Week 5 - Employee Benefits Flashcards
Employee Benefits: Where to debit and credit?
Dr Wages & Salaries Expense (P&L)
Cr Accruals (current liabilities SoFP)
Firm commits 10% of salary & commisions (£5.5m) into pension plan
Have paid £400k so far, show the accounting for the year
£550k Income statement expense
150k (550k-400k) in current liabilities (SoFP)
Accounting for share options
On 1 January 20X0 (the grant date) DL plc grants 10,000 share options to its chief executive, Lilian, with an exercise price of 800p. The options vest in three years’ time (on 31/12/X2) as long as Lilian is still in
employment at DL plc. DL plc have used an option pricing model at the grant date, which has suggested the options have a fair value of 210p. The shares have a nominal value of £1 and a market value of 850p
on 31/12/X2.
Assuming
* Lillian stays in employment throughout the vesting period
* Lillian exercises all of her options on 31/12/X2
Show the accounting entries related to the share options in DL plc’s financial statements from 1/1/X0 to 31/12/X2
1st year:
10,000 options x fair value 210p = £21,000 x 1/3* = £7,000
Dr Income Statement Expense £7,000 Cr Equity £7,000
*as 1/3 of vesting period has elapsed
Year ended 31/12/X1
10,000 options x fair value 210p = £21,000 x 1/3* = £7,000
Dr Income Statement Expense £7,000 Cr Equity £7,000
In the SOFP equity balance is now £14,000
Year ended 31/12/X2
10,000 options x fair value 210p = £21,000 x 1/3* = £7,000
Dr Income Statement Expense £7,000 Cr Equity £7,000
Lillian exercises her options – so she pays 800p x 10,000 = £80,000 to DL plc
Dr Cash £80,000 Cr Share Capital (10,000 x £1) £10,000 Cr Share Premium £70,000
The share option reserve accumulated of £21,000 can also be released (most likely to Retained Earnings)
Would answer change if share price was 750p in 3 years? We would assume options aren’t exercised (as they are out of the money)
Thinking Critically:
Pension accounting criticisms
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Large liabilities, effects gearing. Defined benefit schemes are closing quickly. Kiosse & Peasnell (2009) found this could be due to increasing pension costs, increased regulation and worsening tax incentives
Positive impact on risk management, after adpoting IAS 19 firms got less voatile plan assets (Anantharaman & Chuk, 2018). But lower returns
Asymmentric prudence as assets are capped but not for liabilities
Some gains on plan assets split between OCI & IS. Conceptual Framework says key elements of performance should be in IS.
Thinking Critically:
Criticism of Share Based Payment
4
Could incentivies managers to manipulate statements ot boost share price
Managers gain when share prices rise but not when they lose (opportunity cost though)
Share prices could move due to market movements outside of employee control - thus benefit without earning it
Cheng (2004) suggests can incentivies management risk-taking
Why are defined benefit pension schemes accounted for when they’re held ins eperate entities?
As the employer bears the risk of paying the pension (and the pension obligation
increasing) – therefore the pension liability is brought onto the books of the employer (Martini) even though
the assets are held in a separate entity.
Defined Benefit Scheme Table:
Where do these go and what is the DR CR label?
* Interest
* Past service cost
* Current service cost
* Benefits paid
* Employer Contribution
Interest: Opening balance * Rate, goes in Obligation & Plan Assets, Cr the difference if benefit > Assets & Dr if vice versa
Service Costs: Debit P&L & Defined Benefit Plan
Benefits Paid: Negative from Defined Benefit & Plan Assets
Employer Contribution: Credit Cash & Plan Assets
If asked to summarise the accounting entries for defined benefit plan:
Dr all the debit column
Cr all Credit column
Cr Actuarial Gain (would go into OCI)
Dr Gain in pension asset (or CR Loss)
Gain in pension asset is the difference between the benefit plan & fv plan assets at the start vs the end
e.g. if Benefit plan is 100 and FV Assets is 80, then at the end of year BP is 110 and FV is 120, we’ve gone from -20 to +10, ,’, Gain in Pension Asset needs to be Dr 30
Staff who do not qualify for Pension Plan A are enrolled in Pension Plan B. Syrax plc make a contribution equal to 5% of each qualifying employee’s gross salary into a pension fund.
This fund is used to pay each employee a pension on retirement. The pension fund is a separate legal entity and at 31 December 2022 holds net assets valued at £650 million.
Gross salaries for employees enrolled in the Syrax plc Pension Plan B for the year to 31 December 2022 were £800 million. Syrax plc had paid contributions of £32 million to the Plan B pension fund in the year to 31 December 2022.
What is the accounting in the SoFP & SoCI?
Dr Staff Costs P&L Expense: £40m (800 x 5%)
Cr Cash: £32m
Cr Accruals (liability): £3m
On 1 January 2021, Syrax plc granted 100 share options each to 50 senior managers. In order to be granted shares, the employee must remain in employment at Syrax plc until at least 31 December 2024. The fair value of each share option was £15 at 1/1/21 and £20 at
31/12/22. In 2021, 5 of the managers in the scheme left the company, and Syrax plc estimated that a further 10 managers might leave before 31 December 2024. In 2022, 3 managers left the company and Syrax plc estimated that a further 5 managers might leave before 31 December 2024.
2021: 100 x £15 x 35 x 1/4 = 13,125 Cr Share Reserve
2022: 100 x £15 x 37 x 2/4 = 27,750 Cr Share Reserve
SoCI = the movement between the two ,’, £14,625 P&L Expense
Earnings per Share:
Start of FY24, AGZ had 750m shares. On 1st April made a bonus issue of 1 new share for every 3 held. Earnings were £191.4m in FY24, and £182.7m in FY23.
Calculate basic EPS for FY24.
24: 750 x 3/12 x 4/3 = 250 1,000 x 9/12 = 750 ,’, Weighted Average shares 2024 = 1,000
23: 750 x 4/3 = 1,000
So the 4/3 is the multiplier to previous periods to make it average out. 4/3 is the extra shares they offered
,’, EPS 24 = £0.1914
Explain the reason for the treatment of bonus issues under IAS 33: EPS
No increase in earnings can be expected following bonus issue, just earnings divided over greater number of shares.
Thus, to ensure comparibility, bonus issue is adjusted for as if it had taken place at the beginning of the earliest period presented
Defined benefit vs Defined Contribution Pension
Defined benefit = Obligation to pay is with the employer. They must pay a certain salary. Recognised in seperate entity but as employer must pay it is shown in their books.
E.g. final salary schemes
If fund performs badly or expected obligation rises (due to changes in life expectancy or pay rises) then the employer must pay more so the plan has enough assets to meet the obligation
Defined Contribution = Risk lies with the employees. Firm makes contribution to a pension fund must pay out a % of salary etc.
Easy to calculate for accounting, just debit income statement expense and liabilities for outstanding payments
Thinking Critically EPS:
Criticisms of IAS 33 EPS
Can select different accounting policies to change profit after tax figure, thus manipilation possible
Diluted EPS ratio doesn’t reflect the likelihood of shares being issues e.g. if convertible debt holders will opt for shares
FRC (2022) found errors and omissions in EPS calcs and disclosures in more complex areas. Thus less comparability k
