IAS 19 employee benefits: what your small business actually owes its people

IAS 19 employee benefits sound like a topic for big companies with pension funds and actuaries. In practice, they touch almost every employer, including a business with five people. The core idea is simple: record the cost of a benefit when employees earn it, not when you hand over the cash. If someone worked October and takes leave in December, the cost sits in October's numbers.

IAS 19 employee benefits: the four categories

Short-term employee benefits are benefits expected to be settled within twelve months after the end of the period in which the employees render the related service. Wages, paid annual leave, sick leave, bonuses payable within that window, and non-monetary benefits such as a company car all live here. Recognise the undiscounted amount as an expense as the service is received, and a liability for anything unpaid at the reporting date.

Post-employment benefits are benefits payable after employment ends — retirement pensions and post-employment medical care are the classic examples. These split into defined contribution and defined benefit plans, and the difference matters enormously (see below).

Other long-term employee benefits are benefits not expected to be settled within twelve months — long-service leave and jubilee benefits. They are measured much like defined benefit plans, except remeasurements go through profit or loss rather than other comprehensive income.

Termination benefits are payments made because you end someone's employment early, or because an employee accepts voluntary redundancy. These are recognised when the entity can no longer withdraw the offer — not when the cash is paid.

IAS 19 employee benefits: the short-term benefits you deal with every month

For most small businesses, short-term benefits are where IAS 19 employee benefits actually bite. Two items deserve attention.

First, accumulating paid absences. If employees can carry unused annual leave forward, you must accrue for the leave they have earned but not taken: unused days multiplied by the relevant pay rate. This is the item most small businesses miss, because leave feels free until someone takes it. It is not free; the obligation already exists.

Second, bonuses and profit-sharing. You recognise a bonus cost only when you have a present legal or constructive obligation — for example, a formal plan or a past practice that has created a valid expectation — and you can make a reliable estimate of the amount. A vague hope of a year-end bonus is not an accrual; a documented plan with a known formula usually is.

IAS 19 employee benefits: defined contribution vs defined benefit

Post-employment benefits are where IAS 19 employee benefits get their reputation for complexity, but the distinction is clean.

In a defined contribution plan, the employer's obligation is limited to the contributions it agrees to pay into a fund: recognise the contribution payable as an expense in the period the service is received. If the fund performs badly, that is the fund's problem, not yours — you owe nothing more.

In a defined benefit plan, the employer promises a defined amount of benefit, such as a pension based on final salary and years of service. The entity carries the obligation on its balance sheet: the present value of the defined benefit obligation, measured using actuarial assumptions (including a discount rate based on high-quality corporate bonds, or government bonds where no deep market exists), less the fair value of any plan assets. Service cost and net interest go through profit or loss, while remeasurements — actuarial gains and losses and the return on plan assets — go through other comprehensive income. This is why defined benefit plans need an actuary, and why most small businesses rightly avoid them.

IAS 19 employee benefits: termination benefits and the timing trap

Termination benefits catch businesses out on timing. Suppose you announce a redundancy programme in December and the payments go out in February. Under IAS 19, you recognise the termination benefits when you can no longer withdraw the offer — typically when a detailed formal plan has been communicated and a valid expectation raised in those affected — which may be December, not February. If the termination is linked to a restructuring, the benefits are recognised at the same time as the restructuring costs under IAS 37. The lesson is the same as the standard's core idea: the obligation appears when the commitment is made, not when the money moves.

What to do about IAS 19 employee benefits in your business

You do not need an actuary to get the basics right. Accrue for unused annual leave at each month end. If you run a bonus plan, write it down, apply it consistently, and accrue when the obligation and the estimate are both clear. Prefer a defined contribution pension unless you have a reason to promise more. And budget redundancy costs in the period you commit to them, not the period you pay them. That is IAS 19 in practice: record what your people have earned, when they earned it.

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