Employee Benefits

Question 1

2 objectives

Answer 1

1) recognize cost of service provided by the employee during the period where the employer benefits from the provision of those services
2) recognize a liability for services that have been provided by employee but have not yet been funded by the employer

Question 2

Short term benefits

Answer 2

• benefits expected to be paid within 12 months after the year end (wages, salaries, vacation time, profit sharing, bonuses, etc.)
• recognition: benefits accrued as an expense in the same period, the employee has worked and earned rights to benefits and profit sharing/bonuses are recognized when there is a legal/constructive right to pay & estimate can be made
• anything unpaid at YE = liability
• measurement = undiscounted value

Question 3

Defined contribution plan

Answer 3

• entity pays fixed contributions into a separate fund and has no legal/constructive obligation to pay further contributions or to pay a fixed amount of benefits to employees in retirement.
• in DCP, the employee accepts the risk associated with the fund value
• recognition: pension expense recognized in each period includes: the current services cost for the period, past service granted in the period, net interest costs on discounted current service/past service costs
• Measurement: if contributions due more than 12 month’s after the period in which the current services are provided or past service is granted. expense is the PV of future contributions
• Presentation: accrued expense - contributions made = Asset or liability

Question 4

Current service costs (Def. cont.)

Answer 4

• the amount the employer is required to contribute to the plan, in the period for the service provided by the employee

Question 5

Past service granted in the current period (Def. Cont.)

Answer 5

• the amount the employer is required to contribute to the plan for past service granted to the employee in the period, as a consequence of plan initiation/amendment

Question 6

Defined Benefit Pension Plan

Answer 6

• future payments to retired employees are defined by terms of the plan
• employer bears the majority of the risk because of the uncertainty surrounding changes in the plan asset value while future payments remain fixed
• recognition: pension expense recognized in each period includes: the current service cost for the period, past service cost (due to plan amendment in the period), net interest costs, re-measurement G/L
• Presentation: liability when DBO > FV of plan assets OR asset when DBO < FV of plan assets

Question 7

Defined Benefit Pension Plan: Measurement

Answer 7

• current service costs: actuarial PV of future benefits earned by employee for providing service in CY, net of employee contributions
• past service costs: arise on plan initiation or amendment: NPV of future benefits attributable to years of service for which the past service was granted AND increase in future retirement obligations to be provided. Past service costs are expenses in the year the amendment was made.
• net interest costs (finance expense during the year): interest expense on DBO (based on weighted avg. outstanding in the year) - interest income on plan assets (apply discount rate to determine weighted average) . Interest expense on DBO = DBO at beg. of period + current service costs + past service awarded in the CT - weighted benefits paid. Interest income on plan assets = FV of plan assets at beg. of year + weighted funding contribution during the year - weighted benefits paid to retired employees during the year
• Remeasurement G/L: difference between expected and actual values for DBO and plan assets. netted and recognized as a components of OCI.