FAR28 employee benefits UE PDF

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Summary

EMPLOYEE BENEFITSThe main objective of PAS 19 is to prescribe the accounting and disclosure for employee benefits. PAS 19 requires and entity to recognize:
a liability when an employee has provided service in exchange for employee benefits to bepaid in the future; and
an expense when the entity co...

Description

EMPLOYEE BENEFITS The main objective of PAS 19 is to prescribe the accounting and disclosure for employee benefits. PAS 19 requires and entity to recognize:  a liability when an employee has provided service in exchange for employee benefits to be paid in the future; and  an expense when the entity consumes the economic benefit arising from service provided by an employee in exchange for employee benefits. That’s the clear demonstration of matching principle—to recognize an expense in the period when matching revenue is recognized.

Employee Benefits Classification of Employee Benefits IAS 19 classifies employee benefits into 4 main categories: 1. Short-term employee benefits= employee benefits (other than termination benefits) that are expected to be settled wholly before twelve months after the end of the annual reporting period in which the employees render the related service. 2. Post-employment benefits= employee benefits (other than termination benefits and short-term employee benefits) that are payable after the completion of employment. 3. Other long-term benefits= all employee benefits other than short-term employee benefits, post-employment benefits and termination benefits. 4. Termination benefits= employee benefits provided in exchange for the termination of an employee’s employment as a result of either: o (a) an entity’s decision to terminate an employee’s employment before the normal retirement date; or o (b) an employee’s decision to accept an offer of benefits in exchange for the termination of employment. Short-term Employee Benefits -Within 12 months -For current employees

Post-Employment Employee Benefits -After completion of employment -Other than termination benefits

Other long-term Employee Benefits - Residual category -For current employees

Termination Benefits -Results of retirements.

termination

before

Short-Term Employee Benefits Short-term Employee Benefits Short-term employee benefits include all the following items (if payable within 12 months after the end of the reporting period):  wages, salaries and social security contributions;  Compensated absences (paid annual leave and paid sick leave);  profit-sharing and bonuses payable within twelve months after the end of the period; and  non-monetary benefits (such as medical care, housing, cars and free or subsidized goods for current employees). The accounting entry is as follows:

Recognition and Measurement The entity shall recognize short-term employee benefits as an expense to profit or loss (unless another IFRS requires or permits the inclusion of the benefits in the cost of an asset). The expense shall be recognized in the undiscounted amount of short-term employee benefits expected to be paid in exchange for employee’s service rendered during an accounting period. Liability As a liability (accrued expense), after deducting any amount paid. Asset As an asset (prepaid expense) to the extent that the prepayment will lead to, for example, a reduction in future payments or a cash refund. Expense As an expense, unless the benefit paid forms part of the cost of an asset (i.e., PPE, inventories) If the entity’s expectations of the timing of settlement change temporarily, it need not reclassify a short-term employee benefits. Compensated Absences Short-term paid absences: Expected cost of short-term paid absences shall be recognized when the employees render service that increases their entitlement to future paid absences. E.g. leave pay (in the case of accumulating paid absences); or when the absences occur (in the case of non-accumulating paid absences). An entity may pay employees for absence for various reasons including holidays, sickness and short-term disability, maternity or paternity, jury service and military service. Entitlement to paid absences falls into two categories: 1. Accumulating 2. Non-accumulating

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Accumulating They are carried forward The can be used in future periods if the current period’s entitlement is not used in full They may be either Vesting or Non-Vesting Vesting - employees are entitled to a cash

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Non-accumulating They are not carried forward The lapse if current period’s entitlement is not used in full They do not entitle employee to a cash payment for unused entitlement on leaving the

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payment for unused entitlement on leaving the entity Non-vesting – employees are not entitled to a cash payment for unused entitlement on leaving

An obligation arises as employees render service that increases their entitlement to future paid absences. The obligation exists, and is recognized, even if the paid absences are non-vesting, although the possibility that employees may leave before they use an accumulating non-vesting entitlement affect the measurement of that obligation. An entity shall measure the expected cost of accumulating paid absences as the additional amount that the entity expects to pay as a result of the unused entitlement that has accumulated at the end of the reporting period.

entity

This is commonly the case for sick leave (to the extent that unused past entitlement does not increase future entitlements), maternity or paternity leave and paid absences for jury service or military service. An entity recognizes no liability or expense until the time of the absence, because employee service does not increase the amount of the benefit.

Profit-sharing and Bonus payments Profit sharing and bonuses: An entity shall recognize the expected cost of profit-sharing and bonus payments when the entity has 1. a present legal or constructive obligation to make such payments as a result of past events; and 2. a reliable estimate of the obligation can be made. A present obligation exists when, and only when, the entity has no realistic alternative but to make the payments. A present obligation exists when, and only when, the entity has no realistic alternative but to make the payments.

Example : (Short-term compensated absences) Case 1: (Accumulating vs. Non-accumulating) Tanduay Inc. compensates its employees for certain absences. Employees can receive one day vacation plus one day sick leave for each month worked during the year. Unused vacation days may be carried forward, but unused sick leave expires within the year of employment. Employees are compensated according to their current pay rate. The following data were taken from the records for the year 20x8.

Employee A B C D

Starting Date 1/6/x6 6/2/x7 11/4/x8 7/28/x8

Earned Sick Leave Taken 20x8 5 10 5 2

Carry Forward 1/1/20x8 0 6 0 0

Vacation Days Taken 20x8 7 3 0 1

Current Pay per Day P70 60 48 79

Required: Compute the amount that should be reported as a liability for compensated absences on December 31, 20x8.

Employee A B C D

Vacation Days Not Taken 5 15 2 4

Rate per Day P70 60 48 79

Liability for Compensated Absences P 350 900 96 316 P1,662

Case 2: (Vacation leave – accumulating, vesting vs. Non-vesting) ABC Co. grants its employees 12 days paid vacation leave each year. Per ABC’s policy, employees are required to take vacation leave each year, but not necessarily for their entire vacation leave entitlement. Vacation leaves not taken during a year can be carried over indefinitely. ABC has 500 employees with an average salary of P1,000 per day. The average annual pay increase is 5%. During 20X1, total vacation leaves taken by employees were 5,400 days. Based on past experience, 90% of unused vacation leave for a year are taken in the immediately following year. Required A: Assume that unused vacation leaves vest, how much should ABC accrue as liability for unused vacation leave on December 31, 20X1? Required B: Assume that unused vacation leaves do not vest, how much should ABC accrue as liability for unused vacation leave on December 31, 20X1? Case A The liability for unused vacation leave as of December 31, 20X1 is computed as follows: Total vacation leaves entitlement of employees in 20X1 (500 employees x 12 days each) Vacation leaves taken in 20X1 Unused vacation leave carried over indefinitely Multiply by: Expected pay rate in 20X2 (P1,000 x 105%) 100% + 5% Liability for unused vacation leaves

6,000 (5,400) 600 1,050 630,000

The entry to record the liability for the unsued vacation leave carried over is as follows: December 31, 20X1 Salaries expenses Accrued salaries payable Employee Benefits (Batch May 2020)

630,000 630,000 Page 2 of 17

Case B The liability for unused vacation leave as of December 31, 20X1 is computed as follows: Total vacation leaves entitlement of employees in 20X1 (500 x 120 Vacation leaves taken in 20X1 Unused vacation leave carried over Multiply by: Estimated vacation leaves Multiply by: Pay rate in 20X2 (P1,000 x 105%) Liability for unused vacation leaves

6,000 (5,400) 600 90% 540 1,050 567,000

The entry to record the liability for the unused vacation leave carried over is as follows: December 31, 20X1 Salaries expenses Accrued salaries payable

567,000 567,000

Case 3: (Sick Leave/Vacation Leave under LIFO Basis) An entity has 100 employees, who are each entitled to five (5) working days of paid sick leave for each year. Unused sick leave may be carried forward to one calendar year. Sick leave is taken first out of the current year’s entitlement and then out of any balance brought forward from the previous year (a LIFO basis). At December 30, 20X1, the average unused entitlement is two days per employee. The entity expects, based on past experience which is expected to continue, that:  92 employees will take no more than five days of paid sick leave in 20X2 and  That the remaining 8 employees will take an average of six and a half days each.  The average salary per day, per employee in 20X1 is P1,000 and it is not expected to change in 20X2. Required: Compute for the short-term employee benefits for compensated absences recognized on December 31, 20X1. Analysis: The entity expects that it will pay an additional 12 days of sick pay as a result of the unused entitlement that has Projected at December 31, 20X1 as show below: Total sick leave entitlement of employees in 20X2 (100 employees x 5 days each) 500 Sick leave expected to be taken in 20X2 (92 employees x 5 days each) (460) Sick leave expected to be taken by the remaining 8 employees in 20X2 ( 8 x 6.5 days each) (52) Excess sick leave carried over from 20X1 (12) Note that sick leave is carried forward using a LIFO basis. Meaning, sick leave is taken out first from the entitlement during the year, any excess is taken out of unused entitlement in previous year. On December 31, 20X1, the entity recognizes a liability equal to 12 days of sick pay based on the salary level in 20X2. The entry to record the liability is as follows: December 31, 20X1 Salaries expenses (12 x P1,000) Accrued salaries payable

12,000

When the sick leaves are taken in 20X2, the entry is as follows: Accrued salaries payable Cash

12,000

12,000

12,000

Problem 2: ( Profit – sharing and bonus plans) A profit-sharing plan requires an entity to pay a specified proportion of its profit for the year to employees who serve throughout the year. If no employees leave during the year, the total profit-sharing payments for the year will be 3% of profit. The entity estimates that staff turnover will reduce the payments to 2.5% of profit. Required: The entity recognizes a liability and an expense of ________________. The entity recognises a liability and an expense of 2.5% of profit.

Post Employment Benefits  Employee benefits payable after the completion of employment (excluding termination and short term benefits), such as: a. Retirement benefits (e.g. pensions, lump sum payments) b. Other post-employment benefits (e.g. post-employment life insurance, medical care). Two types of post-employment benefits plan a. Defined contribution plan b. Defined benefit plan

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POST-EMPLOYMENT EMPLOYEE BENEFITS (Employee benefits other than termination benefits payable after the completion of employment) Types Defined Contribution Plans Defined Benefit Plans Entity’s obligation To contribute to the fund To provide agreed benefits Fixed/Defined Contribution Benefit Actuarial and investment risk Falls on the employee Falls on the entity

Defined Contributions Plans 

Defined contribution plans are post-employment benefit plans 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 and prior periods.

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Under defined contribution plans, the amount of contribution is definite but the benefits of employees are indefinite.

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Accounting for defined contribution plans   

Accounting for defined contributions plans is straightforward because the reporting entity’s obligation for each period is determined by the amounts to be contributed for that period. Consequently, no actuarial assumptions are required to measure the obligation or the expense and there is no possibility of any actuarial gain or loss. Moreover, the obligations are measured on an undiscounted basis, except where they are not expected to be settled wholly before twelve months after the end of the annual reporting period in which the employees render the related service.

Recognition and Measurement 

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: a. as a liability (accrued expense), after deducting any contribution already paid. exceeds the contribution due for service before the end of the reporting period.

If the contribution already paid

b. as an asset (prepaid expense) to the extent that the prepayment will lead to, for example, a reduction in future payments or a cash refund. c. as an expense, unless another PFRS requires or permits the inclusion of the contribution in the cost of an asset (see, for examples PAS 2 and PAS 16). Defined Contribution Plan Prepaid pension cost Over funding (balancing figure) Asset / Expense X Accrued pension cost Liability / Cash If payable beyond 12 months = compute present value

Under funding (balancing figure) X

Example: (Accounting for defined contribution plan) Case 1: (Defined contribution plan) ABC Company retirement plan has the following details:  Annual contribution to a fund held by a trustee, P400,000.  Upon retirement, an employee shall receive retirement benefit based on whatever amount is Projected on the fund.  Actual contributions to the fund are: P160,000 in 20X1 and P900,000 in 20X2. An employee retired in 20X3 and was paid a total of P30,000 retirement benefits. Required: Provide all journal entries. 20x1

20x2

20x3

Retirement benefits expense Cash in bank Accrued retirement contributions payable Retirement benefits expense Accrued retirement contributions payable Prepaid retirement contributions Cash in bank No entry

400,000 160,000 240,000 400,000 240,000 260,000 900,000

Case 2: (Retirement plan is unfunded but with separate fund) Assume that ABC Company does not transfer funds to a trustee but rather sets up a retirement fund to be management internally. Required: Provide all journal entries. 20x1

20x2

20x3

Retirement benefits expense Accrued retirement benefits payable (to simplify, amounts are not discounted)

400,000

Retirement fund Cash in bank

160,000

Retirement benefits expense Accrued retirement benefits payable

400,000

Retirement fund Cash in bank Accrued retirement benefits payable Retirement fund

900,000

400,000

160,000

400,000

900,000 30,000 30,000

Case 3: (Retirement plan is unfunded and no separate fund) Assume that ABC Company does not transfer retirement funds to a trustee and does not set up a retirement fund specifically to be used in paying retirement benefits. Required: Provide all journal entries. 20x1

Retirement benefits expense Accrued retirement benefits payable (to simplify, amounts are not discounted)

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400,000 400,000 Page 4 of 17

20x2 20x3

Retirement benefits expense Accrued retirements benefits payable Accrued retirement benefits payable Cash in bank

400,000 400,000 30,000 30,000

Defined Benefit Plans  These are post-employment plans other than defined contribution plans. These would include both formal plans and those informal practices that create constructive obligations to the entity’s employees.  The following are the characteristics of defined benefit plan: 1. The amount of benefit is definite but the contribution is indefinite. 2. Actuarial assumptions are required to measure the obligations and the expense and there is a possibility of actuarial gains and losses. 3. The obligations are measured on a discounted basis because they may be settled many years after the employees render the related service. Defined benefit plans are post-employment benefit plans other than defined contribution plans. Under defined benefit plan, the employer has the obligation to pay specified amount of benefits according to the plan to the employee and all investment and actuarial risk thus fall on the entity. Accounting for defined benefit plans is probably one of the most complex issues in IFRS because it involves incorporating actuarial assumptions into measurement of the obligation and the expenses. Therefore, actuarial gain and losses arise. Also, obligations are measured on a discounted basis, because they might be settled many years after the employees render the related services.

Recognition and measurement 

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Defined benefit plans may be unfunded, or they may be wholly or partly funded by contributions by an entity, and sometimes its employees, into an entity, or fund, that is legally separate from the reporting entity and from which the employee benefits are paid. The payment of funded benefits when they fall due depends not only on the financial position and the investment performance of the fund but also on an entity’s ability, and willingness, to make good any shortfall in the fund’s assets. Therefore, the entity is, in substance, underwriting the actuarial and investment risks associated with the plan. Consequently, the expense recognized for a defined benefit plan is not necessarily to amount of the contribution due for the period.

Steps in accounting defined benefits plans  Accounting by an entity for defined benefit plan involves the following steps: Step 1 Determining the deficit or surplus. This involves: a. Using an actuarial technique, the projected unit credit method, to make a reliable estimate of the ultimate cost to the entity of the benefit that employees have earned in return for their service in the current and prior periods b.

Step 2 Step 3

Step 4

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Discounting that benefit in order to determine the present value of the defined benefit obligation and the current service cost

c. Deducting the fair value of any plan assets from the present value of the defined benefit obligation. Determining the amount of the net defined benefit liability (asset) as the amount of the defic...