Scope of IPSAS 39
IPSAS 39 applies when a public entity receives service from employees and gives benefits in return. The benefit may be salary, leave, medical cover, pension contribution, gratuity, long-service benefit, bonus, or termination payment. The main accounting question is whether the employee has already provided service that creates a present obligation for the entity.
Once service has been provided, the benefit is no longer just a payroll matter. It becomes an accounting issue because the entity may have an expense, a liability, a prepaid asset, or a disclosure requirement.
IPSAS 39 does not deal with reporting by retirement benefit plans themselves, and it does not cover social security programs where the benefit is not given in exchange for service rendered by employees of the reporting entity.
The Big Picture
Employee benefits are accounted for from one main idea: employees provide service now, and the entity gives benefits either now or later. The timing of payment does not remove the obligation. If the service has already been received, the entity must consider whether a liability and an expense exist.
The basic rule: Recognise a liability when an employee has provided service in exchange for benefits to be paid in the future, and recognise an expense when the entity consumes the service potential arising from employee service.
This means salaries, leave, bonuses, pension contributions and gratuity are not treated the same way. The accounting treatment depends on the type of benefit and when it is expected to be settled.
Types of Employee Benefits
IPSAS 39 groups employee benefits into four main categories. This classification is important because each category has a different measurement approach.
1. Short-term employee benefits
Benefits expected to be settled wholly before twelve months after the end of the reporting period in which the service is rendered. Examples include salaries, wages, annual leave, sick leave, medical benefits, housing benefits and short-term bonuses.
2. Post-employment benefits
Benefits payable after employment has ended. Examples include pension benefits, lump sum retirement benefits, post-employment medical cover and post-employment life insurance.
3. Other long-term employee benefits
Benefits not expected to be settled wholly within twelve months, but which are not post-employment benefits or termination benefits. Examples include long-service leave, jubilee benefits, long-term disability benefits, deferred remuneration and long-term bonuses.
4. Termination benefits
Benefits provided because employment is terminated, either through the entity’s decision to terminate employment before normal retirement date or because an employee accepts an offer in exchange for termination.
Key point: Before calculating anything, classify the benefit. A salary accrual, pension contribution, gratuity obligation and retrenchment payment are not measured in the same way.
Short-Term Employee Benefits
Short-term employee benefits are usually the easiest part of IPSAS 39. The entity does not discount them because they are expected to be settled within a short period.
When employees have worked during the reporting period, the entity recognises the undiscounted amount expected to be paid for that service. If the amount has not yet been paid, it becomes an accrued expense. If the entity has paid more than the benefit earned, the excess is recognised as a prepaid expense to the extent that it will reduce future payments or be refunded.
Common short-term examples in a public entity
- Monthly salaries and wages earned before year-end but paid after year-end.
- Employer contributions payable within the next few months.
- Accumulated annual leave expected to be taken or paid within twelve months.
- Medical benefits for current employees.
- Performance bonus payable shortly after the reporting date.
Accumulating leave: Recognise the cost when employees render service that increases their future leave entitlement.
Non-accumulating leave: Recognise the cost only when the absence occurs, because unused entitlement does not carry forward.
Example 1: Salary Accrual
A public hospital has monthly salaries of KSh 18,000,000 for June. By 30 June, KSh 15,500,000 has been paid and KSh 2,500,000 remains unpaid. The employees have already provided the service before year-end.
| Item | Amount (KSh) | Treatment |
|---|---|---|
| Total salary earned | 18,000,000 | Employee benefits expense |
| Amount already paid | 15,500,000 | Cash payment |
| Unpaid amount | 2,500,000 | Accrued expense / liability |
Dr Employee benefits expense 18,000,000 Cr Cash / Bank 15,500,000 Cr Accrued salaries 2,500,000
The liability is recognised because the employees have already worked. Payment after year-end does not make it a new expense for the next year.
Paid Absences
Paid absence means the employee is paid even when not working, for example annual leave, sick leave, maternity leave or paternity leave. The accounting depends on whether the entitlement accumulates.
| Type | Meaning | Accounting treatment |
|---|---|---|
| Accumulating paid absence | Unused leave is carried forward to a future period. | Recognise a liability as employees work and build the entitlement. |
| Non-accumulating paid absence | Unused entitlement lapses if not used. | Recognise the cost when the absence occurs. |
Example 2: Accumulated Leave
A public university has 60 employees with unused annual leave at year-end. Each employee has 4 unused leave days. The average daily salary is KSh 3,500. The leave can be carried forward and is expected to be used in the next reporting period.
Leave obligation: 60 employees × 4 days × KSh 3,500 = KSh 840,000
Dr Employee benefits expense 840,000 Cr Accrued leave liability 840,000
The liability exists because the employees have already worked and earned the leave entitlement. The fact that the leave will be taken later does not remove the present obligation.
Bonus and Performance Payments
A performance bonus is recognised only when the entity has a present legal or constructive obligation and the amount can be reliably estimated. A constructive obligation may arise where the entity has a clear past practice of paying bonuses and has no realistic alternative but to pay.
Example 3: Performance Bonus
A state corporation has a board-approved performance bonus plan. The bonus is 3% of the annual surplus for employees who meet performance targets and remain in service throughout the year. Based on expected staff turnover, management estimates that the actual bonus payable will be 2.4% of the annual surplus. The surplus for the year is KSh 120,000,000.
Bonus expense: KSh 120,000,000 × 2.4% = KSh 2,880,000
Dr Employee benefits expense 2,880,000 Cr Bonus payable 2,880,000
The bonus is an employee benefit expense. It is not treated as a distribution of surplus because the obligation arises from employee service.
Post-Employment Benefits
Post-employment benefits are benefits payable after employment has ended. The main issue is whether the plan is a defined contribution plan or a defined benefit plan.
| Plan type | Main idea | Risk | Accounting approach |
|---|---|---|---|
| Defined contribution plan | The entity pays fixed contributions into a fund. | Actuarial and investment risk fall on the employee. | Recognise contribution payable as expense and liability. |
| Defined benefit plan | The entity promises an agreed benefit to employees. | Actuarial and investment risk fall on the entity. | Measure present value of obligation, deduct plan assets and recognise defined benefit cost. |
Key point: The name of the scheme is not enough. The classification depends on the economic substance. If the entity may have to pay more when the fund is insufficient, the plan is not a pure defined contribution plan.
Defined Contribution Plans
Defined contribution accounting is straightforward. The entity recognises the contribution payable for employee service during the period. No actuarial valuation is needed because the entity’s obligation is limited to the agreed contribution.
Example 4: Pension Contribution Payable
A regulatory authority contributes 12% of pensionable salary to a staff pension scheme. Pensionable salaries for the month of June are KSh 9,000,000. By year-end, the authority has paid KSh 750,000 and the balance remains payable.
Total contribution: KSh 9,000,000 × 12% = KSh 1,080,000
Liability: KSh 1,080,000 − KSh 750,000 = KSh 330,000
Dr Employee benefits expense 1,080,000 Cr Cash / Bank 750,000 Cr Pension contribution payable 330,000
If contributions are not expected to be settled wholly before twelve months after the end of the reporting period, they are discounted using the appropriate discount rate.
Defined Benefit Plans
A defined benefit plan is more complex because the entity promises a benefit and carries the risk that the benefit may cost more than expected. Examples may include pension arrangements, gratuity arrangements or post-employment medical benefits where the entity remains responsible for the promised benefit.
The accounting follows this flow:
- Estimate the benefit earned by employees for service already rendered.
- Use an actuarial valuation method, normally the projected unit credit method.
- Discount the expected future payments to present value.
- Deduct the fair value of plan assets, if any.
- Recognise the net defined benefit liability or asset in the statement of financial position.
- Recognise service cost and net interest in surplus or deficit.
- Recognise remeasurements in net assets/equity.
Key formula: Net defined benefit liability or asset = Present value of defined benefit obligation − Fair value of plan assets, adjusted for any asset ceiling where a net asset arises.
Discount Rate
The discount rate reflects the time value of money. The currency and term of the financial instrument used to determine the rate must be consistent with the currency and estimated term of the benefit obligation.
In practice, a public entity considers whether market yields on government bonds, high quality corporate bonds, or another appropriate financial instrument best reflect the time value of money at the reporting date.
Important: The discount rate is not meant to include the entity’s own credit risk. It is also not a rate for actuarial risk or investment risk. It is used to bring future benefit payments to present value.
Example 5: Gratuity Payable After Three Years
A public entity promises an employee a gratuity of KSh 900,000 payable at the end of three years. The benefit is earned evenly over the three years. The discount rate is 10% per year. There are no plan assets.
The gratuity is earned through service, so each year earns one-third of the final benefit:
KSh 900,000 ÷ 3 = KSh 300,000 per year
| Year | Opening obligation | Interest at 10% | Current service cost | Closing obligation |
|---|---|---|---|---|
| Year 1 | Nil | Nil | 247,934 | 247,934 |
| Year 2 | 247,934 | 24,793 | 272,727 | 545,454 |
| Year 3 | 545,454 | 54,546 | 300,000 | 900,000 |
Explanation of the current service cost:
- Year 1 benefit of KSh 300,000 is payable two years later: KSh 300,000 ÷ 1.10² = KSh 247,934.
- Year 2 benefit of KSh 300,000 is payable one year later: KSh 300,000 ÷ 1.10 = KSh 272,727.
- Year 3 benefit of KSh 300,000 is payable immediately at the end of the year: KSh 300,000.
Key point: The interest is the unwinding of the discount. It is not a bank loan interest. It arises because the liability is one year closer to payment.
Service Cost, Net Interest and Remeasurements
For a defined benefit plan, the cost is separated because not every movement in the liability goes to the same place.
| Component | Meaning | Where recognised |
|---|---|---|
| Current service cost | Increase in obligation from employee service in the current period. | Surplus or deficit |
| Past service cost | Change in obligation from amendment or curtailment of a plan. | Surplus or deficit |
| Net interest | Effect of time passing on the net defined benefit liability or asset. | Surplus or deficit |
| Remeasurements | Actuarial gains and losses, return on plan assets excluding net interest, and changes in asset ceiling. | Net assets/equity |
Do not mix these items: For post-employment defined benefit plans, remeasurements do not go to surplus or deficit. They are recognised in net assets/equity.
Other Long-Term Employee Benefits
Other long-term employee benefits are measured using a simplified method compared to post-employment defined benefit plans. Examples include long-service awards, sabbatical leave, long-term disability benefits, deferred remuneration and long-term bonuses.
The important difference is that remeasurements for other long-term employee benefits are recognised in surplus or deficit, not in net assets/equity.
| Benefit | Reason it is other long-term |
|---|---|
| Long-service award | Payable after a long period of service, not within twelve months. |
| Long-term bonus | Earned now but payable after more than twelve months. |
| Deferred remuneration | Payment is delayed beyond twelve months after service is rendered. |
| Long-term disability benefit | May continue beyond twelve months depending on the terms of the benefit. |
Termination Benefits
Termination benefits are different because the event that creates the obligation is termination of employment, not normal employee service. The benefit may arise because the entity terminates employment before normal retirement date or because an employee accepts an offer in exchange for termination.
Recognition point: Recognise a liability and expense at the earlier of when the entity can no longer withdraw the offer and when the entity recognises restructuring costs that involve termination benefits.
Example 6: Termination Plan
A public entity approves a restructuring plan and communicates it to affected employees. The plan identifies 50 employees to be terminated and states that each employee will receive KSh 400,000. The plan is sufficiently detailed and the entity can no longer withdraw the offer.
Termination benefit liability: 50 × KSh 400,000 = KSh 20,000,000
Dr Termination benefits expense 20,000,000 Cr Termination benefits liability 20,000,000
If the termination benefits are expected to be settled within twelve months, apply the short-term employee benefit approach. If they will be settled after more than twelve months, apply the other long-term employee benefit approach unless the benefit is an enhancement to post-employment benefits.
Presentation in the Financial Statements
The statement of financial position shows the employee benefit liability or asset, depending on the nature of the obligation. Salary accruals, leave accruals, pension contribution payable, gratuity payable and termination benefits payable are liabilities where the entity has received service or made a termination offer that creates a present obligation.
The statement of financial performance recognises employee benefits expense. For defined benefit plans, service cost and net interest are recognised in surplus or deficit. Remeasurements of post-employment defined benefit plans are recognised in net assets/equity.
| Item | Statement of financial performance | Statement of financial position |
|---|---|---|
| Unpaid salaries | Employee benefits expense | Accrued salary liability |
| Accumulated leave | Employee benefits expense | Leave liability |
| Defined contribution pension | Contribution expense | Contribution payable or prepaid contribution |
| Defined benefit plan | Service cost and net interest | Net defined benefit liability or asset |
| Termination benefits | Termination benefits expense | Termination benefits liability |
Disclosure Requirements
IPSAS 39 does not require the same level of disclosure for every employee benefit category. Short-term benefits, other long-term benefits and termination benefits may still require disclosure under other IPSAS, especially IPSAS 1 and IPSAS 20.
Defined benefit plans require more detailed disclosure because they involve estimates, actuarial assumptions, timing uncertainty and risk.
Defined benefit disclosure explains:
- The characteristics of the defined benefit plan and the risks associated with it.
- The amounts recognised in the financial statements.
- How the plan may affect the amount, timing and uncertainty of future cash flows.
Where relevant, the entity also considers related party disclosures for post-employment benefit plans and disclosures for key management personnel.
Application Question
A public entity has the following employee benefit information at 30 June 2026:
- Unpaid June salaries: KSh 4,200,000.
- Accumulated leave entitlement expected to be used next year: KSh 1,100,000.
- Employer pension contribution for June: KSh 900,000, of which KSh 650,000 has already been paid.
- A restructuring plan has been approved and communicated to 25 employees. Each employee will receive KSh 300,000 on termination. The entity can no longer withdraw the offer.
Required: Explain the accounting treatment and prepare the journal entries.
Answer Guide
The unpaid salaries are short-term employee benefits because the employees have already provided service and payment is outstanding. The accumulated leave is recognised because the entitlement has accumulated through service. The pension contribution is a defined contribution expense, with the unpaid balance recognised as a liability. The termination benefits are recognised because the entity can no longer withdraw the offer.
Dr Employee benefits expense 4,200,000 Cr Accrued salaries 4,200,000 Dr Employee benefits expense 1,100,000 Cr Leave liability 1,100,000 Dr Pension contribution expense 900,000 Cr Cash / Bank 650,000 Cr Pension contribution payable 250,000 Dr Termination benefits expense 7,500,000 Cr Termination benefits liability 7,500,000
The termination benefit is KSh 7,500,000, calculated as 25 employees × KSh 300,000.
Recap
- IPSAS 39 applies to benefits given in exchange for employee service or termination of employment.
- Short-term employee benefits are normally measured at the undiscounted amount expected to be paid.
- Defined contribution plans are based on the contribution payable by the entity.
- Defined benefit plans require measurement of the present value of the obligation and deduction of plan assets.
- Service cost and net interest for defined benefit plans go to surplus or deficit.
- Remeasurements of post-employment defined benefit plans go to net assets/equity.
- Other long-term employee benefits use a simplified method, with remeasurements recognised in surplus or deficit.
- Termination benefits are recognised when the entity can no longer withdraw the offer or when related restructuring costs are recognised.
