Financial Accounting 2

ACC203 Financial Accounting 2

Workshop 5 Employee Benefits

COMMONWEALTH OF AUSTRALIA Copyright Regulations 1969

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Material adapted from Financial reporting in Australia / Janice Loftus, Ken Leo, Sorin Daniliuc, Noel Boys, Belinda Luke, Hong Ang, Karyn Byrnes. Second edition.

John Wiley & Sons Australia, Ltd

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Learning objectives

1. Outline the scope, purpose and principles of accounting for employee benefits

2. Prepare journal entries to account for short-term liabilities for employee benefits, such as wages and salaries, sick leave and annual leave

3. Compare defined benefit and defined contribution post- employment benefit plans

4. Explain how to measure and record other long-term liabilities for employment benefits, such as long service leave

5. Explain when a liability should be recognised for termination benefits and how it should be measured.

Class Discussion • What do you understand by the term “employee

benefits”? • Apart of paying a weekly/fortnightly wage, what other

expenses an employer might incur when they employ other people?

Learning objectives

1. Outline the scope, purpose and principles of accounting for employee benefits

2. Prepare journal entries to account for short-term liabilities for employee benefits, such as wages and salaries, sick leave and annual leave

3. Compare defined benefit and defined contribution post- employment benefit plans

4. Explain how to measure and record other long-term liabilities for employment benefits, such as long service leave

5. Explain when a liability should be recognised for termination benefits and how it should be measured.

Scope, purpose and principles of accounting for employee benefits

What are employee Benefits

1. Employee Benefits include all forms of consideration given by an entity in exchange for the service rendered by the employees.

2. They also include consideration given to employees at termination of employment.

3. Employee benefits could also include amounts paid to the dependants of the employees or other parties.

Employers have an obligation to pay these benefits. Therefore, this obligation gives rise to liabilities

These liabilities include: 1. Wages Payable 2. Sick Leave 3. Annual Leave 4. Post employment benefits 5. Employee benefits for past

services.

Source: Para 8, AASB 119

Learning objectives

1. Outline the scope, purpose and principles of accounting for employee benefits

2. Prepare journal entries to account for short-term liabilities for employee benefits, such as wages and salaries, sick leave and annual leave

3. Compare defined benefit and defined contribution post- employment benefit plans

4. Explain how to measure and record other long-term liabilities for employment benefits, such as long service leave

5. Explain when a liability should be recognised for termination benefits and how it should be measured.

Short-term employee benefits

• Payment for employment services (Wages & Salaries) .

• Paid leave entitlements (e.g. sick leave and annual leave) for which employees may be eligible.

• Non-monetary benefits, which are often referred to as ‘fringe benefits’. – The provision of health

insurance. – Housing and motor vehicles,

provided at the employer’s discretion.

WHAT DO THEY

INCLUDE?

HOW IS THIS

DONE?

Through the payroll system.

Source: Para 8, AASB 119

recording the amount of wages or salaries for the pay period

updating personnel records for the appointment of new employees

updating personnel records for the termination of employment contracts

calculating the amount to be paid to each employee, net of deductions

remitting payment of net wages or salaries to employees

remitting payment of deductions to various external parties

complying with regulatory requirements, such as reporting to taxation authorities.

Payroll

deductions from employees remuneration

the remittance of payroll deductions

the measurement of resulting liabilities at the end of the period.

Accounting for Payroll

Short-term employee benefits

• Accrual of wages and salaries: – The end of the payroll period often differs from the

end of the reporting period because payrolls are usually determined on a weekly or fortnightly basis.

– It is usually necessary to recognize an expense and a liability for employee benefits for the business days between the last payroll period and the end of the reporting period.

Class Activity

• What is a paid absence? Provide an example.

Accrual of wages and salaries:

Accounting for annual leave

• Southern Cross Ltd has four employees in its Queensland branch.

• Each employee is entitled to 20 days of paid recreational leave per annum, referred to as annual leave (AL).

• A loading of 17.5% is paid when annual leave is taken. At 1 July 2018, the balance of the provision for annual leave was $5123.

• During the year employees took a total of 70 days of annual leave, which cost Southern Cross Ltd $10 763.

• After annual leave taken during the year had been recorded, the provision for annual leave had a credit balance of $5640 in the trial balance at 30 June 2019 before end-of-period adjustments.

• All annual leave accumulated at 30 June 2019 is expected to be paid by 30 June 2010.

Accounting for annual leave

• The following information is obtained from the payroll records for the year ended 30 June 2019.

• Required: How would Southern Cross Ltd account for accumulated annual leave?

Accounting for annual leave

• A liability must be recognised for accumulated annual leave at 30 June 2019.

• This is measured as the amount that is expected to be paid. As annual leave is vesting, all accumulated leave is expected to be paid.

• The first step in measuring the liability is to calculate the number of days of accumulated annual leave for each employee at 30 June 2019.

Accounting for annual leave

• Although this calculation would normally be performed by payroll software, we will manually calculate the number of days to demonstrate this process.

• The next step is to multiply the number of days of accumulated annual leave by each employee’s daily wage, increased by 17.5% for the annual leave loading.

Accounting for annual leave

Class Activity

Class Activity

Class Activity

• What is the difference between accumulating and non- accumulating sick leave? How does the recognition of accumulating sick leave differ from the recognition of non-accumulating sick leave?

Class Activity

• What is the difference between vesting and non-vesting sick leave? How does the recognition of vesting sick leave differ from the recognition of non-vesting sick leave?

Short-term employee benefits

• Short‐term paid absences:

Accounting for accumulating sick leave

Accounting for accumulating sick leave

Class Activity

• Adelaide Ltd pays its employees on a monthly basis. • The payroll is processed on the 6th day of the month and payable

on the 7th day of the month. Gross salaries for July were $500  000, from which $125  000 was deducted in tax.

• All of Adelaide Ltd’s salaries are accounted for as expenses. Deductions for health insurance were $10  000.

• Payments for health insurance and employee income taxes withheld are due on the 15th day of the following month.

• Required 1. Prepare all journal entries to record the July payroll, the

payment of July salaries and the remittance of deductions. 2. Calculate the balance of the Accrued Payroll account at the

end of July.

Profit Sharing and Bonus Plans

AASB 119/IAS 19 requires an entity to recognise the expected cost of profit-sharing and bonus payments if:

The entity may have no legal obligation to pay the bonus.

The entity has a present legal or constructive obligation to make such payments as a result of past events

A reliable estimate of the obligation can be made.

WHAT IS A CONSTRUCTIVE OBLIGATION?

A constructive obligation arises if

The Entity has no realistic alternative but to pay the bonus

The Entity has a well established practice of paying the bonus

Source: Para 19, AASB 119

Learning objectives

1. Outline the scope, purpose and principles of accounting for employee benefits

2. Prepare journal entries to account for short-term liabilities for employee benefits, such as wages and salaries, sick leave and annual leave

3. Compare defined benefit and defined contribution post- employment benefit plans

4. Explain how to measure and record other long-term liabilities for employment benefits, such as long service leave

5. Explain when a liability should be recognised for termination benefits and how it should be measured.

Formal or informal arrangements under which an entity provides benefits for one or more employees after the termination of employment .

Post Employment Benefits

superannuation plans

employee retirement plans

pension plans.

Relationship between the employer, the superannuation fund (plan) and the employees:

Source: Loftus et al (2018), p.319

Post-employment benefits

• Two types of plans:

• Post‐employment plans for which an entity (employer) pays fixed contributions to a separate entity (e.g. superannuation fund) on behalf of the employee.

Defined contribution plan:

• The benefit received by members on retirement is determined by a formula reflecting their years of service and level of remuneration.

Defined benefit plan:

Class Activity

• Explain how a defined contribution superannuation plan differs from a defined benefit superannuation plan.

Learning objectives

1. Outline the scope, purpose and principles of accounting for employee benefits

2. Prepare journal entries to account for short-term liabilities for employee benefits, such as wages and salaries, sick leave and annual leave

3. Compare defined benefit and defined contribution post- employment benefit plans

4. Explain how to measure and record other long-term liabilities for employment benefits, such as long service leave

5. Explain when a liability should be recognised for termination benefits and how it should be measured.

Other long-term employee benefits They are benefits for services provided in the current period but payment will not be paid until more than 12 months after the end of the period. E.g. Long Service Leave

What are long term employee benefits?

Accounting for Long Term Employee Benefits

1. Long service leave (LSL) is accrued as the employee provides service to the entity.

2. It is an obligation that needs to be catered for even though employees have not legal entitlement to the leave.

3. A liability is recognised for LSL as it is accrued.

Source: Paras 154-155, AASB 119

Class Activity

• The accountant of Bond Ltd believes that long service leave should not be considered as a liability in the accounts until employees have commenced their tenth year of service, given this leave entitlement only applies to Bond Ltd employees after 10 years of continuous service.

• Required: Advise the accountant on whether this approach is acceptable, and what requirements exist under AASB 119/IAS 19.

Learning objectives

1. Outline the scope, purpose and principles of accounting for employee benefits

2. Prepare journal entries to account for short-term liabilities for employee benefits, such as wages and salaries, sick leave and annual leave

3. Compare defined benefit and defined contribution post- employment benefit plans

4. Explain how to measure and record other long-term liabilities for employment benefits, such as long service leave

5. Explain when a liability should be recognised for termination benefits and how it should be measured.

Termination benefits

• When an employee is retrenched or made redundant, the employer may be obliged to pay termination benefits.

• Termination benefits are typically lump sum payments.

• The obligation to pay termination benefits arises from the termination of an employment contract, rather than from past services provided by the employee.

Source: Paras. 166-167, AASB 119

Class Activity

The board of directors of Swinburne Ltd met in June 2019 and decided to close down a branch of the company’s operations when the lease expired in the following February. The chief financial officer advised that termination benefits of $2 million are likely to be paid.

Required: Advise the company’s accountant whether the company should recognise a liability for termination benefits in its financial statements for the year ended June 2019.

References

Loftus, J. , Ken, L., Sorin D., Boys N., Luke B., Hong A. and Byrnes K., (2018) Financial Reporting, 2nd edn. Australia: John Wiley, pp.308-352.

Australian Accounting Standard Board (2019) , AASB 119 Employee Benefits. [Online] Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB119_08- 15_COMPmar18_01-19.pdf (Accessed 8 October 2019)

End of the Workshop