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. Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 13-1 Chapter 13 Accounting for employee benefits.

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Presentation on theme: ". Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 13-1 Chapter 13 Accounting for employee benefits."— Presentation transcript:

1 . Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 13-1 Chapter 13 Accounting for employee benefits

2 . Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 13-2 Objectives of this lecture Understand the various forms of benefits that employees can receive from their 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 . Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 13-3 Overview of employee benefits Employment agreement with employer results in employees receiving various benefits (entitlements) in return for services Accounting for employee benefits governed by AASB 119 Employee not actually defined in standard, but refers to: –a natural person appointed or engaged under a contract of service, whether on a full-time, part-time, permanent, casual or temporary basis Employee benefits according to AASB 119 (par. 7) –All forms of consideration given by an entity in exchange for service rendered by employees

4 . Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 13-4 Overview of employee benefits (cont.) Examples of employee benefits Employee benefits can relate to such items as: –wages and salaries –annual leave –sick leave –long-service leave –superannuation –share entitlements –bonuses –other entitlements

5 . Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 13-5 Overview of employee benefits (cont.) AASB 119 divides employee benefits into categories –Short-term employee benefits –Post-employment benefits –Termination benefits –Other long-term employee benefits (e.g. superannuation) Short-term employee benefits –Wages, salaries, social security contributions –Annual leave and sick leave to the extent that they are paid within 12 months of the period in which the employee renders the services –Benefits measured on an undiscounted basispresent values not used –Refer to AASB 119 (par. 10)

6 . Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 13-6 Overview of employee benefits (cont.) Other entitlements Salaries and wages, social security contributions, and other employee benefits (e.g. termination payments, post-employment benefits and other long-term employment benefits) that do not fall due wholly within 12 months of the end of the period in which the employee renders service –Related obligations to be discounted to present value –Discount rate used to be determined by reference to market yields at the reporting date on high quality corporate bonds

7 . Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 13-7 Salaries and wages For short-term employee benefits such as salaries and wages payable within 12 months of the end of the reporting period no requirement to discount any outstanding obligations to present value For salaries and wages payable more than 12 months after the end of the reporting period any outstanding obligation should be discounted to its present value Liabilities arise only where the services have already been rendered by the employee but the associated entitlements have not been paid as at the reporting date

8 . Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 13-8 Salaries and wages (cont.) Salaries and wages may be treated as an expense in the same period in which the obligation to make the payment is recorded May be carried forward as an asset in certain circumstances (e.g. when labour cost relates to inventories) Initially recorded as work in progress, transferred to finished goods and then expensed as part of cost of goods sold Cost of employee benefits can also be included in cost of property, plant and equipment (refer to AASB 116 Property, Plant and Equipment, par. 17)

9 . Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 13-9 Salaries and wages (cont.) Salaries and wages expenses may include: –wages and salaries –PAYG tax –medical benefits Salaries and wagesAccounting entry at reporting date Dr Wages and salaries expense CrPAYG tax payable CrMedical benefits payable CrWages and salaries payable

10 . Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e Salaries and wages (cont.) Salaries and wagesEntry paid after reporting date DrSalaries and wages expense (incurred since reporting date) DrSalaries and wages payable (owing at reporting date) CrPAYG tax payable CrMedical benefits payable (both incurred since reporting date) CrCash (payment to employees)

11 . Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e Salaries and wages (cont.) Salaries and wagesRemittance to tax office and medical fund DrPAYG tax payable DrMedical benefits payable CrCash Refer to Worked Example 13.1 on page 417 Accounting for salaries and wages

12 . Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e Worked Example 13.1Accounting for salaries and wages Thruster Ltd employs its staff on a five-day work week, with employees being paid on Fridays. The weekly salaries expense is $ and employees are paid in arrears. That is, when the employees are paid, the salaries paid are for work performed in the preceding week. Thruster Ltd retains $3000 per week to pay the Australian Taxation Office for PAYG tax on behalf of the employees. This is paid on the following Monday of each week. It also retains $500 per week to pay staff premiums to the Oceanic Medical Benefits Fund. If we assume that the reporting date falls on a Thursday, what would the accounting entry at reporting date be to recognise four days salary and wages expense?

13 . Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e Worked Example 13.1Solution DrWages and salaries expense8 000 CrPAYG tax payable2 400 CrOceanic MBF payable 400 CrWages and salaries payable5 200 When the wages are ultimately paid to employees on Friday, the entry would be: DrWages and salaries expense2 000 Dr Wages and salaries payables5 200 CrPAYG tax payable 600 CrOceanic MBF payable 100 CrCash6 500

14 . Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e Worked Example 13.1Solution (cont.) When the amounts are paid to the Australian Taxation Office (ATO) and the medical fund on Monday, the entry would be: DrPAYG tax payable3 000 Dr Oceanic MBF payable 500 Cr Cash3 500

15 . Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e Annual leave Typical in Australia for employees to be granted four weeks annual leave entitlement each year May also receive annual leave loading (17.5%) To the extent that the obligation is payable within 12 months of the reporting date, there is no need to discount the obligation to its present value

16 . Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e Annual leave (cont.) 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 Refer to Worked Example 13.2 on pp. 418Accounting for annual leave

17 . Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e On-costs On-costs also to be considered when calculating employers obligations for employee benefits On-costs include: –Payroll tax –Workers compensation insurance –Superannuation contributions

18 . Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e Sick leave Necessary to divide sick leave into two types of entitlements: 1.Vesting sick-leave entitlements 2.Non-vesting sick-leave entitlements

19 . Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e Vesting sick leave Accounting for vesting sick-leave entitlements –Vestingemployee has a right to receive the calculated amount in cash, even if the employee leaves the employer –Accounted for in the same manner as annual leave

20 . Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e Non-vesting sick leave Accounting for non-vesting sick-leave entitlements –Only paid upon a valid claim for sick leave by the employee –Only that part which has accumulated through past service and which is expected to be taken should be recognised as a liability and then only when it is capable of being reliably measured

21 . Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e Non-vesting sick leave (cont.) Accounting for non-vesting sick-leave entitlements (cont.) –Journal entry each week (based on past experience) DrSick-leave expense Cr Provision for sick leave \

22 . Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e Non-vesting sick leave (cont.) Accounting for non-vesting sick-leave entitlements (cont.) –If employees are sick, their entitlements are charged to sick leave instead of salaries and wages: DrProvision for sick leave (wages during sick leave) DrSalaries and wages (wages for rest of period) CrPAYG tax payable CrCash at bank

23 . Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e Long-service leave Employees within Australia typically receive an entitlement to take an extended amount of leave after working for an employer for a specific number of years Although no long-service leave may actually be paid in a given year, the employer must recognise an expense and an associated liability Long-service liabilities must be accrued and the liability measured at its present value to the extent that the obligation is payable beyond 12 months after reporting date Guidance to be found in AASB 119 Australian Guidance (pars G4 to G8)

24 . Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e Long-service leave (cont.) Three common long-service leave entitlement categories (in terms of par. G4) 1.Preconditional period 2.Conditional period 3.Unconditional period

25 . Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e Long-service leave (cont.) Many judgments required in determining long-service leave liability Consideration given to such factors as: - probability employee will stay until such time as they have an LSL entitlement - salary being earned at the time of receiving the LSL entitlement (inflation, promotion prospects, etc.)

26 . Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e Long-service leave (cont.) Recall - AASB 119 requires estimated future cash flows to be discounted to present value when measuring benefits to be paid beyond 12 months from the reporting date Discount rate for entitlements –To be based on rates generated by high quality bonds –Bond rates selected must generally match the expected timing of the long-service leave entitlements

27 . Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e Long-service leave (cont.) Calculating long-service leave liability Need to calculate: –projected salary current salary × (1 + inflation rate) n –accumulated LSL benefit years of employment / total no. of periods required to be served before leave can be taken × weeks of LSL entitlement available after conditional period has been served / 52 × projected salary

28 . Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e Long-service leave (cont.) Calculating long-service leave liability (cont.) –Present value of LSL obligation accumulated LSL benefit/(1 + appropriate bond rate) n –Probability that LSL will be paid determined by reference to prior experience within the organisation and industry

29 . Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e Long-service leave (cont.) Accounting entries for long-service leave Entry to recognise the LSL expense DrLong-service leave expense CrProvision for long-service leave –Provision broken up into current and non-current portion Entry when LSL is subsequently taken DrProvision for long-service leave CrCash at bank Refer to Worked Example 13.4 on pp. 421Accounting for long-service leave

30 . Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e Long-service leave (LSL)Lecture illustration Torquay Ltd has five employees Torquay Ltds employees are entitled to 13 weeks LSL after 15 years of continuous service Employees who cease employment with Torquay Ltd after 10 years service are entitled to a pro-rata payment of accumulated LSL

31 . Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e Long-service leave (LSL)Lecture illustration (cont.) Employee nameYears of service at 30 June 2011 Current salary at 30 June 2011 (salaries are expected to increase by 10% p.a.) Megan1$ Mike2$ Mack8$ Melissa8$ Mary9$75 000

32 . Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e An examination of past employment records reveals the following: Years of completed Service Probability of employee completing the 10 years of service and qualifying for pro-rata LSL benefits 15% 210% 885% 995%

33 . Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e Long-service leave (LSL)Lecture illustration (cont.) Interest rates on high quality corporate bonds at 30 June 2011 are as follows: Years to maturity of corporate bond Interest rate on corporate bonds at 30 June % 27.0% 89.0% 99.5%

34 . Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e Long-service leave (LSL)Lecture illustration (cont.) The balance in the provision for LSL brought forward from 30 June 2010 is $ Calculate the LSL liability of Isis Ltd at 30 June 2011, and prepare the journal entry to adjust the balance of the provision for LSL on 30 June 2011

35 . Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e LSLLecture illustration Projected future salaries EmployeeProjected future salary when LSL vests, (i.e. when employee qualifies for pro-rata LSL benefits) Megan$ x (1.05) 9 =$ Mike$ x (1.05) 8 =$ Mack$ x (1.05) 2 =$ Melissa$ x (1.05) 2 =$ Mary$ x (1.05) 1 =$78 750

36 . Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e LSLLecture illustration Accumulated LSL benefits EmployeeAccumulated LSL benefits at 30 June 2011 (resulting from past service up to 30 June 2011) Megan$ x 13/52 x 1/15 =$905 Mike$ x 13/52 x 2/15 =$2 216 Mack$ x 13/52 x 8/15 =$8 085 Melissa$ x 13/52 x 8/15 =$ Mary$ x 13/52 x 9/15 =$11 813

37 . Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e LSLLecture illustration PV of accumulated LSL benefits EmployeePV of accumulated LSL benefits at 30 June 2011 (discounted using corporate bond rates 30 June 2011) Megan$905 x (1.095) -9 =$400 Mike$2216 x (1.09) -8 =$1 112 Mack$8085 x (1.07) -2 =$7 062 Melissa$ x (1.07) -2 =$ Mary$ x (1.065) -1 =$11 092

38 . Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e LSLLecture illustration LSL liability EmployeeLSL liability at 30 June 2011 (reflecting probability of employee qualifying for LSL benefits) Megan$400 x 0.05 =$20 Mike$1112 x 0.1 =$111 Mack$7062 x 0.85 =$6 002 Melissa$ x 0.85 =$ Mary$ x 0.95 =$ Total LSL liability at 30 June 2011$27 038

39 . Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e LSLLecture illustration 30 June 2011Journal entry Dr LSL expense$7 338 CrProvision for LSL$7 338 [$ (required balance on 30 June 2011) - $ (existing balance)]

40 . Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e Superannuation AASB 119 addresses how a reporting entity is to account for the superannuation entitlements of its employees, as well as other post-employment benefits such as post-employment life insurance and post-employment health care AAS 25 Financial Reporting by Superannuation Funds outlines how a superannuation plan itself should account for the plans assets, liabilities, revenues, and expenses (covered in Chapter 23) Focus in this chapter on contributions of employers and not how superannuation funds account for their resources Where an entity provides post-employment benefits (e.g. superannuation) considered to be post-employment benefit plan

41 . Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e Superannuation (cont.) Post-employment benefit plans classified as either: defined contribution plans defined benefit plans Defined contribution plan A superannuation benefit scheme under which amounts to be paid as retirement benefits are determined by contributions made to the fund together with investment earnings on those contributions Defined benefit plan A superannuation benefit scheme under which amounts to be paid as retirement benefits are paid from an aggregated fund by reference to a members annual salary or are paid as a specified amount regardless of contributions made by the employee

42 . Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e Superannuation (cont.) Overview of defined contribution plans Employers contribution to a plan is set at a specified amount Employees final payout depends on factors such as earnings generated by contributions Employer therefore does not specify final payment to employee Refer to AASB 119 (par. 23)

43 . Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e Superannuation (cont.) Overview of defined contribution plans (cont.) Accounting relatively straightforward (refer to AASB 119, par. 44) –Contribution recognised as an expense (unless part of cost of inventory or property, plant and equipment) –Associated liability limited to amount of obligation unpaid by employer at end of year –Obligations are measured on an undiscounted basis, except where they do not fall due wholly within 12 months after the end of the period in which the employees render the related service (under AASB 119, par. 43)

44 . Superannuation (cont.) Overview of defined contribution plans (cont.) –Where contributions to a defined contribution plan do not fall wholly within 12 months after the end of the period in which the employees render the related service, they are to be discounted using the discount rate specified in paragraph 78 (under AASB 119, par. 45) –Entity to disclose the amount recognised as an expense for defined contribution plans (under AASB 119, par. 46) Refer to Worked Example 13.5 on page 424 Accounting for contributions to a defined contribution plan Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 13-44

45 . Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e Superannuation (cont.) Accounting for employers obligation to a defined contribution superannuation plan Dr Employee benefits costsuperannuation CrEmployee benefits payable When amount paid Dr Employee benefits payable CrCash at bank

46 . Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e Superannuation (cont.) Overview of defined benefit plans More complex accounting issues involved than with defined contribution plans Defined benefit superannuation plan established by employer to, for example, provide employees with a pension of 40% of their final salary after reaching age of 60 Employers need to determine amount to contribute to fund so as to ensure obligation is met taking into account: –projected final salary, earnings rates of the fund, costs associated with managing fund, probability employee will stay until retirement

47 . Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e Superannuation (cont.) Overview of defined benefit plans (cont.) Employer effectively bears the risks associated with the earnings of the fund, as compared with a defined contribution plan where employer pays a set amount and employee receives whatever the plan has earned Large proportion of AASB 119 dedicated to defined benefit plans Need to know whether the fund (possibly externally managed) accepts the risks of unexpected changes in earnings or whether employer retains associated risks

48 . Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e Superannuation (cont.) Overview of defined benefit plans (cont.) Refer to AASB 119 (par. 49) Defined benefit plans may be unfunded, or they may be wholly or partly funded by contributions by an entity, and sometimes its employees, to an entity or fund that is legally separate from the 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 entitys ability (and willingness) to make good any shortfall in the funds assets Therefore, the entity is, in substance, underwriting the actuarial and investment risks associated with the plan Consequently, the expense recognised for a defined benefit plan is not necessarily the amount of contributions for the period

49 . Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e Superannuation (cont.) Steps in accounting for defined benefit plans (a)Estimate of benefits that an employee has earned Assumes knowledge of formula used to determine benefits to be provided to the employer Obligations of the entity require consideration of whether: - benefits have vested in the employee (ultimate payment of the benefit earned in the current period is not conditional on satisfying any further service requirements)probability of payment then 100% -benefits have not vesteduse of probabilities of satisfying service required and will reduce the expense recognised by entity in current period If obligations fall due beyond 12 months after reporting date they are required to be discounted to their present value

50 . Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e Superannuation (cont.) Steps in accounting for defined benefit plans (cont.) (b)Determine the present value of the defined benefit obligation If obligations fall due beyond 12 months after reporting date they are required to be discounted to their present value Discount rate to be used (funded and non-funded) to be determined by reference to market yields at the reporting date on high quality corporate bonds (AASB 119, par. 78) Par. 78 also provides that in countries where there is no deep market in such bonds, the market yields (at reporting date) on government bonds 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 obligation

51 . Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e Superannuation (cont.) Steps in accounting for defined benefit plans (cont.) (c)Determine the fair value of the plans assets Need to assess whether the employer has any outstanding obligation for superannuation at year end by comparing the closing obligation for superannuation entitlements (refer to (b)) with the fair value of the plans assets If fair value of plans assets matches expected payout to employees then no further liabilities exist If fair value exceeds the obligation then an asset would exist

52 . Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e Superannuation (cont.) Steps in accounting for defined benefit plans (cont.) (c) Determine the fair value of the plans assets (cont.) Fair value of plans assets (AASB 119, par. 102) Fair value of any plan assets is deducted in determining the amount recognised in the statement of financial position When no market price is available, the fair value of the plan is estimated, i.e. discounting expected future cash flows using a discount rate that reflects both the risk associated with the plan assets and maturity or expected disposal date of those assets If the assets have not attained maturity, the expected period until the settlement of the related obligation

53 . Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e Superannuation (cont.) Steps in accounting for defined benefit plans (cont.) (d) Determine the amount of the actuarial gains and losses (cont.) When determining accounting entries to be made in relation to the defined benefit liability of an entity, actuarial gains and losses must be recognised as part of the income or expense of the period AASB 110 (par. 94) Actuarial gains and losses may result from increases or decreases in either the present value of a defined benefit obligation or the fair value of any related plan assets

54 . Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e Superannuation (cont.) Steps in accounting for defined benefit plans (cont.) (d) Determine the amount of the actuarial gains and losses (cont.) Causes of actuarial gains and losses include: unexpected high or low rates of employee turnover, early retirement or mortality or of increases in salaries, benefits (if the formal or constructive terms of a plan provide for inflationary benefit increases) or medical costs the effect of changes in estimates of future employee turnover, early retirement or mortality or of increases in salaries, benefits (if formal or constructive terms of a plan provide for inflationary benefit increases) or medical costs the effect of changes in the discount rate, and differences between the actual return on plan assets and the expected return on plan assets (refer to pars 105–107)

55 . Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e Superannuation (cont.) Steps in accounting for defined benefit plans (cont.) (d) Determine the amount of the actuarial gains and losses (cont.) AASB 119 (par. 105) Expected return on the plans assets is one component of the expense recognised in the statement of comprehensive income The difference between the expected rate of return on plan assets and the actual rate of return on plan assets is an actuarial gain or loss Differences between the expected and actual returns on high quality corporate bonds will lead to actuarial gains and losses

56 . Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e Superannuation (cont.) Steps in accounting for defined benefit plans (cont.) Determination of the closing liability for each period Need to assess the difference between the present value of the obligation to the employees and the fair value of the plans assets that are available to meet the obligation to the employees

57 . Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e Superannuation (cont.) Steps in accounting for defined benefit plans (cont.) Determining the total expenses to be recognised in relation to the defined benefit plan often involves consideration of: - current service costs - interest costs - expected return on assets - net actuarial gain or loss Disclosure requirements - Outlined in AASB 119 (par. 120)

58 . Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e Accrued employee benefits and corporate collapses The mere act of making an accrual does not guarantee cash reserves available to make payment should the employer become insolvent Under law employees have some preferential access to payment –Amount available is affected by: existence of secured creditors amount of assets available Calls for establishment of central funds to protect claims of employees

59 . Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e Summary Purpose of the lecture to discuss accounting for employee benefits (entitlements), including application of the relevant accounting standard, AASB 119 Employee Benefits Examples of benefits include: –wages and salaries –annual leave –sick leave –long-service leave –superannuation –share entitlements –bonuses

60 . Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e Summary (cont.) Wages and salaries payable within 12 months of reporting date are to be recorded at their nominal amount, and liabilities are to be recognised where salaries have been incurred but employees have not been fully paid at reporting date Annual leave liabilities payable within 12 months of reporting date are to be recognised at the nominal amount of the entitlement. At year end there will generally be a provision for vesting Obligations for employee benefits, inclusive of salaries and wages, that are payable beyond 12 months after reporting date are to be recorded at their present value The discount rate to be used to determine present values is determined by reference to market yields at the reporting date on high quality corporate bonds. The currency and term of the bonds are to be consistent with the currency and estimated term of the post-employment benefit obligations

61 . Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e Summary (cont.) Sick leave is to be divided into vesting and non-vesting entitlements. For accounting purposes, vesting sick leave can be treated in the same manner as annual leave. With non-vesting sick leave, only the part of the entitlement that is accumulated through past service and that is expected to be taken should be recognised as a liability within the financial statements Long-service leave (LSL) entitlements are to be accrued and the liability is to be measured at its present value. The determination of the obligation and the expense for LSL will require various assumptions, including assumptions about future pay levels, promotion prospects, inflation rates and the likelihood of LSL entitlements ultimately vesting. Failure to recognise LSL obligations can lead to a significant understatement of recorded liabilities Post-employment benefit plans are classified as either defined contribution plans or defined benefit plans. Accounting treatments for defined benefit plans are a great deal more complex than the requirements relating to defined contribution plans


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