Accounting for employee benefits under TFRS for NPAEs: Common pitfalls and practical guidance for SMEs

This article outlines what the standard requires, highlights common mistakes in practice, and offers practical steps for proper application using the official TFAC guideline.

What the standard requires

Employee benefits are addressed in Section 16 of TFRS for NPAEs:

• Section 16.6 requires entities to recognise post-employment benefits, such as retirement severance, using the best estimate of the obligation at the reporting date. Where the effect of the time value of money is material, the amount must be discounted.
• Section 16.14 requires disclosure of the nature and amount of each class of employee benefit obligation.

In addition, Section 5 (Provisions and Contingencies) applies when a present legal obligation (such as statutory severance under Thai labour law) exists and can be reliably estimated.

In short, the standard requires that such liabilities be estimated, discounted, pro-rated, and disclosed appropriately.

TFAC guideline: A practical method for SMEs

To assist SMEs in applying the standard consistently, the Thai Federation of Accounting Professions (TFAC) issued a guideline in 2020 with a step-bystep calculation model:

1. Collect employee data: This includes each staff member’s salary, age, and length of service.
2. Apply severance entitlement: Use statutory severance rates as per Thai labour law. 
   For example, employees with over 20 years of service are entitled to 13.33 months of salary.
3. Discount future obligation: Use a risk-free discount rate such as the yield on long-term Thai government bonds.
4. Estimate probability of retention: Apply a reasonable probability that the employee will stay until retirement. TFAC provides suggested rates by age group, but companies may adjust based on their context.
5. Recognise on a pro-rata basis: Allocate the obligation based on the proportion of service already rendered.
6.  Review and update annually: Revise assumptions and inputs each year to reflect staff changes, new financial data, and changes in relevant labour laws.

Common pitfalls in practice

Despite the availability of the guideline, some common issues continue to arise:

• Failure to recognise the liability: Some entities only recognise the obligation when payment occurs, which is non-compliant.
• Outdated or incorrect assumptions: This includes using an incorrect retirement age or failing to update the severance multiple as employees cross thresholds.
• No discounting applied: Recognising future obligations at nominal value can materially misstate expenses.
• Inappropriate probability estimates: Basing assumptions solely on historical turnover can be too conservative or too optimistic. For instance, turnover among long-serving staff may differ significantly from the rest of the workforce.
• No pro-rata recognition: Some entities forget to proportion the obligation, leading to over- or under-accrual.
• Lack of annual updates: Assumptions must be refreshed each year in line with staff movements and market conditions.

Practical recommendations

To ensure compliance and avoid audit findings:

• Use TFAC’s model as a starting point: It offers a reasonable baseline for calculations.
• Adjust assumptions with care: If your retention probabilities or discount rates differ from those in the guideline, prepare appropriate justifications.
• Avoid relying solely on historical turnover: Consider the expected future behaviour of different employee groups.
• Recalculate annually: Reflect actual staff profiles and current economic assumptions.
• Ensure clear disclosures: The nature and amount of benefit obligations should be disclosed in line with Section 16.14.

Final thought

TFRS for NPAEs provides clear direction on employee benefit obligations, and TFAC’s guideline gives SMEs a solid starting point. However, to apply the standard correctly, companies must go beyond templates—by making realistic estimates, reviewing assumptions annually, and maintaining adequate documentation.

Reference:

• TFAC (2020). Guideline for Employee Benefit Estimation under TFRS for NPAEs.
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