## Learning Outcomes

After reading this article, you will be able to identify how IAS 19 classifies, measures, and remeasures employee benefit obligations, especially defined benefit plans. You will understand the meaning and accounting for actuarial remeasurements, including actuarial gains and losses, and be able to explain and apply disclosure requirements for the ACCA Financial Reporting (FR) exam.

## ACCA Financial Reporting (FR) Syllabus

For ACCA Financial Reporting (FR), you are required to understand the recognition, measurement, and disclosure of employee benefit plans under IAS 19. You should focus on:

- The distinction between defined contribution and defined benefit plans under IAS 19
- The accounting for remeasurements, including actuarial gains and losses, for defined benefit plans
- The correct financial statement presentation and disclosure of remeasurement items and related employee benefit information

## Test Your Knowledge

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, look more closely at that area during your revision._

1. Which type of employee benefit plan involves remeasurements in other comprehensive income under IAS 19?
   a) Defined benefit plan
   b) Defined contribution plan
   c) Short-term employee benefits
   d) Post-employment medical plans only

2. Which of the following are remeasurement components under IAS 19?
   a) Employer contributions
   b) Actuarial gains and losses
   c) Service cost
   d) Both b) and c)

3. True or false? All changes in the defined benefit obligation are recognised in profit or loss.

4. When must entities disclose a sensitivity analysis in relation to employee benefit obligations?

## Introduction

IAS 19 Employee Benefits sets out how entities must account for obligations to provide benefits to their employees. While short-term and defined contribution plans are generally straightforward, defined benefit plans introduce complexities related to estimation and future risk. Remeasurements, primarily actuarial gains and losses and changes in the fair value of plan assets, must be carefully accounted for and adequately disclosed to meet users' needs.

> **Key Term: Defined benefit plan**
> A post-employment benefit plan under which an entity’s obligation is to provide agreed benefits to current and former employees. The actuarial and investment risk falls on the employer.

### Remeasurements in Defined Benefit Plans

Remeasurements are changes in actuarial assumptions and adjustments between expected and actual experience that affect the measurement of defined benefit obligations. Under IAS 19, these remeasurements do not affect profit or loss but are recognised in other comprehensive income (OCI).

![IAS 19 defined benefit cost classification between profit or loss and other comprehensive income, including service cost, net interest, and remeasurement items.](https://static.pastpaperhero.com/images/acca-fr-employee-benefits-ias-19-remeasurements-and-disclosure_00.png)

_Defined benefit cost components under IAS 19 are allocated between profit or loss and other comprehensive income, with remeasurements recognised separately._

> **Key Term: Remeasurement**
> Remeasurements comprise actuarial gains and losses, the return on plan assets (excluding amounts included in net interest), and changes in the effect of the asset ceiling in relation to defined benefit plans.
> **Key Term: Actuarial gains and losses**
> The difference arising from changes in actuarial assumptions and experience adjustments between previous estimates and actual outcomes for employee benefit obligations.

### Where Does Each Component Go?

Statement of Profit or Loss:

- Current service cost (the increase in the present value of the obligation from employee service)
- Past service cost and curtailments
- Net interest on the net defined benefit liability/asset

Other Comprehensive Income:

- Remeasurements, including actuarial gains and losses, and the portion of investment return not recognised in net interest

### Worked Example 1.1

An entity has a defined benefit obligation of \$2,000,000 at the start of the year and plan assets of \$1,600,000. The discount rate is 5%. Employer contributions during the year are \$100,000. At year end, the plan assets are \$1,650,000, while the obligation (after current service and interest cost) is \$2,050,000. The actuary reports an actuarial gain of \$60,000.

Question:
How are remeasurements calculated and presented in the financial statements?

> **Answer:**
>
> - **Net interest for the year:** \$2,000,000 - \$1,600,000 = \$400,000 net liability × 5% = \$20,000 net interest expense (profit or loss).
> - **Actuarial gain of \$60,000** is a remeasurement recognised in OCI.
> - **Actual return on plan assets:** Closing assets \$1,650,000 less opening \$1,600,000, less contributions \$100,000 = -\$50,000 movement. If this differs from the expected return (5% × \$1,600,000 = \$80,000), the difference (actual - expected) also forms part of remeasurement.
> - All remeasurement components are reported in OCI, not profit or loss.

### Disclosure Requirements under IAS 19

Entities must disclose information to allow users to evaluate the significance of defined benefit plans and the risks involved.

Required disclosures include:

- The accounting policy for employee benefits
- A reconciliation of the present value of the obligation and plan assets
- The amount and components of remeasurement in OCI
- A breakdown of the actuarial assumptions used (e.g., discount rate, salary increases)
- Sensitivity analysis for key actuarial assumptions
- A description of plan characteristics and funding arrangements

> **Key Term: Sensitivity analysis (employee benefits)**
> A presentation showing the effect of changes in actuarial assumptions (such as discount rate or mortality) on the defined benefit obligation.

### Worked Example 1.2

An entity has a defined benefit obligation valued using a discount rate of 4.0%. The reported obligation is \$1,000,000. The entity is required to disclose the impact if the discount rate was 3.5% or 4.5%.

Question:
What does the sensitivity analysis show?

> **Answer:**
>
> - The disclosure would show, e.g., that reducing the discount rate to 3.5% increases the obligation by \$70,000, while a rise to 4.5% reduces it by \$60,000.
> - This helps users assess risk and understand how significant the estimates are.
>
> **Exam Warning:**
> Remeasurement items must always be recorded in other comprehensive income, not profit or loss. Failing to separate actuarial gains and losses from service and interest cost in exam answers may result in lost marks.
>
> **Revision Tip:**
> For exam success, memorise which components of defined benefit cost are booked to profit or loss and which go to OCI.

## Summary

IAS 19 requires separate recognition and distinct financial reporting of remeasurement components for defined benefit plans, with actuarial gains and losses and differences between expected and actual investment returns recorded in OCI. Entities must disclose reconciliations, key assumptions, and the risks relating to their plans to give users visibility into the impact of employee benefits.

## Key Point Checklist

_This article has covered the following key knowledge points:_

- Explain the difference between defined contribution and defined benefit plans under IAS 19
- Identify which elements of defined benefit cost are included in profit or loss and which are included in OCI
- Define remeasurements, actuarial gains and losses, and sensitivity analysis
- Prepare a basic reconciliation and explain the required IAS 19 employee benefit disclosures
- Recognise common exam pitfalls relating to presentation of remeasurements

## Key Terms and Concepts

- Defined benefit plan
- Remeasurement
- Actuarial gains and losses
- Sensitivity analysis (employee benefits)


Employee benefits (IAS 19) - Remeasurements and disclosure