Employee Benefits Flashcards
Share Based payment example:
Martini granted 5,000 share options to 20 ppl on 1/1/22 at £8 fair value per share. Options vest on 31/12/25, conditional on meeting targets and being in employment.
By 31/12/22 all 20 were expected to meet targets and remain employed.
By 31/12/23 2 had left and only 15 of the remaining would hit their targets. s. An option pricing model has estimated the fair value of each option is £10 at 31 December 2023.
Show how the share options should be accounted for in the Martini Plc financial statements for the year ended 31 December 2023.
*fair value does not change as these are equity settled share options and not cash settled Share Appreciation Rights
Year | Estimated employees receiving options | Number of options per employee | Fair value per option £ | Proportion of vesting period elapsed
Year end value in SOFP (Share option reserve)
31/12/22 | 20| 5,000 | £8 | ¼ | 200,000
31/12/23 |15| 5,000 |£8 | 2/4 |300,000
Accounting for y/e 31/12/23 SOFP:
Equity: Share Option Reserve £300,000 Income Statement: P&L Expense £100,000
Show the accounting entry for the following scheme:
Martini Plc are contracted to annual contributions equal to 5% of qualifying employees’ salaries into the pension fund. Employees contribute 2% of their net pay into the scheme, although this can be increased by an additional voluntary contribution. Qualifying employees’ salaries totalled £55million in 2023 and Martini had paid employer contributions of £2 million related to 2023 into the scheme by
31/12/23.
Martini plc will show an expense for the 2023 employer contributions of £55 million x 5% = £2.75m (they do not need to disclose the employee contributions). They will also show an accrual for unpaid contributions of £2.75m - £2m paid = £0.75m in liabilities in the SOFP.
Dr P&L Expense – Pension contributions £2.75m
Cr Cash paid £2.0m
Cr Accrual (liabilities) £0.75m
Defined Benefit pension scheme: Working Layout
Present value of plan obligations at 31/12/2022: £28,000,000
Fair value of plan assets at 31/12/2022: £32,000,000
Interest rate on high quality corporate bonds 5.5%
Current service cost: £5,000,000
Benefits paid: £1,500,000
Martini plc employer contributions paid into the plan: £3,000,000
Present value of plan obligations at 31/12/2023: £41,200,000
Fair value of plan assets at 31/12/2023: £37,500,000
show the accounting entries required
DR | CR | Defined Benefit Obligation | Plan Assets
Defined Benefit Obligation: x|x|28k|32k
Past service cost 1/1/2023: 6k|x|6k|x
Current service cost: 5k|x|5k|x
Benefits Paid: x|x|(1.5k)|(1.5k)
Contribution: x|Cash 3k|x|3k
Net interest expense (28+6 x 5.5%, 32k x 5.5%): 110 net|x|1,870|1,760
Sub total: x|x|39,730| 35,260
Actuarial gain: x|x|x|2,240
Actuarial loss: x|x|1,830|x
At 31/12/23 (as per Q): x|x|41,200|37,500
Issues with forcing firms to disclose defined benefit plan liabilities
4
So much uncertainty in how much will actually be paid
Large liabilities will impact the gearing ratio, increasing debt may make firms less attractive to investors
Klosse & Peasnell (2009) found that since pensions were made mandatory to be disclosed in reports the closure of defined benefit pension schemes has become more prevalent
Counter argument is that their inclusion does reflect the economic reality that underfunded pension schemes are a risk for the entity and thus should be included.
