In this topic 7 sections
- 32Classify the benefit before choosing the measure
- 33Leave: accumulation and vesting answer different questions
- 34Long service leave: build the obligation in stages
- 35Original long service leave calculation
- 36Equity-settled versus cash-settled awards
- 37Original awards and journal entries
- 38Sources and further reading
Classify the benefit before choosing the measure
Employee benefits arise from employee service or termination. IAS 19 distinguishes short-term, post-employment, other long-term and termination benefits. Share-based remuneration falls under IFRS 2. A benefit's name alone does not determine its classification.
| Category | Examples | Measurement focus |
|---|---|---|
| Short-term | Wages, qualifying annual leave or bonuses | Expected to be settled wholly within 12 months after the end of the annual period of service; generally undiscounted |
| Post-employment | Retirement pensions and superannuation arrangements | Distinguish defined contribution and defined benefit arrangements |
| Other long-term | Qualifying long service leave and long-term bonuses | Present-value measurement, with relevant actuarial assumptions |
| Termination | Benefits in exchange for ending employment | Different trigger from benefits earned by continuing service |
Superannuation is not automatically an other-long-term benefit merely because payment occurs far in the future. Nor does an amount payable within the next year automatically make the whole benefit short-term: use the standard's settlement definition.
Leave: accumulation and vesting answer different questions
Accumulation asks whether unused entitlement carries forward. Vesting asks whether an employee receives payment for unused entitlement on leaving. An accumulating non-vesting benefit can still create a liability.
| Leave feature | Recognition approach |
|---|---|
| Non-accumulating | Recognise the cost when absence occurs; unused current entitlement does not carry forward |
| Accumulating and vesting | Recognise service-earned obligations as service increases entitlement |
| Accumulating and non-vesting | Recognise the additional amount expected to be paid because unused entitlement has accumulated |
For non-vesting sick leave, do not simply multiply every unused day by salary. Estimate the extra future paid absence caused by the carried-forward balance, taking account of the usage pattern and the order in which entitlements are used.
Long service leave: build the obligation in stages
An obligation may build before legal entitlement vests. Employees have already provided service; uncertainty about staying long enough affects the estimate. The guide uses long service leave to illustrate the projected unit credit approach rather than imposing one universal legal leave entitlement.
- Establish the benefit terms
- project salary at expected payment
- attribute benefit to service already rendered
- estimate the probability of payment
- discount to the reporting date
- compare with the existing liability and recognise the change.
For a simple service-based example, the present obligation can be approximated as projected payment × service fraction × probability × discount factor. This is a teaching calculation, not a formula that overrides the actual benefit terms, vesting conditions or benefit-attribution requirements. If the arrangement is funded, plan assets and the applicable net-measurement requirements also matter.
Original long service leave calculation
Assume a fictional arrangement grants eight weeks' salary after ten years of service. One employee has completed six years and is expected to take leave four years from now. Current annual salary is $78,000, annual salary growth is 3%, probability of payment is 80%, and the appropriate four-year discount rate is 5%. Assume straight-line benefit attribution over ten years, no plan assets and no earlier pro-rata settlement entitlement.
| Step | Calculation | Result |
|---|---|---|
| Project salary | 78,000 × 1.03⁴ | 87,789.69 |
| Full benefit at payment | 87,789.69 × 8 / 52 | 13,506.11 |
| Attribute to past service | 13,506.11 × 6 / 10 | 8,103.66 |
| Probability-weight | 8,103.66 × 80% | 6,482.93 |
| Discount four years | 6,482.93 / 1.05⁴ | 5,333.52 |
The payment is discounted for four future years, not the six years already served or the total ten-year qualifying period. Do not apply the 80% probability twice. If an existing liability were $4,900 and there had been no payments or other changes, the additional expense and liability would be $433.52; normally reconcile all movements before posting a year-end adjustment.
Use reporting-date market yields on high-quality corporate bonds in the obligation's currency, with a term consistent with the benefit payments. Use government bond yields where that currency lacks a deep market in high-quality corporate bonds. Match currency and term; do not assume a particular employer's borrowing rate is the required rate.
Equity-settled versus cash-settled awards
IFRS 2 applies when goods or services are received in a share-based payment arrangement. A payment can fall within the standard even if the employee ultimately receives cash rather than shares.
| Feature | Equity-settled employee award | Cash-settled award |
|---|---|---|
| Credit entry | Equity | Liability |
| Core measurement | Grant-date fair value of equity instruments for employee services | Fair value of the liability |
| Later share-price changes | Do not routinely remeasure the grant-date fair value | Remeasure at each reporting date and settlement |
| Service period | Recognise as service is received; recognise immediately if already vested | Recognise as the relevant service is received |
| Vesting conditions | Apply the distinct rules for service, non-market and market conditions | Apply the relevant vesting and fair-value rules |
For non-employees, direct measurement of goods or services at their fair value is normally the starting point, subject to the standard's requirements. Do not generalise employee grant-date measurement to every supplier transaction.
Original awards and journal entries
For a simple equity-settled employee award, 1,000 shares vest immediately for services already received. Grant-date fair value is $9 per share. Debit employee expense $9,000 and credit equity $9,000. A later share-price rise alone does not remeasure that recognised equity award.
For a separate fully vested cash-settled award, fair value of the liability is $9,000 at reporting date and $10,500 at settlement. Initially debit employee expense and credit award liability $9,000. At settlement, debit employee expense $1,500 and credit liability $1,500; then debit liability $10,500 and credit cash $10,500.
For awards with future service conditions, do not expense the entire expected amount immediately. In a simple three-year equity award with grant-date value $30,000 and all awards expected to vest, cumulative expense after Year 1 is $10,000. Later estimates of service-condition forfeitures can change the number expected to vest even though grant-date fair value is retained. Market conditions are treated differently; read the actual award terms.
Sources and further reading
Study guide: CPA Australia, Financial Reporting study guide, sixth edition, October 2022, Module 1, section 1.6, printed pages 45–50. Download the employee benefits and remuneration workbook.
Concept sources: AASB 119, December 2021 compilation, paragraphs 8–18, 67–74, 83–86 and 153–156; AASB 2, December 2021 compilation, paragraphs 7–23 and 30–33D. Calculations use fictional employment terms for study, not a statement of legal leave entitlements.