Employee benefits

Question 1

What IAS talks about employee benefits?

Answer 1

IAS 19

Question 2

What are the 4 cateogries of employee benefits according to IAS 19?

Answer 2

• Short-term employee benefits
• Post-employment benefits
• Other long-term employee benefits
• Termination benefits ( We won’t go into this)

Question 3

IAS 19 requires an entitiy to recognise Liability and expense when…..

Answer 3

a liability when an employee has provided service in exchange for employee benefits to be paid in the future.
Expense: when the entity consumes the economic benefit arising from the service provided by an employee in exchange for employee benefits.

Question 4

What are short term employee benefits? Do we have to discount it?

Answer 4

This is to be settled within 12 months and its for current employees.
-wages, salaries and social security contributions( national insurance) ;
-paid annual leave and paid sick leave;
-profit-sharing and bonuses
As its short term its already within present value form.

Question 5

What is the accounting entry for short term employment benefits?

Answer 5

Question 6

What is post employment benefits?

Answer 6

benefits after the completion of employment such as pensions, lump sum payments on retirement.

Question 7

Explain the flow of funds with pensions?

Answer 7

Question 8

So we will mostly be focusing on pensions, and this is based upon accounting and reporting for the entitiy, what are 2 key issues?

Answer 8

1) What is the pension obligation that an entity should report in the FSs? ( people die early, interest rates fluctuate in the future, inflation
• What is the pension expense for the period?

Question 9

What are the 2 types of pension schemes IAS 19 talk about?

Answer 9

Defined contribution

Defined benefit

Question 10

What is defined contribution?

Answer 10

The company pays a fixed obligation contribution, monthly, yearly, whatever, to the employees pension fund. As an employee you get a variable return, there is no acturial risk attached to company but employee, as if the pension fund goes up you get more money, if goes down you get less.

Question 11

How do we account for Defined contribution schemes ( HINT WE ARE LOOKING AT THE POSITION OF EMPLOYER)?
Is there any adjustments for acturial risk of the employer?

Answer 11

Dr expense
Cr Cash/accurals

the amount of expense will be based on company agreeing to pay a percentage of your monthly salary.
Employees don’t bare risk, so there isn’t no acturial adjustments we need to make

Question 12

What is defined benefit?

Answer 12

Company pays a variable contribution into the companys own pension plan ( if the scheme is doing well then it doesnt have to pay much, if its doing bad it has to pay more), so acturarial risk lies with company, then you get fixed/guranteed return after retirement( usually based on salary). So the company is accountable for its pension fund growing and variable return.

Question 13

Why is accounting for Defined benefits complex?

Answer 13

1) because actuarial assumptions ( are required to measure
the obligation and the expense ( for a lifetime)

2)there is a possibility of actuarial gains and losses. ( guesses you make about obligation is not the same as what it actually is at end of the year)

Question 14

What does acturial gains and losses ( remeasurement of pension plans) do to SOPL?

Answer 14

It leads to a lot of votaility because one year you can have a profit and the next a loss

Question 15

How do we report DB plan liability/(asset)? ( what happens if there is an asset?)

Answer 15

Present value of defined benefit obligation/liabilities ( how much do you owe employee after how many years of retirement)
Fair value of plan assets ( the value of money you invested in the stock market)

If there is a net defined asset, the rules state we cannot overstate this, hence an asset ceiling( the limit is set by authority, to make sure pension assets not overstated)

Question 16

Now we are going to look at the statement of profit or loss, how does it look?

Answer 16

Return on investment = Return on assets, we will see this.

Question 17

What are current service costs, past service costs and net interest on the net defined benefit liability(asset) ? What is the journal entry for all 3?( next slide too)

Answer 17

Current service cost = the increase in the present value of the defined benefit obligation/liability resulting from employee service in the current period.
Past service costs = the increase in the present value of the defined benefit obligation/liability resulting from employee service in previous period. ( if you work at a company for a particular length of time , your benefit becomes enhanced based on number of years you have worked there, you recognise at the end)

Question 18

What is net interest on the net defined benefit liability ( asset)? what do service costs also include?

Answer 18

Net interest on the net defined benefit liability (asset) - this is the liability at start of year, but it needs to grow the liability based upon interest, so the liability will be much more, the closer you get to paying the liability.( but key when you pay liability, you are not paying more than what its worth in the future period, its just building it up). TO WORK OUT YOU TAKE THE INTEREST RATE GIVEN IN THE QUESTION X THE VALUE OF OPENING LIABILITIY.

Service costs also include any gain or loss on settlement ( if pension scheme has been closed, fully settled, any gains or losses will be recognised in SOPL. )

Question 19

IF the net defined benefit is a liability(asset) at the beginning of the reporting period, then net interest will be what?

Answer 19

Question 20

Remeasurements of the net defined benefit liability (asset) What are the 3 elements of this.

Answer 20

1) Actuarial gains and losses = the changes in the present value of the defined benefit obligation from estimated amount to actual amount, ( obligation)
2) Return on plan assets, excluding amounts included in net interest on the net defined benefit liability (asset) ( the whole fund
3) Any change in the effect of the asset ceiling.

Question 21

Acturial gains and losses can be caused by this:
These are caused by:
(i) differences between actuarial assumptions which were made at the end
of the previous period and events that actually occurred during the
current period, and
(ii) changes in actuarial assumptions between the start and end of the
period.
How do we calculate it?

Answer 21

Question 22

`Now lets look at an example of employee benefits for Defined benefits contribution.
SO we have to do a SOCI and balance sheet given this information.
This is quite easy untill working SOCI.
Firstly we talked about this buy what goes into the SOFP?

Answer 22

Net defined benefit Liability / ( asset) in SoFP = 555.

In this case its a liability, so we put this in Non current liabilities.

Question 23

For this question what would be the layout of SOCI after profit or loss? ( HINT ITS THE SAME THING PREVIOUS SLIDES BUT WITH AN ADDED THING BECAUSE OF ADDITIONAL INFORMATION)

Answer 23

Question 24

Now how we going to workout the remeasurement of net defined benefit liability/(asset),
What will it mean if there is no acturial gain or loss and return on assets = 0.
What interest rate should we use?

Answer 24

Acturial gain or loss We literally compare Pv of DB plan liability at start of reporting period + any changes/movements and compare this to PV of DB plan liability at the end of the period. If the end it more then we have a liability. ( if these two are equal it means 0 acturial gain or loss)

For return on plan assets We literally compare FV of DB plan assets at start of reporting period + any changes/movements and compare this to FV of DB plan assets at the end of the period. If the end is more we have an asset. ( if these two are equal it means no return on assets.
We use the 4% interest rate.

Question 25

Now feel this in. using the workings you found out?

Answer 25

Question 26

What can we see?

Answer 26

It has a positive return on assets but it has a huge actuarial loss, so overall net loss.

Question 27

What are examples of other long term benefits how do you treat this?

Answer 27

a) long-term paid absences such as long-service
leave and sabbatical leave
b) long-term disability benefits

It is really similar to defined benefit scheme

Question 28

What is share based payment ( IFRS 2)?

Answer 28

A payment for goods and services in either;
1) Shares
2) Share options
3) Cash payment based on share price.
It is a common way of awarding employee performance.

Question 29

What are 2 types of share based payements according to IFRS 2?

Answer 29

Equity-settled payments ( a payment of shares or share options to employee in return for provision of goods and services
Cash-settled payments. ( cash payments based on share price in return for provision of goods and services) ( its an incentive for employees, to try and improve share price of the company)

Question 30

What does Grant date, vesting date and vesting period mean

Answer 30

1) Grant date = employee and company agree terms of the scheme.
2) Vesting date = the number of years from grant date, when the employee is entitled to the share based payment.
3) Vesting period= is the difference between grant date and vesting date.

Question 31

What is the accounting treatement of equity settled payments ?

Answer 31

Spread the fair value of the share based payment over the vesting period, which is written off as an expense. ( the fair value doesnt change)

Question 32

What is the accounting treatement of cash settled payments ?

Answer 32

We update the FV of liability (cash settled payment) at each reporting period, because we need to show a fair representation, if share price goes up because, the firm pays more cash and this is spread across vesting period.

Question 33

What is the Dr and credits for Equity-settled payments and cash-settled payments?

Answer 33

You debit both as an expense but its the credits that are different,
For equity-settled payments - credit equity( increase the other equity component) until them shares have been excerised at vesting date, meaning it goes into share capital.
If its cash-settled we credit liability

Question 34

What is the grant date?
What is the vesting date?
What is the vesting period?
What is the fv of option we should use in 2017, 2018 and 2019?

Answer 34

1) 1 Jan 2017
2) 31 Dec 2019
3) 3 years
1) 2017 = £9, 2018 = £8 and 2019 = £11.

Question 35

Answer 35

Question 36

Answer 36

Question 37

Answer 37