Topic 8: Accounting for Employee Benefits Financial Accounting BFA201 BFA201_13
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Topic 8: Accounting for Employee Benefits
Financial Accounting BFA201
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Readings & references
• Read Deegan Chapter 12
• AASB 119 Employee Benefits
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Learning Objectives• Understand the various forms of benefits
employees can receive from employers• Be able to account for the various forms
of employee benefits• Understand whether particular employee
entitlement obligations should be recorded at their nominal value or at their discounted present value
• Be able to provide the necessary disclosures in conformity with AASB 119 Employee Entitlements
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Topics1. Overview of employee benefits
2. Salaries and wages
3. Annual leave
4. Personal leave
5. Long service leave
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Overview of Employee Benefits
• AASB 119 - Purpose and Scope
• ‘Employee’ = a natural person appointed under a contract of service
• ‘Employee benefits’:–All forms of consideration given by an
entity in exchange for service rendered by employees (para 7)
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Overview of Employee Benefits Wages & salaries
Annual leave
Personal leave
Long service leave
Superannuation
Share entitlements
Bonuses
Other entitlements
• Salary packages may also include:– Motor vehicle– Low-interest loan– Payment of school
and club fees– Expense account– Entertainment
allowance
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Regulation of employee benefits
• National Employment Standards (NES) sets minimum conditions. Individual awards and agreements add extra.
• Annual leave accumulates, 4 wks per yr, accumulates, vesting.
• Personal leave (includes carer’s leave, sick leave) 10 days per yr, accumulates.
• Long service leave not specified – rely on awards & agreements & State laws.
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AASB 119: Employee Benefits.
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Short term benefits
Post-employment
benefits
Termination benefits
Other long-term employee benefits
Categories
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Short term benefits: para 10
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Paid within 12 month period
Undiscounted
Annual leave
Wages & salaries
Personal leave
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Salaries and Wages.
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Payable after 12 months or
more
Payable within 12 months
Liability arises
• Discount to PV
• No need to discount
• Only when services rendered
Wages expense may include:* PAYG tax; medical benefits
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Salaries & wages
Dr Salaries & wages expenseCr PAYG tax payableCr Medical benefits payableCr Salaries & wages payable
1. Entry at Reporting date
2. Entry when paid after Reporting date Dr Salaries & wages expense (incurred since reporting) Dr Salaries & wages payable (owing at reporting date)
Cr PAYG tax payableCr Medical benefits payable (since reporting
date)Cr Cash (payment to employees)
3. Remittance to ATO & medical fundDr PAYG tax payable
Dr Medical benefits payableCr Cash
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See HandoutLecture Example 1
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Example 1Vege Ltd employs Iva Bean on a one-year contract at an annual salary package of $52,000. Income tax of $350 per week is deducted from Bean’s salary. Vege Ltd also deducts $65 per week for health insurance premiums payable to Medibank Private. • What would the journal entry be each week to record
and pay Bean’s salary?• What would the journal entry be when the amounts
collected on behalf of others are remitted?• What would be the journal entry if on reporting date
four days wages are owing?
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Compensated absences para 11Annual Leave• Vacation
Personal (sick) Leave• Short-term disability
Service• Jury duty• Military service
Parental Leave• Maternity• Paternity
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Compensated absences2 categories
OR
Use it or lose it!Recognise only when
the absence occurs
Carry forward
unused leaveBFA201_13
Non-accumulating entitlement
year 1
year 2
Accumulating entitlement – yr 3
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2 Types
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Vesting Non-vesting
Accumulating compensated absences
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Annual leave entitlement
4 weeks
Leave loading (17.5%)
If payable within 12 months – no PV calc
Expense & liability accrues DAILY
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Accounting for annual leave
• To recognise annual leave obligation throughout the year:
Dr Annual leave expenseCr Provision for annual leave
• When annual leave taken:
Dr Provision for annual leaveCr PAYG tax payableCr Cash at bank
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See HandoutLecture Example 2
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Example 2
Iva Bean’s annual salary of $52,000 comes with an entitlement to 4 weeks’ annual leave with a 17.5% annual leave loading.• What is the cost of the leave to Vege Ltd?• What entry is required each non-leave week?
What is the entry required each week when Bean is on leave?
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‘On-costs’
‘
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Workers’
comp
Payroll tax
Superannuation contributions
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Total 18.72%
Example of Tasmanian on-costs
http://www.flinders.edu.au/hr-files/documents/TAS%20Oncosts%201-Jul-2013.pdf
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Accounting for personal leaveAccumulating:• obligation arises as service is rendered• Vesting: accrues daily (as per annual leave)• Non-vesting: Only paid upon a valid claim for
personal leave by the employee
• Journal entry each week:Dr Personal leave expense
Cr Provision for personal leaveProvision should be based on past experience
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Accounting for personal leave• If employees are sick:
Dr Provision for personal leave
(wages during personal leave)
Dr Salaries and wages
(wages for rest of period)
Cr PAYG tax payable
Cr Cash at bankBFA201_13
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Question: How does your employer account for sick leave?
See HandoutLecture Example 3
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Example 3Vege Ltd has a weekly payroll of $70,000. A normal working week is Monday to Friday. Its employees are entitled to 10 working days’ non-vesting personal leave each year. Experience suggests that 85% of its employees will take their full personal leave entitlement each year.• Calculate the annual personal leave expense and the
weekly amount of the expense.• Show the journal entry required each week to account
for the personal leave.• Show the journal entry if Iva Bean, who has a weekly
salary of $1,000, takes personal leave of two days.
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Long service leaveExtended leave after working for an employer for a specific number of years
Employer must recognise an expense and an associated liability as LSL accrues
Measured at its present value
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Pre-conditional
Conditional
Unconditional
LSL entitlement categories
Years of service
No entitlement
Entitlement under certain circumstances Entitlement
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Long service leave
• Many judgements required• For example:
– probability employee will stay until such time as they have a LSL entitlement
– salary being earned at the time of receiving the LSL entitlement (inflation, promotion prospects etc.)
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Accounting standards for LSL
• AASB119 (para 128) requires the recognition of a liability for LSL to equal the net total of:
– The present value of the defined benefit obligation at the reporting date
– Minus the fair value at the reporting date of plan assets (if any) out of which the obligations are to be settled directly
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Calculating LSL liability: need to calculate…
Projected salary
current salary ×
(1 + inflation rate)n
Accumulated
LSL benefit
Present value of
LSL obligation
Probability LSL
benefit will be paid
LSL liability
= TOTAL to be shown on financial position statement
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Calculating LSL liability– Projected salary
• current salary × (1 + inflation rate)n
– Accumulated LSL benefit• Projected salary multiplied by • Years worked / total years to be served before leave
can be taken multiplied by• weeks of LSL entitlement / 52
– Present value of LSL obligation• accumulated LSL benefit/(1 + appropriate bond rate)n
– Probability that LSL will be paid (experience based)
– LSL liability = PV of LSL obligation x probability
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PV calculated by discounting the liability using extrapolated yields on Fixed Rate Commonwealth bonds with maturities matching the term to settlement (rates available on the Reserve Bank website http://www.rba.gov.au/fin-services/index.html under the Small Investor Bond Facility – Quarterly Bond Prices, CGS Valuation – Bond Prices, for valuation purposes).
Appropriate bond rate
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Accounting entries for LSL• Entry to recognise the LSL expense:
Dr Long service leave expenseCr Provision for long service leave
NOTE: LSL liability = Balance required in provision
account; Expense = Difference between existing balance
& required balance– provision broken up into current and non-current
portion Entry when LSL is subsequently taken:
Dr Provision for long service leaveCr Cash at bank
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See HandoutLecture Example 4
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Example 4
Inflation rate is 2% and wages are expected to keep pace with inflation. The interest rate on bonds on with 2 & 6 yrs to maturity is 6%. 13 wks LSL for 15 yrs service, 10 yrs pro-rata.
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Calculating projected salaries
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Calculating accumulated LSL benefit
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Calculating LSL liability
80 288Total
LSL expense 80 288Provisions for LSL 80 288
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Next Week
Week 9 - Accounting for Income Taxes
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