Employee benefits

PMv Dept Acc MSU 1

DEFINITIONS
• Employee benefits comprise all forms of
consideration given by an entity in exchange for
services rendered by employees or for termination
of their services
Employee benefits include settlements made to
employees, both past and present
• The standard should be applied to all employee
benefits, except for share-based payments within
the scope of IFRS 2

PMv Dept Acc MSU 2

DEFINITIONS [cont’d]
Employees include all categories: full-time, part-
time, permanent, casual, temporary,
management, directors as well as their spouses or
dependants where the benefits are paid to them

PMv Dept Acc MSU 3

Short-term employee benefits
Short term employee benefits
- Are employee benefits (excluding termination
benefits) that are:
. due to be settled wholly within 12 months

. after the end of period in which

employee
rendered related service

PMv Dept Acc MSU 4

Examples
- Salaries
- Short term paid absences
- Profit-sharing and bonus plans
- Non- monetary benefits (e.g. medical care, cars,
housing)

PMv Dept Acc MSU 5

Short-term employee benefits [cont’d]

Recognition and measurement - All short-

term employee benefits:
- Recognise when employee renders service
(accrual concept)
- Recognise the undiscounted amount as an
expense /liability when employee renders ,i.e.
. no actuarial assumptions are required
. no discounting is applied

PMv Dept Acc MSU 6

Short-term employee benefits [cont’d]
Short term compensated absences :
- can be accumulating or non-accumulating
Accumulating :
- can be carried to future periods if not fully
utilised in current period.
- can be either vesting or non-vesting
- vesting – entitled to cash payment on leaving
entity - raise entire liability

PMv Dept Acc MSU 7

Short-term employee benefits [cont’d]
- non-vesting – not entitled to cash payment on
leaving entity - raise liability for amount that
will be probably be “paid” if leave is taken
(because it is accumulating).
N.B. – Absences taken in year granted
- cost of this short-term absence is recognised as
party of salary (no separate adjustment is
required)

PMv Dept Acc MSU 8

Short-term employee benefits [cont’d]
Non-accumulating
- cannot be carried to future periods if not full
utilised in current period (forfeited)
- entity has no obligation to allow employee to
take the forfeited leave in future
- since there is no obligation, the definition of
liability is not met.
- therefore no provision of unused leave

PMv Dept Acc MSU 9

 Short-term employee benefits [cont’d]
Profit sharing & bonus plans
• If given to employee as reward for services
rendered – considered to be to be employee benefit
• If payable within 12 months of year end –
considered short-term employee benefit (otherwise
– other long-term employee benefits)
• Recognise only when:
- there is a present obligation at year-end
- resulting from a past event

PMv Dept Acc MSU 10

Short-term employee benefits - Profit
sharing & bonus plans [cont’d]
- the obligation can be reliably estimated
• Obligation can either be legal or constructive
- a legal obligation would arise if the
employment contract incorporates the
profit-sharing or bonus arrangement
- a constructive obligation could arise as a result
of the entity’s past practices, policies or public
announcements

PMv Dept Acc MSU 11

Short-term employee benefits - Profit
sharing & bonus plans [cont’d]
• A reliable estimate of the expense associated with the
legal or constructive obligation under profit- sharing
or bonus plan can be made, when & only when:
- terms of the formal plan contain a formula for
determining the amount of the benefit;
- entity calculates the amounts to be paid before
authorisation of financial statements for issue;
or;

PMv Dept Acc MSU 12

 - past practice gives clear evidence of the amount
of the entity’s constructive obligation
• Where a profit –sharing or bonus plan requires an
employee to remain in the entity’s service for a
specified period, there may be partial entitlement
or forfeiture.

• This probability must be factored into calculations

PMv Dept Acc MSU 13

Short-term employee benefits - Profit
sharing & bonus plans [cont’d]
Bonus schemes that are either:
- settled in the entity’s own shares; or
- based on, or determined on the entity’s share
price are not within the scope of IAS19, but
IFRS2

PMv Dept Acc MSU 14

Post-employment benefits
• Are employee benefits (excluding termination
and short-term benefits)
- payable after the completion of employment.
- it is the service that employee renders whilst
employed that gives entitlement
- to these benefits (past event)
- thus employee benefit expense (Dr) & post
employment benefit (Cr)

PMv Dept Acc MSU 15

Post-employment benefits [cont’d]
- are recognised as and when employee provides
services
 can be either :
- defined contribution plan; or
- defined benefit plan;
- depending on whether the entity has obligation
to fund any possible short-fall the plan might
experience.

PMv Dept Acc MSU 16

Post-employment benefits [cont’d]
Defined contribution plan (DCP)
- are post-employment plans under which
- amounts to be paid as retirement benefits
- are determined by reference
- to cumulative total contributions to a fund
- by both employer & employee
- + investment earnings thereon.
- employer liability limited to contributions

PMv Dept Acc MSU 17

Post-employment benefits [cont’d]
payable to the separate fund
- risk that benefits will be less than expected
(actuarial risk) , &
- the risk that the assets invested will be
insufficient
- to meet expected benefits (investment risk)
- fall on the employee.

PMv Dept Acc MSU 18

Post-employment benefits [cont’d]
Recognition and Measurement
Defined contribution plans
- recognise an expense (Dr: Employee benefit
expense ) and
- liability (Cr: Contributions payable )
- when the employee render service
- no actuarial assumptions are need &
- normally undiscounted (if within 12 months)

PMv Dept Acc MSU 19

Post-employment benefits [cont’d]
Defined benefit plan (DBP)
- are post-employment benefit plans
- under which amounts to be paid as retirement
benefits
- to current & retired employees
- are determined using a formula
- usually based
- on employees’ remuneration/ years of service.

PMv Dept Acc MSU 20

Post-employment benefits [cont’d]
- risk that benefits will be less than expected
(actuarial risk) , &
- the risk that the assets invested will be
insufficient
- to meet expected benefits (investment risk)
- fall on the employer.
- the obligation of the entity is to provide agreed
benefits

PMv Dept Acc MSU 21

Post-employment benefits [cont’d]
- to finance the agreed upon benefits
- the entity uses assets set aside for this purpose
(plan assets)
- plan assets are financed from
- contributions by the employer & employees
- + investment returns on accumulated
contributions

PMv Dept Acc MSU 22

Post-employment benefits [cont’d]
When recognising a DBP, recognise both:
- the plan obligation (PO)(i.e. benefits owed to
employees)
- the plan assets (PA) (those set aside to settle
obligation)
- in FSs present net defined benefit plan asset or
- net defined benefit plan liability
- surplus recognised limited to asset ceiling

PMv Dept Acc MSU 23

Post-employment benefits [cont’d]
Asset ceiling is:
- the present value
- of any economic benefits available in the form
of:
. refunds from the plan, or
. reductions in future contributions to the
plan
- i.e. net defined plan asset limited to PV of
amounts actually receivable
PMv Dept Acc MSU 24
Post-employment benefits [cont’d]
amounts actually receivable by the entity
 Future refunds are measured as:
- the surplus:
. FV of plan assets
. less PV of defined benefit obligations
- less any associated costs
- availability of a refund depends on rules of
the fund.

PMv Dept Acc MSU 25

Post-employment benefits [cont’d]
Future expected reductions in contributions are
measures at the lower of:
- the surplus; &
- PV of the estimated:
. Service cost to the entity for future service;
. Less minimum funding contributions
needed for the future accrual of benefits

PMv Dept Acc MSU 26

Post-employment benefits [cont’d]
Determining estimated obligation
Step 1
- use the projected unit credit method
- to make a reliable estimate of
- the promised benefit-actuarial assumptions
Step 2
- discount promised benefit
- to determine PV defined benefit obligation

PMv Dept Acc MSU 27

Post-employment benefits [cont’d]
- as well as current service cost
- N.B. current service cost is the increase
in the PV of defined benefit obligation
(DPO) resulting from employee service in the current period.
• Step 3
- determine FV of plan assets
- used to service the obligation to employees

mm

PMv Dept Acc MSU 28

Post-employment benefits [cont’d]
- N.B. plan assets are those assets set
aside to settle the obligation & comprise
. Assets held by an independently
administered fund
. Qualifying insurance policies (i.e
issued by insurer not a related
party)

PMv Dept Acc MSU 29

Post-employment benefits [cont’d]
Step 4
- determine amount recognised in profit or
loss:
. current service cost+ net interest+
past service cost
. N.B. past service cost is change in
PV of DBO resulting from
employee service in prior periods
due to:
PMv Dept Acc MSU 30
Post-employment benefits [cont’d]
- plan amendment(changes to
plan): or
- curtailment (significant
reduction in no. of employees covered by the plan)
. N.B. net interest is comprised of:
- interest income on plan assets
- interest expense on DBO
- interest effect of asset ceiling

PMv Dept Acc MSU 31

Post-employment benefits [cont’d]
Step 5
- determine amounts recognised in other
comprehensive income:
. actuarial gains or losses on plan obligation . return
on plan assets, excluding amounts already included
in net interest on net defined benefit liability/
asset
. changes in effect of asset ceiling.

PMv Dept Acc MSU 32

Post-employment benefits [cont’d]
. N.B. actuarial gains & losses result from:
- difference between calculated &
- actuarially-determined
- PV of DBO due to
- changes in actuarial assumptions
(demographic & financial variables)
&
- experience adjustments

PMv Dept Acc MSU 33

Post-employment benefits [cont’d]
. Return on plan assets represent:
- interest, dividends or other income
- received from plan assets &
- includes realised &
- unrealised gains & losses but
- deduct cost of managing plan assets
&
- any tax paid by the plan itself.

PMv Dept Acc MSU 34

Post-employment benefits [cont’d]
Ledger accounts necessary to account for DBP
plan asset a/c; plan obligation a/c; asset ceiling
a/c; employee benefit expense a/c (various sub
a/csa); & remeasurement a/c (various sub a/cs)

PMv Dept Acc MSU 35

Post-employment benefits [cont’d]
Plan asset a/c (summary of basic movements)
- Opening balance
- interest income (contra – EBE)
- Contributions by employer (contra - Bank)
- Contributions by employee (contra – Bank)
- less benefits paid (contra – Plan obligation)
- Return on plan assets (Balancing figure)
- Closing figure (FV of plan assets at year-end)

PMv Dept Acc MSU 36

Post-employment benefits [cont’d]
N.B.
- Plan asset balance is measured as:
. FV at year-end.
- Plan assets must:
. be held by a separate legal entity
. only be available to pay or fund employee
benefits; or
. be qualifying insurance policies

PMv Dept Acc MSU 37

Post-employment benefits [cont’d]
The plan obligation account (summary )
- b/f (PV of future obligations based on actuarial
assumptions at end of prior yr)
- Int. exp. (b/f PV x discount rate end prior yr)
- Service cost (+ in oblig. due to employee service)
- less benefits paid (actual payments made)
- actuarial gain/loss (balancing figure)
- c/f (PV of future oblig. based on end current yr
actuarial assumptions
PMv Dept Acc MSU 38
Post-employment benefits [cont’d]
Plan asset ceiling a/c (summary)
- b/f (PV of the adjustments at end prior yr)
- int. exp. (b/f (PV) x discount rate end prior yr)
- re-measurement adj. to current yr asset ceiling
at yr-end (current yr adj.)
- c/f (PV of adj, at end current yr

PMv Dept Acc MSU 39

Post-employment benefits [cont’d]
DBP employee benefit expense a/cs
- employee benefit expense includes only:
. interest on plan obligation , plan
asset & asset ceiling
. current & past service costs
. all other re-measurements are recognised
in OCI

PMv Dept Acc MSU 40

Post-employment benefits [cont’d]
DBP re-measurement a/cs
- re-measurements
. are recognised in OCI
. may never be reclassified to P/L
. a number of re-measurements possible
. each of which must be
. accounted for
. in separate ac/s for disclosure requirements

PMv Dept Acc MSU 41

Other long term benefits

Definition : All employee benefits other than

short-term, post-employment and termination
benefits
- Examples
. long-term paid absence
. jubilee and other long service benefits
. long-term disability benefits

PMv Dept Acc MSU 42

Recognition and measurement
Amount recognised in profit or loss
Current service cost + net interest + actuarial gains/
losses + past service cost + return on plan assets
Amount recognised in Statement of Financial
Position
PV of defined benefit obligation-FV of plan assets

PMv Dept Acc MSU 43

Termination Benefits
 Definition :
- Employee benefits payable
- either as a result of the entity decision
- to terminate employment
- before the normal retirement age or
- the employee’s decision
- to accept voluntary redundancy offer

PMv Dept Acc MSU 44

Termination Benefits
Recognition and measurement
 Recognise an expense and a liability when the
entity when the entity can no longer withdraw the
termination plan or restructuring provision in
terms of IAS 37 ( Including termination benefits )
is made. If benefits will not be settled wholly
within 12 months after the reporting date,
accounting is similar to other long-term benefits
(i.e. discounted)

PMv Dept Acc MSU 45