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