In responding to the significant deterioration in economic conditions and increased uncertainty as a result of the Covid-19 coronavirus, companies may make changes to or introduce new remuneration policies.
The accounting implications of these changes, including to any employee termination plans, will require careful consideration.
These events may also impact how companies:
Market volatility and changes to remuneration policies may impact how companies estimate and measure employee benefits and recognise share-based payment expenses under IFRS® Standards
Changes to remuneration policies
Some companies may offer their employees paid absence in addition to any sick or annual leave entitlement. If new paid absence entitlements do not accrue through past service and do not accumulate then it is unlikely that a company would recognise a liability for these paid absences. Instead, it would expense the cost as absences are taken. [IAS 19.13, Insights 4.4.1250]
If a company implements a restructuring plan that includes employee redundancies, then it recognises an expense and a corresponding liability for termination benefits at the earlier of when it:
A company recognises a restructuring provision when it has a formal plan with sufficient detail of the restructuring and has raised a valid expectation in those affected by the plan – i.e. it has either started to implement the plan or has announced the main features to those affected by it. [IAS 37.72, Insights 3.12.230]
Updating estimates, including actuarial assumptions
Companies may need to consider the potential impact on estimates, including actuarial assumptions used in the measurement of employee benefits.
During periods of mandatory quarantine or lockdowns, employees could be required to use existing employee entitlements – e.g. sick or annual leave entitlements. Therefore, companies may need to consider the impact on the measurement of employee benefits – e.g. they may need to revise estimates of the likelihood and timing of employees using these entitlements.
There could also be an impact on certain demographic and financial assumptions used to measure these benefits – e.g. the discount rate used to measure the present value of employee benefit obligations.
Companies preparing interim financial statements should consider whether net defined benefit obligations/assets need to be remeasured. Under IAS 19 Employee Benefits, remeasurements are recognised in the period they arise in; therefore, if adjustments at the interim reporting date are considered to be material, they will need to be recorded at that date. An updated measurement of plan assets and obligations is required when a plan amendment, curtailment or settlement is recognised. In addition, significant market fluctuations may trigger the need for an updated actuarial valuation. [IAS 34.IE.B9, Insights 4.4.360, 5.9.150]
Practically, many companies obtain actuarial valuations a few months before the reporting date. This is acceptable if the valuation is adjusted for material subsequent events up to the reporting date. Therefore, companies should consider the timing of their actuarial valuation reports and whether they reflect material events between the valuation and reporting date. [Insights 4.4.350]
Companies with share-based payments whose vesting depends on the achievement of non-market performance conditions – e.g. earnings per share targets – may need to revise their estimate of the number of instruments expected to vest, which would reduce the charge in the income statement over the remaining vesting period. However, expectations of achieving market performance conditions – e.g. achieving a specified total shareholder return and non-vesting conditions – and grant-date fair value are not revised. [Insights 4.5.500]
Modifications to share-based payment arrangements will need to be assessed as to whether they are either beneficial or non-beneficial to the employee and accounted for accordingly. For example, if plans are modified such that market conditions are easier to achieve, then this may constitute a beneficial modification which increases the value of the award in the hands of the employee. In this case, the incremental fair value is recognised over the modified vesting period. [Insights 4.5.1190]
References to ‘Insights’ mean our publication Insights into IFRS [with link on the title]
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