Section 28 Employee Benefits

Employee Benefits All forms of consideration given by the entity in exchange for services rendered by the employees. Short term - employee benefits other than termination benefits which are wholly due within twelve months after the end of the Period. Termination Benefits are employee benefits payable as a result of; Entity’s decision to terminate an employee’s employment before the normal retirement date; or An employee’s decision to accept voluntary redundancy in exchange for those benefits.

Employee benefits Post Employment benefits which are benefits (other than short-term & post-termination benefits) that are payable after the completion of employment.

Accumulated untaken Holiday leave The entity shall make a provision for Unpaid Holiday Leave at the reporting date. Profit Sharing & Bonus plans The entity shall recognize the expected cost of profit sharing and bonus payments only when; The entity has a present legal or constructive obligation as a result of a past event & A reliable estimate can be made

Termination benefits; An Entity shall recognize termination benefits as a liability and as an expense only when the entity is demonstrably committed either; To terminate the employment of an employee or a group of employees before their normal retirement date; or To provide termination benefits as a result of an offer made in order to encourage voluntary redundancy. Demonstrably committed to a termination only when the entity has a detailed formal plan for the termination and is without realistic possibility of withdrawal. Use “Best Estimate” of the expenditure required to settle the obligation at the reporting Date

2 Types of Pension Scheme Defined Contribution Risk of shortfall is with employee Defined Benefit Risk of shortfall is with Company Risk is the possibility of the Pension Fund’s assets being inadequate to pay pensions as they fall due. Radical difference between two types in relation to Pension Risk for company

Pension “Risk” The Pension assets are” inadequate “to pay members pensions as they fall due. In a Defined Contribution scheme, the company is not obliged to make any further payments. So, the employee has to make up the shortfall. In a Defined Benefit Scheme, the company must make good any shortfall. Hence, the pension risk is with the Company.

Defined Contribution The Company pays an agreed amount per annum into the Pension fund. It has no further obligation in relation to the Pension Fund. This is the company’s only commitment. The company can have no shortfall or surplus. The risk of a pension shortfall rests with the employee.  

Accounting for Defined Contribution Schemes Profit & Loss The contributions payable for the period are charged as an Expense in the P&L SOFP Any Unpaid or Prepaid contributions at the end of the year are shown in the Balance Sheet as an accrual or prepaid. This is the only asset/liability that the Company has in relation to Pension Fund obligations.

Disclosure for Defined Contribution Amount recognized in the Income Statement. If an entity treats a Defined Benefit multi-employer plan as a Defined Contribution plan , because of insufficient information to treat it as a DBS, it shall disclose this fact & the reason why it is being accounted for as DCS, along with available information regarding the surplus or deficit, and the implications if any for the entity.

Defined Benefit Scheme (DBS) The major difference in a Defined Benefit Scheme is that the company guarantees the amount of the Pension Benefits that its employees receive after they retire. The Risk of a Pension Shortfall rests with the Company

Accounting Treatment for Defined Benefit Recognize in Statement of Financial Position; Pension Obligations less Assets in Company’s Non current Liabilities. Net figure recognized for each separate Pension Fund (Ring fences Pension assets are set off against Liabilities.)

Defined Benefit Cost in the Income Statement “Net” Expense in P&L will be the total of ; Current Service Cost Past service Costs. Net Interest on the Net Defined Benefit Liability

Typical DBS Pension Account Assets Liabilities Net Opening Assets and Liabilities 5,000 (7,500) (2,500) Current service Cost (2,000) Past Service Cost (1,100) Net Interest Cost on Net Liability 350 ( 750) ( 400) Contributions Paid in 3,000 Pensions paid out (1500) 1,500 Expected Assets & Liabilities 6,850 ( 9,850) (3,000) Remeasurement Gains & Losses ???? 1,150 150 1,300 Closing Assets & Liabilities 8,000 (9,700) (1,700)

Valuation of Pension Liabilities   Liabilities are measured at the Present Value of the Deferred obligations, using the Projected Unit Credit Method. Future Pensions payable to retired members & current employees are the principle liabilities of a defined Benefit scheme. These obligations are estimated by the actuary based on estimates and assumptions. Since pensions are payable in the future, the obligations are discounted at their present values

Appropriate Discount Rate for Liabilities. Defined Benefit Scheme liabilities should be discounted at a rate that reflects the time value of money and the characteristics of the liabilities. Such a rate should be assumed to be the current rate of return on a high quality corporate bond of equivalent currency and term to the scheme liabilities. A bond rated at the level of AA or Equivalent status.

Actuarial Valuations Not required to be carried out annually. Not required to be carried out by an Independent Valuer. Use the “Projected unit Method” if it can be done without undue cost and effort. Otherwise, use the “Discontinuance Method”.

Valuation of Pension Assets The Pension plan assets are valued at Fair Value. Assets include equities, bonds, cash and Properties. The Fair Value of Equities will be the Market Value of shares quoted on the Stock Exchange This does not take a long-term view, but rather a short-term valuation view which increases the volatility of the Gains or Losses reported annually.  

Current Service Cost Employees earn additional pension entitlements for every year they work. This increases in the Liabilities of a Pension scheme. The ACTUARY will provide this figure for each year Company Accounts Dr: Profit & Loss Account 2,000 Cr: Pension Liabilities 2,000

Past Service Cost A decision to improve benefits retrospectively will lead to “extra liabilities” immediately in relation to Past service. This is called “Past Service Costs”  

Net Interest on the NET Defined Pension Liability The Net Interest on the Net Defined Benefit Liability shall be determined by multiplying the net defined benefit liability by the discount rate, both as determined at the start of the period, taking into account any changes in the net defined liability during the period as a result of contribution and benefit payments. Rate on High Quality corporate bonds. (or Government bonds)

Re-measurement Gains and Losses Actuarial Gains and Losses are increases and decreases in the pension plan assets or liabilities that occur either because the actuarial assumptions have changed or because there were differences between the previous assumptions and actual reality (experience adjustments)

Calculate Re-measurement Gain or Loss Take Opening Pension Fund Assets & Liabilities  Adjust for Operating Costs; Current Operating Costs Past Service Cost Curtailment Costs Return on Assets Interest Cost of Pension Fund Obligations

Calculate Re-measurement Gain or Loss Adjust for Cash-flows to & from Pension scheme Contributions paid into fund Benefits paid out (unique as it reduces assets & liabilities) This gives you the “Expected” Assets & Liabilities

Calculate Re-measurement Gain or Loss Compare the Expected Closing Assets & Liabilities & Actual Closing Pension Assets &Liabilities   Difference is the Re-measurement Gain or Loss

Re-measurement Gains & Losses Re-measurement Gain or Loss shall be recognised in the Other Comprehensive Income (OCI)

Net Pension Fund Liabilities/Assets in the Balance Sheet Fair Value of Pension Fund Obligations less Fair Value of Pension Fund Assets

Net Pension Fund Asset in the SOFP Ceiling on the Net Pension Fund Asset in the Accounts. Pension Fund Asset recognized cannot exceed; Present Value of economic refunds arising from refunds or pension fund holidays

Disclosures for Defined Benefit General description of the nature of the plan. Accounting policy for actuarial gains & losses A narrative explanation if the entity uses the simpler method of valuation of obligations. Date of most recent actuarial valuation. A reconciliation of the movement in Pension Obligations. A reconciliation of the movement in Pension Assets.

Disclosures for Defined Benefit The total cost relating to DBS for the period, separating; Recognized in P&L as an expense. Included in the cost of an asset Details of plan assets and return for the year. Principal assumptions