Commission Regulation (EU) No 475/2012 of 5 June 2012 amending Regulation (EC) No 1126/2008 adopting certain international accounting standards in accordance with Regulation (EC) No 1606/2002 of the European Parliament and of the Council as regards International Accounting Standard (IAS) 1 and International Accounting Standard (IAS) 19 Text with EEA relevance

COMMISSION REGULATION (EU) No 475/2012

of 5 June 2012

amending Regulation (EC) No 1126/2008 adopting certain international accounting standards in accordance with Regulation (EC) No 1606/2002 of the European Parliament and of the Council as regards International Accounting Standard (IAS) 1 and International Accounting Standard (IAS) 19

(Text with EEA relevance)

THE EUROPEAN COMMISSION,

Having regard to the Treaty on the Functioning of the European Union,

Having regard to Regulation (EC) No 1606/2002 of the European Parliament and of the Council of 19 July 2002 on the application of international accounting standards ([^E0001]), and in particular Article 3(1) thereof,

Whereas:

• (1) By Commission Regulation (EC) No 1126/2008 ([^E0002]) certain international standards and interpretations that were in existence at 15 October 2008 were adopted.

• (2) On 16 June 2011, the International Accounting Standards Board (IASB) published Amendments to IAS 1 Presentation of Financial Statements - Presentation of Items of Other Comprehensive Income (hereinafter "the amendments to IAS 1") and to IAS 19 Employee Benefits, (hereinafter "the amendments to IAS 19"). The objective of the amendments to IAS 1 is to make the presentation of the increasing number of items of other comprehensive income clearer, and to assist the users of financial statements in distinguishing between the items of other comprehensive income that can be reclassified subsequently to profit or loss, and those that will never be reclassified to profit or loss. As to the amendments to IAS 19, they should help users of financial statements better understand how defined benefit plans affect an entity's financial position, financial performance and cash flows. The objective of the standard is to prescribe the accounting and disclosure for employee benefits.

• (3) The consultation with the Technical Expert Group (TEG) of the European Financial Reporting Advisory Group (EFRAG) confirms that the amendments to IAS 1 and the amendments to IAS 19 meet the technical criteria for adoption set out in Article 3(2) of Regulation (EC) No 1606/2002.

• (4) Regulation (EC) No 1126/2008 should therefore be amended accordingly.

• (5) The measures provided for in this Regulation are in accordance with the opinion of the Accounting Regulatory Committee,

HAS ADOPTED THIS REGULATION:

Article 1

The Annex to Regulation (EC) No 1126/2008 is amended as follows:

• (1)International Accounting Standard (IAS) 1 Presentation of Financial Statements is amended as set out in the Annex to this Regulation;

• (2)International Financial Reporting Standard (IFRS) 1, IFRS 5, IFRS 7, IAS 12, IAS 20, IAS 21, IAS 32, IAS 33, and IAS 34 are amended in accordance with the amendments to IAS 1 as set out in the Annex to this Regulation;

• (3)International Accounting Standard (IAS) 19 Employee Benefits is amended as set out in the Annex to this Regulation;

• (4)International Financial Reporting Standard (IFRS) 1, IFRS 8, IFRS 13, IAS 1, IAS 24, and Interpretation 14 of the Standing Interpretations Committee (SIC) are amended in accordance with the amendments to IAS 19 as set out in the Annex to this Regulation.

Article 2

Article 3

This Regulation shall enter into force on the third day following that of its publication in the Official Journal of the European Union.

This Regulation shall be binding in its entirety and directly applicable in all Member States.

ANNEX

INTERNATIONAL ACCOUNTING STANDARDS

IAS 1	IAS 1  Presentation of Financial Statements - Presentation of Items of Other Comprehensive Income
IAS 19	IAS 19  Employee Benefits

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AMENDMENTS TO IAS 1

Presentation of Financial Statements

Paragraph 7 is amended.

• 7The following terms are used in this Standard with the meanings specified: … Notes contain information in addition to that presented in the statement of financial position, statement(s) of profit or loss and other comprehensive income, …

Paragraph 10 is amended, paragraph 10A is added and paragraph 12 is deleted.

• 10A complete set of financial statements comprises: … a statement of profit or loss and other comprehensive income for the period; … An entity may use titles for the statements other than those used in this Standard. For example, an entity may use the title ‘statement of comprehensive income’ instead of ‘statement of profit or loss and other comprehensive income’.

• 10AAn entity may present a single statement of profit or loss and other comprehensive income, with profit or loss and other comprehensive income presented in two sections. The sections shall be presented together, with the profit or loss section presented first followed directly by the other comprehensive income section. An entity may present the profit or loss section in a separate statement of profit or loss. If so, the separate statement of profit or loss shall immediately precede the statement presenting comprehensive income, which shall begin with profit or loss.

The headings above paragraphs 81 and 82 and paragraph 82 are amended and paragraph 81 is deleted. Paragraphs 81A and 81B, a heading and paragraph 82A are added and paragraphs 83 and 84 are deleted.

Statement of profit or loss and other comprehensive income

• 81AThe statement of profit or loss and other comprehensive income (statement of comprehensive income) shall present, in addition to the profit or loss and other comprehensive income sections: (a)profit or loss; (b)total other comprehensive income; (c)comprehensive income for the period, being the total of profit or loss and other comprehensive income. If an entity presents a separate statement of profit or loss it does not present the profit or loss section in the statement presenting comprehensive income.

• 81BAn entity shall present the following items, in addition to the profit or loss and other comprehensive income sections, as allocation of profit or loss and other comprehensive income for the period: (a)profit or loss for the period attributable to: (i)non-controlling interests, and (ii)owners of the parent. (b)comprehensive income for the period attributable to: (i)non-controlling interests, and (ii)owners of the parent. If an entity presents profit or loss in a separate statement it shall present (a) in that statement.

Information to be presented in profit or loss section or the statement of profit or loss

• 82In addition to items required by other IFRSs, the profit or loss section or the statement of profit or loss shall include line items that present the following amounts for the period: (a)revenue; (b)finance costs; (c)share of the profit or loss of associates and joint ventures accounted for using the equity method; (d)tax expense; (e)[deleted] (ea)a single amount for the total of discontinued operations (see IFRS 5). (f)–(i)[deleted]

Information to be presented in the other comprehensive income section

• 82AThe other comprehensive income section shall present line items for amounts of other comprehensive income in the period, classified by nature (including share of the other comprehensive income of associates and joint ventures accounted for using the equity method) and grouped into those that, in accordance with other IFRSs: (a)will not be reclassified subsequently to profit or loss; and (b)will be reclassified subsequently to profit or loss when specific conditions are met.

Paragraphs 85–87, 90, 91, 94, 100 and 115 and the heading above paragraph 97 are amended and paragraph 139J is added.

• 85An entity shall present additional line items, headings and subtotals in the statement(s) presenting profit or loss and other comprehensive income when such presentation is relevant to an understanding of the entity’s financial performance.

• 86Because the effects of an entity’s various activities, transactions and other events differ in frequency, potential for gain or loss and predictability, disclosing the components of financial performance assists users in understanding the financial performance achieved and in making projections of future financial performance. An entity includes additional line items in the statement(s) presenting profit or loss and other comprehensive income and it amends the descriptions used and the ordering of items when this is necessary to explain the elements of financial performance. …

• 87An entity shall not present any items of income or expense as extraordinary items, in the statement(s) presenting profit or loss and other comprehensive income or in the notes.

• 90An entity shall disclose the amount of income tax relating to each item of other comprehensive income, including reclassification adjustments, either in the statement of profit or loss and other comprehensive income or in the notes.

• 91An entity may present items of other comprehensive income either: (a)net of related tax effects, or (b)before related tax effects with one amount shown for the aggregate amount of income tax relating to those. If an entity elects alternative (b), it shall allocate the tax between the items that might be reclassified subsequently to the profit or loss section and those that will not be reclassified subsequently to the profit or loss section.

• 94An entity may present reclassification adjustments in the statement(s) of profit or loss and other comprehensive income or in the notes. An entity presenting reclassification adjustments in the notes presents the items of other comprehensive income after any related reclassification adjustments.

Information to be presented in the statement(s) of profit or loss and other comprehensive income or in the notes

• 100Entities are encouraged to present the analysis in paragraph 99 in the statement(s) presenting profit or loss and other comprehensive income.

• 115In some circumstances, it may be necessary or desirable to vary the order of specific items within the notes. For example, an entity may combine information on changes in fair value recognised in profit or loss with information on maturities of financial instruments, although the former disclosures relate to the statement(s) presenting profit or loss and other comprehensive income and the latter relate to the statement of financial position. Nevertheless, an entity retains a systematic structure for the notes as far as practicable.

• 139J Presentation of Items of Other Comprehensive Income (Amendments to IAS 1), issued in June 2011, amended paragraphs 7, 10, 82, 85–87, 90, 91, 94, 100 and 115, added paragraphs 10A, 81A, 81B and 82A, and deleted paragraphs 12, 81, 83 and 84. An entity shall apply those amendments for annual periods beginning on or after 1 July 2012. Earlier application is permitted. If an entity applies the amendments for an earlier period it shall disclose that fact.

AMENDMENTS TO OTHER IFRSS

This appendix sets out the amendments to other IFRSs that are a consequence of the Board issuing the amendments to IAS 1 Presentation of Financial Statements. An entity shall apply the amendments when it applies the amendments to IAS 1 in Presentation of Items of Other Comprehensive Income.

IFRS 1   First-time Adoption of International Financial Reporting Standards

Paragraph 21 is amended and paragraph 39K is added.

• 21To comply with IAS 1, an entity’s first IFRS financial statements shall include at least three statements of financial position, two statements of profit or loss and other comprehensive income, two separate statements of profit or loss (if presented), two statements of cash flows and two statements of changes in equity and related notes, including comparative information.

• 39K Presentation of Items of Other Comprehensive Income (Amendments to IAS 1), issued in June 2011, amended paragraph 21. An entity shall apply that amendment when it applies IAS 1 as amended in June 2011.

IFRS 5   Non-current Assets Held for Sale and Discontinued Operations

Paragraph 33A is amended and paragraph 44I is added.

• 33AIf an entity presents the items of profit or loss in a separate statement as described in paragraph 10A of IAS 1 (as amended in 2011), a section identified as relating to discontinued operations is presented in that statement.

• 44I Presentation of Items of Other Comprehensive Income (Amendments to IAS 1), issued in June 2011, amended paragraph 33A. An entity shall apply that amendment when it applies IAS 1 as amended in June 2011.

IFRS 7   Financial Instruments: Disclosures

Paragraph 27B is amended and paragraph 44Q is added.

• 27BFor fair value measurements recognised in the statement of financial position an entity shall disclose for each class of financial instruments: … (c)for fair value measurements in Level 3 of the fair value hierarchy, a reconciliation from the beginning balances to the ending balances, disclosing separately changes during the period attributable to the following: (i)total gains or losses for the period recognised in profit or loss, and a description of where they are presented in the statement(s) of profit or loss and other comprehensive income; … (d)the amount of total gains or losses for the period in (c)(i) above included in profit or loss that are attributable to gains or losses relating to those assets and liabilities held at the end of the reporting period and a description of where those gains or losses are presented in the statement(s) of profit or loss and other comprehensive income. …

• 44Q Presentation of Items of Other Comprehensive Income (Amendments to IAS 1), issued in June 2011, amended paragraph 27B. An entity shall apply that amendment when it applies IAS 1 as amended in June 2011.

IAS 12   Income Taxes

Paragraph 77 is amended, paragraph 77A is deleted and paragraph 98B is added.

• 77The tax expense (income) related to profit or loss from ordinary activities shall be presented as part of profit or loss in the statement(s) of profit or loss and other comprehensive income.

• 98B Presentation of Items of Other Comprehensive Income (Amendments to IAS 1), issued in June 2011, amended paragraph 77 and deleted paragraph 77A. An entity shall apply those amendments when it applies IAS 1 as amended in June 2011.

IAS 20   Accounting for Government Grants and Disclosure of Government Assistance

Paragraph 29 is amended, paragraph 29A is deleted and paragraph 46 is added.

• 29Grants related to income are presented as part of profit or loss, either separately or under a general heading such as ‘Other income’; alternatively, they are deducted in reporting the related expense.

• 46 Presentation of Items of Other Comprehensive Income (Amendments to IAS 1), issued in June 2011, amended paragraph 29 and deleted paragraph 29A. An entity shall apply those amendments when it applies IAS 1 as amended in June 2011.

IAS 21   The Effects of Changes in Foreign Exchange Rates

Paragraph 39 is amended and paragraph 60H is added.

• 39The results and financial position of an entity whose functional currency is not the currency of a hyperinflationary economy shall be translated into a different presentation currency using the following procedures: … (b)income and expenses for each statement presenting profit or loss and other comprehensive income (ie including comparatives) shall be translated at exchange rates at the dates of the transactions; and (c)…

• 60H Presentation of Items of Other Comprehensive Income (Amendments to IAS 1), issued in June 2011, amended paragraph 39. An entity shall apply that amendment when it applies IAS 1 as amended in June 2011.

IAS 32   Financial Instruments: Presentation

Paragraph 40 is amended and paragraph 97K is added.

• 40Dividends classified as an expense may be presented in the statement(s) of profit or loss and other comprehensive income either with interest on other liabilities or as a separate item. In addition to the requirements of this Standard, disclosure of interest and dividends is subject to the requirements of IAS 1 and IFRS 7. In some circumstances, because of the differences between interest and dividends with respect to matters such as tax deductibility, it is desirable to disclose them separately in the statement(s) of profit or loss and other comprehensive income. Disclosures of the tax effects are made in accordance with IAS 12.

• 97K Presentation of Items of Other Comprehensive Income (Amendments to IAS 1), issued in June 2011, amended paragraph 40. An entity shall apply that amendment when it applies IAS 1 as amended in June 2011.

IAS 33   Earnings per Share

Paragraphs 4A, 67A, 68A and 73A are amended and paragraph 74D is added.

• 4AIf an entity presents items of profit or loss in a separate statement as described in paragraph 10A of IAS 1 Presentation of Financial Statements (as amended in 2011), it presents earnings per share only in that separate statement.

• 67AIf an entity presents items of profit or loss in a separate statement as described in paragraph 10A of IAS 1 (as amended in 2011), it presents basic and diluted earnings per share, as required in paragraphs 66 and 67, in that separate statement.

• 68AIf an entity presents items of profit or loss in a separate statement as described in paragraph 10A of IAS 1 (as amended in 2011), it presents basic and diluted earnings per share for the discontinued operation, as required in paragraph 68, in that separate statement or in the notes.

• 73AParagraph 73 applies also to an entity that discloses, in addition to basic and diluted earnings per share, amounts per share using a reported item of profit or loss, other than one required by this Standard.

• 74D Presentation of Items of Other Comprehensive Income (Amendments to IAS 1), issued in June 2011, amended paragraphs 4A, 67A, 68A and 73A. An entity shall apply those amendments when it applies IAS 1 as amended in June 2011.

IAS 34   Interim Financial Reporting

Paragraphs 8, 8A, 11A and 20 are amended and paragraph 51 is added.

• 8An interim financial report shall include, at a minimum, the following components: … (b)a condensed statement or condensed statements of profit or loss and other comprehensive income; (c)…

• 8AIf an entity presents items of profit or loss in a separate statement as described in paragraph 10A of IAS 1 (as amended in 2011), it presents interim condensed information from that statement.

• 11AIf an entity presents items of profit or loss in a separate statement as described in paragraph 10A of IAS 1 (as amended in 2011), it presents basic and diluted earnings per share in that statement.

• 20Interim reports shall include interim financial statements (condensed or complete) for periods as follows: … (b)statements of profit or loss and other comprehensive income for the current interim period and cumulatively for the current financial year to date, with comparative statements of profit or loss and other comprehensive income for the comparable interim periods (current and year-to-date) of the immediately preceding financial year. As permitted by IAS 1 (as amended in 2011), an interim report may present for each period a statement or statements of profit or loss and other comprehensive income.

• 51 Presentation of Items of Other Comprehensive Income (Amendments to IAS 1), issued in June 2011, amended paragraphs 8, 8A, 11A and 20. An entity shall apply those amendments when it applies IAS 1 as amended in June 2011.

INTERNATIONAL ACCOUNTING STANDARD 19

Employee Benefits

OBJECTIVE

• 1The objective of this Standard is to prescribe the accounting and disclosure for employee benefits. The Standard requires an entity to recognise: (a)a liability when an employee has provided service in exchange for employee benefits to be paid in the future; and (b)an expense when the entity consumes the economic benefit arising from service provided by an employee in exchange for employee benefits.

SCOPE

• 2This Standard shall be applied by an employer in accounting for all employee benefits, except those to which IFRS 2 Share-based Payment applies.

• 3This Standard does not deal with reporting by employee benefit plans (see IAS 26 Accounting and Reporting by Retirement Benefit Plans).

• 4The employee benefits to which this Standard applies include those provided: (a)under formal plans or other formal agreements between an entity and individual employees, groups of employees or their representatives; (b)under legislative requirements, or through industry arrangements, whereby entities are required to contribute to national, state, industry or other multi-employer plans; or (c)by those informal practices that give rise to a constructive obligation. Informal practices give rise to a constructive obligation where the entity has no realistic alternative but to pay employee benefits. An example of a constructive obligation is where a change in the entity’s informal practices would cause unacceptable damage to its relationship with employees.

• 5Employee benefits include: (a)short-term employee benefits, such as the following, if expected to be settled wholly before twelve months after the end of the annual reporting period in which the employees render the related services: (i)wages, salaries and social security contributions; (ii)paid annual leave and paid sick leave; (iii)profit-sharing and bonuses; and (iv)non-monetary benefits (such as medical care, housing, cars and free or subsidised goods or services) for current employees; (b)post-employment benefits, such as the following: (i)retirement benefits (eg pensions and lump sum payments on retirement); and (ii)other post-employment benefits, such as post-employment life insurance and post-employment medical care; (c)other long-term employee benefits, such as the following: (i)long-term paid absences such as long-service leave or sabbatical leave; (ii)jubilee or other long-service benefits; and (iii)long-term disability benefits; and (d)termination benefits.

• 6Employee benefits include benefits provided either to employees or to their dependants or beneficiaries and may be settled by payments (or the provision of goods or services) made either directly to the employees, to their spouses, children or other dependants or to others, such as insurance companies.

• 7An employee may provide services to an entity on a full-time, part-time, permanent, casual or temporary basis. For the purpose of this Standard, employees include directors and other management personnel.

DEFINITIONS

• 8The following terms are used in this Standard with the meanings specified: Definitions of employee benefits Employee benefits are all forms of consideration given by an entity in exchange for service rendered by employees or for the termination of employment. Short-term employee benefits are employee benefits (other than termination benefits) that are expected to be settled wholly before twelve months after the end of the annual reporting period in which the employees render the related service. Post-employment benefits are employee benefits (other than termination benefits and short-term employee benefits) that are payable after the completion of employment. Other long-term employee benefits are all employee benefits other than short-term employee benefits, post-employment benefits and termination benefits. Termination benefits are employee benefits provided in exchange for the termination of an employee’s employment as a result of either: (a)an entity’s decision to terminate an employee’s employment before the normal retirement date; or (b)an employee’s decision to accept an offer of benefits in exchange for the termination of employment. Definitions relating to classification of plans Post-employment benefit plans are formal or informal arrangements under which an entity provides post-employment benefits for one or more employees. Defined contribution plans are post-employment benefit plans under which an entity pays fixed contributions into a separate entity (a fund) and will have no legal or constructive obligation to pay further contributions if the fund does not hold sufficient assets to pay all employee benefits relating to employee service in the current and prior periods. Defined benefit plans are post-employment benefit plans other than defined contribution plans. Multi-employer plans are defined contribution plans (other than state plans) or defined benefit plans (other than state plans) that: (a)pool the assets contributed by various entities that are not under common control; and (b)use those assets to provide benefits to employees of more than one entity, on the basis that contribution and benefit levels are determined without regard to the identity of the entity that employs the employees. Definitions relating to the net defined benefit liability (asset) The net defined benefit liability (asset) is the deficit or surplus, adjusted for any effect of limiting a net defined benefit asset to the asset ceiling. The deficit or surplus is: (a)the present value of the defined benefit obligation less (b)the fair value of plan assets (if any). The asset ceiling is the present value of any economic benefits available in the form of refunds from the plan or reductions in future contributions to the plan. The present value of a defined benefit obligation is the present value, without deducting any plan assets, of expected future payments required to settle the obligation resulting from employee service in the current and prior periods. Plan assets comprise: (a)assets held by a long-term employee benefit fund; and (b)qualifying insurance policies. Assets held by a long-term employee benefit fund are assets (other than non-transferable financial instruments issued by the reporting entity) that: (a)are held by an entity (a fund) that is legally separate from the reporting entity and exists solely to pay or fund employee benefits; and (b)are available to be used only to pay or fund employee benefits, are not available to the reporting entity’s own creditors (even in bankruptcy), and cannot be returned to the reporting entity, unless either: (i)the remaining assets of the fund are sufficient to meet all the related employee benefit obligations of the plan or the reporting entity; or (ii)the assets are returned to the reporting entity to reimburse it for employee benefits already paid. A qualifying insurance policy is an insurance policy ([^E0003]) issued by an insurer that is not a related party (as defined in IAS 24 Related Party Disclosures) of the reporting entity, if the proceeds of the policy: (a)can be used only to pay or fund employee benefits under a defined benefit plan; and (b)are not available to the reporting entity’s own creditors (even in bankruptcy) and cannot be paid to the reporting entity, unless either: (i)the proceeds represent surplus assets that are not needed for the policy to meet all the related employee benefit obligations; or (ii)the proceeds are returned to the reporting entity to reimburse it for employee benefits already paid. Fair value is the amount for which an asset could be exchanged or a liability settled between knowledgeable, willing parties in an arm’s length transaction. Definitions relating to defined benefit cost Service cost comprises: (a) current service cost, which is the increase in the present value of the defined benefit obligation resulting from employee service in the current period; (b) past service cost, which is the change in the present value of the defined benefit obligation for employee service in prior periods, resulting from a plan amendment (the introduction or withdrawal of, or changes to, a defined benefit plan) or a curtailment (a significant reduction by the entity in the number of employees covered by a plan); and (c)any gain or loss on settlement. Net interest on the net defined benefit liability (asset) is the change during the period in the net defined benefit liability (asset) that arises from the passage of time. Remeasurements of the net defined benefit liability (asset) comprise: (a)actuarial gains and losses; (b)the return on plan assets, excluding amounts included in net interest on the net defined benefit liability (asset); and (c)any change in the effect of the asset ceiling, excluding amounts included in net interest on the net defined benefit liability (asset). Actuarial gains and losses are changes in the present value of the defined benefit obligation resulting from: (a)experience adjustments (the effects of differences between the previous actuarial assumptions and what has actually occurred); and (b)the effects of changes in actuarial assumptions. The return on plan assets is interest, dividends and other income derived from the plan assets, together with realised and unrealised gains or losses on the plan assets, less: (a)any costs of managing plan assets; and (b)any tax payable by the plan itself, other than tax included in the actuarial assumptions used to measure the present value of the defined benefit obligation. A settlement is a transaction that eliminates all further legal or constructive obligations for part or all of the benefits provided under a defined benefit plan, other than a payment of benefits to, or on behalf of, employees that is set out in the terms of the plan and included in the actuarial assumptions.

SHORT-TERM EMPLOYEE BENEFITS

• 9Short-term employee benefits include items such as the following, if expected to be settled wholly before twelve months after the end of the annual reporting period in which the employees render the related services: (a)wages, salaries and social security contributions; (b)paid annual leave and paid sick leave; (c)profit-sharing and bonuses; and (d)non-monetary benefits (such as medical care, housing, cars and free or subsidised goods or services) for current employees.

• 10An entity need not reclassify a short-term employee benefit if the entity’s expectations of the timing of settlement change temporarily. However, if the characteristics of the benefit change (such as a change from a non-accumulating benefit to an accumulating benefit) or if a change in expectations of the timing of settlement is not temporary, then the entity considers whether the benefit still meets the definition of short-term employee benefits.

Recognition and measurement

• 11When an employee has rendered service to an entity during an accounting period, the entity shall recognise the undiscounted amount of short-term employee benefits expected to be paid in exchange for that service: (a)as a liability (accrued expense), after deducting any amount already paid. If the amount already paid exceeds the undiscounted amount of the benefits, an entity shall recognise that excess as an asset (prepaid expense) to the extent that the prepayment will lead to, for example, a reduction in future payments or a cash refund. (b)as an expense, unless another IFRS requires or permits the inclusion of the benefits in the cost of an asset (see, for example, IAS 2 Inventories and IAS 16 Property, Plant and Equipment).

• 12Paragraphs 13, 16 and 19 explain how an entity shall apply paragraph 11 to short-term employee benefits in the form of paid absences and profit-sharing and bonus plans.

• 13An entity shall recognise the expected cost of short-term employee benefits in the form of paid absences under paragraph 11 as follows: (a)in the case of accumulating paid absences, when the employees render service that increases their entitlement to future paid absences. (b)in the case of non-accumulating paid absences, when the absences occur.

• 14An entity may pay employees for absence for various reasons including holidays, sickness and short-term disability, maternity or paternity, jury service and military service. Entitlement to paid absences falls into two categories: (a)accumulating; and (b)non-accumulating.

• 15Accumulating paid absences are those that are carried forward and can be used in future periods if the current period’s entitlement is not used in full. Accumulating paid absences may be either vesting (in other words, employees are entitled to a cash payment for unused entitlement on leaving the entity) or non-vesting (when employees are not entitled to a cash payment for unused entitlement on leaving). An obligation arises as employees render service that increases their entitlement to future paid absences. The obligation exists, and is recognised, even if the paid absences are non-vesting, although the possibility that employees may leave before they use an accumulated non-vesting entitlement affects the measurement of that obligation.

• 16An entity shall measure the expected cost of accumulating paid absences as the additional amount that the entity expects to pay as a result of the unused entitlement that has accumulated at the end of the reporting period.

• 17The method specified in the previous paragraph measures the obligation at the amount of the additional payments that are expected to arise solely from the fact that the benefit accumulates. In many cases, an entity may not need to make detailed computations to estimate that there is no material obligation for unused paid absences. For example, a sick leave obligation is likely to be material only if there is a formal or informal understanding that unused paid sick leave may be taken as paid annual leave. An entity has 100 employees, who are each entitled to five working days of paid sick leave for each year. Unused sick leave may be carried forward for one calendar year. Sick leave is taken first out of the current year’s entitlement and then out of any balance brought forward from the previous year (a LIFO basis). At 31 December 20X1 the average unused entitlement is two days per employee. The entity expects, on the basis of experience that is expected to continue, that 92 employees will take no more than five days of paid sick leave in 20X2 and that the remaining eight employees will take an average of six and a half days each. The entity expects that it will pay an additional twelve days of sick pay as a result of the unused entitlement that has accumulated at 31 December 20X1 (one and a half days each, for eight employees). Therefore, the entity recognises a liability equal to twelve days of sick pay.

• 18Non-accumulating paid absences do not carry forward: they lapse if the current period’s entitlement is not used in full and do not entitle employees to a cash payment for unused entitlement on leaving the entity. This is commonly the case for sick pay (to the extent that unused past entitlement does not increase future entitlement), maternity or paternity leave and paid absences for jury service or military service. An entity recognises no liability or expense until the time of the absence, because employee service does not increase the amount of the benefit.

• 19An entity shall recognise the expected cost of profit-sharing and bonus payments under paragraph 11 when, and only when: (a)the entity has a present legal or constructive obligation to make such payments as a result of past events; and (b)a reliable estimate of the obligation can be made. A present obligation exists when, and only when, the entity has no realistic alternative but to make the payments.

• 20Under some profit-sharing plans, employees receive a share of the profit only if they remain with the entity for a specified period. Such plans create a constructive obligation as employees render service that increases the amount to be paid if they remain in service until the end of the specified period. The measurement of such constructive obligations reflects the possibility that some employees may leave without receiving profit-sharing payments. A profit-sharing plan requires an entity to pay a specified proportion of its profit for the year to employees who serve throughout the year. If no employees leave during the year, the total profit-sharing payments for the year will be 3 per cent of profit. The entity estimates that staff turnover will reduce the payments to 2.5 per cent of profit. The entity recognises a liability and an expense of 2,5 per cent of profit.

• 21An entity may have no legal obligation to pay a bonus. Nevertheless, in some cases, an entity has a practice of paying bonuses. In such cases, the entity has a constructive obligation because the entity has no realistic alternative but to pay the bonus. The measurement of the constructive obligation reflects the possibility that some employees may leave without receiving a bonus.

• 22An entity can make a reliable estimate of its legal or constructive obligation under a profit-sharing or bonus plan when, and only when: (a)the formal terms of the plan contain a formula for determining the amount of the benefit; (b)the entity determines the amounts to be paid before the financial statements are authorised for issue; or (c)past practice gives clear evidence of the amount of the entity’s constructive obligation.

• 23An obligation under profit-sharing and bonus plans results from employee service and not from a transaction with the entity’s owners. Therefore, an entity recognises the cost of profit-sharing and bonus plans not as a distribution of profit but as an expense.

• 24If profit-sharing and bonus payments are not expected to be settled wholly before twelve months after the end of the annual reporting period in which the employees render the related service, those payments are other long-term employee benefits (see paragraphs 153–158).

Disclosure

• 25Although this Standard does not require specific disclosures about short-term employee benefits, other IFRSs may require disclosures. For example, IAS 24 requires disclosures about employee benefits for key management personnel. IAS 1 Presentation of Financial Statements requires disclosure of employee benefits expense.

POST-EMPLOYMENT BENEFITS: DISTINCTION BETWEEN DEFINED CONTRIBUTION PLANS AND DEFINED BENEFIT PLANS

• 26Post-employment benefits include items such as the following: (a)retirement benefits (eg pensions and lump sum payments on retirement); and (b)other post-employment benefits, such as post-employment life insurance and post-employment medical care. Arrangements whereby an entity provides post-employment benefits are post-employment benefit plans. An entity applies this Standard to all such arrangements whether or not they involve the establishment of a separate entity to receive contributions and to pay benefits.

• 27Post-employment benefit plans are classified as either defined contribution plans or defined benefit plans, depending on the economic substance of the plan as derived from its principal terms and conditions.

• 28Under defined contribution plans the entity’s legal or constructive obligation is limited to the amount that it agrees to contribute to the fund. Thus, the amount of the post-employment benefits received by the employee is determined by the amount of contributions paid by an entity (and perhaps also the employee) to a post-employment benefit plan or to an insurance company, together with investment returns arising from the contributions. In consequence, actuarial risk (that benefits will be less than expected) and investment risk (that assets invested will be insufficient to meet expected benefits) fall, in substance, on the employee.

• 29Examples of cases where an entity’s obligation is not limited to the amount that it agrees to contribute to the fund are when the entity has a legal or constructive obligation through: (a)a plan benefit formula that is not linked solely to the amount of contributions and requires the entity to provide further contributions if assets are insufficient to meet the benefits in the plan benefit formula; (b)a guarantee, either indirectly through a plan or directly, of a specified return on contributions; or (c)those informal practices that give rise to a constructive obligation. For example, a constructive obligation may arise where an entity has a history of increasing benefits for former employees to keep pace with inflation even where there is no legal obligation to do so.

• 30Under defined benefit plans: (a)the entity’s obligation is to provide the agreed benefits to current and former employees; and (b)actuarial risk (that benefits will cost more than expected) and investment risk fall, in substance, on the entity. If actuarial or investment experience are worse than expected, the entity’s obligation may be increased.

• 31Paragraphs 32–49 explain the distinction between defined contribution plans and defined benefit plans in the context of multi-employer plans, defined benefit plans that share risks between entities under common control, state plans and insured benefits.

Multi-employer plans

• 32An entity shall classify a multi-employer plan as a defined contribution plan or a defined benefit plan under the terms of the plan (including any constructive obligation that goes beyond the formal terms).

• 33If an entity participates in a multi-employer defined benefit plan, unless paragraph 34 applies, it shall: (a)account for its proportionate share of the defined benefit obligation, plan assets and cost associated with the plan in the same way as for any other defined benefit plan; and (b)disclose the information required by paragraphs 135–148 (excluding paragraph 148(d)).

• 34When sufficient information is not available to use defined benefit accounting for a multi-employer defined benefit plan, an entity shall: (a)account for the plan in accordance with paragraphs 51 and 52 as if it were a defined contribution plan; and (b)disclose the information required by paragraph 148.

• 35One example of a multi-employer defined benefit plan is one where: (a)the plan is financed on a pay-as-you-go basis: contributions are set at a level that is expected to be sufficient to pay the benefits falling due in the same period; and future benefits earned during the current period will be paid out of future contributions; and (b)employees’ benefits are determined by the length of their service and the participating entities have no realistic means of withdrawing from the plan without paying a contribution for the benefits earned by employees up to the date of withdrawal. Such a plan creates actuarial risk for the entity: if the ultimate cost of benefits already earned at the end of the reporting period is more than expected, the entity will have either to increase its contributions or to persuade employees to accept a reduction in benefits. Therefore, such a plan is a defined benefit plan.

• 36Where sufficient information is available about a multi-employer defined benefit plan, an entity accounts for its proportionate share of the defined benefit obligation, plan assets and post-employment cost associated with the plan in the same way as for any other defined benefit plan. However, an entity may not be able to identify its share of the underlying financial position and performance of the plan with sufficient reliability for accounting purposes. This may occur if: (a)the plan exposes the participating entities to actuarial risks associated with the current and former employees of other entities, with the result that there is no consistent and reliable basis for allocating the obligation, plan assets and cost to individual entities participating in the plan; or (b)the entity does not have access to sufficient information about the plan to satisfy the requirements of this Standard. In those cases, an entity accounts for the plan as if it were a defined contribution plan and discloses the information required by paragraph 148.

• 37There may be a contractual agreement between the multi-employer plan and its participants that determines how the surplus in the plan will be distributed to the participants (or the deficit funded). A participant in a multi-employer plan with such an agreement that accounts for the plan as a defined contribution plan in accordance with paragraph 34 shall recognise the asset or liability that arises from the contractual agreement and the resulting income or expense in profit or loss. An entity participates in a multi-employer defined benefit plan that does not prepare plan valuations on an IAS 19 basis. It therefore accounts for the plan as if it were a defined contribution plan. A non-IAS 19 funding valuation shows a deficit of CU100 million in the plan. The plan has agreed under contract a schedule of contributions with the participating employers in the plan that will eliminate the deficit over the next five years. The entity’s total contributions under the contract are CU8 million. The entity recognises a liability for the contributions adjusted for the time value of money and an equal expense in profit or loss.*

• 38Multi-employer plans are distinct from group administration plans. A group administration plan is merely an aggregation of single employer plans combined to allow participating employers to pool their assets for investment purposes and reduce investment management and administration costs, but the claims of different employers are segregated for the sole benefit of their own employees. Group administration plans pose no particular accounting problems because information is readily available to treat them in the same way as any other single employer plan and because such plans do not expose the participating entities to actuarial risks associated with the current and former employees of other entities. The definitions in this Standard require an entity to classify a group administration plan as a defined contribution plan or a defined benefit plan in accordance with the terms of the plan (including any constructive obligation that goes beyond the formal terms).

• 39In determining when to recognise, and how to measure, a liability relating to the wind-up of a multi-employer defined benefit plan, or the entity’s withdrawal from a multi-employer defined benefit plan, an entity shall apply IAS 37 Provisions, Contingent Liabilities and Contingent Assets.

Defined benefit plans that share risks between entities under common control

• 40Defined benefit plans that share risks between entities under common control, for example, a parent and its subsidiaries, are not multi-employer plans.

• 41An entity participating in such a plan shall obtain information about the plan as a whole measured in accordance with this Standard on the basis of assumptions that apply to the plan as a whole. If there is a contractual agreement or stated policy for charging to individual group entities the net defined benefit cost for the plan as a whole measured in accordance with this Standard, the entity shall, in its separate or individual financial statements, recognise the net defined benefit cost so charged. If there is no such agreement or policy, the net defined benefit cost shall be recognised in the separate or individual financial statements of the group entity that is legally the sponsoring employer for the plan. The other group entities shall, in their separate or individual financial statements, recognise a cost equal to their contribution payable for the period.

• 42Participation in such a plan is a related party transaction for each individual group entity. An entity shall therefore, in its separate or individual financial statements, disclose the information required by paragraph 149.

State plans

• 43An entity shall account for a state plan in the same way as for a multi-employer plan (see paragraphs 32–39).

• 44State plans are established by legislation to cover all entities (or all entities in a particular category, for example, a specific industry) and are operated by national or local government or by another body (for example, an autonomous agency created specifically for this purpose) that is not subject to control or influence by the reporting entity. Some plans established by an entity provide both compulsory benefits, as a substitute for benefits that would otherwise be covered under a state plan, and additional voluntary benefits. Such plans are not state plans.

• 45State plans are characterised as defined benefit or defined contribution, depending on the entity’s obligation under the plan. Many state plans are funded on a pay-as-you-go basis: contributions are set at a level that is expected to be sufficient to pay the required benefits falling due in the same period; future benefits earned during the current period will be paid out of future contributions. Nevertheless, in most state plans the entity has no legal or constructive obligation to pay those future benefits: its only obligation is to pay the contributions as they fall due and if the entity ceases to employ members of the state plan, it will have no obligation to pay the benefits earned by its own employees in previous years. For this reason, state plans are normally defined contribution plans. However, when a state plan is a defined benefit plan an entity applies paragraphs 32–39.

Insured benefits

• 46An entity may pay insurance premiums to fund a post-employment benefit plan. The entity shall treat such a plan as a defined contribution plan unless the entity will have (either directly, or indirectly through the plan) a legal or constructive obligation either: (a)to pay the employee benefits directly when they fall due; or (b)to pay further amounts if the insurer does not pay all future employee benefits relating to employee service in the current and prior periods. If the entity retains such a legal or constructive obligation, the entity shall treat the plan as a defined benefit plan.

• 47The benefits insured by an insurance policy need not have a direct or automatic relationship with the entity’s obligation for employee benefits. Post-employment benefit plans involving insurance policies are subject to the same distinction between accounting and funding as other funded plans.

• 48Where an entity funds a post-employment benefit obligation by contributing to an insurance policy under which the entity (either directly, indirectly through the plan, through the mechanism for setting future premiums or through a related party relationship with the insurer) retains a legal or constructive obligation, the payment of the premiums does not amount to a defined contribution arrangement. It follows that the entity: (a)accounts for a qualifying insurance policy as a plan asset (see paragraph 8); and (b)recognises other insurance policies as reimbursement rights (if the policies satisfy the criterion in paragraph 116).

• 49Where an insurance policy is in the name of a specified plan participant or a group of plan participants and the entity does not have any legal or constructive obligation to cover any loss on the policy, the entity has no obligation to pay benefits to the employees and the insurer has sole responsibility for paying the benefits. The payment of fixed premiums under such contracts is, in substance, the settlement of the employee benefit obligation, rather than an investment to meet the obligation. Consequently, the entity no longer has an asset or a liability. Therefore, an entity treats such payments as contributions to a defined contribution plan.

POST-EMPLOYMENT BENEFITS: DEFINED CONTRIBUTION PLANS

• 50Accounting for defined contribution plans is straightforward because the reporting entity’s obligation for each period is determined by the amounts to be contributed for that period. Consequently, no actuarial assumptions are required to measure the obligation or the expense and there is no possibility of any actuarial gain or loss. Moreover, the obligations are measured on an undiscounted basis, except where they are not expected to be settled wholly before twelve months after the end of the annual reporting period in which the employees render the related service.

Recognition and measurement

• 51When an employee has rendered service to an entity during a period, the entity shall recognise the contribution payable to a defined contribution plan in exchange for that service: (a)as a liability (accrued expense), after deducting any contribution already paid. If the contribution already paid exceeds the contribution due for service before the end of the reporting period, an entity shall recognise that excess as an asset (prepaid expense) to the extent that the prepayment will lead to, for example, a reduction in future payments or a cash refund. (b)as an expense, unless another IFRS requires or permits the inclusion of the contribution in the cost of an asset (see, for example, IAS 2 and IAS 16).

• 52When contributions to a defined contribution plan are not expected to be settled wholly before twelve months after the end of the annual reporting period in which the employees render the related service, they shall be discounted using the discount rate specified in paragraph 83.

Disclosure

• 53An entity shall disclose the amount recognised as an expense for defined contribution plans.

• 54Where required by IAS 24 an entity discloses information about contributions to defined contribution plans for key management personnel.

POST-EMPLOYMENT BENEFITS: DEFINED BENEFIT PLANS

• 55Accounting for defined benefit plans is complex because actuarial assumptions are required to measure the obligation and the expense and there is a possibility of actuarial gains and losses. Moreover, the obligations are measured on a discounted basis because they may be settled many years after the employees render the related service.

Recognition and measurement

• 56Defined benefit plans may be unfunded, or they may be wholly or partly funded by contributions by an entity, and sometimes its employees, into an entity, or fund, that is legally separate from the reporting entity and from which the employee benefits are paid. The payment of funded benefits when they fall due depends not only on the financial position and the investment performance of the fund but also on an entity’s ability, and willingness, to make good any shortfall in the fund’s assets. Therefore, the entity is, in substance, underwriting the actuarial and investment risks associated with the plan. Consequently, the expense recognised for a defined benefit plan is not necessarily the amount of the contribution due for the period.

• 57Accounting by an entity for defined benefit plans involves the following steps: (a)determining the deficit or surplus. This involves: (i)using an actuarial technique, the projected unit credit method, to make a reliable estimate of the ultimate cost to the entity of the benefit that employees have earned in return for their service in the current and prior periods (see paragraphs 67–69). This requires an entity to determine how much benefit is attributable to the current and prior periods (see paragraphs 70–74) and to make estimates (actuarial assumptions) about demographic variables (such as employee turnover and mortality) and financial variables (such as future increases in salaries and medical costs) that will affect the cost of the benefit (see paragraphs 75–98). (ii)discounting that benefit in order to determine the present value of the defined benefit obligation and the current service cost (see paragraphs 67–69 and 83–86). (iii)deducting the fair value of any plan assets (see paragraphs 113–115) from the present value of the defined benefit obligation. (b)determining the amount of the net defined benefit liability (asset) as the amount of the deficit or surplus determined in (a), adjusted for any effect of limiting a net defined benefit asset to the asset ceiling (see paragraph 64). (c)determining amounts to be recognised in profit or loss: (i)current service cost (see paragraphs 70–74). (ii)any past service cost and gain or loss on settlement (see paragraphs 99–112). (iii)net interest on the net defined benefit liability (asset) (see paragraphs 123–126). (d)determining the remeasurements of the net defined benefit liability (asset), to be recognised in other comprehensive income, comprising: (i)actuarial gains and losses (see paragraphs 128 and 129); (ii)return on plan assets, excluding amounts included in net interest on the net defined benefit liability (asset) (see paragraph 130); and (iii)any change in the effect of the asset ceiling (see paragraph 64), excluding amounts included in net interest on the net defined benefit liability (asset). Where an entity has more than one defined benefit plan, the entity applies these procedures for each material plan separately.

• 58An entity shall determine the net defined benefit liability (asset) with sufficient regularity that the amounts recognised in the financial statements do not differ materially from the amounts that would be determined at the end of the reporting period.

• 59This Standard encourages, but does not require, an entity to involve a qualified actuary in the measurement of all material post-employment benefit obligations. For practical reasons, an entity may request a qualified actuary to carry out a detailed valuation of the obligation before the end of the reporting period. Nevertheless, the results of that valuation are updated for any material transactions and other material changes in circumstances (including changes in market prices and interest rates) up to the end of the reporting period.

• 60In some cases, estimates, averages and computational short cuts may provide a reliable approximation of the detailed computations illustrated in this Standard.

Accounting for the constructive obligation

• 61An entity shall account not only for its legal obligation under the formal terms of a defined benefit plan, but also for any constructive obligation that arises from the entity’s informal practices. Informal practices give rise to a constructive obligation where the entity has no realistic alternative but to pay employee benefits. An example of a constructive obligation is where a change in the entity’s informal practices would cause unacceptable damage to its relationship with employees.

• 62The formal terms of a defined benefit plan may permit an entity to terminate its obligation under the plan. Nevertheless, it is usually difficult for an entity to terminate its obligation under a plan (without payment) if employees are to be retained. Therefore, in the absence of evidence to the contrary, accounting for post-employment benefits assumes that an entity that is currently promising such benefits will continue to do so over the remaining working lives of employees.

Statement of financial position

• 63An entity shall recognise the net defined benefit liability (asset) in the statement of financial position.

• 64When an entity has a surplus in a defined benefit plan, it shall measure the net defined benefit asset at the lower of: (a)the surplus in the defined benefit plan; and (b)the asset ceiling, determined using the discount rate specified in paragraph 83.

• 65A net defined benefit asset may arise where a defined benefit plan has been overfunded or where actuarial gains have arisen. An entity recognises a net defined benefit asset in such cases because: (a)the entity controls a resource, which is the ability to use the surplus to generate future benefits; (b)that control is a result of past events (contributions paid by the entity and service rendered by the employee); and (c)future economic benefits are available to the entity in the form of a reduction in future contributions or a cash refund, either directly to the entity or indirectly to another plan in deficit. The asset ceiling is the present value of those future benefits.

Recognition and measurement: present value of defined benefit obligations and current service cost

• 66The ultimate cost of a defined benefit plan may be influenced by many variables, such as final salaries, employee turnover and mortality, employee contributions and medical cost trends. The ultimate cost of the plan is uncertain and this uncertainty is likely to persist over a long period of time. In order to measure the present value of the post-employment benefit obligations and the related current service cost, it is necessary: (a)to apply an actuarial valuation method (see paragraphs 67–69); (b)to attribute benefit to periods of service (see paragraphs 70–74); and (c)to make actuarial assumptions (see paragraphs 75–98).

• 67An entity shall use the projected unit credit method to determine the present value of its defined benefit obligations and the related current service cost and, where applicable, past service cost.

• 68The projected unit credit method (sometimes known as the accrued benefit method pro-rated on service or as the benefit/years of service method) sees each period of service as giving rise to an additional unit of benefit entitlement (see paragraphs 70–74) and measures each unit separately to build up the final obligation (see paragraphs 75–98). A lump sum benefit is payable on termination of service and equal to 1 per cent of final salary for each year of service. The salary in year 1 is CU10,000 and is assumed to increase at 7 per cent (compound) each year. The discount rate used is 10 per cent per year. The following table shows how the obligation builds up for an employee who is expected to leave at the end of year 5, assuming that there are no changes in actuarial assumptions. For simplicity, this example ignores the additional adjustment needed to reflect the probability that the employee may leave the entity at an earlier or later date.

Year 1 2 3 4 5 CU CU CU CU CU Benefit attributed to: —  prior years 0 131 262 393 524 —  current year (1 % of final salary) 131 131 131 131 131 —  current and prior years 131 262 393 524 655 Opening obligation — 89 196 324 476 Interest at 10 % — 9 20 33 48 Current service cost 89 98 108 119 131 Closing obligation 89 196 324 476 655 1

The opening obligation is the present value of the benefit attributed to prior years. 2

The current service cost is the present value of the benefit attributed to the current year. 3

The closing obligation is the present value of the benefit attributed to current and prior years.

• 69An entity discounts the whole of a post-employment benefit obligation, even if part of the obligation is expected to be settled before twelve months after the reporting period.

• 70In determining the present value of its defined benefit obligations and the related current service cost and, where applicable, past service cost, an entity shall attribute benefit to periods of service under the plan’s benefit formula. However, if an employee’s service in later years will lead to a materially higher level of benefit than in earlier years, an entity shall attribute benefit on a straight-line basis from: (a)the date when service by the employee first leads to benefits under the plan (whether or not the benefits are conditional on further service) until (b)the date when further service by the employee will lead to no material amount of further benefits under the plan, other than from further salary increases.

• 71The projected unit credit method requires an entity to attribute benefit to the current period (in order to determine current service cost) and the current and prior periods (in order to determine the present value of defined benefit obligations). An entity attributes benefit to periods in which the obligation to provide post-employment benefits arises. That obligation arises as employees render services in return for post-employment benefits that an entity expects to pay in future reporting periods. Actuarial techniques allow an entity to measure that obligation with sufficient reliability to justify recognition of a liability. 1A defined benefit plan provides a lump sum benefit of CU100 payable on retirement for each year of service. A benefit of CU100 is attributed to each year. The current service cost is the present value of CU100. The present value of the defined benefit obligation is the present value of CU100, multiplied by the number of years of service up to the end of the reporting period. If the benefit is payable immediately when the employee leaves the entity, the current service cost and the present value of the defined benefit obligation reflect the date at which the employee is expected to leave. Thus, because of the effect of discounting, they are less than the amounts that would be determined if the employee left at the end of the reporting period. 2A plan provides a monthly pension of 0,2 per cent of final salary for each year of service. The pension is payable from the age of 65. Benefit equal to the present value, at the expected retirement date, of a monthly pension of 0,2 per cent of the estimated final salary payable from the expected retirement date until the expected date of death is attributed to each year of service. The current service cost is the present value of that benefit. The present value of the defined benefit obligation is the present value of monthly pension payments of 0,2 per cent of final salary, multiplied by the number of years of service up to the end of the reporting period. The current service cost and the present value of the defined benefit obligation are discounted because pension payments begin at the age of 65.

• 72Employee service gives rise to an obligation under a defined benefit plan even if the benefits are conditional on future employment (in other words they are not vested). Employee service before the vesting date gives rise to a constructive obligation because, at the end of each successive reporting period, the amount of future service that an employee will have to render before becoming entitled to the benefit is reduced. In measuring its defined benefit obligation, an entity considers the probability that some employees may not satisfy any vesting requirements. Similarly, although some post-employment benefits, for example, post-employment medical benefits, become payable only if a specified event occurs when an employee is no longer employed, an obligation is created when the employee renders service that will provide entitlement to the benefit if the specified event occurs. The probability that the specified event will occur affects the measurement of the obligation, but does not determine whether the obligation exists. 1A plan pays a benefit of CU100 for each year of service. The benefits vest after ten years of service. A benefit of CU100 is attributed to each year. In each of the first ten years, the current service cost and the present value of the obligation reflect the probability that the employee may not complete ten years of service. 2A plan pays a benefit of CU100 for each year of service, excluding service before the age of 25. The benefits vest immediately. No benefit is attributed to service before the age of 25 because service before that date does not lead to benefits (conditional or unconditional). A benefit of CU100 is attributed to each subsequent year.