Retrenchment and termination benefits
When a client recognises a liability for retrenchment packages under IAS 19, how it fits with an IAS 37 restructuring, and cuts announced after year end.
By Achekam · · 5 min read · For Accountants & audit firms in South Africa, Nigeria, Kenya
Retrenchment is painful for everyone involved, and the accounting is often handled in a hurry. A client cuts its workforce near year end, the packages are paid in the first weeks of the new year, and the question arrives late: do the packages belong in this year's statements or next year's? The directors usually have a view, and it is usually driven by which year they would rather show the cost in.
IAS 19 answers the question with a specific rule for termination benefits, separate from the rules for wages, leave and bonuses. This article covers the two points at which a liability arises, how voluntary offers are treated, how the rule fits with a wider restructuring, what happens when the cuts are announced after year end, and how to post and disclose the result.
The two IAS 19 recognition points
IAS 19 sets out when an entity recognises a liability and expense for termination benefits: at whichever comes first of two points.
- When the entity can no longer withdraw the offer of those benefits.
- When the entity recognises costs for a restructuring that falls within the scope of IAS 37 and involves paying termination benefits.
The rule looks to the client's freedom of action. Until one of those points is reached, the client could still change course without breaking a commitment to anyone, so there is nothing to record. Once either is reached, the cost belongs in the period.
The test is about the offer and the restructuring, not about when the employees leave or are paid. A package the client is committed to before year end belongs in this year's statements even if the employee works out a notice period and is paid next year.
Offers that can no longer be withdrawn
The first recognition point matters most for voluntary arrangements, such as a voluntary severance scheme offered to staff in a department being reduced, or an early-retirement package offered to long-serving employees.
When does an offer stop being withdrawable? That depends on the facts: what was communicated, whether employees have accepted, and whether any law, agreement or consultation process restricts the client from taking the offer back. IAS 19 gives guidance on this, and it should be read for the particular scheme. In practice, the evidence to collect is:
- the written offer and the date it was made;
- the acceptance forms signed by employees, with their dates;
- any agreement with a union or employee representatives;
- legal advice on whether the client could still withdraw.
Where the client's country sets statutory minimum severance, or a collective agreement fixes terms, those set a floor on what is paid. Confirm them with the client's labour lawyer; the accounting follows whatever the client is actually committed to.
Termination benefits inside an IAS 37 restructuring
The second recognition point links IAS 19 to IAS 37. Under IAS 37, a restructuring provision is recognised only when the entity has a constructive obligation, because the main features of the detailed restructuring plan have been announced to those affected. IAS 37 explains that a constructive obligation arises from the entity's own actions, through which it has created an expectation in others that it will meet certain responsibilities.
So when a client closes a branch and announces the plan, including the retrenchments, to the staff affected before year end, the restructuring provision is recognised under IAS 37 and, at the same time, the termination benefits that form part of it are recognised under IAS 19. The two standards meet at the announcement. The detail of the restructuring side, including which other costs qualify, is in restructuring provisions and future losses.
Retrenchments announced after year end
A board that decides before year end to retrench staff, but tells nobody until after it, has reached neither recognition point by year end. The offer has not been made, so it cannot be irrevocable. The plan has not been announced to those affected, so there is no constructive obligation under IAS 37. No liability is recognised in the year just ended.
That does not make the decision irrelevant to the statements. A significant retrenchment announced after year end but before the statements are signed may need to be disclosed, so that readers know the cost is coming. Consider it alongside the client's other events after the reporting period, and record the dates of the board decision and the announcement in the working papers. Those two dates are the whole of the argument, and a reviewer will look for both.
Posting the liability and completing the note
A worked example in words. A security company offers voluntary severance to guards on a contract it has lost. Before year end, a number of guards sign acceptances, and the company's agreement with the union prevents it from withdrawing accepted offers. Those packages are recognised as a liability and an expense in the year, at the amounts the company is committed to pay. Offers still open at year end, which the company could still withdraw, are not.
In Achekam's Studio, the liability is posted as a year-end adjusting entry against the client's trial balance. If the entry later proves wrong, it is reversed with a record of who reversed it and why, never deleted. The Studio's standard policy wording is based on IFRS for SMEs and is labelled for review before issue; staff can write the client's own employee benefits policy, including a sentence on when termination benefits are recognised. Notes take their figures from the mapped trial balance, and facts the trial balance does not hold, such as the number of employees affected and the nature of the scheme, are left as "[to be completed]" for a person to write.
Termination costs usually belong in the staff costs note as a separate line, so readers can distinguish a one-off retrenchment from the ongoing payroll; building that note is covered in the staff costs note from payroll.
The IFRS Foundation's IAS 19 page summarises how the standard accounts for all types of employee benefits. When a client mentions job cuts near year end, ask for two dates first: when the offer or plan was communicated, and when it became binding.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
