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Financial Accounting and Reporting | My Assignment Tutor

1-1Welcome toFinancialAccounting andReportingWednesday 8.30am – 11.30amUBSS Sydney CBD CampusLevel 10 & 11 233 Castlereagh StreetSydney NSW20001-2Financial Accountingand ReportingAccounting for EmployeeBenefits (Chapter 12)(AASB 119)Assistant Professor Dr Nilima PaulLecture 5♦ Copyright ©2017 Pearson Australia (a division of Pearson Australia Group Pty Ltd) –9781442561175/Henderson/Issues In Financial Accounting/16e1-3Introduction♦The development of salary packages is largely a result of thedifferences between … Continue reading “Financial Accounting and Reporting | My Assignment Tutor”

1-1Welcome toFinancialAccounting andReportingWednesday 8.30am – 11.30amUBSS Sydney CBD CampusLevel 10 & 11 233 Castlereagh StreetSydney NSW20001-2Financial Accountingand ReportingAccounting for EmployeeBenefits (Chapter 12)(AASB 119)Assistant Professor Dr Nilima PaulLecture 5♦ Copyright ©2017 Pearson Australia (a division of Pearson Australia Group Pty Ltd) –9781442561175/Henderson/Issues In Financial Accounting/16e1-3Introduction♦The development of salary packages is largely a result of thedifferences between corporate and personal income tax rates:● The attractiveness of such salary packages has been reducedby a fringe benefits tax♦ Salary packages may include:● Motor vehicle● Low-interest loan● Payment of school and club fees● Expense account● Entertainment allowance● Provision of long-service leave and sick leave1-4Introduction♦Some components of salary packages provide conditional or deferredbenefits:● Sick leave is a conditional benefit● Superannuation and other post-employment benefits is deferred untilthe employee retires or resigns● Long-service leave is both conditional and deferred♦Issues in accounting for deferred and conditional benefits:● Relate to measuring and reporting the annual expense and theassociated liability1-5Accounting standards♦AASB 119 prescribes general recognition, measurement and disclosurerequirements for employee benefits:● Employee benefits are:– All forms of consideration given by an entity in exchange forservices rendered by employees● An employer is required to recognise a liability when:– An employee provides a service in exchange for employeebenefits to be paid in the future● An expense is also to be recognised when:– The entity consumes the economic benefits from the serviceprovided by an employee in exchange for employee benefits1-6Accounting standards● Employee benefits may be recognised as assets rather than liabilities; e.g.in a manufacturing enterprise as part of the cost of goods manufactured● AASB 1109 prescribes two specific bases for the measurement of liabilities:► Nominal basis:– measures the liabilities at the undiscounted amount that will ultimately be paid tosettle the liability– must be used for short-term employee benefits► Present value basis:– is required for long-term employee benefits– discounts amounts expected to be paid in the future in settlement of the liability– reflects only obligations actually incurred by the end of the reporting period1-7Accounting standards● AASB 119 also covers accounting by employers for arrangements to providepost-employment benefits● It classifies post-employment benefits into two categories1. Defined contribution plans:– Superannuation plans that specify the contributions that must be made to the planby the employees and/or the employer2. Defined benefit plans:– Superannuation plans that specify the benefits that will be received by members1-8Wages and salaries♦ Wages and salaries can be divided into two parts:1. Monetary component:► Cash paid to the employee, usually includes income tax withheld and paid to theATO2. Non-monetary component:► Other benefits received by the employee; e.g. payment of health insurancepremiums, housing etc.♦ The only liability arising is for accrued wages payable♦Wages and salaries are short-term employee benefits under AASB 119:● They will generally be recognised as an expense and a liability● Liabilities are to be measured on a nominal basis♦Non-monetary benefits are also short-term benefits under AASB 119:● The amount is measured as the net marginal cost (if any) to the employer of thebenefits provided1-9Annual leave♦Annual leave is:• The number of weeks of paid leave to which full-timeemployees are entitled in a year♦Paragraph 13 requires:• The expected cost of the annual leave to be recognised as:● liabilities and expenses when the employees provide the services thatincrease their entitlement• Short-term compensated absences such as annual leave to be measured atnominal amounts1-10Sick leave♦ Non-accumulating sick leave:● If not taken in a particular year, it lapses and a new entitlement begins for the nextyear● AASB 119 requires the recognition of an expense and liability only when theabsence occurs:► because employee service does not increase the amount of the benefit♦ Accumulating sick leave:● Allows an employee to carry forward unused sick leave for use in subsequent periods● Vesting sick leave entitlements:► An obligation that will ultimately be paid by the employer► The amount of the entitlement is equal to 100 per cent of the sick leaveaccumulated● Non-vesting sick leave entitlements► Payable only where there is a valid claim by employees► An entity must assess what is expected to be paid as a result of theunused entitlement that has accumulated at the end of the reportingperiod1-11Long-service leave♦ Preconditional period:● These are the early years of service that provide no long-serviceleave entitlement♦ Conditional period:● The employee has a long-service leave entitlement that dates fromthe commencement of employment● The employee is usually not entitled to take long-service leave, but itis eligible for payment if employment ceases♦ Unconditional period:● An employee becomes eligible to take long-service leave● An employee who resigns during this period is entitled to payment foraccumulated long-service leave● Long-service leave is paid at the wage rate when the leave is taken orpayment is made1-12Accounting for long-service leave♦AASB 119 requires the recognition of a liability for long-service leave equal to thenet total of:● The present value of the defined benefit obligation at the reporting date,minus● The fair value at the reporting date of plan assets (if any) out of which theobligations are to be settled directly♦To estimate the present value of the long-service leave defined benefit obligation,it is necessary to:● Apply an actuarial method:► Projected Unit Credit Method (the method prescribed by AASB 119): anentity attributes long-service leave benefits to the periods in whichemployees provide services in return for future long-service leave benefits● Make actuarial assumptions:► Demographic assumptions; e.g. mortality rates, employee turnover etc.► Financial assumptions; e.g. discount rate, future salary and benefit levels1-13Profit-sharing and bonus plans♦Wages and salaries may have a component determined on the basis of theentity’s profit:● Benefits may be equity-based rather than cash-based♦AASB 119 requires an entity to recognise the expected cost of profitsharing and bonus plans when:● The entity has a present legal or constructive obligation to make suchpayments as a result of past events; and● A reliable estimate of the obligation can be made1-14Termination benefits♦ Termination benefits are:● Payments or other benefits made to employees when an entityterminates their employment● Typically lump-sum payments♦Liabilities and expenses for termination payments are to be recognised byan entity at the earlier of the date:● The entity can no longer withdraw from the offer of those benefits● The entity recognises costs for a restructuring within the scope ofAASB 137 that involves payment of termination payments1-15Post-employment benefits♦ Post-employment benefits are (AASB 113):● Employee benefits (other than termination benefits and short-termbenefits) that are payable after the completion of employment♦Where benefits are granted to an individual employee as a special privilegeon retirement:● The benefits should be treated in the same way as wages andsalaries● The only liability would be for accrued benefits payable at the end ofthe reporting period♦Where rights to post-employment benefits vest after a specified qualifyingperiod of service:● A liability must be recognised progressively over the qualifying period1-16Post-employment benefits♦Two types of post-employment costs are borne by an employer:● Nominal cost:► The expense that should be paid by the employer for postemployment entitlements earned by employees during thereporting period● Past-service cost:► It arises when there is a change in the defined benefit obligation foremployee service provided in prior periods; i.e. when a plan isintroduced by an established employer or when the plan isamended (e.g. the benefits are increased)1-17Post-employment benefits♦Two approaches to accounting for post-employment benefit costs byemployers are:1. The form method:► Based on an assumption that the trust managing thesuperannuation plan is a separate independent legal entity► The employer’s obligations are satisfied when it providesresources to the trustees2. The net-worth method:► Based on an assumption that the legal form of the relationshipbetween an employer and a plan does not represent the substanceof the relationship► The employer does not satisfy its obligations by making paymentsto the plan because the plan is part of the same economic entity1-18Accounting for post-employment benefits♦ Post-employment benefits are categorised as either:♦ Defined contribution plan:● An employer’s legal or constructive obligation is limited to the amount that itagrees to contribute to the plan● The investment risk and actuarial risk are borne by the employee♦ Defined benefit plan:● An employer effectively underwrites the actuarial and investment risks● Payment of benefits depends on the plan’s financial position, investmentperformance and the ability of an employer to fund any shortfall in planassets♦ Accounting for defined contribution plans:• When an employee provides services during a period, AASB 119 requires the employingentity to:• Recognise any contributions payable as a liability and an expense afterdeducting any contributions already paid• Recognise any excess contributions paid as an asset1-19Accounting for post-employment benefits♦Management of defined benefit plans is frequently entrusted to specialisedfinancial institutions. These plans are referred to as multi-employer plans; i.e.:• Post-employment plans that pool assets contributed by various entitiesthat are not under common control, and use those assets to providebenefits to employees of more than one entity♦When accounting for multi-employer defined benefit plans, the employer must:• Account for its proportionate share of the defined benefit obligation, planassets and associated costs as for any other defined benefit plan♦When insufficient information is available to use defined benefit accounting, theemployer must:• Report its obligations to the plan as if it were a defined contribution plan• Disclose the fact that the plan is a defined benefit plan and the reason thenecessary information is not available1-20Accounting for post-employment benefits♦ Defined benefit obligation:• The expected future payments required to settle the obligation arising fromthe employee service in current and prior periods♦ Recognition of a net defined benefit liability (asset):• If net total of defined benefit obligation minus the fair value of plan assets is positive:• a liability for post-employment benefits is recognised• If the net total is negative:• an asset is reportedAASB 119 requires recognition of defined benefit costs comprisingthe following components:● Service cost (current and past) in profit or loss● Net interest on the net defined benefit liability in profit or loss, and● Remeasurements of the net defined benefit liability (asset) in other comprehensiveincome1-21Accounting for post-employment benefits♦ Disclosure:♦Presentation and disclosure requirements relating to post-employment definedbenefit plans relate to information on:► The characteristics of an entity’s defined benefit plan(s) and theirassociated risks► Actuarial gains and losses► The closing balance of the net defined benefit liability (asset)showing separate reconciliations► Individual components of the total benefits expense► The classes of the plan assets► Principal actuarial assumptions► Details of funding arrangements for employer contributions

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