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Objectives: Chapter 5 - Employee Benefits - Ias 19
Objectives: Chapter 5 - Employee Benefits - Ias 19
OBJECTIVES
apply and discuss the accounting treatment of both short‐term & long‐term
employee benefits
discuss and apply the accounting treatment of both defined contribution and
defined benefit plans
account for gains and losses on settlements and curtailments
account for the asset ceiling test and the reporting of remeasurement gains and
losses
discuss the effects of current issues in corporate reporting
1
EMPLOYEE BENEFITS – IAS 19
IAS 19 identifies 4 separate categories of employee benefits
– Short‐term employee benefits that are expected to be settled
wholly within 12 months of the end of the reporting period
– Post‐employment benefits such as pensions
– Other long‐term employee benefits (e.g. long service leave)
– Termination benefits
2
EMPLOYEE BENEFITS – IAS 19
Recognise an expense (or asset) when the entity consumes the
economic benefit arising from the service provide
An entity must recognise a liability when an employee had provided
services in exchange for employee benefits payable in the future
3
EMPLOYEE BENEFITS – IAS 19
Recognise an expense – Accounting Framework
Expenses are recognised in the income statement when a decrease in
future economic benefits has arisen that:
• related to a decrease in an asset or
• to an increase of a liability and
• can be measured reliably.
– Dr expense in profit or loss
– Cr cash (decrease an asset) or
– Cr salary & wages payable (increase a current liability) or
– Cr non‐current liability (LSL, pension obligation)
4
EMPLOYEE BENEFITS – IAS 19
Recognise a liability – Accounting Framework
A liability is a present obligation arising from past events, the settlement
of which is expected to result in an outflow of resources embodying
economic benefits.
– Dr expense in profit or loss
– Cr salary & wages payable (increase a current liability)
– Cr provision for LSL (increase a non‐current liability)
5
EMPLOYEE BENEFITS – IAS 19
Recognise an asset – Accounting Framework
An asset is a resource controlled by the entity as a result of past events
and from which future economic benefits are expected to flow to the
entity .
– Dr Work in Process (creating inventory asset) or
– Dr PP&E (direct costs incurred bringing an asset to use) or
– Dr Intangible Asset (direct development cost)
– Cr Cash (reduce an asset) or
– Cr salary & wages payable (increase a current liability) or
– Cr provision for LSL (increase a non‐current liability)
6
EMPLOYEE BENEFITS – IAS 19
EMPLOYEE ON‐COSTS
• base wage 100.0%
• annual leave (4 weeks) 9.1%
• sick leave (2 weeks) 3.1%
• long‐service leave 0.8%
• NSW payroll tax 5.5%
• workers’ compensation insurance 0.5%
• superannuation contribution 9.5%
128.5%
• paid maternity leave?
• paid paternity leave?
7
Post‐employment benefit plans – IAS 19 text page 91
IAS 19 definition Under a defined
contribution plan the entity pays fixed
contributions into a separate entity &
will not have legal or constructive
obligation to pay more if the fund does EMPLOYEE
not hold sufficient assets to pay all BENEFITS
benefits relating to employee service.
The employer’s obligation is limited to
defined payments at certain times. An
expense is recognised when the Defined Defined
obligation is incurred. benefit contribution
pensions pensions
All other post‐employment plans (i.e.
that are not defined contribution plans)
are defined benefit plans.
SFP OCI
P/L
8
EMPLOYEE BENEFITS – IAS 19
9
EMPLOYEE BENEFITS – IAS 19
11
EMPLOYEE BENEFITS – defined contribution plans text p. 92
The expense of providing pensions in the period is often the same as the
the cash paid does not equal the value of contributions due for the period.
12
EMPLOYEE BENEFITS – defined contribution plan
13
EMPLOYEE BENEFITS – defined contribution plan
14
EMPLOYEE BENEFITS – defined benefit plan text p. 94
15
EMPLOYEE BENEFITS – defined benefit plan
Plan obligation – the present value of the estimated future
obligation
Plan assets – the fair value of investments and cash held by the
defined benefit plan
Plan deficit/surplus – the amount by which the plan obligation
exceeds plan assets and vice versa. This is recognised on the SFP.
16
EMPLOYEE BENEFITS – defined benefit plan
17
EMPLOYEE BENEFITS – defined benefit plan
18
Accounting for defined benefit plans – IAS 19 ¶ 57 text p. 94
The statement of financial position
1. calculate the present value of the current obligation to employees using an
actuarial technique – the projected unit credit method ¶ 67‐69
2. calculate the fair value of plan assets (per IFRS 13) ¶ 113‐115
3. the net liability or asset is the sum of 2. fair value of assets less 1. present
value of obligation
• a surplus (asset) is limited to its availability to the entity as refunds or in
reducing future contributions (the asset ceiling) ¶ 65
4. Unpaid expenses (service costs) are a liability at the reporting date
19
Accounting for defined benefit plans – IAS 19 ¶ 57 text p. 96
Interest charged / paid to
Charged to P&L current P&L for change in liability
service cost + past service / asset due to passage of
cost ¶ 103 + gain or loss time.
on settlement ¶ 109
20
EMPLOYEE BENEFITS – defined benefit plan
31 December 20X1 4%
In the statement of profit or loss, Byzantium recognises an expense for the current
service cost of $5 million.
Byzantium charges the net interest component of $0.9 million (($90m – $72m) × 5%)) to
profit or loss.
22
EMPLOYEE BENEFITS – example 4 asset ceiling
Bloom operates a defined benefit pension scheme. The following details relate
to the pension scheme in the year ended 31 December 20X1:
$m
Present value of the obligation at 31 December 20X1 107
Present value of the obligation at 1 January 20X1 95
Fair value of plan assets at 31 December 20X1 124
Fair value of plan assets at 1 January 20X1 110
Current service cost 7
Contributions into the scheme by Byzantium 8
Pension benefits paid during the year 3
The interest rate on good quality corporate bonds at the start of the year was 6%.
Bloom identified an asset ceiling at the beginning and the end of the year of $10 million
– the present value of expected refunds from the scheme.
23
EMPLOYEE BENEFITS – example 4 asset ceiling – answer
The scheme was in surplus at the start of the year. This was recognised at the
lower of $15m ($110m – $95m) and the $10m ceiling – i.e. $10million.
Interest on the asset of $0.6 million ($10m × 6%) is credited to profit or loss as
income. The service cost of $7 million is charged to profit or loss as an expense. The
contributions increase the scheme surplus.
The scheme was still in surplus at the end of the year. The surplus is recognised at
the lower of $17m ($124m – $107m) and $10m – i.e. $10m.
Settlements
Settlements to employees are made by the plan. A settlement reduces the
reporting entity’s obligation and reduces plan assets, normally be the same
amount. The reporting entity’s deficit/surplus normally will remain unchanged.
Any gain or loss on settlement is recognised in profit or loss.
Disclosures
IAS 19 requires risk‐based disclosures – explain how the reporting entity is
exposed to uncertainty in future obligations and how that uncertainty may affect
future cash flows. Uncertainty arises from investment risks, interest rate risks,
employee‐based risks such as salaries and life‐spans.
25
Defined benefit plans – IAS 19 text p. 102
Criticisms
Current developments
Revised conceptual framework – updating actuarial assumptions within a
reporting period.
Ethical issues
How might management seek to manipulate financial statements?
Essential reading
Chapter 5 section 4 in Appendix 2
26
By the end of this session you should be able to:
apply and discuss accounting for events after the reporting period
determine and report going concern issues arising after the reporting date
Chapter 6
27
Events after reporting period + Provisions & contingencies text p. 124
Non- Definitions
Adjusting and
adjusting
recognition
Specific
situations
28
Provisions – recognition & measurement IAS 37 text p 125
ignore if “remote”
disclose if “possible”
an obligation is
something that may
not be avoided
constructive means
expectation from
past behaviour
29
Provisions – remeasurement & derecognition IAS 37
Remeasure provisions to the best estimate of expenditure required to settle the
liability at each reporting date ¶ 59
• unwind a discount & recognise in financing costs in profit or loss
Dr financing expense in P/L
Cr liability (provision)
Derecognise a provision that is no longer required to settle the obligation.
• only use a provision for expenditure related to the matter for which the
provision had been raised ¶ 61
30
Provisions – specific guidance text p 126
the unavoidable costs of meeting
obligations exceed the economic
benefits expected
31
Onerous contract & future operating costs IAS 37 ¶¶ 66‐69
An onerous contract exists when the unavoidable costs of the contract exceed
the benefits that will be obtained
A provision is recorded at the lower of:
• the cost of fulfilling the contract
• the cost of terminating the contract
No provision is allowed for future operating costs, even when the expenditure is
required by law – however consider IAS36 impairment of assets
No provision is normally allowed for the cost of future repairs
32
Restructuring provisions IAS 37 ¶¶ 72‐83 text p. 127
A restructuring provision should only include direct costs necessarily incurred by
the restructuring
• these are costs not associated with ongoing activities of the entity ¶ 80
Costs that are prohibited from inclusion:
• retraining or relocating staff
• marketing
• systems
• future operating losses (other than onerous contracts)
• profits from disposal of assets
33
Environmental & decommissioning provisions IAS 37
Raise a provision for future costs if an obligation exists to decommission an asset
• DR property, plant & equipment
• CR provision
An environmental provision may only cover environmental damage already
incurred
• and there is an obligation to repair the damage
• just causing damage or intending to clean up do not create an obligation
Recognise the full cost as the obligation arises:
• discount for the time value of money as appropriate
• recognise an asset if expenditure gives rise to future economic benefits
34
Environment issues ‐ example
35
Environmental issues - answer
Obligation to repair damage
Bringing the machinery into use and operating it for the first year are past events that
have caused damage to the local land.
There is no legal obligation for Alias to repair the damage caused to the local land.
Alias has a constructive obligation to repair the damage because it publishes its
environmental policies in its <IR> & it is known for honouring these policies.
A provision for the initial damage by the machine is recognised at 1 October 20X5.
The present value is unwound over the year, increasing the carrying amount of the
provision & raising a finance cost of $0.12m ($1.47m× 8%) in profit or loss.
The PPE is depreciated over 4 years, with annual charge of $2.87 million (($10m +
$1.47m) / 4 years) recorded in profit or loss.
As at 30 September 20X6, Alias has operated the machine for a year so has a
constructive obligation to pay $0.5 million to repair the additional damage caused.
Alias cannot provide for the damage that would be caused in years 2, 3 and 4 of the
machine’s life because this is avoidable (the machine could be disassembled early).
The provision that should be recognised in respect of this additional damage at 30 September
20X6 is $0.40 million ($0.5m × 1/1.083). 36
Contingent liabilities & contingent assets – IAS 37 text p 129
An entity will not recognise a contingent liability ¶ 27 or a contingent asset ¶ 31
A contingent liability is:
• a possible obligation whose existence will be confirmed by future events not
controlled by the entity
• a present obligation where an outflow of economic benefits is not probable
• a present obligation where the outflow of economic benefits is not measurable
Disclose a contingent liability unless the possibility is remote – IAS 37 ¶ 86
An asset is contingent when its existence will only be confirmed by future events not
controlled by the entity
Disclose a contingent asset where inflow of economic benefits is probable – IAS 37 ¶ 89
37
Events after reporting period – IAS 10 text p. 130
see IAS 10 ¶¶ 3‐7
financial
statements are
based upon
conditions
existing at the
reporting date
a fundamental change
to the basis of
accounting 38
Adjusting events IAS 10 ¶¶ 8‐9
Events that provide evidence of conditions that existed at the reporting date, e.g.
1. sale of inventory (& net realisable value changes)
2. bankruptcy of a debtor (& allowance had not been made)
3. discovered fraud or error
4. settlement of a legal dispute (& allowance had not been made)
Adjust the amounts recognised in the financial statements, for the effects of these
events
39
Non‐adjusting events IAS 10 ¶¶ 10‐11
Events evidencing conditions that arose after the reporting date, e.g.
1. announced plan to discontinue an operation
2. announced plan to restructure an operation
3. purchase, disposal or destruction of assets
4. changes to market factors or conditions (e.g. exchange rates)
Disclose the details and consequences of material events
40
Adjusting events – example
41
Adjusting events – example
IFRS 5
see text page 335
Active marketing commenced after the reporting date. As at the period end,
the building was not being actively marketed and so should not have been
classified as held for sale.
42
Adjusting events – example
has new evidence arisen of a condition
that existed or of a new condition that
did not exist at year end?
43
Adjusting events – example
44
GOING CONCERN – issue arising IAS 10 ¶¶ 14‐16
IAS 1 ¶¶ 25‐26
An entity shall not prepare its financial statements on a going
concern basis if management determines after the reporting period either that
it intends to liquidate the entity or to cease trading, or that it has no realistic
alternative but to do so.
IAS10 requires a fundamental change in the basis of accounting when the going
concern assumption is no longer appropriate – rather than an adjustment to the
amounts recognised.
45
Events after reporting period + Provisions & contingencies
Ethical issues
How might management seek to manipulate financial statements? Look for use of
provisions to manipulate profits.
Essential reading
Chapter 6 section 1.3 in Appendix 2
Chapter 6 section 3 in Appendix 2
46
CHAPTER 9 – LEASES – IFRS 16
47
LEASES – IFRS 16
Identifying a
Right-of-use lease
asset
Lessee Lessor
Leases
accounting accounting
Net
Liability Sale and investment
leaseback
Remeasurement
Transfer is Transfer is
a sale not a sale
48
LEASES – IFRS 16
an identified asset – the
supplier does not have a
substantive right to
substitute the asset during
the lease period 49
IDENTIFYING A LEASE – IFRS 16 ¶ 9
1. the right to use ¶ B9
o the right to substantially all economic benefits from use ¶ B21‐B23
o the right to direct the use ¶ B24‐B27
2. an identifiable asset
o the lessor does not have a substantive right to substitute an asset ¶
B14‐B18
3. for a period of time ¶ B10
4. in exchange for consideration 50
IDENTIFYING A LEASE – IFRS 16 ¶ 9
51
IDENTIFYING A LEASE – IFRS 16 ¶ 9
52
LESSEE ACCOUNTING – initial measurement – IFRS 16 text p. 197
At inception
of lease
recognise
Right-of-use
Lease liability
asset
THE TERM OF A LEASE COMPRISES: ¶ 18
o non‐cancellable periods ¶ B34
o the period of an option to extend, if reasonably certain to be exercised ¶ B37
o the period of an option to terminate if reasonably certain to not be exercised
¶ B35
54
LEASE ACCOUNTING – initial treatment IFRS 16
55
LEASE ACCOUNTING – initial treatment IFRS 16
Dr right‐of‐use asset $3.14
Cr lease liability $3.04
Cr opex $0.1
56
LESSEE ACCOUNTING – IFRS 16
no liability
no right‐of‐use asset
straight‐line recognition of payments, in P/L
57
LESSEE ACCOUNTING – IFRS 16 ¶ 36
58
LESSEE ACCOUNTING – IFRS 16 ¶ 29
59
LESSEE ACCOUNTING – subsequent measurement
ownership
does not tfr to
3 the lessee
60
LEASE ACCOUNTING – subsequent measurement
3
2
61
LESSEE ACCOUNTING – IFRS 16
Separating components ¶ B9 – B33
A contract may contain a lease component and a non-lease component.
Unless an entity chooses otherwise, IFRS 16 specifies that the consideration in the
contract should be allocated to each component based on standalone selling prices.
In these cases, the lessee can choose to recognise the lease payments in profit or
loss on a straight-line basis. No lease liability or right-of-use asset would therefore
be recognised.
62
LESSEE ACCOUNTING – reassessed liability
PV of 3annual
pmts $2mn
discounted 10%
p.a. is $4.97mn
63
LESSEE ACCOUNTING – example 4 solution
Year ended 30 April 20X3
In the prior year, the right-of-use asset would have been recognised at $7 million ($5m +
$2m). The depreciation charge in the prior year was $1.75 million ($7m/4 years) and the
carrying amount of the asset at the end of the prior year was $5.25 million.
The lease liability was recorded at $5 million. Interest of $0.5m ($5m × 10%) was added
& charged to profit or loss. The liability at 30 April 20X3 was $5.5m ($5m + $0.5m).
Based on inflation for the last 12 months, the lease payments now due each year are
$2.1 million ($2m × 105%). The revised liability is calculated as follows:
Cash flows Disc. Present value
• the leased assets are specialised
• the lessee benefits from increased
fair value
65
LESSOR ACCOUNTING – lease classification
66
LESSOR ACCOUNTING – example 5 solution
In this case, the leases are operating leases. This is for the following reasons:
The lease is unlikely to transfer ownership of the vehicle to the lessee by the end
of the lease term as the option to purchase the vehicle is at a price which is
higher than fair value at the end of the lease term.
The lease term is not for the major part of the economic life of the asset as
vehicles normally have a length of life of more than three years and the
maximum un-penalised mileage is 10,000 miles per annum.
Carsoon maintains the vehicles, which again indicates that the risks and rewards
remain with the entity.
67
LESSOR ACCOUNTING – IFRS 16
PV of lease payments +
RV @ implicit interest
rate
68
LESSOR ACCOUNTING – Finance lease – IFRS 16 ¶ 70
A lessor shall recognise finance income over the lease term, based on a pattern
reflecting a constant periodic rate of return on the lessor’s net investment in the
lease ¶ 75
At inception. a lessor presents assets held under a finance lease as a receivable.
The investment in a finance lease comprises the present value of:
o future fixed payments for the right to use the asset
o variable payments valued at date of inception
o guaranteed and unguaranteed residual value
o exercise price of purchase options, if expected to be exercised
o termination penalties if the lease term is based on termination event
69
LESSOR ACCOUNTING – Finance lease – IFRS 16 ¶ 70
A lessor shall recognise finance income over the lease term, based on a pattern
reflecting a constant periodic rate of return on the lessor’s net investment in the
lease ¶ 75
Subsequent measurement of the investment in a finance lease:
1. increase the carrying amount of the lease receivable by the finance income
earned in the current period – e.g. if monthly
annual percentage
opening carrying amount * (1 + APR / 12) rate (APR) implicit in
the lease
Dr lease receivable
Cr investment income
2. reduce the carrying amount of the receivable by the rental received in the
current period
Dr cash
Cr lease receivable
70
LESSOR ACCOUNTING – finance lease
71
LESSOR ACCOUNTING – finance lease
72
LESSOR ACCOUNTING – Operating lease – IFRS 16 & IAS 16
1. a lessor shall recognise lease payments over the lease term, on a
straight‐line basis under IFRS 16 ¶ 81
2. recognise and measure the underlying asset according to IAS 16 PPE
or IAS 38 Intangible assets
73
LESSOR ACCOUNTING – operating lease
74
LESSOR ACCOUNTING – operating lease
75
Sale & Leaseback – the right‐of‐use asset text p. 207
see text p. 51
76
Sale & Leaseback – the right‐of‐use asset
IFRS 16 ¶ 100 (a)
• the seller/lessee recognises a profit or loss based on rights transferred to buyer
• the lease liability represents rights retained by the seller/lessee
1. proportion of rights retained = lease liability / sale price
liability ÷
2. right‐of‐use asset = proportion of rights retained * carrying value sale price X
carrying
value
3. profit/loss = value of rights transferred = + sale price
+ right‐of‐use‐asset value
‐ carrying value
illustration p. 208 ‐ lease liability
77
LESSOR ACCOUNTING – sale & leaseback
78
LESSOR ACCOUNTING – sale & leaseback
Example 8 - answer
ORYX – if a sale & leaseback transaction represents the satisfaction of a performance
obligation (per IFRS 15), the seller-lessee recognises a right-of-use asset at the
proportion of the underlying asset’s previous carrying amount that relates to the rights
retained. A profit or loss on disposal arises based on the rights transferred to the buyer-
lessor.
Dr Cash $20m
Dr Right-of-use asset $2m
The profit on disposal of $9.3 million is recorded in the statement of profit or loss.
Crake records the asset purchase as $20 million and applies lessor accounting rules.
The lease is an operating lease because the present value of lease payments is much lower than
the fair value of the asset. Crake recognises rental income in profit or loss on a straight-line basis.
The asset is depreciated over its useful economic life.
79
Sale & Leaseback – where consideration ≠ fair value
IFRS 16 ¶ 101‐102
consideration is below the asset’s fair value:
• recognise the shortfall as a prepayment of lease rentals
consideration is greater than the asset’s fair value:
• recognise the excess as additional financing provided by the lessor
80
LESSOR ACCOUNTING – disclosure – IFRS 16 ¶ 89
Present the underlying asset in the statement of position
For a finance lease, disclose:
• finance income
• profit or loss on sale
• changes in the carrying amount of the net investment
• a maturity analysis of undiscounted lease payments receivable
For an operating lease, disclose:
• a maturity analysis of undiscounted lease payments receivable
81
Chapter 9 LEASES – IFRS 16
Ethical issues
How might management seek to manipulate financial statements? Look for
incorrect classification to manipulate SFP.
Essential reading
Chapter 9 section 1.4 in Appendix 2
82