PAS 19 Employee Benefits Learning Objectives 1. Differentiate between the four (4) classification of employee benefits under PAS 19. 2. State the timing of the recognition of employee benefits. 3. Differentiate between a defined contribution plan and a defined benefit plan. 4. State the accounting procedures for defined benefit plans. Introduction to PAS 19 PAS 19 prescribes the accounting for employee benefits by employers, EXCEPT employee benefits within the scope of PFRS 2 Share-based Payment and reporting by employee benefit plans to which PAS 29 Accounting and Reporting by Retirement Benefit Plans applies.
Employee benefits are “all forms of consideration given by an entity in
exchange for service rendered by employees. 4 categories of employee benefits under PAS 19 1. Short-term employee benefits 2. Post-employment benefits 3. Other long-term employee benefits 4. Termination benefits Short-term employee benefits these are employee benefits (other than termination benefits) that are due to be settled within 12 months after the end of the period in which the employees render the related service.
ex: paid time off
Recognition and Measurement 1. as a liability (accrued expense), after deducting any amount already paid. 2. as an asset (prepaid expense) if the amount paid is in excess of the undiscounted amount of the benefits incurred; provided, the repayment will lead to a reduction in future payments or a cash refund 3. as an expense, unless the employee benefit forms part of the cost of an asset. Short-term compensated absences a. Accumulating those that can be carried forward and used in future periods if not used in the current period. Accumulating paid absences may be either:
1. Vesting - unused entitlement are paid in cash when the employee
leaves the entity (i.e., monetized) 2. Non-vesting - unused entitlement are not monetized. Short-term compensated absences b. Non-accumulating those that expire if not used in the current period and are not paid in cash when the employee leaves the entity. Comparison Accumulating Non- accumulating When the employees render service that when the absences increases their entitlement occur to future compensated absences Post-employment benefits Post-employment benefits are employee benefits (other than termination benefits) that are payable after the completion of employment. Post-employment benefit plans are classified as either:
1. Defined contribution plans
2. Defined benefit plans Post-employment benefit plans Post-employment benefit plan can be a formal arrangement or it can also be informal. Post-employment benefit plans can be:
a. Contributory or Non-contributory; and
b. Funded or Unfunded Post-employment benefit plans are either:
01. DEFINED CONTRIBUTION PLANS; OR
02. DEFINED BENEFIT PLANS
Comparison Accounting for defined contribution plan The accounting for defined contribution plans is straightforward because the reporting entity’s obligation for each period is determined by the amounts to be contributed for that period. Consequently, no actuarial assumptions are required to measure the obligation or the expense and there is no possibility of any actuarial gain or loss. Accounting for defined benefit plan The 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.
Obligations are measured on a discounted basis.
Accounting procedures for defined benefit plans Step #1: Determine the deficit or surplus
(Deficit) Surplus = FVPA – PV of DBO
FVPA < PV of DBO = deficit
FVPA > PV of DBO = surplus Accounting procedures for defined benefit plans Step #2: Determine the Net defined benefit liability (asset)
If there is a deficit, the deficit is the net defined
benefit liability. If there is a surplus, the net defined benefit asset is the lower of the surplus and the asset ceiling. Accounting procedures for defined benefit plans Step #3: Determine the defined benefit cost
Defined benefit cost is the expense that an employer incurs for providing retirement benefits to employees through a defined benefit pension plan. It represents the cost of promising and delivering future pension benefits to employees based on a predetermined formula. Other terms: Multi-employer plans - can either be a defined contribution plan or defined benefit plan. State plans - is established by law and operated by the government. Insured benefits - benefits that are promised under specific conditions Other long-term employee benefits Other long-term employee benefits are employee benefits (other than post-employment benefits and termination benefits) that are due to be settled beyond 12 months after the end of the period in which the employees render the related service. Other long-term employee benefits are accounted for using the procedures applicable for a defined benefit plan. However, all of the components of the net benefit cost are recognized in profit or loss. Termination benefits Termination benefits are employee benefits provided in exchange for the termination of an employee's employment as a result of either:
an entity's decision to terminate an employee's employment
before the normal retirement date; or an employee's decision to accept an entity's offer of benefits in exchange for the termination of employment. PAS 20 Accounting for Government Grants & Disclosure of Government Assistance Learning Objective: 1. Explain the recognition and measurement of government grants. 2. Explain the presentation of government in the financial statements Introduction of PAS 20 PAS 20 prescribes the accounting and disclosure of government grants and the disclosure of other forms of government assistance.
PAS20 does not apply
a. accounting for government grants under hyperinflationary economies b. tax benefits such as income tax holidays, investment tax credits, accelerated depreciation allowances and reduced income tax rates; c. government participation in the ownership of the entity; and d. government grants covered by PAS41 Agriculture.(PAS20) Government Grants Government Grants (sometimes called subsidies, subventions, or premiums ) are assistance received from the government in the form of transfers of resources in exchange for compliance with certain conditions. Examples: Receipts of cash, land, or other non-cash assets from the government subject to compliance with certain conditions Receipts financial aid in case of loss from calamity Forgiveness of an existing loan from government Benefit of a government loan with below-market rate of interest. Only government assistance that meet the asset recognition criteria are recognized as government grants. Accordingly, government grants exclude government assistance whose value cannot be reasonably measured or cannot be distinguished from the entity’s normal trading transactions. The following are forms of government assistance but are not government grants: Tax benefits Free technical or marketing advice Provision of guarantees Government procurement policy that is responsible for portion of the entity’s sales RECOGNITION Government grants are recognized if there is reasonable assurance that: a) The attached conditions will be complied with; and b) The grants will be received The mere receipt of grant is not conclusive evidence that the attached condition has been or will be satisfied Types of government grants according to attached condition 1. Grants related to assets- grants whose primary condition that the recipient entity should acquire or construct long-term assets. EXAMPLES; a)Cash is received from the government with the con that the amount should be used to acquire equipment b)Land is received from the government with the condition that a building should be constructed on it. 2. Grants related to income - grants other than those related to assets. MEASUREMENT : MONETARY GRANTS NON-MONETARY GRANTS
a. fair value of the non- a. amount of cash received
monetary asset received or or; b. alternatively, at nominal b. fair value of amount amount receivable Fair Value is “the price that would be received to sell an asset or paid to transfer liability in an orderly transaction between market participants at the measurement date”
Government Grants may also be in the form of
loan, such as: Forgivable loan-a loan that the lender (government) waives repayment subject to certain conditions; or Loan at below market - market rate of interest or zero- interest Approaches to the accounting for government grants CAPITAL APPROACH INCOME APPROACH
-grants is recognized -grant is recognized in
outside profit or loss in profit or loss over one equity or more periods.
PAS 20 uses the income approach. The capital approach is used
only when donations are received from shareholders Accounting for Grants related to depreciable assets
A. are recognized in profit of loss over
government grants the periods and in the proportions in which depreciation expense on those assets is recognized
Government Grants are “recognized in profit or
loss on a systematic basis over the periods in Grants related to non-depreciable
B. which the entity recognizes as expenses the assets are recognized in profit or related costs for which the are intended to loss when the costs of fulfilling the compensate”(PAS 20.12) attached condition are incurred. Accounting for government grant uses a ‘matching’ concept such that, if the related Grants received as financial aid for
C. expense is not yet recognized, income from expenses or losses already incurred are government grant is also not yet recognized immediately in profit or recognized. Accordingly: loss when the grant becomes receivable (because the related costs have already been expensed) GRANTS RELATED TO ASSETS Grants related to assets may be presented either by gross presentation or net presentation as follows:
Statement of financial position
Gross presentation Net presentation
-The grant is presented -The grant is deducted
as a deffered income from the carrying amount (liability) of the related asset GRANTS RELATED TO ASSETS Grants related to assets may be presented either by gross presentation or net presentation as follows:
Statement of comprehensive income (profit or loss section)
Gross presentation Net presentation
-The income from the grant -The income from the grant is reported separately or is deducted from the included in ‘Other income’ depreciation charge Grants related to income Grants related to income may also be presented either by gross presentation or net presentation as follows: Statement of comprehensive income (profit or loss section)
Gross presentation Net presentation
-The income from the grant -The income from the grant is reported separately or is deducted from the included in ‘Other income’ depreciation charge Repayment of Grants A government grant that become repayable for examples, due to future to satisfy the attached condition, is treated as a change in accounting estimate and accounted for prospectively. The repayment of a grant related to income is deducted from the related deffered income balance, if any. Any excess is recognized immediately as in profit or loss. The repayment of a grant related to asset is treated as a reduction in the deffered income balance or an increase in the carrying amount of the asset. The cumulative additional depreciation that would have been recognized in the absence of the grant is recognized immediately in profit or loss. Following repayment, the entity may need to consider the possibility of impairment of the new carrying amount of the asset Disclosure a. Accounting policy and method of presentation b. Nature and extent of government grants and other forms of government assistance from which the entity has directly benefited c. Unfulfilled conditions and contingencies attached to the government grants PAS 21 THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES LEARNING OBJECTIVES 1. Differentiate between the two ways of conducting foreign activities. 2. State the initial and subsequent measurements of foreign currency transaction. 3. Decribe the procedures in translating financial statements into a presentation currency. INTRODUCTION to PAS 21 PAS 21 prescribes the accounting for foreign activities and the translation of financial statements into a presentation currency.
Two ways of conducting foreign activities
1. Foreign Currency Transactions 2. Foreign Operations Two main accounting issues a. Which exchange rate(s) to use; and b. How to report the effects of changes in exchange rates in the financial statements. FUNCTIONAL CURRENCY - Is the currency in which the entity’s cash inflows and outflows are normally denominated into and is not necessarily the currency of the country where the entity is based.
Factors when determining its functional currency:
a. the currency that mainly influences the entity’s sale prices and cost of goods or services. b. the currency in which cash flows from financing activities and operating activities are usually generated and retained. FUNCTIONAL CURRENCY Factors when determining the functional currency of a foreign operation: the foreign operation is essentially an extension of the entity the proportion of the foreign operation transactions with the entity the nature of the foreign operation’s cash flows in relation to the entity.
Once determined, the functional currency is not changed unless there is a
change in underlying transactions, events, and conditions. A change in functional transaction currency is accounted for by translating the financial statements into the new functional currency prospectively from the date of change. All currenies other than entity’s functional currency are considered foreign currencies. FOREIGN CURRENCY TRANSACTIONS is “a transaction that is denominated or requires settlement in a foreign currency”. (e.g. import or export transactions that are settled in a foreign country.)
Initially Recognized by translating the foreign currency amount into the functional currency using the spot exchange rate at the date of the transaction.
Spot exchange rate - the current exchange rate on the given date. Date of a transaction - the date on which the transaction first qualifies for recognition in accordance with PFRS. Subsequent Measurement
Items Translated using
a. Monetary Items Closing rate
b. Nonmonetary items measured
Exchange rate at the date of transaction at historical cost
c. Nonmonetary items measured Exchange rate at the date when the fair at fair value value was determined.
Closing rate - the spot exchange rate at the reporting date.
MONETARY ITEMS vs NON-MONETARY ITEMS Monetary Items -are currencies held assets and liabilities to be received or paid in a fixed or determinable
Monetary Assets Monetary Liabilities
a. Cash and cash equivalents a. Accounts/Notes/Loans/Bonds payable
b. Accounts/Notes/Loans receivable b. Employee benefits to be paid in cash
c. Finance lease receivables c. Provisions and accrued payables to be settled in cash.
d. Cash surrender value d. Cash dividends payable.
MONETARY ITEMS vs NON-MONETARY ITEMS Non-monetary Items -are those which do not give rise to the receipt or payment of a fixed or determinable amount of money.
Non-monetary Items
a. Inventories e. Intangible assets
b. Prepaid Assets f. Goodwill
c. PPE g. Provision that are to be settled by the delivery of a non-monetary asset
d. Investment property h. Share capital and share premium.
MONETARY vs NON-MONETARY ITEMS Exchange Differences -Is “the difference resulting from translating a given number of units of one currency into another currency at different exchange rates.”
Exchange differences arising from settling or translating;
a. Monetary items are recognized in profit or loss in a period which they arises. b. Nonmonetary items - if the gain or loss is recognized in other comprehensive income (OCI), the exchange component of the gain or loss is also recognized in OCI. TRANSLATION OF FINANCIAL STATEMENTS An entity is required to present its financial statements using its functional currency. However, whenever needed, the entity may translate its financial statements into any presentation currency as follows; Items Translating using
a. Assets and Liabilities -Closing date at the date of the financial statement
b. Income and Expenses -Exchange rates at the dates of the transactions
All resulting exchange differences are recognized in other comprehensive income.
Presentation currency - is “the currency in which the (entity’s) financial
statements are presented. FOREIGN OPERATION -Is a subsidiary, associate, joint venture or branch that is based in a foreign country and is using a foreign currency. (e.g. A branch in another country.)
-When a foreign operation is disposed of, the cumulative amount of
exchange differences recognized in other comprehensive income and accumulated in equity is reclassified to profit or loss as a reclassified adjustment. FOREIGN OPERATION Disclosure a. Exchange differences recognized in profit or loss and OCI. b. The fact and reason for using a different presentation currency from the entity’s functional currency. c. The fact and reason for a change in functional currency. Thank you!
