CH 5. Employee Benefits Flashcards
What types of Employee Benefits are there?
Types of employee benefit
IAS 19 Employee Benefits identifies four types of employee benefit as follows:
- Post-employment benefits. This normally relates to retirement benefits.
- Short-term employee benefits. This includes wages and salaries, bonuses and other benefits.
- Termination benefits. Termination benefits arise when benefits become payable upon employment being terminated, either by the employer or by the employee accepting terms to have employment terminated.
- Other long-term employee benefits. This comprises other items, not within the above classifications and will include long-service leave or awards, long-term disability benefits and other long-service benefits.
What are Short term Paid Benefits and how are they Account for?
Short-term benefits include items such as (IAS 19: para. 9):
- (a) Wages, salaries and social security contributions
- (b) Paid annual leave and paid sick leave
- (c) Profit-shoring and bonuses
- (d) Non-monetary benefits (eg medical core, housing, cars and free or subsidised goods or services)
Short-term employee benefits are recognised as a liability and an expense when an employee has rendered service during an accounting period, ie on an accruals basis.
Accounted for when they occur
Short-term benefits are not discounted to present value.
How are Short·term paid absences (holiday entitlement carried forward) accounted for?
Accumulating paid absences: Unused Holiday pay carried forward is charged in the current year, based on historical trends.
So an adjustment should be accounted for in the current period for :
-
The unused period is LIKELY/EXPECTED to be used up in the next year.
- So the total holiday pay accrual is not C/F as it might be likely staff next year might use up their total entitlement.
- E.g
<span>Total No of employees<br></br>(Less) Expected Leavers uncompensated<br></br>* Expected entitlement of benefit they will use<br></br>* The cost per individual entitlement </span>
<span>= Journal:- <br></br>Dr - Staff benefits carried forward expense - P/L<br></br>Cr - Accruals - SFP</span>
Unaccumulating paid absences: Like maternity pay is charged in the year it occurs
How are Profit sharing and bonus plans accounted for?
Entity recognises the expected cost of profit-shoring and bonus payments when, and only when (IAS 19: para. 19-24):
- (a) Entity has a present legal or constructive obligation to make payments as a result of past events;
and
- (b) A reliable estimate of the obligation can be mode.
What are the 2 main post-employment Benefit plans?
- Defined Contributions, when an employer makes a defined/specific contribution to the employee’s pension plan fund. A specific fixed amount.
- Defined Benefit Plans, This type of plan is when the employee receives a fixed sum of money when they retire till they pass away. Usually a sum of the final salary amount.
How are defined Contribution schemes accounted for?
Defined contribution plans:
- Post-employment benefit plans under which one entity pays fixed contributions into a separate entity (a fund) and will have no legal or constructive obligation to pay further contributions if the fund does not hold sufficient assets to pay all employee benefits relating to employee service in the current and prior periods.
Accounted for under the usual Accruals accounting method.
An expense is recognised when a legal or constructive obligation has occurred because the employee has completed his or her service conditions.
What are the 8 steps to accounting for the Defined BENEFIT scheme?
- Step 1. Record the Opening Figures of Plan asses and Plan obligations often Offset.
- Step 2. Record Interest Costs
- Step 3. Account for Current Service Cost
- Step 4. Account for Past Service Cost
- Step 5. Account for Contributions paid into the Plan
- Step 6. Account for Benefits paid out as pension to past employees
- Step 7. Remeasurements of Plan asset/obligation Based on actuary
- Step 8. Presentation and Disclosure notes of Deficit or Surplus on pension
Explain Step 1. Record the Opening Figures of Plan assets and Plan obligations? (often Offset)
Plan Obligation - an entity has an obligation to its employees for pension payments in retirement. The has a long-term liability that must be measured at P.V
Plan Assets - To meet the plan obligations it will be making regular contributions into the pension plan, These contributions will be invested that generate returns.
On the statement of financial position, an entity offsets its pension obligation and its plan assets and reports the net position:
- A plan is usually in deficit (liability),
- It could also be represented as a surplus (Asset)
The defined benefit calculations start with the opening balance of the plan.
Explain, Step 2. Record Interest Costs?
*Defined Benefit pension scheme Calculation*
Interest is charged on the obligation and interest income is earned on the assets and is accounted for directly in the P/L, Usually represented as an offset amount.
The discount rate used is in reference to market yields at the START of the year.
It represents the change in the net pension liability (or asset) due to the passage in time.
Tricky step Note:-
The interest is time apportioned so it must account for changes throughout there year for any plan:
Amendments
Curtailments
Settlements
Journals
Interest on Obligation
Cr - SFP - Plan obligation (Liability)
Dr - P/L - Net Interest cost
Interest on Plan asset
Dr - SFP - Plan Asset
Cr - P/L - Net Interest cost
Explain, Step 3. Account for Current Service Cost
*Defined Benefit pension scheme Calculation*
Current service cost is the increase in the P.V of the obligation arising from employee service in the current period.
It must Account for any plan for the current service cost:
Amendments
Curtailments
Settlements
Journals
Dr - SFP - Plan Obligation
Cr - P/L - Current Service Cost
<strong>Definitions: </strong>
<span><strong>Curtailment</strong> - is a significant reduction in the number of employees covered by a pension plan. This may be a consequence of employees being made redundant.</span>
<span><strong>Amendments -</strong> Plans can be amended so that the company pays more or less to employees in retirement benefits.</span>
Settlements - to make an amendment to be agreed employees will often be paid a settlement amount
Explain, Step 4. Account for Past Service Cost
*Defined Benefit pension scheme Calculation*
Present service cost is the increase or decrease in the P.V of the obligation arising from employee service in the previous period.
Past service costs are recognised at the earlier of:
- *- Plan amendment or curtailment occurs
- Entity recognises related restructuring costs or termination benefit’**
It must Account for any plan for the Past service cost:
Amendments
Curtailments
Settlements
Journals
Increase in obligation
Dr - SFP - Plan Obligation
Cr - P/L - Past Service Cost
Decrease in obligation
Cr - SFP - Plan Obligation
Dr - P/L - Past Service Cost
<strong>Definitions: </strong>
<span><strong>Curtailment</strong> - is a significant reduction in the number of employees covered by a pension plan. This may be a consequence of employees being made redundant.</span>
<span><strong>Amendments -</strong> Plans can be amended so that the company pays more or less to employees in retirement benefits.</span>
Settlements - to make an amendment to be agreed employees will often be paid a settlement amount
Explain, Step 5. Account for Contributions paid into the Plan?
Contributions paid into the Plan refers to the companies cash paid into the plan assets,
The amounts are usually suggested by the Actuaries.
Journals:-
Dr - SFP - Plan Assets
Cr - SFP - Cash in Bank
Explain, Step 6. Account for Benefits paid out as pension to past employees?
Benefits paid out as pension payments to past employees in the scheme will be paid from the Plan assets and therefore reducing the companies Liabilities.
Journals:-
Cr - SFP - Plan Assets
Dr - SFP - Plan Obligations
Explain, Step 7. Remeasurements of Plan asset/obligation Based on actuary?
At the end of the year, assets are remeasured to their F/V based on the Actuaries assumptions and performance of the plan assets and obligations, also the “Asset Ceiling test”
Carrying amount after all the interest costs, Service costs, Contributions and Payouts have been accounted for.
vs
Actuarial F.V of plan assets and plan obligation
= Difference charged to the OCI
Explain, Step 8. Presentation and Disclosure notes of Deficit or Surplus on pension?
IAS 19 has extensive disclosure requirements. An entity should disclose the following information about defined benefit plans:
- Significant actuarial assumptions used to determine the net defined benefit obligation or assets.
- General description of the type of plan operated
- Reconciliation of the assets and liabilities recognised in the statement of financial position
- The charge to total comprehensive income for the year, separated into the appropriate components
- Analysis of the remeasurement component to identify returns on plan assets, together with actuarial gains and losses arising on the net plan obligation
- Sensitivity analysis and narrative description of how the defined benefit plan may affect the nature, timing and uncertainty of the entity’s future cash flows.
