Solutions Tutorial 6 Employee Benefits PDF

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HI6025 Accounting Theory and Current Issue Tutorial 6 Accounting for Employee Benefits

Suggested solutions:

1.

According to AASB 119 Employee Benefits, employee benefits means all forms of consideration given by an entity in exchange for services rendered by employees. Employee benefits would include, but would not be limited to, wages and salaries (including fringe benefits and non-monetary benefits), annual leave, sick leave, longservice leave, superannuation and other post-employment benefits.

2

AASB 119 requires that short-term employee benefit obligations be measured on an undiscounted basis. Short-term employee benefits could include wages, salaries, social security contributions, short-term compensated absences, profits sharing and bonuses payable within 12 months. Obligations for employee benefits, inclusive of salary and wages, that are payable beyond 12 months after the end of the reporting period are to be recorded at their present value. For the purpose of determining present values, the discount rate is to be based on market yields at the end of the reporting period of high quality corporate bonds. The currency and terms of the bonds are to be consistent with the current and estimated term of the obligations. While paragraph 83 of AASB 119 states that reference should be made to high quality corporate bonds, it also states that where there is no deep market in such bonds the market yields on government bonds shall be used. Paragraph 83 states: The rate used to discount post-employment benefit obligations (both funded and unfunded) shall be determined by reference to market yields at the end of the reporting period on high quality corporate bonds. For currencies for which there is no deep market in such high quality corporate bonds, the market yields (at the end of the reporting period) on government bonds denominated in that currency shall be used. The currency and term of the corporate bonds or government bonds shall be consistent with the currency and estimated term of the post-employment benefit obligations.

3.

The following employee benefits are to be disclosed at their nominal amounts: employee benefits in the form of wages and salaries, annual leave, sick leave and other employee benefits which are expected to be settled within twelve months of the end of the reporting period. All employee benefits to be settled beyond 12 months after the end of the reporting period are to be measured at the present value of the estimated cash outflows to be made by the employer in respect of employee services rendered up to the reporting date.

Page 1 of 5 HI6025 Tutorial 5 T2 2017

4.

5.

As the illustrations in chapter 12 indicate, a number of factors need to be considered in determining the total expenses to be recognised in relation to a defined benefit plan. These include: 

current service costs



interest costs

 

expected return on assets net actuarial gain or loss.

Long-service leave is an entitlement additional to leave that employees accrue as they work for an employer. This entitlement does not exist in all countries. Although the entitlement typically accrues from the first day of employment, access to the entitlement is dependent upon the employee remaining with the employer for a stated period of time. Paragraph G4 of a former version of AASB 119 identifies three common long-service leave entitlement categories: (When AASB 119 was re-released in 2006 the ‘Australian Guidance’ section—paragraphs G1 to G20—was removed. This was part of a process in which the AASB removed ‘Australian Guidance’ from the accounting standards. Nevertheless, the guidance is still relevant, and hence it is provided below.) (a)

Preconditional period In the early years of employment no legal entitlement to any cash payment or leave will exist until such time as the individual has been employed for the minimum period of service necessary to qualify for the entitlement. If the employee leaves in this early period, no long-service leave entitlement is required to be paid by the employer.

(b)

Conditional period In certain circumstances a legal entitlement to pro-rata payment in lieu of longservice leave arises after a conditional period of service has been completed. For example, the employment agreement may provide that employees are entitled to take 13 weeks leave after 15 years of service. The agreement may further provide that once a conditional period of employment has been served, for example, 10 years, then the employee is entitled to a pro-rata cash payment in relation to longservice leave. In such an arrangement, an employee who has served nine years before resignation would not be entitled to any cash payment. An employee who serves 11 years may not be entitled to take leave, but would be entitled to 9.53 weeks salary on resignation (which equals 11/15 multiplied by 13 weeks).

(c)

Unconditional period An unconditional legal entitlement to payment arises after a qualifying period of service (usually 10 or 15 years). After this qualifying period, the long-service leave can be taken. Accumulation of long-service leave entitlement continues after this point, until the leave is taken. An employer should not defer recognition of long-service leave entitlements until a preconditional period has been served. Rather, using various actuarial assumptions (such as probabilities that the employee will stay until at least the conditional period, projected promotions, wages rates, and so on), a liability should be recognised throughout the term of employment, starting from the first year of service. 2

6.(a)

The accounting entry at the end of the reporting period to recognise eight days salary and wages expense would be (this assumes a ten day working week, of which 8 days remain unpaid at the end of the reporting period): 

 (b)

Cr

PAYG tax payable

Cr

Wages and salaries payable



8 000 16 000

($24 000 = $30 000 x 8/10)

2 July Dr

Wages and salaries expense

6 000

Dr

Wages and salaries payable

16 000

Cr

PAYG tax payable

Cr

Cash at bank

2 000 20 000

$6000 represents two days salary, which would be included as an expense of the new financial period. The employees would receive the net amount after deduction of the PAYE tax, that is, $30 000 less $10 000. This entry assumes that no reversing entries were made on 1 July.

When the amounts are paid to the ATO on Monday, the entry would be: 

6 July Dr Cr

7.

24 000

When the amount is ultimately paid to employees on 2 July, the entry would be: 

(c)

30 June Dr Wages and salaries expense

(a)

PAYG tax payable

10 000

Cash

10 000

The expected annual sick leave expense for Bear Island Ltd (on the basis of average salaries) would be: $300 000 x 2 x 0.6 =

$360 000

$300 000 x 1 x 0.2 =

$60 000

$300 000 x 1/5 x 0.1 =

$6000 $426 000

(b)

This would equate to $8192 per week. On this basis, Bear Island Ltd could post the following journal entry each week: Dr

Sick leave expense

Cr

Provision for Sick leave

8192 8192

($8192 = $426 000/52) 3

8.

(a)

Calculations (see notes below for explanation of calculations under each column):

Employee name

Present value of Probability LSL that LSL will be paid obligation

Projected salary

Accumulated LSL benefit

LSL liability

Black

48 760

1 563

724

15%

109

White

46 866

3 004

17 48

20%

350

Brown

56 308

5 414

3710

50%

1855

Green

64 946

8 326

6595

70%

4617

Purple

72 828

11 671

10 426

90%

9383 16 314

Notes 1. The projected salary is determined by the following calculation: Current salary x (1 + inflation rate)n, where n = number of years until the long service leave entitlement vests. In this question it is assumed that the inflation rate will continue to be 2%. For the first listed employee, the calculation would be $40 000 x (1.02)10 = $48 760. 2. Accumulated LSL benefit is determined by the following calculation: Accumulated LSL entitlement = (years of employment)/(number of periods until entitlement can be taken in leave) x weeks of LSL entitlement/52 x projected salary. For the first listed employee, the calculation would be 2/12 x 10/52 x $48 760 = $1563. 3. The present value of the long-service leave calculation is determined by the following calculation: Accumulated long service leave benefit (1 + appropriate government bond rate)n where n is the number of years until long-service leave entitlements can be taken. For the first listed employee the calculation would be $1563/(1.08) 10 = $724. 4. Probability that long-service leave will be taken: The probability that long-service leave will be taken would be determined by reference to prior experience within the organisation and industry. For example, it has been assessed that an employee with 2 years service has a probability of 15 per cent of staying in the firm until long-service leave must be taken. Once an employee reaches the pre-conditional period (in this question, 12 years) the probability is 100% that a payment will be made. For the first listed employee, the calculation would be $724 x 0.15 = $109. Following on from the above calculations, after considering all five employees, the long service leave provision at the end of the period should total $16 314. 4

(b)

9.

(a)

If the balance in the provision account at the beginning of the year had been $12 500, then the expense for the year would be $3814. This would represent the increase in the obligation that has occurred throughout the year. The accounting entry to recognise the long-service leave expense would be: Dr

Long-service leave expense

Cr

Provision for long-service leave

3814 3814

2017 recruits $600 000 x (1 + 0.01)7 x 3/10 x 13/52 = $48 246 2019 recruits $400 000 x (1 + 0.01)9 x 1/10 x 13/52 = $10 937 = $59 183 Note: the above amount reflects the total amount of LSL accumulated for each employee and does not take account of the probability that the employees will stay until the conditional period is over.

(b)

$48 246/(1+0.06)7 x 40% = $32 086 x 40% = $12 403 $10 937/(1+0.08)9 x 20% = $5471 x 20% =

$1 094 = $13 497

(c) Dr

Long-service leave expense

Cr

Provision for long-service leave

5

$7497 $7497...