Week 9 - Employee benefits Flashcards
Post-employment benefits - Defined contribution (DC) vs Defined benefit (DB) pension schemes
+ their accounting
*actuarial risk - the benefits will be less than expected
*investment risk - assets invested will be insufficient to meet expected benefits
DC plans
- employer’s contributions are fixed
- employer not obliged to make any further contributions
- actuarial risk + investment risk fall onto the EMPLOYEE
- simple accounting b/c no actuarial assumptions required & no possibility of any actuarial gain/loss
DB plans (employees are safer)
- employer is obliged to make sufficient contributions to pension fund to ensure that an agreed level of employee benefits can be paid
- actuarial risk + investment risk fall onto the entity (EMPLOYER)
- employer’s obligation may be increased if ^ worsen
- complex acct. b/c ACTUARIAL ASSUMPTIONS are required + possibility of actuarial gains/losses
- these obligations are measured on a DISCOUNTED basis (done by actuaries)
Plan assets
(a) assets held by a long-term employee benefit fund; AND (b) qualifying insurance policies.
Net defined benefit liability (asset) [deficit (liability) or surplus (asset)]
Present value of the defined benefit obligation/liabilities - Fair value of plan assets
Reporting of changes in DB liability/(asset), i.e., cost of DB plans [SoCI]
- what falls under ‘Service Cost’ and which section is it recognised in the SoCI?
Service cost -> profit & loss
1. Current service cost
2. PRESENT VALUE of past service cost
3. Any gain or loss on settlement
Reporting of changes in DB liability/(asset), i.e., cost of DB plans [SoCI]
- how to calculate ‘Net interest cost/income’ and which section is it recognised in the SoCI?
Net interest cost/income -> profit & loss
= Discount rate x Net defined benefit liability (asset)
Must use OPENING RATE & OPENING net DB liability!
- if net DB liability position, then net interest COST
- if net DB asset position, the net interest INCOME
Reporting of changes in DB liability/(asset), i.e., cost of DB plans [SoCI]
- what falls under ‘Remeasurement’ and which section is it recognised in the SoCI?
Remeasurement -> Other comprehensive income
1. Actuarial loss/(gain)
2. Return on plan assets (NET OF INTEREST INCOME)
3. Any change in the effect of the asset ceiling
IFRS 2 Share-based payments - equity-settled payments & cash-settled payments
+ what is vesting period?
Equity-settled payments (increase in equity)
- the FAIR VALUE of the shares/options is measured at the GRANT DATE
- & written off as an expense over the VESTING PERIOD (=time between grant date and vesting date)
- Changes in the estimated number of shares or options to be issued on the vesting date are accounted for prospectively.
Cash-settled payments
- FAIR VALUE of the LIABILITY for such payments is re-measured at each reporting date during the VESTING PERIOD
- The estimated cost of providing cash- settled payments is written off as an expense over the vesting period.
Format to calculate DB expense in profit/loss (I/S) + extend to calculate Losses/(gains) recognised in OCI
Current service cost for the year
+ Present value of past service cost
+ Administration cost
+ NET interest cost/(income) = opening interest rate*opening net DB position
= Expense recognised in profit/loss (I/S)
Remeasurements of net DB liability/(asset)
ACTUARIAL LOSSES/(GAINS)
+ RETURN ON PLAN ASSETS (net of interest income)
= Losses/(gains) recognised in other comprehensive income
3 main steps of workings to calculate Actuarial loss/(gain) as Balancing figure
Workings column = PV of DB plan liability
- At the START of reporting period
- Current service cost
+ Present value of past service cost
+ Interest cost/(income)
- BENEFITS PAID <- ie. liability goes down
= Actuarial loss/(gain) as balancing figure - At the END of reporting period
3 main steps of workings to calculate Return on plan assets (net of interest income) as Balancing figure
Workings column = PV of DB plan assets
- At the START of reporting period
- ADMINISTRATION cost
+ Interest cost/(income)
- BENEFITS PAID
+ EMPLOYER CONTRIBUTIONS <- ie. plan assets increases
= Return on plan assets (net of interest income) - At the END of reporting period
4 steps to show the share-based transactions in the fin. stt.s
What happens when the share options are exercised by the successful employees? And when the share options are not exercised?
- Calculate the TOTAL COST of the options
- eg. 2/3 of the vesting period has now EXPIRED
- Calculate the EXPENSE for the year
- EQUITY (as part of retained earnings eg. “credit for share-based payments”) increases, by the amount of the expense
When the options are exercised, the amount shown in equity for the share options will be TRANSFERRED to SHARE CAPITAL.
- If any of the employees decide not to exercise their options (eg. b/c market share price is lower), any remaining balance in the “shares to be issued” account must remain in EQUITY
One reason for the decreasing/closing of DB plans in the UK/USA (but still used widely by many companies in other EU countries) is the COMPLEX acct. & requirement of actuarial ASSUMPTIONS.
What is another reason?
Accounting for DB plans could create VOLATILITY in an entity’s FSs since IAS 19 (2011).
eg. see M&S’s accounts for YE 2 April 2022, note 1 Accounting Policies, p.133 on pensions, and note 11 Retirement Benefits, pp. 150-153.
