Whilst addressing some accountants in London on IFRS issues, a very interesting question was put my way by a delegate.  The question was as follows:

“if long-term employee benefits, such as defined benefit pension schemes, employ the use of the Projected Unit Credit Method, then surely this method can be used for other long-term employee benefits such as long-term bonuses - can it not?”

The answer to this question is - yes - long term employee benefits are accounted for in the same way as defined benefit pension schemes - but:

1.  Actuarial gains and losses are recognised immediately through profit or loss; and
2.  All past service costs are recognised immediately.

I managed to find time in the break to quickly devise an illustration of how the Projected Unit Credit Method would be used in respect of long-term bonuses.

Facts
Consider an entity that pays employees a bonus on completion five years’ service at a rate of 1% of each year’s salary.  The salaries are expected to increase at a rate of 3% per annum and the entity’s discount rate is 7%. 

Employee joins the company in year 1 on a salary of $50,000.  The assumptions are that the employee will reach five years’ service and all actuarial assumptions remain unchanged.  This is how the bonus would build up over the five years’:
Year                                     1                 2             3                 4                 5
Current year
(1% x salary)                        500           515           530           546               563
Cumulative bonus                 500         1,015       1,545         2,091           2,654

Opening obligation              -              405         866         1,391           1,984
Interest at 7%                          -                28           61             97               139
Current service cost               405           433         464             496               531
Closing obligation              405           866       1,391       1,984             2,654

In my example here, the current service cost is arrived at by discounting the present value of the benefit attributed to the current year (i.e. $2654 / 5 years).  So in year 2 we have ($2,654 / 5) = $531 / 1.07 to the power of 3 = $433.