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AASB 119 - Employee Benefits - August 2015
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Turn the raw legal text into a practical explanation grounded in AASB 119 - Employee Benefits - August 2015.
19 An entity shall recognise the expected cost of profit-sharing and bonus payments under paragraph 11 when, and only when:
(a) the entity has a present legal or constructive obligation to make such payments as a result of past events; and
(b) a reliable estimate of the obligation can be made.
A present obligation exists when, and only when, the entity has no realistic alternative but to make the payments.
20 Under some profit-sharing plans, employees receive a share of the profit only if they remain with the entity for a specified period. Such plans create a constructive obligation as employees render service that increases the amount to be paid if they remain in service until the end of the specified period. The measurement of such constructive obligations reflects the possibility that some employees may leave without receiving profit-sharing payments.
| Example illustrating paragraph 20 |
|---|
| A profit-sharing plan requires an entity to pay a specified proportion of its profit for the year to employees who serve throughout the year. If no employees leave during the year, the total profit-sharing payments for the year will be 3 per cent of profit. The entity estimates that staff turnover will reduce the payments to 2.5 per cent of profit. |
| The entity recognises a liability and an expense of 2.5 per cent of profit. |
21 An entity may have no legal obligation to pay a bonus. Nevertheless, in some cases, an entity has a practice of paying bonuses. In such cases, the entity has a constructive obligation because the entity has no realistic alternative but to pay the bonus. The measurement of the constructive obligation reflects the possibility that some employees may leave without receiving a bonus.
22 An entity can make a reliable estimate of its legal or constructive obligation under a profit-sharing or bonus plan when, and only when:
(a) the formal terms of the plan contain a formula for determining the amount of the benefit;
(b) the entity determines the amounts to be paid before the financial statements are authorised for issue; or
(c) past practice gives clear evidence of the amount of the entity’s constructive obligation.
23 An obligation under profit-sharing and bonus plans results from employee service and not from a transaction with the entity’s owners. Therefore, an entity recognises the cost of profit-sharing and bonus plans not as a distribution of profit but as an expense.
24 If profit-sharing and bonus payments are not expected to be settled wholly before twelve months after the end of the annual reporting period in which the employees render the related service, those payments are other long-term employee benefits (see paragraphs 153–158).
25 Although this Standard does not require specific disclosures about short-term employee benefits, other Australian Accounting Standards may require disclosures. For example, AASB 124 requires disclosures about employee benefits for key management personnel. AASB 101 Presentation of Financial Statements requires disclosure of employee benefits expense.
Post-employment benefits: distinction between defined contribution plans and defined benefit plans