Tut 5 Chapter 9: Employee benefits

Comprehension questions

1. What is a paid absence? Provide an example.

Refer to section 9.2. Paid absence refers to an employee entitlement to be paid during certain
absences. Examples include sick leave and annual leave.

2. 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?

Refer to section 9.2.4. Accumulating sick leave may be carried forward to a future period if
the employee has not taken the leave in the current period. Non-accumulating sick leave may
not be carried forward to a future period. A liability must be recognised for accumulating
sick leave when the employee renders services that increase the entitlement. The liability is
measured as the amount that the entity expects to pay. If the leave is non-vesting, the amount
recognised is affected by the probability that the leave will be taken.

3. 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?

Refer to section 9.2.4. If sick leave is vesting, the employee is entitled to cash settlement for
unused leave. If sick leave is non-vesting, the employee has no entitlement to cash settlement
of unused leave. The employer recognises a liability for accumulating sick leave, measured
as the undiscounted amount expected to be paid. The entity will have good reason to expect
that all vested accumulating sick leave will be paid. However, if sick leave is not vesting, a
liability is recognised for proportion of accumulated sick leave that the entity expects to be
taken by its employees.

4. Explain how a defined contribution superannuation plan differs from a defined

benefit superannuation plan.

Refer to sections 9.4 and 9.5. Under a defined contribution superannuation plan the employer
pays fixed contributions into a fund. Employees’ benefits are a function of the level of
contributions paid and the return achieved by the fund on the investment of plan assets. The
employer has no obligation to make further payments if the fund is unable to pay all the
benefits accruing to members for past service.

In a defined-benefit superannuation plan, the benefits received by members on retirement are

determined by a formula reflecting their years of service and level of remuneration, rather
than the performance of the fund. The employer has an obligation to pay further
contributions if the fund is unable to pay members’ benefits.
Case study 9.1

Termination benefits

The board of directors of Swinburne Ltd met in June 2016 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. The company’s accountant has asked whether they should recognise a liability for
termination benefits in its financial statements for the year ended June 2016.

Required
Advise the accountant, with reference to the requirements of AASB 119/IAS 19.

Given the timeframe for the expected payments is within 12 months after the end of the
reporting period, the amount should be recorded as a current liability (para. 8, AASb 119/IAS
9).

Exercise 9.1

Accounting for the payroll

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 withheld income taxes 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.

1.

6 July Wages and Salaries Expense Dr 500 000

Accrued Payroll Cr 500 000
(Payroll for July)

7 July Accrued Payroll Dr 365 000

Bank Cr 365 000
(Payment of net salaries for July)

15 August Accrued Payroll Dr 10 000

Bank Cr 10 000
(Payment of health insurance
payroll deductions)

15 August Accrued Payroll Dr 125 000

Bank Cr 125 000
 (Payment of payroll deductions for
withheld income tax)

2. $135 000 credit ($500 000 - $365 000), as all June payroll deductions would have been
remitted during July.

Exercise 9.4

Accounting for sick leave

Auckland Ltd has 200 employees who each earn a gross wage of $140 per day.
Auckland Ltd provides 5 days of paid non-accumulating sick leave for each employee
per annum. During the year, 150 days of paid sick leave and 20 days of unpaid sick
leave were taken. Staff turnover is negligible.

Required
Calculate the employee benefits expense for sick leave during the year and the amount
that should be recognised as a liability, if any, for sick leave at the end of the year.

Employee benefits for sick leave during the year: 150 days x $140 per day = $21 000
Auckland Ltd should not recognise a liability for sick leave because it is non-cumulative.

Exercise 9.5

Accounting for annual leave

Newcastle Ltd provides employees with 4 weeks (20 days) of annual leave for each year
of service. The annual leave is accumulating and vesting up to a maximum of 6 weeks.
Thus, all employees take their annual leave within 6 months after the end of each
reporting period so that it does not lapse. Newcastle Ltd pays a loading of 17.5% on
annual leave; that is, employees are paid an additional 17.5% of their regular wage
while taking annual leave. Refer to the following extract from Newcastle Ltd’s payroll
records for the year ended 30 June 2016.

AL 1 July 2015 Increase in AL taken

Employee Wage/day Days entitlement Days Days
Chand $160 6 20 15
Kim $125 3 20 16
Smith $150 2 20 13
Zhou $100 4 20 17

Required
Calculate the amount of annual leave that should be accrued for each employee.

Employee Wage, Change in AL AL 30/6/16 AL accrual (col. 2

per day entitlement in days x col. 4 x 117.5%)
$
Chand $160 6+20-15 11 2 068.00
Kim $125 3+20-16 7 1 028.13
Smith $150 2+20-13 9 1 586.25
Zhou $100 4+20-17 7 822.50