Syllabus D. Audit of Historical Financial Information D3. Evaluation and review

D3a. Pensions Introduction 24 / 41

Syllabus D3a)

Evaluate the matters (e.g. materiality, risk, relevant accounting standards, audit evidence) relating to:
xi)  employee benefits

Objective of IAS 19

Companies give their employees benefits - the most obvious being wages but there are, of course, other things they may offer such as pensions

IAS 19 says that the benefit should be shown when earned rather than when paid

Employee benefits include paid holiday, sick leave and free or subsidised goods given to employees

Short-term Employee Benefits

As we mentioned above, any benefits payable within a year after the work is done, (such as wages, paid vacation and sick leave, bonuses etc) should be recognised when the work is done not when paid for

Profit-sharing and Bonus Payments

Recognise when there is an obligation to make such payments and a reliable estimate of the expected cost can be made


Grazydays PLC give their employees 6 weeks of paid holiday each year, and because they’re groovy employers, any holiday not taken can be carried forward to the next year.

  • Accounting Treatment 
    Any untaken holiday entitlement should be recognised as a liability in the current year even though it wouldn’t be taken until the next year

Types of Post-employment Benefit Plans

There are two types:

  1. Defined Contribution plan

    In this one the company just promises to pay fixed contributions into a pension fund for the employee and has no further obligations

    The contribution payable is recognised in the income statement for that period

    If contributions are not payable until after a year they must be discounted

  2. Defined Benefit plan

    This is a post-employment benefit that gives the company an obligation to pay a defined pension to its employees who have left

Defined Benefit Scheme - Terms

Let’s look at some terms:

  • Actuarial gains/losses

    These occur due to differences between previous estimates and what actually occurred

    These are recognised in the OCI

  • Past service cost

    Dr Income statement
    Cr Pension Liability

    This is a change in the pension plan resulting in a higher pension obligation for employee service in prior periods.

    They should be recognised immediately if already vested or not

  • Plan curtailments or settlements

    Curtailments are reductions in benefits or the number of employees covered by the pension

    Any gain/loss is recognised when the curtailment occurs.

  • Current service cost

    Increase in pension liability due to benefits earned by employee service in the period

    Dr Income statement
    Cr Pension Liability

  • Interest cost

    The unwinding on the discount of the pension liability

    Dr Interest
    Cr Pension Liability

  • Expected return on plan assets

    This is the Interest, dividends and other revenue from the pension assets and is now to be based on the return from AA-rated corporate bonds

    This means companies cannot set expected returns according to the assets actually held by the plan; it could encourage them to invest in more secure vehicles than is currently the case, seeing as the potential higher return will no longer be reflected in the accounts.

    The reason behind this is to improve transparency and consistency

    Dr Pension Asset
    Cr Interest received

    The Interest cost and EROA are netted off against each other. 

    They use the same discount rate.

    So if a fund has more assets than liabilities (a surplus) - it will have net interest received

    If a fund has more liabilities than assets (a deficit) - it will have net interest paid

  • Contributions to Pension fund

    This is simply the money that the company puts in to the fund - so the fund can buy assets to generate an expected return

    Dr Pension Asset
    Cr Cash

  • Benefits paid

    These are the actual pensions paid out to former employees.

    Paying the pensions means we reduce the liability, but we use the pension fund to do it, so we reduce the pension asset also

    Dr Pension Liability
    Cr Pension Asset