1. Topic 8: Accounting for Employee Benefits Financial Accounting BFA201 BFA201_13

2. Readings & references Read Deegan Chapter 12 AASB 119 Employee Benefits BFA201_13 2

3. Learning Objectives Understand the various forms of benefits employees can receive from employers Be able to account for the various forms of employee benefits Understand whether particular employee entitlement obligations should be recorded at their nominal value or at their discounted present value Be able to provide the necessary disclosures in conformity with AASB 119 Employee Entitlements 3

4. Topics 1.Overview of employee benefits 2.Salaries and wages 3.Annual leave 4.Personal leave 5.Long service leave BFA201_13 4

5. Overview of Employee Benefits AASB 119 - Purpose and Scope ‘Employee’ = a natural person appointed under a contract of service ‘Employee benefits’: –All forms of consideration given by an entity in exchange for service rendered by employees (para 7) BFA201_13 5

6. Overview of Employee Benefits Wages & salaries Annual leave Personal leave Long service leave Superannuation Share entitlements Bonuses Other entitlements BFA201_13 6

7. Regulation of employee benefits National Employment Standards (NES) sets minimum conditions. Individual awards and agreements add extra. Annual leave accumulates, 4 wks per yr, accumulates, vesting. Personal leave (includes carer’s leave, sick leave) 10 days per yr, accumulates. Long service leave not specified – rely on awards & agreements & State laws. BFA201_13 7

8. AASB 119: Employee Benefits. BFA201_13 Short term benefits Post- employment benefits Termination benefits Other long-term employee benefits Categories 8

9. Short term benefits: para 10 BFA201_13 9

10. Salaries and Wages. BFA201_13 Payable after 12 months or more Payable within 12 months Liability arises Discount to PV No need to discount Only when services rendered Wages expense may include: * PAYG tax; medical benefits 10

11. Salaries & wages Dr Salaries & wages expense CrPAYG tax payable CrMedical benefits payable CrSalaries & wages payable 1. Entry at Reporting date 2. Entry when paid after Reporting date Dr Salaries & wages expense (incurred since reporting) Dr Salaries & wages payable (owing at reporting date) CrPAYG tax payable CrMedical benefits payable (since reporting date) CrCash (payment to employees) 3. Remittance to ATO & medical fund Dr PAYG tax payable Dr Medical benefits payable CrCash 11

12. See Handout Lecture Example 1 BFA201_13 12

13. Example 1 Vege Ltd employs Iva Bean on a one-year contract at an annual salary package of $52,000. Income tax of $350 per week is deducted from Bean’s salary. Vege Ltd also deducts $65 per week for health insurance premiums payable to Medibank Private. What would the journal entry be each week to record and pay Bean’s salary? What would the journal entry be when the amounts collected on behalf of others are remitted? What would be the journal entry if on reporting date four days wages are owing? BFA201_13 13

14. Compensated absences para 11 Annual Leave Vacation Personal (sick) Leave Short-term disability Service Jury duty Military service Parental Leave Maternity Paternity BFA201_13 14

15. Compensated absences 2 categories OR Use it or lose it!  Recognise only when the absence occurs Carry forward unused leave BFA201_13 Non- accumulating entitlement year 1 year 2 Accumulating entitlement – yr 3 15

16. 2 Types BFA201_13 Vesting Non-vesting Accumulating compensated absences 16

17. Annual leave entitlement 4 weeksLeave loading (17.5%) If payable within 12 months – no PV calc Expense & liability accrues DAILY BFA201_13 17

18. Accounting for annual leave To recognise annual leave obligation throughout the year: DrAnnual leave expense CrProvision for annual leave When annual leave taken: DrProvision for annual leave CrPAYG tax payable CrCash at bank BFA201_13 18

19. See Handout Lecture Example 2 BFA201_13 19

20. Example 2 Iva Bean’s annual salary of $52,000 comes with an entitlement to 4 weeks’ annual leave with a 17.5% annual leave loading. What is the cost of the leave to Vege Ltd? What entry is required each non-leave week? What is the entry required each week when Bean is on leave? BFA201_13 20

21. ‘On-costs’ ‘ BFA201_13 Workers’ comp Payroll tax Superannuation contributions 21

22. BFA201_1322 Total 18.72% Example of Tasmanian on-costs http://www.flinders.edu.au/hr-files/documents/TAS%20Oncosts%201-Jul-2013.pdf

23. Accounting for personal leave Accumulating: obligation arises as service is rendered Vesting: accrues daily (as per annual leave) Non-vesting: Only paid upon a valid claim for personal leave by the employee Journal entry each week: DrPersonal leave expense Cr Provision for personal leave Provision should be based on past experience 23

24. Accounting for personal leave If employees are sick: DrProvision for personal leave (wages during personal leave) DrSalaries and wages (wages for rest of period) CrPAYG tax payable CrCash at bank BFA201_13 24

25. Question: How does your employer account for sick leave? See Handout Lecture Example 3 BFA201_13 25

26. Example 3 Vege Ltd has a weekly payroll of $70,000. A normal working week is Monday to Friday. Its employees are entitled to 10 working days’ non-vesting personal leave each year. Experience suggests that 85% of its employees will take their full personal leave entitlement each year. Calculate the annual personal leave expense and the weekly amount of the expense. Show the journal entry required each week to account for the personal leave. Show the journal entry if Iva Bean, who has a weekly salary of $1,000, takes personal leave of two days. BFA201_13 26

27. Long service leave Extended leave after working for an employer for a specific number of years Employer must recognise an expense and an associated liability as LSL accrues Measured at its present value BFA201_13 27

28. BFA201_1328 Pre-conditional Conditional Unconditional LSL entitlement categories Years of service No entitlement Entitlement under certain circumstances Entitlement

29. Long service leave Many judgements required For example: –probability employee will stay until such time as they have a LSL entitlement –salary being earned at the time of receiving the LSL entitlement (inflation, promotion prospects etc.) BFA201_13 29

30. Accounting standards for LSL AASB119 (para 128) requires the recognition of a liability for LSL to equal the net 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 the obligations are to be settled directly BFA201_13 30

31. BFA201_13 Calculating LSL liability: need to calculate… Projected salary current salary × (1 + inflation rate) n Present value of LSL obligation Probability LSL benefit will be paid LSL liability = TOTAL to be shown on financial position statement

32. Calculating LSL liability –Projected salary current salary × (1 + inflation rate) n –Accumulated LSL benefit Projected salary multiplied by Years worked / total years to be served before leave can be taken multiplied by weeks of LSL entitlement / 52 –Present value of LSL obligation accumulated LSL benefit/(1 + appropriate bond rate) n –Probability that LSL will be paid (experience based) –LSL liability = PV of LSL obligation x probability BFA201_13 32

33. BFA201_1333 PV calculated by discounting the liability using extrapolated yields on Fixed Rate Commonwealth bonds with maturities matching the term to settlement (rates available on the Reserve Bank website http://www.rba.gov.au/fin- services/index.html under the Small Investor Bond Facility – Quarterly Bond Prices, CGS Valuation – Bond Prices, for valuation purposes). http://www.rba.gov.au/fin- services/index.html Appropriate bond rate

34. BFA201_1334

35. Accounting entries for LSL Entry to recognise the LSL expense: DrLong service leave expense CrProvision for long service leave NOTE:  LSL liability = Balance required in provision account;  Expense = Difference between existing balance & required balance –provision broken up into current and non-current portion Entry when LSL is subsequently taken: DrProvision for long service leave CrCash at bank BFA201_13 35

36. See Handout Lecture Example 4 BFA201_13 36

37. 37 Example 4 Inflation rate is 2% and wages are expected to keep pace with inflation. The interest rate on bonds on with 2 & 6 yrs to maturity is 6%. 13 wks LSL for 15 yrs service, 10 yrs pro-rata.

38. BFA201_1338 Calculating projected salaries

39. BFA201_13 Calculating accumulated LSL benefit

40. BFA201_13 40 Calculating LSL liability 80 288Total LSL expense80 288 Provisions for LSL 80 288

41. Next Week Week 9 - Accounting for Income Taxes Copyright notice © Copyright University of Tasmania, School of Accounting & Corporate Governance All rights reserved. Commonwealth of Australia Copyright Regulations 1969 - WARNING This material has been reproduced and communicated to you by or on behalf of the University of Tasmania pursuant to Part VB of the Copyright Act 1968 (the Act). The material in this communication may be subject to copyright under the Act. Any further reproduction or communication of this material by you may be the subject of copyright protection under the Act. Do not remove this notice. BFA201_13 41