#1.1 Remuneration - Employee benefits (IAS 19) - SHORT-TERM BENEFITS
Q1: "The salaried employees of Co A are entitled to 20 days paid leave each year. The entitlement accrues
evenly over the year and unused leave may be carried forward for one year. The holiday year is the same as
the financial year. At 31-12-X4, Co A has 2,200 salaried employees and the average unused holiday
entitlement is four days per employee. Approx. 6% of employees leave without taking their entitlement and
there is no cash payment when an employee leaves in respect of holiday entitlement. There are 255 working
days in the year and the total annual salary cost is £42m. No adjustment has been made in the FS's for the
above and there were no opening accrual required for holiday entitlement."
Short-term benefits
An accrual should be made under IAS 19 Employee Benefits for the holiday entitlement that can be carried
- Recognised as a liability as employee renders forward to the following year. This is because employees have worked additional days in the current period
service (ie accruals basis) (generating additional economic benefits for the company), but will work fewer days in the following period
when the salary for those days is paid. An accrual is therefore required to match costs and revenues and apply
- Not discounted the accruals concept.
- Accrue for short-term compensated absences (eg DR Operating costs P/L (£42m x 94% x 4 days / 255 days) £619,294
CR Accruals £619,294
holiday pay) that can be carried forwards
QϮ: "The salaried employees of Co A are entitled to 25 days paid leave each year. The entitlement
accrues evenly over the year and unused leave may be carried forward for one year. The holiday
year is the same as the financial year. At 31-May-X3, Co A has 900 salaried employees and the
average unused holiday entitlement is three days per employee. 5% of employees leave without
taking their entitlement and there is no cash payment when an employee leaves in respect of
holiday entitlement. There are 255 working days in the year and the total annual salary cost is
£19m. No adjustment has been made in the FS's for the above and there were no opening accrual
required for holiday entitlement."
IAS 19, Employee Benefits requires that an accrual be made for holiday entitlement carried
forward to next year.
No of days c/fwd: 900 x 3 x 95% = 2,565 days
No. of working days: 900 x 255 = 229,500
Accrual (2,,500) x £19m = £0.21m
DR Operating costs £0.21m
CR Accruals £0.21m
, #1.2 Remuneration - Employee benefits (IAS 19) - PENSIONS
[1] Defined contribution plans Q1: "Co A agrees to contribute 5% of employees' total remuneration into a post-employment plan each
period. In the YE 31-Dec-X9, the company paid total salaries of £10.5m. A bonus of £3m based on the income
- An entity pays fixed contributions into a separate for the period was paid to the employees in March 20Y0.
entity (a fund) and will have no legal or The company had paid £510k into the plan by 31-Dec-X9. "
constructive obligation to pay further Salaries £10,500,000
Bonus £3,000,000
contributions if the fund does not hold sufficient
£13,500,000 x 5% = £675,000
assets to pay all employee benefits relating to DR Staff costs expense £675,000
employee service in the current or prior periods CR Cash £510,000
CR Accruals £165,000
- Company's only obligation is agreed contribution
Q2: "Co A will make a contribution of £2.8m to Scheme B in the YE 31-Dec-X6, which has been recognised in
e.g. 5% of salary admin expenses. This scheme is for employees who are not eligible for Scheme A. Contributions create, for
an employee, a right to a portion of the scheme assets, which can be used to buy an annuity on retirement.
Contributions are fixed at 7% of the annual salary for the employer and 3% for the employee."
- Accounted for on an accruals basis Scheme B appears to be a defined contribution plan therefore the accounting treatment adopted by the
finance assistant is correct. This is a defined contribution plan because there is no obligation on the part of
Co A other than to pay its contribution of 7% to the pension fund.
DEFINED CONTRIBUTION VS DEFINED BENEFIT PLAN
- Co A wishes to account for its proposed pension plan as a defined contribution scheme, probably because the accounting is
more straightforward and the risk not reflected in the financial statements. However, although the entity's proposed plan
has some features in common with a defined contribution plan, it needs to be considered whether this is really the case.
- With defined contribution plans, the employer (and possibly, as proposed here, current employees too) pay regular
contributions into the plan of a given or 'defined' amount each year. The contributions are invested, and the size of the post-
employment benefits paid to former employees depends on how well or how badly the plan's investments perform. If the
investments perform well, the plan will be able to afford higher benefits than if the investment performed less well.
- With defined benefit plans, the size of the post-employment benefits is determined in advance ie, the benefits are
'defined'. The employer (and possibly, as proposed here, current employees too) pay contributions into the plan, and the
contributions are invested. The size of the contributions is set at an amount that is expected to earn enough investment
returns to meet the obligation to pay the post-employment benefits. If, however, it becomes apparent that the assets in the
fund are insufficient, the employer will be required to make additional contributions into the plan to make up the expected
shortfall. On the other hand, if the fund's assets appear to be larger than they need to be, and in excess of what is required
to pay the post-employment benefits, the employer may be allowed to take a 'contribution holiday' (ie, stop paying in
contributions for a while).
- The main difference between the two types of plans lies in who bears the risk: if the employer bears the risk, even in a
small way by guaranteeing or specifying the return, the plan is a defined benefit plan. A defined contribution scheme must
give a benefit formula based solely on the amount of the contributions.
- Co A's scheme, as currently proposed, would be a defined benefit plan. Co A, the employer, would guarantee a pension
based on the average pay of the employees on the scheme. The entity's liability would not be limited to the amount of the
contributions to the plan, but would be supplemented by an increase premium which the insurance company can increase if
required in order to fulfill the plan obligations.
- The trust fund which the insurance company builds up, is in turn dependent on the yield on investments. If the insurer has
insufficient funds to pay the guaranteed pension, Co A has to make good the deficit. Indirectly, through insurance
premiums, the employer bears the investment risk. The employee's contribution, on the other hand is fixed.
- A further indication that Co A would bear the risk is the provision that if an employee leaves Co A and transfers the pension
to another fund, Co A would be liable for, or would be refunded the difference between the benefits the employee is
entitled to and the insurance premiums paid. Co A would thus have a legal or constructive obligation to make good the
shortfall if the insurance company does not pay all future employee benefits relating to employee service in the current or
prior periods.
- In conclusion, even though the insurance company would limit some of the risk, Co A, rather than its employees, would
bear the risk, so this would be a defined benefit plan.
