How are employee benefits accounted for under IFRS for SMEs Section 28?

IFRS for SMEs Section 28 — Core Rule

Under IFRS for SMEs Section 28 — Employee Benefits, an entity recognises the cost of all employee benefits to which employees have become entitled in exchange for service, measured at the undiscounted amount for short-term benefits and using a simplified projected unit credit method for post-employment defined benefit plans.

How IFRS for SMEs Section 28 Works

Employee benefits under Section 28 are classified into four categories, each with distinct recognition and measurement requirements:

• Short-term employee benefits (Section 28.3–28.7): Recognised as a liability (accrued expense) and an expense when the employee renders service. Measured at the undiscounted amount expected to be paid. This covers wages, salaries, social security contributions, paid annual leave, sick leave, profit-sharing, and non-monetary benefits. Accumulated compensated absences (e.g., unused holiday) are accrued as the employee earns entitlement (Section 28.6).

• Post-employment benefits — defined contribution plans (Section 28.8–28.13): The entity recognises the contribution payable as an expense in the period the employee renders service. No actuarial assumptions or discounting required; accounting mirrors the economic substance directly (Section 28.10).

• Post-employment benefits — defined benefit plans (Section 28.14–28.22): The entity must estimate its obligation using the projected unit credit method, though Section 28.19 permits a simplified approach — allocating the benefit to service periods on a straight-line basis if the formula gives materially the same result. The defined benefit obligation (DBO) is measured at the present value of estimated future cash flows, discounted using a high-quality corporate bond rate (or government bond rate where no deep market exists) (Section 28.17). Plan assets are measured at fair value and netted against the DBO to arrive at the net defined benefit liability (or asset) recognised on the balance sheet. Actuarial gains and losses are recognised immediately in other comprehensive income (Section 28.22), not recycled to profit or loss — a key simplification vs. the full IAS 19 corridor.

• Other long-term benefits and termination benefits (Section 28.23–28.28): Long-service awards, sabbaticals, and similar are measured and recognised similarly to defined benefit plans but actuarial gains and losses are taken to profit or loss immediately, not OCI (Section 28.23). Termination benefits are recognised as a liability and expense at the earlier of: when the entity can no longer withdraw the offer, or when it recognises restructuring costs involving termination payments (Section 28.25).

IFRS for SMEs Section 28 — Practical Example

Scenario: A manufacturing SME has ten employees entitled to 20 days' paid leave per year. At year-end, eight employees have each accrued 3 unused days. Average daily wage cost = €150. Additionally, the company makes a defined contribution pension of 5% of monthly salary; total December salary = €50,000.

Accrual for unused holiday (short-term benefit)

(8 employees × 3 days × €150 = €3,600)

Defined contribution pension — December payroll

(€50,000 × 5% = €2,500)

Defined benefit plan — actuarial gain recognised in OCI

If a year-end actuarial re-measurement produces a €12,000 actuarial gain on the DBO:

IFRS for SMEs Section 28 — Common Pitfalls

• Discounting short-term benefits: Practitioners sometimes apply present value techniques to wages and accrued leave. Section 28.5 explicitly prohibits discounting short-term benefits — they are measured at the undiscounted amount expected to be paid.

• Misclassifying defined benefit plans as defined contribution: If an entity retains any actuarial or investment risk (e.g., a guaranteed minimum return on contributions), it is a defined benefit plan requiring full DBO calculation (Section 28.13). Incorrectly classifying it as DC avoids the complexity but materially misstates the balance sheet.

• Routing actuarial gains and losses through P&L: Unlike long-term benefits, Section 28.22 requires defined benefit re-measurements to go to OCI. Processing them directly through profit or loss — a common error when staff apply IAS 19 habits loosely — distorts operating performance and fails disclosure requirements under Section 28.40.

IFRS for SMEs Section 28 — Key Paragraphs

• Section 28.3–28.7 — Recognition and measurement of short-term employee benefits, including accumulated absences.
• Section 28.10 — Defined contribution: expense equals contribution due for the period.
• Section 28.17 — Discount rate for defined benefit obligation (high-quality corporate bond / government bond).
• Section 28.19 — Simplified attribution method for defined benefit plans (straight-line allocation).
• Section 28.22 — Re-measurement of defined benefit obligations recognised in OCI, not recycled.
• Section 28.25 — Recognition trigger for termination benefits.