Accounting For Employee Benefits

Chapter 13
Accounting for
employee benefits
Copyright 2010 McGraw-Hill Australia Pty Ltd

PPTs to accompany Deegan, Australian Financial Accounting 6e
13-1
Objectives of this lecture

Understand the various forms of benefits that
employees can receive from their 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

13-2
Overview of employee benefits
Employment agreement with employer results in employees

receiving various benefits (entitlements) in return for services
Accounting for employee benefits governed by AASB 119
Employee not actually defined in standard, but refers to:

a natural person appointed or engaged under a contract
of service, whether on a full-time, part-time, permanent,
casual or temporary basis
Employee benefits according to AASB 119 (par. 7)

All forms of consideration given by an entity in exchange
for service rendered by employees

13-3
Overview of employee
benefits (cont.)
Examples of employee benefits
Employee benefits can relate to such items as:
wages and salaries
annual leave
sick leave
long-service leave
superannuation
share entitlements
bonuses
other entitlements

13-4
benefits (cont.)
AASB 119 divides employee benefits into
categories
Short-term employee benefits

Post-employment benefits
Termination benefits
Other long-term employee benefits (e.g. superannuation)
Short-term employee benefits
Wages, salaries, social security contributions

Annual leave and sick leave to the extent that they are
paid within 12 months of the period in which the
employee renders the services
Benefits measured on an undiscounted basispresent
values not used
Refer to AASB 119 (par. 10)

13-5
benefits (cont.)
Other entitlements
Salaries and wages, social security contributions,
and other employee benefits (e.g. termination
payments, post-employment benefits and other
long-term employment benefits) that do not fall
due wholly within 12 months of the end of the
period in which the employee renders service
Related obligations to be discounted to present value
Discount rate used to be determined by reference to
market yields at the reporting date on high quality
corporate bonds

13-6
Salaries and wages

For short-term employee benefits such as salaries and
wages payable within 12 months of the end of the
reporting period no requirement to discount any
outstanding obligations to present value
For salaries and wages payable more than 12 months
after the end of the reporting period any outstanding
obligation should be discounted to its present value
Liabilities arise only where the services have already
been rendered by the employee but the associated
entitlements have not been paid as at the reporting date

13-7
Salaries and wages (cont.)

Salaries and wages may be treated as an expense in
the same period in which the obligation to make the
payment is recorded
May be carried forward as an asset in certain
circumstances (e.g. when labour cost relates to
inventories)
Initially recorded as work in progress, transferred to
finished goods and then expensed as part of cost of
goods sold
Cost of employee benefits can also be included in
cost of property, plant and equipment (refer to AASB
116 Property, Plant and Equipment, par. 17)

13-8

Salaries and wages expenses may include:
wages and salaries
PAYG tax
medical benefits
Salaries and wagesAccounting entry at reporting

date
Dr Wages and salaries expense
Cr PAYG tax payable
Cr Medical benefits payable
Cr Wages and salaries payable
.

13-9

Salaries and wagesEntry paid after reporting date
Dr
Dr
Salaries and wages expense (incurred

since reporting date)
Salaries and wages payable (owing at
reporting date)
Cr
PAYG tax payable
Cr
Medical benefits payable (both
incurred since reporting date)
Cr
Cash (payment to employees)

13-10

Salaries and wagesRemittance to tax office and
medical fund
Dr PAYG tax payable
Dr Medical benefits payable
Cr
Cash
Refer to Worked Example 13.1 on page 417
Accounting for salaries and wages

13-11
Worked Example 13.1Accounting for

salaries and wages
Thruster Ltd employs its staff on a five-day work week, with
employees being paid on Fridays. The weekly salaries expense is
$10 000 and employees are paid in arrears. That is, when the
employees are paid, the salaries paid are for work performed in
the preceding week. Thruster Ltd retains $3000 per week to pay
the Australian Taxation Office for PAYG tax on behalf of the
employees. This is paid on the following Monday of each week. It
also retains $500 per week to pay staff premiums to the Oceanic
Medical Benefits Fund.
If we assume that the reporting date falls on a Thursday, what
would the accounting entry at reporting date be to recognise four
days salary and wages expense?

13-12
Worked Example 13.1Solution

Dr
Cr
Cr
Cr
Wages and salaries expense

PAYG tax payable
Oceanic MBF payable
Wages and salaries payable
8 000
2 400
400
5 200
When the wages are ultimately paid to employees on Friday, the

entry would be:
Dr Wages and salaries expense
2 000
Dr Wages and salaries payables 5 200
Cr PAYG tax payable
600
Cr Oceanic MBF payable
100
Cr Cash
6 500

13-13
Worked Example 13.1Solution (cont.)

When the amounts are paid to the Australian Taxation
Office (ATO) and the medical fund on Monday, the
entry would be:
Dr
Dr
Cr
PAYG tax payable

Oceanic MBF payable
Cash
3 000
500
3 500

13-14
Annual leave
Typical in Australia for employees to be granted four
weeks annual leave entitlement each year
May also receive annual leave loading (17.5%)
To the extent that the obligation is payable within 12
months of the reporting date, there is no need to
discount the obligation to its present value

13-15
Annual leave (cont.)

Accounting for annual leave
To recognise annual leave obligation throughout the year
Dr
Annual leave expense
Cr
Provision for annual leave
When annual leave taken
Dr
Provision for annual leave
Cr
PAYG tax payable
Cr
Cash at bank
Refer to Worked Example 13.2 on pp. 418Accounting for
annual leave

13-16
On-costs
On-costs also to be considered when calculating
employers obligations for employee benefits
On-costs include:
Payroll tax
Workers compensation insurance
Superannuation contributions

13-17
Sick leave
Necessary to divide sick leave into two types of

entitlements:
1. Vesting sick-leave entitlements
2. Non-vesting sick-leave entitlements

13-18
Vesting sick leave

Accounting for vesting sick-leave entitlements
Vestingemployee has a right to receive the calculated
amount in cash, even if the employee leaves the
employer
Accounted for in the same manner as annual leave

13-19
Non-vesting sick leave

Accounting for non-vesting sick-leave entitlements
Only paid upon a valid claim for sick leave by the
employee
Only that part which has accumulated through past
service and which is expected to be taken should be
recognised as a liability and then only when it is capable
of being reliably measured

13-20
Non-vesting sick leave (cont.)

(cont.)
Journal entry each week (based on past experience)
Dr Sick-leave expense
Cr Provision for sick leave

13-21
Non-vesting sick leave (cont.)

(cont.)
If employees are sick, their entitlements are charged to
sick leave instead of salaries and wages:
Dr Provision for sick leave (wages during sick leave)
Dr Salaries and wages (wages for rest of period)
Cr
PAYG tax payable
Cr
Cash at bank

13-22
Long-service leave
Employees within Australia typically receive an
entitlement to take an extended amount of leave
after working for an employer for a specific number
of years
Although no long-service leave may actually be paid
in a given year, the employer must recognise an
expense and an associated liability
Long-service liabilities must be accrued and the
liability measured at its present value to the extent
that the obligation is payable beyond 12 months after
reporting date
Guidance to be found in AASB 119 Australian
Guidance (pars G4 to G8)
.

13-23
Long-service leave (cont.)
Three common long-service leave entitlement

categories (in terms of par. G4)
1. Preconditional period
2. Conditional period
3. Unconditional period

13-24

Many judgments required in determining long-service
leave liability
Consideration given to such factors as:
- probability employee will stay until such time as they
have an LSL entitlement
- salary being earned at the time of receiving the LSL
entitlement (inflation, promotion prospects, etc.)

13-25

Recall
- AASB 119 requires estimated future cash flows to be
discounted to present value when measuring benefits to be
paid beyond 12 months from the reporting date
Discount rate for entitlements

To be based on rates generated by high quality bonds
Bond rates selected must generally match the expected
timing of the long-service leave entitlements

13-26

Calculating long-service leave liability
Need to calculate:
projected salary
current salary (1 + inflation rate)n
accumulated LSL benefit
years of employment / total no. of periods required to
be served before leave can be taken weeks of LSL
entitlement available after conditional period has
been served / 52 projected salary

13-27

Calculating long-service leave liability (cont.)
Present value of LSL obligation
accumulated LSL benefit/(1 + appropriate bond rate)n
Probability that LSL will be paid
determined by reference to prior experience within
the organisation and industry

13-28

Accounting entries for long-service leave
Entry to recognise the LSL expense
Dr Long-service leave expense
Cr
Provision for long-service leave
Provision broken up into current and non-current portion
Entry when LSL is subsequently taken

Dr Provision for long-service leave
Cr
Cash at bank
Refer to Worked Example 13.4 on pp. 421Accounting for

long-service leave

13-29
Long-service leave (LSL)Lecture illustration

Torquay Ltd has five employees
Torquay Ltds employees are entitled to 13
weeks LSL after 15 years of continuous service
Employees who cease employment with Torquay
Ltd after 10 years service are entitled to a prorata payment of accumulated LSL

13-30

(cont.)
Employee name
Years of service at
30 June 2011
Current salary at
30 June 2011
(salaries are
expected to increase
by 10% p.a.)
Megan
$35 000
Mike
$45 000
Mack
$55 000
Melissa
$95 000
Mary
$75 000

13-31
An examination of past employment records

reveals the following:
Years of
completed
Service
Probability of employee completing the 10 years

of service and qualifying for pro-rata LSL benefits
5%
10%
85%
95%

13-32

(cont.)
Interest rates on high quality corporate bonds at 30 June 2011 are
as follows:
Years to maturity of
corporate bond
Interest rate on corporate bonds at

30 June 2011
6.5%
7.0%
9.0%
9.5%

13-33

(cont.)
The balance in the provision for LSL brought forward
from 30 June 2010 is $19 700
Calculate the LSL liability of Isis Ltd at 30 June 2011,
and prepare the journal entry to adjust the balance of
the provision for LSL on 30 June 2011

13-34
LSLLecture illustration
Projected future salaries
Employee
Projected future salary when LSL vests, (i.e. when

employee qualifies for pro-rata LSL benefits)
Megan
$35 000 x (1.05)9 =
$54 296
Mike
$45 000 x (1.05)8 =
$66 485
Mack
$55 000 x (1.05)2 =
$60 638
Melissa
$95 000 x (1.05)2 =
$104 738
Mary
$75 000 x (1.05)1 =
$78 750

13-35
Accumulated LSL benefits
Employee
Accumulated LSL benefits at 30 June 2011

(resulting from past service up to 30 June 2011)
Megan
$54 296 x 13/52 x 1/15 =
$905
Mike
$66 485 x 13/52 x 2/15 =
$2 216
Mack
$60 638 x 13/52 x 8/15 =
$8 085
Melissa
$104 738 x 13/52 x 8/15 =
$13 965
Mary
$78 750 x 13/52 x 9/15 =
$11 813

13-36
PV of accumulated LSL benefits
Employee
PV of accumulated LSL benefits at 30 June 2011

(discounted using corporate bond rates 30 June
2011)
Megan
$905 x (1.095)-9 =
$400
Mike
$2216 x (1.09)-8 =
$1 112
Mack
$8085 x (1.07)-2 =
$7 062
Melissa
$13 965 x (1.07)-2 =
$12 198
Mary
$11 813 x (1.065)-1 =
$11 092

13-37
LSL liability
Employee
LSL liability at 30 June 2011 (reflecting probability

of employee qualifying for LSL benefits)
Megan
$400 x 0.05 =
$20
Mike
$1112 x 0.1 =
$111
Mack
$7062 x 0.85 =
Melissa
$12 198 x 0.85 =
$10 368
Mary
$11 092 x 0.95 =
$10 537
Total LSL liability at 30 June 2011

$6 002
$27 038
13-38
30 June 2011Journal entry
Dr LSL expense
$7 338
Cr Provision for LSL
$7 338
[$27 038 (required balance on 30 June 2011) - $19
700 (existing balance)]

13-39
Superannuation
AASB 119 addresses how a reporting entity is to account for

the superannuation entitlements of its employees, as well as
other post-employment benefits such as post-employment
life insurance and post-employment health care
AAS 25 Financial Reporting by Superannuation Funds

outlines how a superannuation plan itself should account for
the plans assets, liabilities, revenues, and expenses
(covered in Chapter 23)
Focus in this chapter on contributions of employers and not

how superannuation funds account for their resources
Where an entity provides post-employment benefits (e.g.

superannuation) considered to be post-employment benefit
plan
13-40
Superannuation (cont.)
Post-employment benefit plans classified as either:
defined contribution plans
defined benefit plans
Defined contribution plan
A superannuation benefit scheme under which amounts to
be paid as retirement benefits are determined by
contributions made to the fund together with investment
earnings on those contributions
Defined benefit plan
A superannuation benefit scheme under which amounts to
be paid as retirement benefits are paid from an aggregated
fund by reference to a members annual salary or are paid
as a specified amount regardless of contributions made by
the employee

13-41
Overview of defined contribution plans
Employers contribution to a plan is set at a specified amount

Employees final payout depends on factors such as
earnings generated by contributions
Employer therefore does not specify final payment to
employee

13-42
Overview of defined contribution plans (cont.)
Accounting relatively straightforward (refer to AASB
119, par. 44)
Contribution recognised as an expense (unless part of cost
of inventory or property, plant and equipment)
Associated liability limited to amount of obligation unpaid by
employer at end of year
Obligations are measured on an undiscounted basis,
except where they do not fall due wholly within 12 months
after the end of the period in which the employees render
the related service (under AASB 119, par. 43)

13-43
Overview of defined contribution plans (cont.)
Where contributions to a defined contribution plan do not fall
wholly within 12 months after the end of the period in which the
employees render the related service, they are to be discounted
using the discount rate specified in paragraph 78 (under AASB
119, par. 45)
Entity to disclose the amount recognised as an expense for
defined contribution plans (under AASB 119, par. 46)
Refer to Worked Example 13.5 on page 424

Accounting for contributions to a defined contribution
plan

13-44
Accounting for employers obligation to a defined contribution
superannuation plan
Dr
Employee benefits costsuperannuation

Cr
Employee benefits payable
When amount paid

Dr
Employee benefits payable

Cr
Cash at bank

13-45
Overview of defined benefit plans
More complex accounting issues involved than with defined

contribution plans
Defined benefit superannuation plan established by
employer to, for example, provide employees with a pension
of 40% of their final salary after reaching age of 60
Employers need to determine amount to contribute to fund
so as to ensure obligation is met taking into account:
projected final salary, earnings rates of the fund, costs
associated with managing fund, probability employee will
stay until retirement

13-46
Overview of defined benefit plans (cont.)
Employer effectively bears the risks associated with the

earnings of the fund, as compared with a defined
contribution plan where employer pays a set amount and
employee receives whatever the plan has earned
Large proportion of AASB 119 dedicated to defined benefit
plans
Need to know whether the fund (possibly externally
managed) accepts the risks of unexpected changes in
earnings or whether employer retains associated risks

13-47
Overview of defined benefit plans (cont.)
Defined benefit plans may be unfunded, or they may be
wholly or partly funded by contributions by an entity, and
sometimes its employees, to an entity or fund that is legally
separate from the entity and from which the employee
benefits are paid
The payment of funded benefits when they fall due depends
not only on the financial position and the investment
performance of the fund but also on an entitys ability (and
willingness) to make good any shortfall in the funds assets
Therefore, the entity is, in substance, underwriting the
actuarial and investment risks associated with the plan
Consequently, the expense recognised for a defined benefit
plan is not necessarily the amount of contributions for the
period

13-48
Steps in accounting for defined benefit plans
(a) Estimate of benefits that an employee has earned
Assumes knowledge of formula used to determine benefits

to be provided to the employer
Obligations of the entity require consideration of whether:

benefits have vested in the employee (ultimate payment
of the benefit earned in the current period is not
conditional on satisfying any further service
requirements)probability of payment then 100%
benefits have not vesteduse of probabilities of
satisfying service required and will reduce the expense
recognised by entity in current period
If obligations fall due beyond 12 months after reporting
date they are required to be discounted to their present
value

13-49
Steps in accounting for defined benefit plans (cont.)
(b) Determine the present value of the defined benefit
obligation
If obligations fall due beyond 12 months after reporting

date they are required to be discounted to their present
value
Discount rate to be used (funded and non-funded) to be

determined by reference to market yields at the reporting
date on high quality corporate bonds (AASB 119, par. 78)
Par. 78 also provides that in countries where there is no

deep market in such bonds, the market yields (at reporting
date) on government bonds shall be used. The currency
and term of the corporate bonds or government bonds
shall be consistent with the currency and estimated term of
the post-employment benefit obligation

13-50
(c) Determine the fair value of the plans assets
Need to assess whether the employer has any outstanding

obligation for superannuation at year end by comparing the
closing obligation for superannuation entitlements (refer to
(b)) with the fair value of the plans assets
If fair value of plans assets matches expected payout to

employees then no further liabilities exist
If fair value exceeds the obligation then an asset would

exist

13-51
(c) Determine the fair value of the plans assets (cont.)
Fair value of plans assets (AASB 119, par. 102)
Fair value of any plan assets is deducted in determining

the amount recognised in the statement of financial
position
When no market price is available, the fair value of the plan

is estimated, i.e. discounting expected future cash flows
using a discount rate that reflects both the risk associated
with the plan assets and maturity or expected disposal date
of those assets
If the assets have not attained maturity, the expected

period until the settlement of the related obligation

13-52
(d) Determine the amount of the actuarial gains and losses
(cont.)
When determining accounting entries to be made in relation
to the defined benefit liability of an entity, actuarial gains and
losses must be recognised as part of the income or
expense of the period
AASB 110 (par. 94)
Actuarial gains and losses may result from increases or
decreases in either the present value of a defined benefit
obligation or the fair value of any related plan assets

13-53
(cont.)
Causes of actuarial gains and losses include:
unexpected high or low rates of employee turnover, early
retirement or mortality or of increases in salaries, benefits (if
the formal or constructive terms of a plan provide for
inflationary benefit increases) or medical costs
the effect of changes in estimates of future employee
turnover, early retirement or mortality or of increases in
salaries, benefits (if formal or constructive terms of a plan
provide for inflationary benefit increases) or medical costs
the effect of changes in the discount rate, and
differences between the actual return on plan assets and the
expected return on plan assets (refer to pars 105107)

13-54
(cont.)
AASB 119 (par. 105)
Expected return on the plans assets is one component of

the expense recognised in the statement of comprehensive
income
The difference between the expected rate of return on plan

assets and the actual rate of return on plan assets is an
actuarial gain or loss
Differences between the expected and actual returns on

high quality corporate bonds will lead to actuarial gains and
losses

13-55
Determination of the closing liability for each period
Need to assess the difference between the present value

of the obligation to the employees and the fair value of the
plans assets that are available to meet the obligation to the
employees

13-56
Determining the total expenses to be recognised in relation to
the defined benefit plan often involves consideration of:
- current service costs
- interest costs
- expected return on assets
- net actuarial gain or loss
Disclosure requirements
- Outlined in AASB 119 (par. 120)

13-57
Accrued employee benefits and corporate

collapses
The mere act of making an accrual does not guarantee cash

reserves available to make payment should the employer
become insolvent
Under law employees have some preferential access to
payment
Amount available is affected by:
existence of secured creditors
amount of assets available
Calls for establishment of central funds to protect claims of
employees

13-58
Summary
Purpose of the lecture to discuss accounting for employee

benefits (entitlements), including application of the relevant
accounting standard, AASB 119 Employee Benefits
Examples of benefits include:
wages and salaries
annual leave
sick leave
long-service leave
superannuation
share entitlements
bonuses

13-59
Summary (cont.)
Wages and salaries payable within 12 months of reporting date
are to be recorded at their nominal amount, and liabilities are to
be recognised where salaries have been incurred but
employees have not been fully paid at reporting date
Annual leave liabilities payable within 12 months of reporting
date are to be recognised at the nominal amount of the
entitlement. At year end there will generally be a provision for
vesting
Obligations for employee benefits, inclusive of salaries and
wages, that are payable beyond 12 months after reporting date
are to be recorded at their present value
The discount rate to be used to determine present values is
determined by reference to market yields at the reporting date
on high quality corporate bonds. The currency and term of the
bonds are to be consistent with the currency and estimated term
of the post-employment benefit obligations

13-60
Summary (cont.)
Sick leave is to be divided into vesting and non-vesting
entitlements. For accounting purposes, vesting sick leave can be
treated in the same manner as annual leave. With non-vesting
sick leave, only the part of the entitlement that is accumulated
through past service and that is expected to be taken should be
recognised as a liability within the financial statements
Long-service leave (LSL) entitlements are to be accrued and the
liability is to be measured at its present value. The determination
of the obligation and the expense for LSL will require various
assumptions, including assumptions about future pay levels,
promotion prospects, inflation rates and the likelihood of LSL
entitlements ultimately vesting. Failure to recognise LSL
obligations can lead to a significant understatement of recorded
liabilities
Post-employment benefit plans are classified as either defined
contribution plans or defined benefit plans. Accounting treatments
for defined benefit plans are a great deal more complex than the
requirements relating to defined contribution plans

13-61

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Chapter 13

Copyright 2010 McGraw-Hill Australia Pty Ltd

Objectives of this lecture

Copyright 2010 McGraw-Hill Australia Pty Ltd

Overview of employee benefits

Employment agreement with employer results in employees