employee benefits

27
I. Employee Benefits: “Employee benefits" is a term like an umbrella that includes insurance programs, fully compensated absences (vacations, holidays, sick leave), pensions, stock ownership plans, and employer-provided services (such as child care) offered by employers to their employees. Employee benefits are also referred to as fringe benefits. Yet other benefits sometimes are treated by government as forms of income for tax purposes. These include bonuses, profit sharing, and the provision of a leased vehicle or housing. All "fringes" are by definition offered at the employer's option; thus employer contributions to Social Security, Medicaid, basic Medicare, Workers' Compensation, and other programs are not viewed as fringe benefits; they are required under law. Certain categories of employee benefits may require that the employee pay a part of the cost of the benefit in order to receive the employer's contribution. For this reason, employees who have access to benefits outnumber employees who actually participate in the benefits offered. II. Types of employee benefits: There are two broad categories of benefits offered by employers in today's work environment: mandated and optional. 1. Mandated Benefits Programs Mandated benefits are those required by law. These include federal or state sponsored programs that aim to provide for the most essential needs of employees and / or their families. Examples of three very important, and mandated, benefits include: Social Security Unemployment Insurance Workers Compensation Employee Benefits : Recognition, Measurement and Disclosure 1

Upload: dibakar-das

Post on 02-Oct-2015

6 views

Category:

Documents


2 download

DESCRIPTION

Finanacial reporting of Employee benefits

TRANSCRIPT

I. Employee Benefits:Employee benefits" is a term like an umbrella that includes insurance programs, fully compensated absences (vacations, holidays, sick leave), pensions, stock ownership plans, and employer-provided services (such as child care) offered by employers to their employees. Employee benefits are also referred to as fringe benefits. Yet other benefits sometimes are treated by government as forms of income for tax purposes. These include bonuses, profit sharing, and the provision of a leased vehicle or housing. All "fringes" are by definition offered at the employer's option; thus employer contributions to Social Security, Medicaid, basic Medicare, Workers' Compensation, and other programs are not viewed as fringe benefits; they are required under law.Certain categories of employee benefits may require that the employee pay a part of the cost of the benefit in order to receive the employer's contribution. For this reason, employees who have accessto benefits outnumber employees who actuallyparticipatein the benefits offered.

II. Types of employee benefits:There are two broad categories of benefits offered by employers in today's work environment: mandated and optional.

1. Mandated Benefits ProgramsMandated benefits are those required by law. These include federal or state sponsored programs that aim to provide for the most essential needs of employees and / or their families. Examples of three very important, and mandated, benefits include: Social Security Unemployment Insurance Workers Compensation

2. Optional Benefits ProgramsAs the name implies, optional employee benefits includes a wide array of programs that employers can choose to offer employees; typical programs include: Health Care Insurance Disability Insurance Life Insurance Retirement/ Pension Plans Flexible Compensation Paid Leave

III. Examples of employee Benefits:1. Health Care and Wellness: Medical Benefits Dental Benefits Vision Benefits Health Care Flexible Spending Account

2. Future Investments: Registered Pension Plan RRSP Plans Life and AD&D Insurance

3. Work/Life Benefits: Adoption Assistance Auto & Homeowners Insurance Banking Employee Discounts Telecommuting Tuition Assistance Program

4. Time Away: Company Paid Holidays Vacation Sick Time

IV. Pros. and Cons. of Employee Benefits (optional benefits):Like most business decisions, there are pros and cons to consider when offering benefits. Pros: There are many advantages to offering benefits, including: Tax advantages.Entity may be able to deduct plan contributions.

Recruiting advantages.Entity can use benefits packages to attract good employees and it can structure them in such a way to reward and thus retain your best employees.

Alternatives to pay.Sometimes employees will accept benefits in lieu of higher salaries.

Cons:The biggest disadvantage of offering benefits is the cost. Benefits are costly to large employers and that burden becomes even more significant for the small employer. Specifically, conventional wisdom holds that smaller employers may encounter the following challenges:

Pay higher rates than larger employers for group health care coverage because there are fewer employees among who to spread risk. Have more difficulty providing life insurance coverage to the employee group. Have fewer design choices when offering a retirement plan because of high administrative costs. Be less likely to offer fringe benefits due to administrative complexity.

V. Recognition, measurement and disclosure of Employee Benefits:International Accounting Standard 19 prescribes the Recognition, measurement and disclosure by employers for employee benefits. It replaces IAS19 Retirement Benefit Costs which was approved in 1993.

International Accounting Standard 19 shall be applied by an employer in accounting for all employee benefits. The employee benefits to which this Standard applies include those provided: I. Under formal plans or other formal agreements between an entity and individual employees, groups of employees or their representatives;II. Under legislative requirements, or through industry arrangements, whereby entities are required to contribute to national, state, industry or other multi-employer plans; orIII. By those informal practices that give rise to a constructive obligation. Informal practices give rise to a constructive obligation where the entity has no realistic alternative but to pay employee benefits.

IAS 19 identifies the following categories of employee benefits:

I. Short term employee benefits being benefits that become due within 12 months after the end of the period in which the employees render the related service. It includes items such as wages, salaries and social security contributions, paid annual leave, paid sick leave, profit sharing and bonuses;

II. Post-employment benefits such as pensions, other retirement benefits, post-employment life insurance and post-employment medical care;

III. other long-term employee benefits including long service leave or sabbatical leave, jubilee or other long-service benefits, long term disability benefits, and if they are not payable wholly within 12 months after the end of the period, profit sharing, bonuses and deferred compensation;

IV. Termination benefits;

a. Short-term employee benefits:

Short-term employee benefits are employee benefits which fall due wholly within twelve months after the end of the period in which the employees render the related service.

Short-term employee benefits include items such as:(a) Wages, salaries and social security contributions;(b) Short-term compensated absences (such as paid annual leave and paid sick leave) where the compensation for the absences is due to be settled within 12 months after the end of the period in which the employees render the related employee service;(c) profit-sharing and bonuses payable within twelve months after the end of the period in which the employees render the related service; and(d) Non-monetary benefits (such as medical care, housing, cars and free or subsidized goods or services) for current employees.1. Recognition and measurement: All shortterm benefits:When an employee has rendered service to an entity during an accounting period, the entity shall recognize the undiscounted amount of shortterm employee benefits expected to be paid in exchange for that service: (a) As a liability (accrued expense), after deducting any amount already paid. Ifthe amount already paid exceeds the undiscounted amount of the benefits, an entity shall recognize that excess as an asset (prepaid expense) to the extent that the prepayment will lead to, for example, a reduction in future payments or a cash refund; and(b) As an expense, unless another Standard requires or permits the inclusion of the benefits in the cost of an asset. Shortterm compensated absences:An entity shall recognize the expected cost of shortterm employee benefits in the form of compensated absences as follows: (a) In the case of accumulating compensated absences, when the employees render service that increases their entitlement to future compensated absences; and(b) In the case of nonaccumulating compensated absences, when the absences occur.An entity may compensate employees for absence for various reasons including vacation, sickness and shortterm disability, maternity or paternity, jury service and military service. Entitlement to compensated absences falls into two categories: (a)Accumulating and(b)NonaccumulatingAccumulating compensated absences are those that are carried forward and can be used in future periods if the current periods entitlement is not used in full. Nonaccumulating compensated absences do not carry forward: they lapse if the current periods entitlement is not used in full and do not entitle employees to a cash payment for unused entitlement on leaving the entity.

2. Accounting treatment of short term employee benefits:

Balance sheet

Benefit Liability Salaries payable Vacation benefit payableAssets

Prepaid benefit expenses (debit balance)

Liabilities

Accrued benefit liability

Stockholders Equity

*******

General Journal

ParticularsDebitCredit

Short term employee benefit expenseEx: Salaries expenses

*****

Benefit liabilityEx: Salaries payable*****

Benefit Expense:Vacation benefit expenses Salaries expensesIncome statement

Revenue******

Expense:

Salaries expenses******

Vacation benefit expenses******

Total expense(****)

Net income

*****

Example: (Salary, wage)Suppose A company pays its 100 employees every Thursday tk. 1800 (tk. 300 per day) each for a six-day workweek that begins on Saturday. On Thursday, June 5 the company paid tk. 180000. This payment consists of tk. 30000 of salaries payable at May 31 plus tk. 150000 of salaries expenses for June 1 to June 5. Therefore on June 5 the company will make following entry:

ParticularsDebitCredit

June 05Salaries payableSalaries expenses30000150000

cash180000

To record June 5 payroll

At June 30 the salaries for the last 3 days of the month represents an accrued expenses and a related liability. Thus accrued salaries at June 30 are tk. 90000.Pioneer will make the following adjusting entry: ParticularsDebitCredit

June 30Salaries expenses90000

Salaries payable90000

To record accrued salaries

After the company posts this adjusting entry, the accounts show below:

Salaries payables

06/30 Adj. 90000

Salaries expenses

06/2606/30 180000Adj. 90000

06/30Bal. 270000

The fiscal year is ended on Wednesday, Dec 31. Suppose salaries expenses showing a debit balance of tk. 150000. So closing entry on Dec 31 will be the flowing:

ParticularsDebitCredit

June 30Income summary150000

Salaries expenses150000

Example: (vacation benefit)

Suppose ABC Companys employees are entitled for vacation benefits. If in a given month the accrual for vacation benefits is $120000 then ABC Company will record the liability at the end of the month by the following entry:

ParticularsDebitCredit

June 15Vacation benefit expenses120000

Vacation benefit payable120000

Later when the ABC Company will pay vacation benefits, it will debit vacation benefits payable and credits cash. Suppose the company pay the Vacation benefit at July 15 then the entry will be as follow:

ParticularsDebitCredit

July 15Vacation benefit payable120000

Cash120000

At the end of the fiscal year the company will close its Vacation benefit expenses account. Assume that the company has an ongoing Vacation benefit expenses of tk.50000. So closing entry on Dec 31 will be the flowing:

ParticularsDebitCredit

June 30Income summary50000

Vacation benefit expenses50000

3. Disclosure:Although this Standard does not require specific disclosures about shortterm employee benefits, other Standards may require disclosures. For example, IAS24 Related Party Disclosures requires disclosures about employee benefits for key management personnel. IAS1 Presentation of Financial Statements requires disclosure of employee benefits expense.

b. Post-employment benefits:Post-employment benefits are employee benefits (other than termination benefits) which are payable after the completion of employment. Post-employment benefit plans are formal or informal arrangements under which an entity provides post-employment benefits for one or more employees. Post-employment benefits include, for example:(a) Retirement benefits, such as pensions; and(b) Other post-employment benefits, such as post-employment life insurance and post-employment medical care.

Post-employment benefit plans are classified as either defined contribution plans or defined benefit plans.

b. 1. Post-employment benefits: defined contribution plans:

Defined contribution plans are post-employment benefit plans under which an entity pays fixed contributions into a separate entity (a fund) and will have no legal or constructive obligation to pay further contributions if the fund does not hold sufficient assets to pay all employee benefits relating to employee service in the current and prior periods. Under defined contribution plans:

(a) The entitys legal or constructive obligation is limited to the amount that it agrees to contribute to the fund. Thus, the amount of the post-employment benefits received by the employee is determined by the amount of contributions paid by an entity.

(b) In consequence, actuarial risk (that benefits will be less than expected) and investment risk (that assets invested will be insufficient to meet expected benefits) fall on the employee.

1. Recognition and Measurement:

IAS 19 requires entities to recognize the contributions payable to a defined contributions plan in exchange for services rendered by an employee during the period:

(a) In the balance sheet as a liability (accrued expense) after deducting any contributions already paid. If prepayments exceed the contribution due for service before the balance sheet date, the excess should be recognized as an asset (prepaid expense) to the extent that all prepayments are recoverable, for example, by a reduction in future payments or a cash refund.(b) In the income statement as an expense

The amount of contributions should be discounted if due more than 12 months after the end of the period in which the employees render the related service.

2. Accounting treatment of defined contribution plans:

A company may report the pension plan asset, pension plan liability, and accumulated other comprehensive income items, depending on the circumstances, on its balance sheet and income statement as follow:

Balance sheet

Assets

Prepaid pension expense (debit balance)

Liabilities

Accrued pension liability (credit balance)

Stockholders Equity

General Journal

ParticularsDebitCredit

Pension expenses*******

pension liability

******

Income statement

Revenue*********

Expense:

Pension expenses********

Other expenses********

Total expense(*******)

Net income*******

Example: Defined Contribution Plan {pension 401 (k)}

Suppose a Company make a contribution on behalf of employee in its Defined Contribution Plan. When company recognizes this contribution then it debits pension expense and credit pension liability. If in a given month the Company recognizes a contribution of $5000 for pension fund then Company will record the liability at the end of the month by the following entry:ParticularsDebitCredit

June 30pension expenses5000

pension liability5000

Later when the ABC Company make this contribution then it debit pension liability and credit cash as like follow:

ParticularsDebitCredit

July 15pension liability5000

Cash5000

3. Disclosure: An entity shall disclose the amount recognized as an expense for defined contribution plans. Where required by IAS24 Related Party Disclosures an entity discloses information about contributions to defined contribution plans for key management personnel.

b. 2. Post-employment benefits: defined benefit plans:Defined benefit plans are post-employment benefit plans other than defined contribution plans. Under defined benefit plans:(a) the entitys obligation is to provide the agreed benefits to current and former employees; and (b) Actuarial risk (that benefits will cost more than expected) and investment risk fall, in substance, on the entity. If actuarial or investment experience are worse than expected, the entitys obligation may be increased.

1. Recognition and measurement:Accounting for defined benefit plans is complex because actuarial assumptions are required to measure the obligation and the expense and there is a possibility of actuarial gains and losses. Moreover, the obligations are measured on a discounted basis because they may be settled many years after the employees render the related service.

Balance sheet:IAS 19 requires entities to recognize in the balance sheet the net total of the following as the defined benefit liability: The present value (PV) of the defined benefit obligation (gross obligations before deducting the fair value of plan assets);

Plus any actuarial gains(less any actuarial losses)

Minus any past service cost not yet recognized; and

Minus the fair value at the balance sheet date of plan assets (if any) out of which obligations are to be settled directly.

If the net total (calculated in previous paragraph) is negative, the resulting asset recognized in the balance sheet should be the lower of: The net total calculated;

The net total of;

Any actuarial losses and past service costs not recognized as an expense; and

The present value (using the discount rate specified by the Standard) of any economic benefits available in the form of refunds from the plan or reductions in future contributions to the plan.

Income statement:The enterprise should recognize in the income statement the net total of the following as expense (or income), except to the extent that another IAS requires or permits their inclusion in the cost of an asset: Current service cost; Interest cost; The expected return on any plan assets and any reimbursement rights; Actuarial gains and losses to the extent that they are recognized; Past service cost to the extent required; and The effect of any curtailment or settlement of the defined benefit plan.

2. Accounting treatment of defined benefit plans:

Net Pension Liability:+PV of Pension Obligation- FV of Pension Asset+ Unrecognized Actuarial Gain / (Loss) - Past Service Cost Not Yet Recognized = Pension Liability / (Asset)

Balance sheet

Assets

Prepaid pension expense(debit balance)

Liabilities

Pension liability

Stockholders Equity

*******

General Journal

ParticularsDebitCredit

Pension expenses

pension liability***********

Net Periodic Pension Expense:Current Service +Interest Cost +(Return on Plan Assets) +Amortization of Unrecognized Prior Service Cost +(Gains) or Losses (Unrecognized) +Amortization of Existing Net Obligation or Net Asset at ImplementationIncome statement

Revenue******

Expense:

Pension expenses******

Other expenses******

Total expense(****)

Net income*****

3. Disclosure:An entity shall disclose information that enables users of financial statements to evaluate the nature of its defined benefit plans and the financial effects of changes in those plans during the period.An entity shall disclose the following information about defined benefit plans: (a)The entitys accounting policy for recognizing actuarial gains and losses.(b)A general description of the type of plan.(c)A reconciliation of opening and closing balances of the present value of the defined benefit obligation showing separately, if applicable, the effects during the period attributable to each of the following:a. Current service costb. Interest costc. Contributions by plan participantsd. Actuarial gains and lossese. Foreign currency exchange rate changes on plans measured in a currency different from the entitys presentation currency,f. Benefits paid,g. Past service cost,h. Business combinations,i. Settlements.

c. Other long-term employee benefits:

Other long-term employee benefits are employee benefits (other than post-employment benefits and termination benefits) which do not fall due wholly within twelve months after the end of the period in which the employees render the related service.

Other longterm employee benefits include, for example: (a)Longterm compensated absences such as longservice or sabbatical leave;(b)Jubilee or other longservice benefits;(c)Longterm disability benefits; (d)Profitsharing and bonuses payable twelve months or more after the end of the period in which the employees render the related service; and(e)Deferred compensation paid twelve months or more after the end of the period in which it is earned.

1. Recognition and measurement:The amount recognized as a liability for other longterm employee benefits shall be the net total of the following amounts: (a)The present value of the defined benefit obligation at the balance sheet date.(b)Minus the fair value at the balance sheet date of plan assets (ifany) out of which the obligations are to be settled directly.

For other longterm employee benefits, an entity shall recognize the net total of the following amounts as expense or income, except to the extent that another Standard requires or permits their inclusion in the cost of an asset: (a)Current service cost (b)Interest cost (c)The expected return on any plan assets and on any reimbursement right recognized as an asset(d)Actuarial gains and losses, which shall all be recognized immediately; (e)Past service cost, which shall all be recognized immediately; and(f)The effect of any curtailments or settlements

2. Accounting treatment of Other long-term employee benefits:

Net longterm benefits liability:present value of the defined benefit obligation - fair value of plan assets= benefits Liability

Balance sheet

Assets

Prepaid benefit expenses (debit balance)

Liabilities

Benefit liability

Stockholders Equity

*******

General Journal

ParticularsDebitCredit

benefit expenses Ex: Sick day benefit expenses

*****

Benefit liability

*****

Net longterm benefits Expense:Current service cost +Interest cost +The expected return on any plan assets +Actuarial gains and losses+Past service cost+effect of any settlements

Income statement

Revenue******

Expense:

Sick day benefit expenses******

Other expenses******

Total expense(****)

Net income

*****

3. Disclosure:Although this Standard does not require specific disclosures about other longterm employee benefits, other Standards may require disclosures, for example, where the expense resulting from such benefits is material and so would require disclosure in accordance with IAS1 Presentation of Financial Statements. When required by IAS24 Related Party Disclosures, an entity discloses information about other longterm employee benefits for key management personnel.

d. Termination benefits:

Termination benefits are moneypaid to anemployeewhoseemploymenthas been terminated because of a closedown ordownsizing. Termination benefits are employee benefits payable as a result of either:

(a) an entitys decision to terminate an employees employment before the normal retirement date; or (b) An employees decision to accept voluntary redundancy in exchange for those benefits.

1. Recognition and Measurement: This Standard deals with termination benefits separately from other employee benefits because the event which gives rise to an obligation is the termination rather than employee service. An entity shall recognize termination benefits as a liability and an expense when, and only when, the entity is demonstrably committed to either:

(a) terminate the employment of an employee or group of employees before the normal retirement date; or (b) Provide termination benefits as a result of an offer made in order to encourage voluntary redundancy.

Where an entity recognizes termination benefits, the entity may also have to account for a curtailment of retirement benefits or other employee benefits.

Where termination benefits fall due more than 12 months after the balance sheet date, they shall be discounted. In the case of an offer made to encourage voluntary redundancy, the measurement of termination benefits shall be based on the number of employees expected to accept the offer.2. Disclosure:Where there is uncertainty about the number of employees who will accept an offer of termination benefits, a contingent liability exists. As required by IAS37 an entity discloses information about the contingent liability unless the possibility of an outflow in settlement is remote. As required by IAS 1, an entity discloses the nature and amount of an expense if it is material. Termination benefits may result in an expense needing disclosure in order to comply with this requirement.VI. Conclusion:The accounting for employee benefits, for pensions in particular, is complex. The liabilities in defined benefit pension plans are frequently material. They are long-term and difficult to measure, and this gives rise to difficulty in measuring the cost attributable to each year. Employee benefits are all forms of consideration given or promised by an entity in exchange for services rendered by its employees. Recognition and measurement for short-term benefits is relatively straightforward, because actuarial assumptions are not required and the obligations are not discounted. However, long-term benefits, particularly post-employment benefits, give rise to more complicated measurement issues. In June 2011, the International Accounting Standards Board (IASB or the Board) issued revisions to IAS 19 Employee Benefits (the revisions, IAS 19R or revised standard) that provide significant changes in the recognition, presentation and disclosure of post-employment benefits. IAS 19R also changes the accounting for termination benefits and short-term employment benefits, along with a number of more minor clarifications and re-wording of the standard. The impact of these revisions could range from significant to immaterial. Regardless of the magnitude, employee compensation is a fundamental area of accounting and all entities need to be aware of these changes and carefully consider the potential implications.

VII. References:

Pearcy L., Mersureau A., Tokar M. (2011) , First impression: Employee benefits, UK, KPMG limitedAustralian accounting standard board (2013), Defined Benefit Plans: Employee Contributions, Publication no: 239, Australian government printing office.

Heckaboom W., 2011, Accounting for Pensions and Employee Benefits (IAS19), 17, 03, 2014;Website:http://whatheheckaboom.wordpress.com/2011/12/06/accounting-for-pensions-and-employee-benefits-ias-19/#comment-1126Hamidi Ravari A., August 1, 2003, IAS 19: Employee Benefits A Summary

Employee Benefits : Recognition, Measurement and Disclosure 18