Post-employment benefits are all those payments that an entity makes to a worker, after the employment relationship with the company has ended and that are not termination benefits.
Within IAS 19 we find 4 different types of employee benefits, short-term employee benefits, post-employment benefits, long-term employee benefits and termination benefits.
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Short-term employee benefits are all those payments that a company makes to a worker for providing services and that are not share-based payments.
These types of benefits are paid in a period less than an accounting period, which is generally 12 months after the service is provided by the employee, this type of benefits for being short-term, should not be discounted.
Ie, It’s not necessary to recognize the present value of these payments in the financial statements.
Within the short-term benefits we find salaries, contributions to social security, among others.
In long-term employee benefits, we find for example, sabbatical years, vacations after long periods of service, permanent disability benefits, among others.
The essential characteristic of this type of benefits is that they must be recognized at present value, since It’s necessary to show the value of money over time effect.
On the other hand, there are the termination benefits, this type of benefits is the one where the employment relationship between the company and the employee is terminated, either by an agreement between the parties or by the unilateral termination of the employment contract by the company.
And finally we find the post-employment benefits.
In this type of benefits we find, pensions, payments unique retirement, life insurance, among others.
Post-employment benefits features
Within this type of benefits we find 4 categories, multi-employer plans, insured benefits, defined contribution plans, and defined benefit plans.
The multi-employer plans: they are basically assets contributed by different companies with the aim of obtaining benefits for the employees of the different entities that participate in the common fund.
Insured benefits : In this type of benefits, a company agrees to pay the insurance policy premiums with an external company with the objective that once the worker leaves the entity due to some eventuality, he or his family can enjoy this benefit, for example.
If an entity within its benefits establish that will pay the premiums of a funeral insurance to all the workers of a company, this means that at the moment that a worker dies, his family will be the first beneficiary of this insurance, it is important to say that the benefits to employees are extended to the family of workers.
Defined contributions: they are contribution plans where an entity pays fixed fees to a separate entity, that is, a fund that can be public or private, in such a way that an entity does not assume the risks and benefits associated with the increases or decreases resulting from the product of the liquidation of these incentives.
A typical example of defined contributions is when an entity assumes part of the payment of employee pensions and each month give a percentage of the workers’ salary to a fund that is independent of the entity.
Is important to say that when we are talking about a private fund, we must bear in mind that the contributions it receives this company are reinvested in equity instruments in order to obtain some type of return that must be delivered in a percentage to the workers, however, as this is an investment decision, the resources invested by this fund can also obtain a loss that will also be transferred to workers in the form of reductions in the payment of their pensions, in this type of plan, these losses are assumed by the worker and not by the company, unlike to the defined benefit plans.
Defined benefit plans : In this type of plan, the risk of providing the payments falls directly on the company, in other words, the entity assumes the management and control of the resources given by the employees, in this type of benefits, the company assumes any risk associated with that the worker received a lower value of his future pension due to some eventuality, or some risk that the company has assumed due to the use of these resources.
In this type of plans, the entity must perform the actuarial calculation to determine what the liability to recognize in the financial statements, an actuarial calculation is a calculation performed by a specialist that includes mathematical and financial variables, staff turnover rates, employee retirements, worker mortality rate, demographic indices, among others.
Accounting recognition of post-employment benefits.
The accounting recognition of this type of benefit will be determined by the quality of the contribution, rather, if the benefit is based on defined contributions, the initial and subsequent recognition will be very different from that established by an agreement based on defined benefits.
Accounting recognition in defined contribution plans is very simple because the management and control of the resources are handled by an entity that will be independent of the company, this means that the actuarial calculation will be carried out by the pension fund.
An entity must recognize a pension contribution expense against a liability on behalf of the fund.
The accounting recognition in this type of benefits will be determined by the following formula:
Defined benefit liability = present value of contributions – plan assets.
The calculation of the contributions that an entity must recognize as a liability in a fund established by the company itself must take into account all the uncertainties associated with the increase or decrease in the obligation, that is, the increase in wages over time, indicators of employee mortality, absences, retirements, financial variables, among other indicators, such a calculation is of such complexity that generally, many companies hire an independent third party to carry out this actuarial methodology, although IAS 19 does not require an entity to hire a third party to perform said calculation.
Once the company has made this calculation, it is necessary to show the present value effect.
And on the other hand are the assets of the plan: This concept refers to the way in which an entity will finance the obligations with its employees, in other words, a company can allocate part of its assets to respond for the future payment of this obligation, better said, a company can establish that certain investments or investment properties will be used to finance the defined benefit obligation.
In conclusion, in post-employment benefits, specifically in defined contributions, the liability that an entity must recognize in its financial statements is determined by the net between the present value liability for the contributions minus the plan assets, it is important to say that if the assets of the plan are greater than contributions, the company must recognize an asset for defined benefits.