Ch.21 Employee Benefits Flashcards
IAS 19 and ASPE 3462
IAS 19 and ASPE 3462
What are some examples of short-term benefits that are paid out?
Paid sick leave, profit sharing, bonuses, car allowances, housing and medical care coverage
What are defined contribution plans?
These are when the contributions are defined by the terms of the plan - risk is born by the employee.
How do you account for defined contribution plans?
IT can be applied prospectively and retrospectively. The pension expense to be recognized can include service amounts recognized in the period, and for past services granted in the period (due to initiation or amendments) and net interest costs on discounted current or past service costs. If there are contributions expected to be made after 12 months after the period in which service is incurred, you need to discount it to PV. If there are excess amounts paid, it is recorded as a prepaid.
What are defined benefit plans?
Instead of paying an agreed amount each pay cheque to the plan, the employer instead guarantees a specific amount for when the employee retires. For example, an employer may pay 1.5% of each year they have served. The risk here is on the employer.
What are the two types of risks borne from defined benefit plans?
The first risk is due to actuarial risks – how long the employee lives, the other is due to investment risk - if earnings on the plan assets do not meet the amount defined, the company would need to pay out the difference
How are defined benefit pension plans accounted for in the financial statements (and off the financial statements
off: defined benefit oblgiation and plan assets
IS: current and past service (pension expense)
net interest cost (financing expense)
BS: net defined benefit asset or liability
Othe comprehensive income: measurement component (experience and actuarial gains and losses) or remeasurement gains or losses
What is a defined benefit obligation?
It is the present value of all future employee benefits estimated to be paid as determined by the actuary (someone who’s job is to find the actual value of things)
What affects the valuation of a defined benefit obligation
The value is reassessed regularly and they consider employee turnover when the employee will retire when the employee or the employee’s beneficiaries will die, future salary and beneficiaries will die. All of this does not show up in the financial statement - it’s important to track this to show the other components on the financial statements that relate to this.
Why are plan assets not included in the financial assets?
Because they technically do not own them, they’re out of their hands and given to someone else (Trust/fund manager)to manage and then pay to the employees.
What are current and past service costs?
These are benefits earned either in the present or past (due to a new benefit plan being initiated). If it relates to the past, then it is measured at the NPC and these are expensed in the year the amendment is made.
What are net interest costs?
These are interest expenses on the DBO net of interest income earned on the planned assets. This reflects the increased obligation associated with the passage of time (market rate). Interest cost is calculated on the weighted average DBO outstanding during the period.
How do you calculate net interest costs?
For the rate, we pull it from corporate bonds or government bonds. To get interest income on plan assets, we take the same rate to determine DBO weighted average (x2 for asset and cost WA) and then net it out with the interest cost to determine the net interest cost to recognize as a finance expense this year.
How do you calculate weighted average BDO?
Beg bal + past service awared to employee assumed to be outstanding + current service costs (included at 1/2 assuming service costs were incurred evenly throughout the year) - weighted benefits paid in the period – if weighted are normally paid to employees evenly over the year then (1/2)
how do you calculate weighted average plan assets
FV of plan assets at BEG + weighted funding contributions made (weighted over the year ex. 6/12) - weighted benefits paid by the trustee to retired employees in the period. (1/2 is normally paid to employees evenly over the year)
