FAR V: MFRS 119 Employee Benefits

Summary

MFRS 119 (Employee Benefits) outlines the accounting and disclosure requirements for employee benefits. The standard mandates recognizing liabilities when employees perform services in exchange for benefits. It covers short-term, long-term, post-employment, and termination benefits, and guides how these should be calculated, disclosed, and reported in financial statements. Influenced by normative, positive, and regulatory theories, MFRS 119 emphasizes transparency and consistency in accounting practices. Despite its strengths, it faces limitations such as complexity, lack of standardization, and reliance on numerous assumptions. Suggestions include better training, standardization of actuarial terms, and adapting to evolving circumstances like the COVID-19 pandemic.

Takeaways

• 😀 MFRS 119 outlines the accounting and disclosure of employee benefits, requiring liabilities to be recognized when employees perform services in exchange for benefits.
• 😀 Employee benefits under MFRS 119 include short-term benefits (like wages), long-term benefits (such as long service leave), post-employment benefits (like pensions), and termination benefits.
• 😀 Costs for employee benefits must be calculated in the financial period when the employee earns the benefits, not when they are paid.
• 😀 MFRS 119 applies to employee benefits provided through formal plans, legislative requirements, or informal practices that create a constructive obligation.
• 😀 Theories influencing MFRS 119's development include Normative Theory (guiding how employee benefits should be reported), Positive Theory (explaining current practices), and Regulatory Theory (focused on legal mandates).
• 😀 Normative Theory in MFRS 119 emphasizes recognizing employee benefits as liabilities when the employer consumes services from employees, in line with the matching principle.
• 😀 Positive Theory in MFRS 119 seeks to explain and forecast the impact of managerial decisions on defined benefit plans, including actuarial assumptions.
• 😀 Regulatory Theory in MFRS 119 is based on legislation like the Employee Act 1995 in Malaysia, which mandates employer obligations for benefits like maternity leave and EPF contributions.
• 😀 The Malaysian Accounting Standards Board (MASB) is the sole body responsible for issuing MFRS 119, derived from IFRS, with an effective date of January 1, 2012.
• 😀 MFRS 119 follows a principle-based approach, providing general guidelines for companies to apply employee benefits accounting, unlike rule-based standards that offer detailed procedures.
• 😀 Key limitations of MFRS 119 include its complexity (due to actuarial assumptions and reconciliations), lack of standardization (leading to confusion in financial statements), and reliance on many assumptions (like mortality and discount rates).
• 😀 Suggestions to overcome MFRS 119 limitations include improving training for accountants, standardizing actuarial terms, and promoting ethical practices, especially in response to situations like the COVID-19 pandemic.

Q & A

What is MFRS 119 and what does it address?

MFRS 119 is the standard that specifies the accounting and disclosure of employee benefits. It outlines how liabilities should be recognized when an employee performs services in exchange for benefits, and the calculation of employee benefits in the financial period when the benefits are earned.

What types of employee benefits are covered under MFRS 119?

MFRS 119 covers short-term employee benefits (such as wages and salaries), long-term employee benefits (like long service leave), post-employment benefits (such as pensions and retirement benefits), and termination benefits.

What are the key theories used in the development of MFRS 119?

The key theories are normative theory (specifying how accounting practices should be carried out), positive theory (explaining observed practices and predicting outcomes), and regulatory theory (focusing on legislation to address public demand and market inefficiencies).

Who is responsible for issuing MFRS 119 in Malaysia?

The Malaysian Accounting Standards Board (MASB) is responsible for issuing MFRS 119 in Malaysia. The standard is derived from IFRS (International Financial Reporting Standards).

What is the significance of MFRS 119's adoption in Malaysia?

MFRS 119 was adopted in Malaysia by the MASB in 2011, with the effective date set for January 1, 2012. It provided a comprehensive framework for the recognition, measurement, and disclosure of employee benefits.

What verification basis is used to support MFRS 119?

MFRS 119 is based on documentary verification, following the dogmatic basis of authority. This is grounded in the historical context of employee benefits regulation, starting from the industrial revolution and evolving through governmental actions like the 1959 health benefits legislation.

What is the nature of the MFRS 119 standard—rules-based or principles-based?

MFRS 119 is a principles-based standard. It provides general principles for employee benefits accounting rather than detailed, rigid rules. It allows companies some flexibility in application while adhering to the overall principles of the standard.

What are some of the limitations of MFRS 119?

The limitations of MFRS 119 include its complexity, lack of standardization in practice, and reliance on numerous assumptions. These factors can make it difficult for organizations to apply and can lead to confusion among financial statement users.

How can the limitations of MFRS 119 be overcome?

To overcome these limitations, suggestions include improving training for accountants, standardizing actuarial terms, increasing awareness about ethical practices, and adjusting employee benefits in response to current circumstances like the COVID-19 pandemic.

What assumptions are necessary for calculating employee benefits under MFRS 119?

Assumptions required under MFRS 119 include demographic factors (e.g., mortality rates), financial variables (such as discount rates and salary benefits), and medical costs. These assumptions impact the cost of employee benefits and must be disclosed in detail in the financial statements.