Leading the Way is a column written by PricewaterhouseCoopers professional staff. It appears in the Business section of the Bangkok Post twice each month. The column provides specialised advice to corporate decision-makers in Thailand on global and local business trends.

This article appeared in the May 20, 2008 issue of the Bangkok Post.

By Sa-nga Chokenitisawat

Most companies have both permanent and temporary employees, and employee costs constitute a significant portion of their business costs. While current employee costs are accounted for in financial statements, companies do not always consider post-employment benefits. Not anymore, as International Financial Reporting Standards now require companies to consider their liability for all employee benefits in their financial statements.
The Securities and Exchange Commission of Thailand and the Federation of Accounting Professions recently announced their intention to fully adopt the accounting framework of International Financial Reporting Standards (IFRS) for companies in the Thai capital market. The task is demanding at the point of first-time adoption and is a continual challenge. One of the standards that will affect Thai companies is IAS 19 "Employee Benefits".
It is understood that accounting for wages, salaries and other short-term benefits payable in cash is for the most part straightforward. However, the approach to accounting for long-term employee benefits in accordance with IAS 19 is fundamentally different. All benefits provided to employees, both short- and long-term benefits, are required to be accounted for to ensure that an employer's financial statements reflect a liability when employees have worked in exchange for future benefits.

The following are employee benefits as defined by IAS 19:

- Short-term benefits: Wages, salaries, holiday pay, sick leave, bonuses payable within 12 months of the balance sheet date, and social security contributions payable in respect of employee benefits.

- Long-term benefits: Long-term incentive plans, long-service awards and bonuses payable more than 12 months after the balance sheet date.

- Termination benefits: Redundancy payments.

- Post-employment benefits: Retirement benefits, pensions and post-retirement medical insurance

There are two major types of employee benefits that a company should account for, and which currently many companies in Thailand do not currently consider.

The first of these is "termination benefits". Termination benefits are amounts payable when an employee ceases to work for an employer. In this context they are similar to post-employment benefits, such as pensions. However, whereas post-employment benefits are earned throughout an employee's working life, termination benefits arise as a result of an employer's decision, such as a factory closure.

A liability in respect of termination benefits should be recognised when an entity has a demonstrable commitment to either:

- terminate the employment of an employee or group of employees before the normal retirement date; or

- provide termination benefits as a result of an offer made in order to encourage voluntary redundancy.

The second type of benefit an employer should account for is "post-employment benefits". In Thailand, the most common type of post-employment benefit is a pension. The accounting for post-employment benefits depends on the type of benefits that are promised.

Defined-contribution plans are pension plans where the level of benefits depends on the value of contributions paid in respect to each member and the investment performance achieved on those contributions. Therefore, the employer's liability is limited to the contributions it has agreed to pay. Hence, the amount recognised as an expense in respect of a defined-contribution plan is the contribution payable.

Defined benefit plans are pension plans where the rules specify the benefits to be paid and they are financed accordingly. Defined benefit plans in Thailand generally relate to the severance payments required under the Labour Law of a maximum of 10 months' final salary.

IAS 19 approaches accounting for defined benefit plans from a balance sheet perspective. The standard describes how a defined benefit liability should be recognised and measured. To achieve this, the plan liabilities are measured at each balance sheet date. The plan liabilities are measured on an actuarial basis and discounted to present value.

How will this affect your company's financial statements? IAS 19 requires the cost of providing employee benefits to be recognised in the period in which the benefits are earned. For defined-contribution plans the contribution payable to the fund is expensed and the pension liability equals the unpaid contributions for past service. Defined-benefit plans require the use of actuarial valuations. This method considers each period of service as giving rise to an additional unit of benefit entitlement and measures each unit separately, at its present value, to build up the final obligation.

The transition to IAS 19 will not only have a significant impact on the balance sheet and the income statement, but will also require an increased effort in terms of valuing pension deficits or surpluses together with external specialists such as actuaries.