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

© 2011 IFRS Foundation

1The IFRS for SMEs

Topic 3.1

Section 20 Leases

Section 21 Provisions and Contingencies

Section 28 Employee Benefits


2

This PowerPoint presentation was prepared by IFRS Foundation education staff as a convenience for others. It has not been approved by the IASB. The IFRS Foundation allows individuals and organisations to use this presentation to conduct training on the IFRS for SMEs. However, if you make any changes to the PowerPoint presentation, your changes should be clearly identifiable as not part of the presentation prepared by the IFRS Foundation education staff and the copyright notice must be removed from every amended page .

This presentation may be modified from time to time. The latest version

may be downloaded from: http://www.ifrs.org/IFRS+for+SMEs/SME+Workshops.htm

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.

The IFRS Foundation, the authors, the presenters and the publishers do not accept responsibility for loss caused to any person who acts or refrains from acting in reliance on the material in this PowerPoint presentation, whether such loss is caused by negligence or otherwise.


3The IFRS for SMEs

Section 20 Leases


4Section 20 – scope

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)


5Section 20 – classification of leases• 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.


6Section 20 – classification of leases continued

• 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)


7Section 20 – classification of leases continued

• 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


Section 20 – lease classification Ex

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.

8



• 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.

9



• 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).

10



• 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.

11



• Ex 6 continued:

Lease classification:– lessor = finance lease– lessee = operating lease – other party has firm commitment to acquire

asset

12


13The IFRS for SMEs

Lessee

(finance lease & operating lease)


14Section 20 – lessee: finance lease

• 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


15

Section 20 – lessee: finance lease continued

• 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)


Section 20 – lessee: finance lease Ex

Ex 7: Same as Ex 1. Finance lease obligation amortisation table:

16

1 Jan Finance cost

Payment 31 Dec

20X1 100,000 5,000 (23,000) 82,000

20X2 82,000 4,100 (23,000) 63,100

20X3 63,100 3,155 (23,000) 43,255

20X4 43,255 2,163 (23,000) 22,418

20X5 22,418 1,121 (23,539) –


Section 20 – lessee: finance lease Ex

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

17


18

Section 20 – lessee: finance lease continued

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.


19Section 20 – lessee: operating lease

• 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).


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

20


21Section 20 – lessee: operating lease

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


22The IFRS for SMEs

Lessor



23Section 20 – lessor: finance lease

• 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.


24Section 20 – lessor: finance lease• 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


25Section 20 – lessor: finance lease

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)


26Section 20 – lessor: operating lease• 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)


Section 20 – lessor: operating leaseExamples

• 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

27


28The IFRS for SMEs

Sale and lease-back transactions



29Section 20 – sale and leaseback

• 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).


30Section 20 – finance leaseback

• 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


31Section 20 – operating leaseback

• 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.


Section 20 – operating leaseback examples

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.

32


Section 20 – operating leaseback examples

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.

33


34The IFRS for SMEs

Section 21

Provisions & Contingencies



• 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)


36Section 21 – provisions

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)


37Section 21 – examples provisions

• 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


38

Section 21 – examples provisions continued

• 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


39Section 21 – examples not provisions

• 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


40

Section 21 – example constructive oblig.

• 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.



41Section 21 – recognition of provisions

• 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.


42

Section 21 – measurement of provisions• 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


43Section 21 – best estimate

• 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).


44Section 21 – examples measurement• 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) = CU40,000Calculation: (75% x 1,000 units x nil) + (20% x 1,000

units x CU100) + (5% x 1,000 units x CU400)



45Section 21 – examples measurement• 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 = CU300,000. 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



46Section 21 – example remeasurement

• 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



47Section 21 – provision disclosureFor 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


48Section 21 – contingent liabilities

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.


49Section 21 – contingent liabilities

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.


50

Section 21 – example contingent liability

• 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.



51


• 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.


52


• 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.


53Section 21 – contingent liab disclosure

• 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.


54Section 21 – contingent asset

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.


55

Section 21 – contingent asset disclosure

• 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.


56Section 21 – prejudicial disclosures• 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.


57The IFRS for SMEs

Section 28

Employee Benefits



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.


59Section 28 – types of employee benefits

• 4 types of EBs:– short-term employee benefits – post-employment benefits – other long-term employee benefits – termination benefits

And equity compensation (see Section 26)


60

Section 28 – general recognition criteria

• 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)


61

Section 28 – short-term employee benefits

• 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.


62

Section 28 – short-term employee benefits• 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.


63Section 28 – measurement of S/TEBs

• Measure S/TEBs that meet general recognition criteria (above)– at the undiscounted amount expected to

be paid


64Section 28 – examples S/TEBs

• 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.



65Section 28 – examples S/TEBs• 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.



66Section 28 – examples S/TEBs• 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%)



67Section 28 – post-employment benefits

• 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


68Section 28 – post-employment benefits

• 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).


69Section 28 – PEBs defined contribution• 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


70Section 28 – PEBs defined benefit plans

• 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).


71Section 28 – defined benefit liability• 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.


72Section 28 – defined benefit obligation (DBO)

• 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.


73Section 28 – DBO actuarial assumptions• 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.


74Section 28 – DBO valuation method• 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)).


75Section 28 – DBO PUC valuation method• 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


76Section 28 – DBO PUC valuation methodYear 1 2 3 4 5

Attributed to:

– prior years - 131 262 393 524– current year (1% of final salary) 131 131 131 131 131

– current and prior years 131 262 393 524 655

Opening obligation - 89 196 324 476

Interest at 10% - 9 20 33 48

Current service cost 89 98 108 119 131

Closing obligation 89 196 324 476 655


77Section 28 – DBO PUC valuation method

• 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 ÷ 0.683013 = CU89.47

The closing obligation is the present value of benefit attributed to current and prior years.


78Section 28 – DBO simplified method

• Ex 33*: Same as Ex 30, except use simplified method of calculation.



79Section 28 – DBO simplified methodYear 1 2 3 4 51% of current salary (increase at 7% per year) 100 107 114 123 131

Years service at end of year 1 2 3 4 5FV of obligation 100 214 343 490 655Discount factor (10%) 0.6830 0.7513 0.8264 0.9091 1

PV of obligation 68 161 284 445 655Opening obligation – 68 161 284 445Interest (10%) – 7 16 28 45Current service cost 68 80 95 111 131Actuarial gain or loss (balancing figure) – 5 12 22 34

Closing obligation 68 161 284 445 655


80Section 28 – DBO simplified method

• 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


81Section 28 – defined benefit expense• 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).


82Section 28 – defined benefit expense Ex• 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.



83Section 28 – defined benefit expense Ex

Defined benefit plan obligation (liability) account

1/1/20X1Opening balance

900

20X1Pension paid

40

31/12/20X1Closing balance

1,000 20X1Profit or loss

140

1,040 1,040

1/1/20X2Opening balance

1,000



• 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.




• 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).




Funded defined benefit plan (liability) account

1/1/20X1Opening balance 10(a)

20X1Increase funding 110

31/12/20X1Closing balance 20(b) 20X1

Profit or loss 120(c)

130 130

1/1/20X2Opening balance 20

(a) CU900 obligation less CU890 plan assets(b) CU1,000 obligation less CU980 plan assets(c) balancing figure


87

Section 28 – other long-term employee benefits

• 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.


88Section 28 – OL/TEBs• 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


89Section 28 – OL/TEBs

• 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)


90Section 28 – termination benefits

• 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.


91Section 28 – termination benefits

• 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.


92Section 28 – recognition & measurement• 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).


93Section 28 – EBs disclosures• 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.

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

Documents

lease slide

lease asset

ifrs foundation section

finance lease lessee

lease classification

operating lease

lessee lessee

cancellable lease