. Section 28 – defined benefit expense Ex83
Defined benefit plan obligation (liability) account
1/1/20X1
Opening balance
900
20X1
Pension paid 40
31/12/20X1
Closing balance
1,000
Profit or loss
140
1,040
1/1/20X2
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84. Section 28 – defined benefit expense Ex84
Ex 42*: Same as Ex 39 except recognises all actuarial gains & losses in OCI.
CU50 of the cost of the defined benefit plan for 20X1 is attributable to actuarial losses.
Recognise CU140 expense for 20X1 as follows:
CU50 in OCI (ie actuarial gains & losses)
CU90 (the remainder) in profit or loss.
* see example 42 in Module 28 of the IFRS Foundation training material
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85. Section 28 – defined benefit expense Ex85
Ex 40*: Same as Ex 39 except plan is funded
in 20X1 fund paid pensions of CU40 to past employees & entity contributed CU110 to the fund.
at 31/12/20X1 FV of plan assets = CU980 (20X0: CU890).
* see example 40 in Module 28 of the IFRS Foundation training material
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86. Section 28 – defined benefit expense Ex86
Funded defined benefit plan (liability) account
1/1/20X1
Opening balance
10(a)
20X1
Increase funding
110
31/12/20X1
Closing balance
20(b)
Profit or loss
120(c)
130
1/1/20X2 20
(a) CU900 obligation less CU890 plan assets
(b) CU1,000 obligation less CU980 plan assets
(c) balancing figure
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87. Section 28 – other long-term employee benefits87
Other long-term employee benefits (OL/TEBs) are employee benefits (other than post-employment benefits & termination benefits) that are not wholly due within 12 months after the end of the period in which the employees render the related service.
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88. Examples of OL/TEBs include:
Section 28 – OL/TEBs 88
Examples of OL/TEBs include:
long-term compensated absences, eg long-service or sabbatical leave
long-service benefits
long-term disability benefits
profit-sharing & bonuses payable + 12 months after the end of the period in which the employees render the related service
deferred compensation paid + 12 months after the end of the period in which it is earned
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89. Recognise a liability for OL/TEBs measured at the net of:
Section 28 – OL/TEBs 89
Recognise a liability for OL/TEBs measured at the net of:
PV of the benefit obligation
FV of plan assets (if any) out of which the obligations are to be settled directly.
Expense recognition is same as post-employment defined benefit plan
can choose to recognise actuarial gains & losses in OCI)
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90. Section 28 – termination benefits90
Termination benefits are employee benefits payable as a result of either:
an entity’s decision to terminate an employee’s employment before the normal retirement date, or
an employee’s decision to accept voluntary redundancy in exchange for those benefits.
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91. Section 28 – termination benefits91
Termination benefits include commitments by legislation, by contractual or other agreements with employees or their representatives or by a constructive obligation based on business practice, custom or a desire to act equitably, to make payments (or provide other benefits) to employees when it terminates their employment.
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92. Section 28 – recognition & measurement92
Recognise termination benefits as a liability & an expense only when the entity is demonstrably committed either:
to terminate the employment of an employee before the normal retirement date, or
to provide termination benefits as a result of a firm voluntary redundancy offer.
measure at best estimate of expenditure that would be required to settle the obligation at reporting date (PV if > 12 months).
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93. Section 28 – EBs disclosures93
PEBs have extensive disclosures.
S/TEBs Section 28 does not specify disclosures
For each category OL/TEBs & termination benefits: the nature of the benefit, the amount of its obligation and the extent of funding at the reporting date.
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