Valuation of employee benefits under IAS 19

This article answers the following questions:

• What is the definition of an employee benefit?
• What types of employee benefits are recognised under Polish regulations?
• How should provisions for employee benefits be calculated?

Following our discussion on asset valuation, it is now time to examine the valuation of liabilities. In particular, employee benefits deserve close attention, as they represent one of the most complex areas of accounting. Companies increasingly offer a wide range of employee benefits, both monetary and non-monetary, raising the question of how to value them – especially when they are long-term. So, how is this approached by accounting experts?

What are employee benefits?

First, we must ask what is meant by the term “employee benefit” – is it limited to salary payments? No, the definition under International Accounting Standard 19 (IAS 19) is broader.

An employee benefit is any benefit provided by an entity to its employees in exchange for services rendered or upon termination of employment. Furthermore, this term also encompasses benefits provided to individuals dependent on employees – such as children, spouses or other dependants (IAS 19, para. 6).

Types and valuation of employee benefits under IAS 19

Today, companies offer a wide variety of benefits – from basic salaries, through jubilee awards and bonuses, to non-monetary benefits such as medical care or company cars. Each benefit can be classified into one of four categories defined by IAS 19:

• short-term employee benefits – benefits expected to be settled within 12 months after the end of the reporting period in which the employee rendered the related service. According to IAS 19, para. 9, these include:
  • salaries,
  • social security contributions,
  • bonuses,
  • profit-sharing payments,
  • paid leave and sick leave,
  • non-monetary benefits (e.g. medical care, accommodation, vehicles and other goods or services provided free of charge or subsidised);
• post-employment benefits – including retirement benefits (e.g. pensions and lump-sum retirement gratuities) and other benefits payable after employment ends, such as:
  • post-employment life insurance,
  • pension schemes;
• other long-term employee benefits – benefits payable at a specified future date, such as:
  • jubilee awards and other long-service benefits,
  • long-term paid absences,
  • disability pensions;
• termination benefits – benefits payable as a result of termination of employment, either at the employer’s initiative before retirement age or at the employee’s decision to accept compensation in exchange for termination. These are typically lump-sum payments.

Depending on the category, the benefit must be appropriately recognised in the entity’s accounting records. The fundamental principle under IAS 19 is to recognise a liability for employee benefits when the employee has rendered service in exchange for the benefit.

Conversely, the entity should recognise the cost of the benefit when the economic benefits from the employee’s work are consumed. Exceptions apply where another standard – such as IAS 2 “Inventories” – requires capitalisation of employee benefit costs in the cost of asset production.

Employee benefits are not recognised as an expense in one further case – in strictly defined situations, post-employment benefit valuations are recognised as other comprehensive income. However, such benefits are not yet present in Polish business practice.

The value of a benefit is also presented differently depending on its classification under IAS 19. Correct categorisation is therefore crucial, as it determines not only the valuation method but also the presentation and impact on financial results.

Accountants recognising provisions for employee benefits must also consider their tax implications. Employee benefit provisions represent a deductible temporary difference for income tax purposes and require recognition of a deferred tax asset (in accordance with IAS 12 “Income Taxes”).

Employee benefits in the Polish context

In practice, Polish employers most commonly opt for short-term and other long-term employee benefits.

Short-term benefits

The value of short-term employee benefits is relatively straightforward to determine. The liability (accrued expense) is recognised at its undiscounted value – as the benefit is settled in the short term, there is no need to account for the time value of money.

However, when determining the value of a short-term benefit, accountants must deduct any amounts already paid. Notably, if the amounts paid exceed the undiscounted liability, the excess should be recognised as a short-term prepaid expense.

Valuation becomes more complex in the case of short-term paid absences – IAS 19 (paras. 13-15) distinguishes between accumulating and non-accumulating absences.

• Non-accumulating paid absences, such as sick leave, do not give rise to a liability until the absence occurs, as the benefit is not conditional on service rendered.
• Accumulating paid absences, on the other hand, carry forward unused entitlement to future periods – for example, unused holiday leave. Valuation is particularly important when an employee is entitled to a cash equivalent for unused accumulating absences upon termination. The unit value of the holiday equivalent – and thus the size of the provision – depends on the minimum wage.

Long-term benefits: is actuarial valuation necessary?

Valuing long-term benefits is more complex than short-term ones.

As the benefit is payable more than 12 months after the reporting period, the accountant must consider the time value of money and discount the liability to present value.

This raises the question of how to determine the discount rate reliably. It is most commonly based on the yield of government bonds (IAS 19, para. 83).

In practice, the volatility of government bond yields is significant – interest rates rose in 2021–2023 and then gradually declined in 2024–2025. Each change directly affects the discount rate and the valuation of employee benefit provisions. Therefore, companies increasingly engage actuaries to estimate the value of employee benefits, especially when multiple factors and assumptions must be considered. Although IAS 19 does not mandate actuarial valuation, it enhances the reliability of audited financial statements, particularly in entities with large workforces.

Valuation of provisions for employee benefits

Valuation of employee benefits must consider numerous factors to accurately estimate future benefit costs.

The valuation of employee benefit liabilities involves demographic and financial assumptions.

Demographic assumptions include characteristics of employees entitled to benefits, such as employee turnover rates, mortality, etc. Financial assumptions include the discount rate, salary growth rate, and inflation. Economic factors therefore directly influence the value of employee benefits.

Caution is advised when adopting assumptions for employee benefit liability valuation

Given the economic environment’s impact on the valuation of liabilities related to employee benefits, adopting appropriate assumptions (and accounting for changes in the economic landscape) is particularly important.

Experienced accountants and audit professionals may observe correlations between government bond yields and the discount rate affecting long-term benefit values. Any entity offering employee benefits should regularly analyse the impact of current economic conditions on the valuation of these liabilities and, if necessary, engage internal audit services to develop procedures that mitigate the risk of valuation errors adversely affecting the accounting records.