Accounting for employee termination benefits

When a company terminates employees, it may offer them a number of benefits such as additional pay, leave encashment, retirement benefits, insurance benefits, pension benefits, etc. These benefits may be considered termination benefits and are generally covered under IAS 19. 

When it comes to recognition for termination benefits under IAS 19, a company recognises a liability and an expense for termination benefits at the earlier of:  

• when it recognises costs for a restructuring in the scope of IAS 37 that includes the payment of termination benefits; and
• when it can no longer withdraw the offer of those benefits.

If the company decides to terminate an employee's employment, it is communicated with a detailed plan to the affected employees. This plan should include information about the number of employees to be terminated, their job roles, locations, when the termination will be completed, and the benefits employees will receive when they are terminated.

It's worth noting that the company doesn't have to individually inform each employee about their termination. Instead, they can communicate the plan to a group of employees that includes those who will be affected. For example, if a decision about the termination plan has been approved by a body that includes employee representatives, like a supervisory board, it creates an obligation even if the affected employees haven't been directly informed yet.

Further, termination benefits can be short term i.e. expected to be paid within 12 months of the end of the reporting period or Long term i.e. expected to be paid more than 12 months after the end of the reporting period. Short term termination benefits are recognised as a current liability. Long term termination benefits are generally accounted as other long-term employee benefits.

IAS 19 provides a simplified method of accounting for other long-term employee benefits compared to post-employment benefits. Unlike post-employment benefits, remeasurements of other long-term employee benefits are not recognised in other comprehensive income. The cost of other long-term employee benefits (service cost, net interest and remeasurements of the net defined benefit liability (asset)) are recognised in profit or loss. These costs can be capitalised in the cost of an asset if permitted under other standards.

Typically, estimating the expected cost of termination benefits that will be settled within 12 months is easier. It usually involves assessing the number of employees who will be terminated, determining the compensation amount for each employee, and considering the timing of these payments. However, for long-term termination benefits, which will be settled after 12 months, a different approach is necessary. In these cases, employers may require actuarial valuation to determine the cost, which considers additional factors that could impact the termination benefit expenses.

It's important to note that IAS 19 requires the employer to reassess the liability for termination benefits at each reporting period. The employer must adjust the liability if there are any changes in the expected cost of the benefits or if there are any changes in the assumptions used to estimate the cost of the benefits.

In addition to termination benefits, terminating employees may also impact accounting for other defined benefits which are conditional on future service such as pensions and post-employment benefits for existing employees. It may impact the assumptions used in calculating these benefits. For example, if the company has a defined benefit pension plan and terminates employees, the plan's assets and liabilities may need to be adjusted for its assumptions about rate of employee turnover, disability and early retirement to reflect the impact of the employee’s termination.

The impact of these adjustments on the company's financial statements can be significant. Changes in actuarial assumptions can result in gains or losses being recognised in the income statement, which will impact the company's reported earnings. 

In conclusion, employee termination can have a significant impact on a company's financial statements. Companies must recognise termination benefits as an expense when they have incurred it as part of reorganisation or have an unconditional obligation, account for the termination benefits appropriately, whether they are short-term or long-term in nature, use appropriate actuarial assumptions for long-term employee benefits where necessary, and test their assets for impairment if there is an indication that the carrying value of the assets may not be recoverable.

Companies must carefully consider the impact of employee termination on their financial statements and ensure that they comply with the requirements of IAS 19.