Week 2 - Employee Benefits

Question 1

What are the rules for the recognition and measurement of short-term employee benefits?

Answer 1

In the period when the employee has rendered the service, the undiscounted amount of short-term employee benefits needs to be recognized:

• as a liability
• as an expense

Needs to be settled (paid) within 12 months of the period during which the service is provided.

Question 2

Recognition on the basis of relevance may not happen if?

Answer 2

Recognition on the basis of relevance may not happen if:

• If it is uncertain that an asset/liability/expense exists (does not satisfy definition).
• Not sufficiently probable that an inflow/outflow of economic benefits will result.

Question 3

Recognition on the basis of faithful representation may not happen if?

Answer 3

• Measurement uncertainty is too high.

Question 4

What is the Scope of IAS 19?

Answer 4

When employee benefits result from:

• formal plans or other formal agreements between an entity and individual employees, groups of employees or their representatives.
• legislative requirements, or from industry arrangements, whereby entities are required to contribute to national, state, industry or other multi-employer plans.
• informal practices that give rise to a constructive obligation.

Question 5

What can equity by sub-divided into?

Answer 5

Equity can be sub-divided into:

• paid-in capital
• retained earnings
• reserves representing appropriations of retained earnings
• reserves representing the amounts required to be retained in order to maintain “real” capital, that is, either real financial capital or physical capital

Question 6

What constitutes short-term employee benefits?

Answer 6

• Wages, salaries and social security contributions.
• Short term compensated absences
• Profit sharing and bonuses payable within 12 months after the end of the period in which the employees render the related service.
• Non-monetary benefits (e.g. housing, cars)

Question 7

What does IAS 19 relate to?

Answer 7

IAS 19 - Accounting for short-term employee benefits.

Question 8

What does IFRS 2 relate to?

Answer 8

IFRS 2 - Accounting for profit-sharing and bonus plans - accounting for equity compensation benefits.

Question 9

What is the Principle of IAS 19?

Answer 9

• Recognise a liability in the Statement of Financial Position (SoFP) when an employee has rendered a service in exchange for employee benefits to be paid in the future.
• Recognise an expense in Statement of Profit or Loss and Other Comprehensive Income (SPLOCI) i.e. Income statement when economic benefits arising from service provided are consumed .

Question 10

There are 3 types of share-based payment transactions. What are they?

Answer 10

• equity-settled share-based payment transactions
• cash-settled share-based payment transactions
• share-based payment transactions with cash alternatives.

Question 11

What are equity-settled share-based payment transactions?

Answer 11

Equity-settled share-based payment transactions: Entity receives goods or services as consideration for equity instruments of the entity (including shares or share options).

Question 12

What are cash-settled share-based payment transactions?

Answer 12

Cash-settled share-based payment transactions: Entity acquires goods or services by incurring liabilities to the supplier of those goods or services for amounts that are based on the price (or value) of the entity’s shares or other equity instruments of the entity.

Question 13

What are share-based payment transactions with cash alternatives?

Answer 13

Share-based payment transactions with cash alternatives: These are transactions with the entity receives or acquires goods or services and the term of the arrangement provide either the entity or the supplier of those goods or services with a choice of whether the entity settles the transaction in cash (or other assets) or by issuing equity instruments.

Question 14

What are the rules for recognizing equity-settled share based payment transactions?

Answer 14

• The entity shall measure the goods or services received and the corresponding increase in equity, directly, at the fair value of the goods or services received, unless the fair value cannot be estimated reliably.
• If the entity cannot estimate reliably the fair value of the goods or services received, the entity shall measure their value, and the corresponding increase in equity, indirectly, by reference to the fair value of the equity instruments granted.

Question 15

In the context of share-based payment transactions, what is meant by the grant date?

Answer 15

Grant date:

• Date at which the entity and another party (employee) agree to a share-based payment arrangement, employee gets right to receive cash, other assets or equity.

Question 16

In the context of share-based payment transactions, what is meant by vesting conditions?

Answer 16

Vesting conditions:

• Conditions must be satisfied for the employee to become entitled to receive cash, other assets or equity instruments:
  
  • Complete a specified period of service
  • Meet specified performance targets

Question 17

In the context of share-based payment transactions, what is meant by fair value?

Answer 17

Fair value (market prices) of equity instruments granted should be determined at the measurement date. (grant date)

Question 18

In the context of share-based payment transactions, what is meant by Intrinsic value

Answer 18

The difference between the fair value of the shares the employee has a right to and the price (if any) the employee is required to pay for those shares.

Question 19

What are the rules for Cash-settled share-based payment transactions?

Answer 19

The entity shall measure the goods or services acquired and the liability incurred at the fair value of the liability.

Until the liability is settled, the entity shall remeasure the fair value of the liability at each reporting date and at the date of settlement, with any changes in fair value recognized in profit or loss for the period.

Question 20

What is a defined contribution pension plan?

Answer 20

Post-employment benefit plan 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 or prior periods.

Question 21

How does the accounting for a defined contribution plan work?

Answer 21

When an employee has rendered service to an entity during a period, the entity shall recognize the contribution payable to a defined contribution plan in exchange for that service as:

• a liability
• an expense

Question 22

What’s the problem with defined benefit plans?

Answer 22

Problem: the total amount of the benefit paid to the pensioner (the obligation of the pension fund) is known only on retirement or when the pensioner dies.

• we must charge the cost over the service years of the employee.
• basically we get the pension assets and liabilities right and we charge any resulting movements to the income statement.