IPSAS 25 is based on IAS 19 Employee Benefits (2004).
IPSAS 25 prescribes the accounting and disclosure requirements for employee benefits. IPSAS 25 establishes the matching principle for employee benefits, i.e. the cost of the employee benefits should be recognized in the period in which the employee provides the services to the entity and not when they are paid or become payable. The standard provides guidance about the measurement of each category of employee benefits and in particular about post-employment benefits.
IPSAS 25 was issued in February 2008 and applies to annual periods beginning on or after 1 January 2011.
History of IPSAS 25
Annual periods beginning on or after 1 January 2011.
Refer to IFAC website here
Summary of IPSAS 25 Employee Benefits
The objective of IPSAS 25 is to prescribe the accounting and disclosure requirements for employee benefits. These benefits include short-term benefits (e.g. wages and salaries, annual leave), post-employment benefits (e.g. retirement benefits) and other long-term benefits (e.g. long service leave) and termination benefits. IPSAS 25 establishes the matching principle for employee benefits, i.e. the cost of the employee benefits should be recognized in the period in which the employee provides the services to the entity and not when they are paid or become payable. The standard provides guidance about the measurement of each category of employee benefits and in particular about post-employment benefits. Share based transactions and employee retirement benefit plans are not within the scope of IPSAS 25.
This standard applies to all accounting for employee benefits except for share based transactions and employee retirement benefit plans [IPSAS 25.2-3]. IPSAS 25 applies to all public sector entities other than GBEs [IPSAS 25.8].
The standard is applicable for include employee benefits provided [IPSAS 25.4]:
• Under formal plans or 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 where entities are required to contribute to the composite social security program
• 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. An example of a constructive obligation is where a change in the entity’s informal practices would cause unacceptable damage to its relationship with employees.
Employee benefits concern, amongst others [IPSAS 25.5]:
• Short-term employee benefits, such as:
o Wages and salaries
o social security contributions
o paid annual leave and paid sick leave
o profit-sharing and bonuses (if payable within twelve months of the end of the period)
o non-monetary benefits (such as medical care, housing, cars, and free or subsidized goods or services)
• Post-employment benefits such as:
o other retirement benefits
o post-employment life insurance
o post-employment medical care
• Other long-term employee benefits, which may include:
o long-service leave or sabbatical leave
o jubilee or other long-service benefits
o long-term disability benefits
o profit-sharing and bonuses if paid after more than 12 months
• Termination benefits.
Key definitions [IPSAS 25.10]
Employee benefits: all forms of consideration given by an entity in exchange for service rendered by employees
Current service cost: the increase in the present value of the defined benefit obligation resulting from employee service in the current period.
Defined benefit plans: post-employment benefit plans other than defined contribution plans.
Defined contribution plans: 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.
Past service cost: the change in the present value of the defined benefit obligation for employee service in prior periods, resulting in the current period from the introduction of, or changes to, post-employment benefits or other long-term employee benefits. Past service cost may be either positive (when benefits are introduced or changed so that the present value of the defined benefit obligation increases) or negative (when existing benefits are changed so that the present value of the defined benefit obligation decreases).
Main principle of IPSAS 25
The cost relating to employee benefits should be recognized as an expense when the provides the service in exchange for the benefit, rather than when the benefit is paid or payable [IPSAS 25.1].
Short-term employee benefits
The accounting treatment for short-term employee benefits is straightforward (e.g. wages, paid holiday leave and sick leave, bonuses, and non-monetary benefits such as medical care and housing), because they are measured on an undiscounted basis [25.12].
The undiscounted amount of the benefits expected to be paid in respect of the services rendered by employees in an accounting period should be recognized in that period [IPSAS 25.13] The expected cost of short-term compensated absences should be recognized as the employees render service that increases their entitlement to future compensated expenses or, in the case of non-accumulating absences, when the absences occur [IPSAS 25.14].
Bonus and Profit-sharing payments
The entity must recognize the expected cost of bonus and profit-sharing payments when, and only when [IPSAS 25.20]
• a legal or constructive obligation to make such payments as a result of past events exists and;
• a reliable estimate of the expected cost can be made.
Post-employment benefit plans (defined contribution vs defined benefit)
The accounting treatment for a post-employment benefit plan depends on the type of the plan, which is determined by the economic substance of the plan. We can distinguish two types of plans [IPSAS 25.28]:
• defined contribution plan
• defined benefit plan
The main difference between the two types of plans:
• defined contribution plan: fixed contributions are paid into a fund but the entity has no legal or constructive obligation to make further payments if the fund does not have sufficient assets to pay all of the employees' entitlements to post-employment benefits.
• defined benefit plan: concerns a post-employment benefit plan other than a defined contribution plan, these include both formal plans and informal practices that create a constructive obligation to the entity's employees.
Defined contribution plans
The cost to be recognized in the period is the contribution payable in exchange for service rendered by employees during the period [IPSAS 25.55].
In case contributions to a defined contribution plan do not fall due in full within 12 months after the end of the period in which the employees render the service, they must be discounted to their present value [IPSAS 25.56].
Defined benefit plans
The accounting treatment of defined benefit plans is more complex because actuarial assumptions are required to measure the obligation and the expense and there is a possibility of actuarial gains and losses. Furthermore, the obligations are measured on a discounted basis because they may be settled many years after the employees render the related service [IPSAS 25.59].
The amount recognized in the balance sheet should be net total of [IPSAS 25.65]:
(i) the present value of the defined benefit obligation
(ii) adjusted for unrecognized actuarial gains and losses
(iii) adjusted for unrecognized past service cost
(iv) reduced by the fair value of plan assets at the reporting date
Valuations should be carried out with sufficient regularity to ensure that the amounts recognized in the financial statements do not differ materially from those that would be determined at the reporting date [IPSAS 25.67].
If the calculation of this amount results in an asset, the amount recognized should be limited to the net total of unrecognized actuarial losses and past service cost, plus the present value of available refunds and reductions in future contributions to the plan [IPSAS 25.69]. The standard prohibits the recognition of gains solely as a result of deferral of actuarial losses or past service cost, and prohibits the recognition of losses solely as a result of deferral of actuarial gains [IPSAS 25.70].
The present value of the defined benefit obligation is the present value of expected future payments required to settle the obligation resulting from employee service in the current and prior periods and should be determined using the Projected Unit Credit Method [IPSAS 25.77].
The actuarial assumptions used for these valuations should be unbiased and mutually compatible [IPSAS 25.85]. The rate used to discount estimated cash flows should reflect the time value of money at the reporting date [IPSAS 25.91].
Actuarial gains and losses
Actuarial gains and losses will arise continuously. These comprise experience adjustments (the effects of differences between the previous actuarial assumptions and what has actually occurred) and the effects of changes in actuarial assumptions. In the long-term, actuarial gains and losses may offset each other and, as a result, the entity is not required to recognize all such gains and losses in surplus or deficit immediately. IPSAS 25 outlines that if the accumulated unrecognized actuarial gains and losses exceed 10% of the greater of the defined benefit obligation or the fair value of plan assets, a portion of that net gain or loss is required to be recognized immediately as revenue or expense. The portion recognized is the excess divided by the expected average remaining working lives of the employees participating in the plan. Actuarial gains and losses that do not exceed the 10% limits (the 'corridor') need not be recognized - unless the entity elects otherwise [IPSAS 25.105-106].
If entity elects to recognize actuarial gains and losses in full in the period in which they occur, these may be elected directly in a separate line net assets/equity [IPSAS 25.107].
Past service cost
Past service cost concerns the change in the obligation for employee service in prior periods, arising as a result of changes to plan arrangements in the current period. Past service cost could be either positive (where benefits are introduced or improved) or negative (where existing benefits are reduced). Past service cost should be recognized immediately to the extent that it relates to former employees or to active employees if these benefits are already vested. If the benefits are not vested yet, the amount must be amortized on a straight-line basis over the average period until the amended benefits become vested [IPSAS 25.112].
Curtailments or settlements
Curtailments are the effect of plan amendments that reduce benefits for future service [IPSAS 25.114].
A settlement eliminates occurs all further legal or constructive obligation for part or all of the benefits provided under a defined benefit plan [IPSAS 25.132].
Gains or losses resulting from curtailments or settlements of a plan are recognized when the curtailment or settlement occurs [IPSAS 25.129].
Statement of financial performance
The total amount charged to surplus or deficit recognized relating to a defined benefit plan will consist out of the following components [IPSAS 25.74]:
• current service cost (the present value of defined benefits as a result from employee service in the period)
• interest cost (the increase in the present value due to the passage of time)
• expected return on any plan assets
• actuarial gains and losses (recognized portion)
• past service cost (recognized portion)
• the effect of plan curtailments or settlements
• the effect of the limit as described in IPSAS 25.69.
The return on plan assets is interest, dividends or similar distributions and other revenue derived from the plan assets, together with realized and unrealized gains or losses on the plan assets, less any costs of administering the plan (other than those included in the actuarial assumptions used to measure the defined benefit obligation) and less any tax payable by the plan itself [IPSAS 25.10].
For defined benefit plans detailed disclosures are included in the Standard [IPSAS 25.140-146]
Other long-term benefits
The that should be applied differs from the accounting required for post-employment benefits as described above. The simplified method recognizes [IPSAS 25.150-151]:
• actuarial gains and losses immediately and no 'corridor' is applied
• all past service costs immediately
Liabilities relating termination benefits should be recognized when, and only when, the entity is demonstrably committed to either [IPSAS 25.155]:
• terminate the employment of an employee or group of employees before the normal retirement date; or
• provide termination benefits as a result of an offer made in order to encourage voluntary redundancy
An entity is demonstrably committed to a termination when, and only when, it has a detailed formal plan for the termination and there is no realistic possibility of withdrawal [IPSAS 25.156]. In case termination benefits fall due after more than 12 months after the reporting date, they should be discounted [IPSAS 25.161].
Other accounting guidance in IPSAS 25:
• a multi-employer plan to the individual entities-employers [IPSAS 25.29-38]
• a defined benefit plan to the entities under common control [IPSAS 25.39-42]
• a state plans [IPSAS 25.43-46]
• composite social security programs [IPSAS 25.47-49]
Issuance of IPSAS 25: Employee Benefits
1 January 2011
Effective date of IPSAS 25
1 January 2011
Effective date of Improvements to IPSASs (issued in January 2010)