Chapter 4 Employee Benefits Flashcards
Short term benefits (IAS 19)
Employee benefits (other than termination benefits) that are expected to be settled wholly before twelve months after the end of the annual reporting period in which the employees render the related service.
Short term benefits include items such as:
- Wages, salaries and social security contributions.
- Paid annual leave and paid sick leave.
- Profit sharing and bonuses.
- Non-monetary benefits e.g. Medical care, 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 (accruals basis).
Short term benefits are not discounted to present value.
Short term paid absences
- Accumulating paid absences
Those that can be carried forward for use in future periods if the current period’s entitlement is not used in full.
The expected cost of any unused entitlement that can be carried forward or paid in lieu of holidays is recognised as an accrual at the year end.
- Non-accumulating paid absences
Those that cannot be carried forward and only recognised as an expense when the absence occurs.
Profit sharing and bonus plans
An entity recognises the expected cost of profit sharing and bonus payments when and only when:
- The entity has a present legal or constructive obligation to make such payments as a result of past events and
- A reliable estimate of the obligation can be made.
Defined contribution plans (IAS 19)
Post employment benefit plans under which an 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.
Accounting treatment
The obligation for each year is shown as an expense for the period (disclosed in a note) and in the statement of financial position to the extent that it has not been paid.
Defined benefit plans (IAS 19)
Post employment benefit plans other than defined contribution plans.
Defined benefit plans - approach
- Record opening figures:
- obligation
- asset - Net interest cost:
- interest applied to b/d obligation and assets (and netter in profit or loss).
- should also reflect any changes in obligation during period e.g. Past service cost.
- technically the interest on assets is also time apportioned on contributions less benefits paid in the period (if they do not occur at year end)
Recognition:
DR: Net interest cost (p/l) (x% x b/d obligation)
CR: PV defined benefit obligation (SOFP)
And
DR: Plan assets (SOFP) (x% x b/d assets)
CR: Net interest cost (p/l)
- Current service cost:
- increase in the present value of the obligation resulting from employee service in the current period.
Recognition:
DR: Current service cost (p/l)
CR: PV defined benefit obligation (SOFP)
- Past service cost
- change in PV obligation for employee service in prior periods, resulting from a plan amendment or curtailment.
- charged or credited immediately to profit or loss.
Recognition:
Increase in obligation
DR: Past service cost (p/l)
CR: PV defined benefit obligation (SOFP)
Decrease in obligation
DR: PV defined benefit obligation (SOFP)
CR: Past service cost (p/l)
- Contributions
- into the plan by the company
- as advised by actuary
Recognition:
DR: Plan assets (SOFP)
CR: Company cash
- Benefits
- actual pension payments made
Recognition:
DR: PV defined benefit obligation (SOFP)
CR: Plan assets (SOFP)
- Re-measurements
- Arising from annual valuations of obligations and assets.
- on obligation, differences between actuarial assumptions and actual experience during the period or changes in actuarial assumptions.
- on assets, differences between actual return on plan assets and amounts included in net interest.
Recognition:
Recognise all changes due to re-measurements in other comprehensive income.
- Disclose deficit or surplus in accordance with the standard.
Settlements
A settlement is a transaction that eliminates all further legal or constructive obligations for part or all of the benefits provided under a defined benefit plan.
The gain or loss on a settlement is recognised in profit or loss when the settlement occurs:
DR: PV obligation (as advised by actuary) X
CR: FV plan assets (any asset transferred) X
CR: Cash (paid directly by the entity) X
CR/DR: Profit or loss (difference) X
The ‘Asset Ceiling’ test
Amounts recognised as a net pension asset in the SOFP must not be stated at more than their recoverable amount.
Consequently IAS 19 requires any net pension asset to be measured at the lower of:-
- Net reported asset and
- The present value of any refunds/ reduction of future contributions available from the pension plan
The amount is charged immediately to other comprehensive income.
DR: OCI
CR: Net reported asset
Current developments
Issues re IAS 19
Some key issues are:
- Definitions of the types of plan
- Interest rate used for discounting
- Measurement of plan liabilities
- Treatment of more unusual plans
