ACCA 3 DIPAC Employee benefits_Leases_Events after Reporting Period.docx

7/30/2019 ACCA 3 DIPAC Employee benefits_Leases_Events after Reporting Period.docx

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| P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework Presentation Revenue - Change in Acc Policies Incom

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CONTENTS:

MPLOYEES BENEFITS IAS 19 , IFRIC 14 , AC504 ..............................................................................................................................

SPECIALNOTES: ..............................................................................................................................................................................................................

CHANGES FROM 2011 : STILL TO CHANGE HERE: ..................................................................................................................................................FUNNY DEFINITIONS: read all all these have something funny in them ..................................................................................................

Different Places where Items are recognised on a straight line basis over no. yrs: .................................................................................

different meanings of vest ...................................................................................................................................................................................................

SFP Holding accounts used in this chapter: ................................................................................................................................................................

SCOPE ..................................................................................................................................................................................................................................

SHORTTERMEMPLOYEEBENEFITS .....................................................................................................................................................................

POSTEMPLOYMENTBENEFITS: .............................................................................................................................................................................

1- Post employment benefits : DEFINED CONTRIBUTION PLANS...................................................................................................................

2- post employment benefits :DEFINED BENEFIT PLANS ...................................................................................................................................

DEFINED BENEFIT ASSETS AND THE ASSET CEILING ........................................................................................................................................

IFRIC 14 AVAILABILITY OF REFUNDS etc. AND MINIMUM FUNDING REQUIREMENTS: ...................................................................

CURTAILMENTS AND SETTLEMENTS: .........................................................................................................................................................................

OTHER CONSIDERATIONS: .................................................................................................................................................................................................

OTHERLONGTERMEMPLOYEEBENEFITS ........................................................................................................................................................

TERMINATIONBENEFITS ...........................................................................................................................................................................................

METHOD: ...........................................................................................................................................................................................................................

SFP: ................................................................................................................................................................................................................................................

PRESENTATION&DISCLOSURE SEE EXAMPLE GAAP PG 321.-FINAL DISCLOSURE EXAMPLE. ...................................................................

EASES IAS 17 ,IFRIC 4, SIC15, SIC27, CIRCULAR 1/2006&12/2006 ..........................................................................................

BASICS: .........................................................................................................................................................................................................................................

SCOPE: ..........................................................................................................................................................................................................................................

DEFINITIONS: ...........................................................................................................................................................................................................................

FUNDAMENTAL CONCEPTS: note these tricky terms before continuing they are convoluted. ......................................................

CLASSIFICATION OF LEASES: ...........................................................................................................................................................................................

OPERATING LEASE'S IN FINANCIAL RECORDS OF LESSEE: .............................................................................................................................................

OPERATING LEASE'S IN FINANCIAL RECORDS OF LESSOR: .............................................................................................................................................

FINANCELEASESINBOOKSOFLESSEE: ..............................................................................................................................................................

AS10 EVENTS AFTER THE REPORTING PERIOD : IAS10 ................................................................................................................

MAJORPOINTINIAS10: ..............................................................................................................................................................................................

Background ................................................................................................................................................................................................................................

METHOD ......................................................................................................................................................................................................................................

DATE OF AUTHORISATION OF FIN. STATS. ................................................................................................................................................................

DIVIDENDS .................................................................................................................................................................................................................................

GOING CONCERN .....................................................................................................................................................................................................................

DISCLOSURE: .............................................................................................................................................................................................................................


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AS37 PROVISIONS, CONTINGENT ASSETS AND CONTINGENT LIABILITIES IAS37 , IFRIC 5, IFRIC6. .............................

SCOPE ..................................................................................................................................................................................................................................


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EMPLOYEES BENEFITS IAS 19 , IFRIC 14 , AC504

IT IS OFTEN VERY UNCERTAIN around the measurement of the cost to employers of employee benefits is. Thus IAS 19 hel

clear it up and allow users of fin stats adequate understanding .

PECIAL NOTES:

CHANGES FROM 2011 : STILL TO CHANGE HERE:

1.

FUNNY DEFINITIONS: READ ALL ALL THESE HAVE SOMETHING FUNNY IN THEM

1. Funded or Unfunded: funded means there is a separate fund as a separate legal entity, which handles it and to whi

contributions are paid and benefits are paid from. Unfunded means there is not., the company does it itself.

2. Employee benefitsare all forms of consideration given by an entity in exchange for service rendered by employees.Short-term employee benefitsare employee benefits (other than termination benefits) that are due to be settled within

twelve months after the end of the period in which the employees render the related service.

Post-employmentbenefitsare employee benefits (other than termination benefits) which are payable after the complet

of employment.

Defined contribution plansare 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 n

hold sufficient assets to pay all employee benefits relating to employee service in the current and prior periods.

Defined benefit plansare post-employment benefit plans other than defined contribution plans.

Multi-employer plansare defined contribution plans (other than state plans) or defined benefit plans (other than state

plans) that:

(a) pool the assets contributed by various entities that are not under common

control; and

(b) use those assets to provide benefits to employees of more than one entity,

on the basis that contribution and benefit levels are determined without regard to the identity of the entity that empl

the employees concerned.

Other long-term employee benefitsare employee benefits (other than post-employment benefits and termination bene

that are not due to be settled within twelve months after the end of the period in which the employees render the rela

service.

Vested employee benefitsare employee benefits that are not conditional on future employment.

0.Thepresent value of a defined benefitobligationis the present value, without deducting any plan assets, of expected fut

payments required to settle the obligation resulting from employee service in the current and prior periods.1.The return on plan assetsis interest, dividends and other revenue derived from the plan assets, together with realised a

unrealised gains or losses on the plan assets, less any costs of administering the plan (other than those included in the

actuarial assumptions used to measure the defined benefit obligation) and less any tax payable by the plan itself.

2.Plan assetscomprise:

(a) assets held by a long-term employee benefit fund;AND AND AND AND

(b) AND AND AND AND qualifying insurance policies.

Assets held by a long-term employee benefit fundare assets (other than non-transferable financial instruments issued b

reporting entity) that:

(a) are held by an entity (a fund) that is legally separate from the reporting entity and exists solely to pay or fund employ

benefits; and


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(b) are available to be used only to pay or fund employee benefits, are not available to the reporting entitys own credito

(even in bankruptcy), and cannot be returned to the reporting entity, unless either:

(i) the remaining assets of the fund are sufficient to meet all the related employee benefit obligations of the plan or the

reporting entity; or

(ii) the assets are returned to the reporting entity to reimburse it for employee benefits already paid.

A qualifying insurance policyis an insurance policy* issued by an insurer that is not a related party (as defined in IAS 24

Related Party Disclosures ) of the reporting entity, if the proceeds of the policy:

(a) can be used only to pay or fund employee benefits under a defined benefit plan; and(b) are not available to the reporting entitys own creditors (even in bankruptcy) and cannot be paid to the reporting e

unless either:

(i) the proceeds represent surplus assets that are not needed for the policy to meet all the related employee benefit

obligations; or

(ii) the proceeds are returned to the reporting entity to reimburse it for employee benefits already paid.

13.REIMBURSEMENT RIGHTS : If another partly MUST reimburse some/all of cost required to settle a Defined Benefit

Obligation eg: non- qualifying insurance policy etc. This can be recognized as a SEPARATE ASSET in the companies b

ie:like all normal assets ,when it is virtually certain it will be paid.BUT NOT AS PLAN ASSETS, so it may not be offset ag

defined benefit obligation.

14.

DIFFERENT PLACES WHERE ITEMS ARE RECOGNISED ON A STRAIGHT LINE BASIS OVER NO. YRS:

1)"Projected Unit Credit Method of Actuarial Evaluation: the EXCEPTION: there is 1 exception: When in later yrs the form

has a materially higher percentage/s in later years ( like 10 % in yr 1-8 but 20% of salary from after 8 yrs service) THEN

entity should apportion benefits on a straight line basis from start of benefit entitlement to day percentages will not chang

anymore.

2)For DEFINED BENEFIT OBLIGATION , in "Past service costs" : Unvested benefits:

DIFFERENT MEANINGS OF VEST

1. Vested benefits: benefits that are NOT conditional on future employment.

2. Unvested benefits: benefits that ARE CONDITIONAL on future employment.

1. ACCUMULATING LEAVE PAY: eg: vacation leave : THERE ARE 2 TYPES

a. VESTING LEAVE PAY: (note : different meaning to vested&unvested benefits in Past Service Costs of Defined Be

Plans ) vesting means leave days accumulated at end of reporting period that entity must pay money to

employee for if he ever decides to resign - so this leave can may never be forfeited no matter what happens.(saccrued leave only lasts 1 year , or 2 years then it is forfeited, or if you leave job you dont get paid out for it, bu

some must get paid out) It should be obvious from this that an obligation arises for leave pay daily as employe

renders services and gets extra leave pay each day accumulated . All this leave pay MUST only be raised as a lia

at (??when??reporting date though.)

b. NON-VESTING LEAVE PAY: this is leave which can be possibly forfeited if employee leaves work- so it may be us

leave or may be forfeited cause it cannot be claimed as actual moneyever. IAS 19 says entity must estimate ho

many days will probably be used/taken as leave in future , and how many will probably be forfeited.

SFP HOLDING ACCOUNTS USED IN THIS CHAPTER:

1. ACTUARIAL GAINS /LOSSES ACCOUNT HAS 2 OTHER ACCOUNTS IT COMES FROM : : IAS 19 requires that the Defined

benefit Obligation & Plan Assets must be actuarily valued .


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a. Defined benefit account : The difference from the Actuaries valuation and the Book Value then reduces/increas

the Defined Benefit Obligation Account. The CONTRA account is NOT in P&L, but rather it is another SFP HOLD

account: the Unrecognised Actuarial Gain/Loss account. It is kept in this account so long and recognized in P&

later.

b. Plan Assets :

2. PAST SERVICE COST ACCOUNT :

a. Note NB: NB: PUT ON SAME SIDE IN SFP AS IT WOULD BE FOR AN EXPENSE/INCOME. it is an EQUITY account,

DR in SFP would reduce equity (expense) and a CR would increase equity (income) ( not sure if first is a liabilityor what since the Defined Benefit Ob;igation acc is the liability acc- maybe its an an Equity account?under wh

heading in SFP does it go ans:seems to be an equity holding account! )

b. (Note NB :POSITIVEpast service costs means yes it is a expense , NEGATIVE means it is an income so a nega

cost is a income basicly.

c. This is where: Past periods of service a worker already has accrued are affected by either: benefits are introduc

the first time, OR where a change is made by the company to the formula for calculating benefits, NOT for curre

years service but for PRIOR PERIODS OF SERVICE only.

d. Method: (important : quickly SEE EXAMPLE pg. 287 GAAP book) First work out the PV of what you work out as

change in benefits , then

i. 1st

:Funny part : First send to a SFP HOLDING account called Unrecognised Past Service Cost CONTRA Defined BeneObligation liability account.

MISTAKES YOU MAKE IN EXERCISES:

1. Defined Benefit Obligation incr/decr. : Rem : Note : An incr. in defined benefit obligation acc. from actuarial valuat

is actually a LOSS- so it decreases Unrecognised Actuarial Gains on the Dr side of course ( you regarded a incr. a

Gain)In Plan Assets acc it is visa versa of course.

2. Benefits Paid :REM that all benefits paid NEVER go to staff costs they are a creditor payment onlyof a creditor r

long ago, depending if Plan Assets were used to pay them or if normal Bank was used to pay them . DEFAULT is alw

plan assets account if nothing mentioned in exam on which is used to pay the benefits. The creditor payment is

BETWEEN Plan Assets/or Bank and Defined Benefits Obligation account. This is because the defined benefits is like

pension the staff costs only come into it as the employee builds up his pension fund by work. BUT when they are out to him it is NOT a staff cost anymore, but a pension payout from the Defined Benfits Plan .

a. Journals: Note : not Staff costs CONTRA Plan Assets at all !!! Just:

i. Defined Benefit Obligation Liability: (SFP) 500

1. Plan Assets (SFP) 500

3. JOURNALS : BANK : no need to first do : creditor employee then a separate Bank-pay creditor out Journals for

anything with bank just leave out the creditor part and go direct : Staff costs: salaries CONTRA Bank to keep it fast

exam- vertabim unisa answers.

4. JOURNALS FOR : FOR ALL ACCRUALS: eg: accrued leave pay or accrued bonus: never reverse old accruals from end

year that were not all used up in the current year and then do a new one, rather just adjust last years C/B of accru

left over if it was not al lused up for some reason to this years level- so this ADJUSTMENT is your journal entry, NOT

actual figure:

a. CALCULATIONS: show for marks : 100% per unisa marksheeti. O/B begin yr Accruals bonuses or leavepay

ii. Amount actually used this yearof accrual

iii. C/B left over

iv. Calc . this yrs needed accrual

v. Minus left over from last yr

vi. = Journal adjustment to actually go do.

5.


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COPE

1. Covers all employee benefits EXCEPT those covered by IFRS 2 Share based Payment.

2. Does NOT deal with accounting by employee benefit plans themselves , as a entity - see IAS 26 employee benefit p

3. Includes: special payments for some wrong done by company, state insurance ,normal benefits, wages , sick leave ,

PENSION, etc.+ fringe benfits eg housing , car etc.

4. Incl. benefits that may be settled by cash or goods & services to employees or dependants.

5. Incl. directors & management

HORT TERM EMPLOYEE BENEFITS

1. Definition: Short term employee benefits are those due to be settled within 12 mnths EXCLUDING termination bene

termination benefit is ONLY for retrenchment )

2. There are 4 categories of these:

a. Salaries & Wages.

b. Short term compensated absences : sick leave and annual leave.

c. Profit sharing & bonuses.

d. Non-monetary benefits : fringe benfits incl. subsidized goods or services.

3. SHORT TERM EMPLOYEE BENEFITS : RECOGNITION : When an employee has rendered service to an entity duri

an accounting period, the entity shall recognise the undiscounted amount of short-term employee benefits expect

be paid in exchange for that service: (all typesspecial instances get extra explanation IN THEIR headings below to b

added to this)

a. as an expense, unless another Standard requires or permits the inclusion of the benefits in the cost of an as(see, for example, IAS 2 Inventories and IAS 16 Property, Plant and Equipment). AND

b.AND as a liability (accrued expense), after deducting any amount already paid. If the amount already paidexceeds the undiscounted amount of the benefits, an entity shall recognise 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 crefund; and

4. Paragraphs 11, 14 and 17 explain how an entity shall apply this requirement to short-term employee benefits in theform of compensated absences and profit-sharing and bonus plans.

SALARIES & WAGES

1. Normally : Cost to Company = a Basic Salary certain Top ups

2. Gross Salary of employee = total wages he earns before tax &deductions BUT less what company pays in for med

etc. ( so if company pays 4% of salary to pension and R3000 to med aid , this is a company contribution, and NOT part

his gross salary. If it says R2000 is deducted from his salary to pay med aid, this DOES form part of gross salary, just

company contrbutions does not)

3. JOURNALS : (here below the cost to company is R1500 but the Gross Salary is only R1000.)a. Dr Staff Costs R1000 (recognition of basic salary)

i. CR creditor : Employee R500 (cash )

ii. CR creditor : Med Aid R100 (deduction from salary to be paid over to med. aid on behalf of

employee)

iii. CR creditor :SARS R150 (PAYE & SITE)

iv. CR creditor : provident fund R 250 (pension)

b. DR Staff Costs R500 (recognition of company contributions)

i. CR creditor : Med Aid R250 (company contribution not a deduction but paid by company

ii. CR creditor : provident fund R 250 (company contribution not a deduction but paid by compa

SHORT TERM COMPENSATED ABSENCES (sick leave & annual leave)


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1. Recognition:

a. IAS 19.11 : An entity shall recognise the expected cost of short-term employee benefits in the form ofcompensated absences under paragraph 10 as follows:

i. (a) in the case of accumulating compensated absences, when the employees render service thatincreases their entitlement to future compensated absences; and

ii. (b) in the case of non-accumulating compensated absences, when the absences occur.

2. Eg leave pay, military service, vacation, sickness maternity.

3. This is PART of Gross Salary of person

4. At end of fin yr if any unused leave is able to be carried forward to the following year and be actually Eitherused or / pa

out to employee , then a LIABILITY must be raised for unused balances at reporting date.

5. LEAVE PAY:

a. ACCUMULATING LEAVE PAY: eg: vacation leave : THERE ARE 2 TYPES

i. VESTING LEAVE PAY: (note : different meaning to vested&unvested benefits in Past Service Costs of De

Benefit Plans ) vesting means leave days accumulated at end of reporting periodthat entity must pay

money to employee for if he ever decides to resign - so this leave can may never be forfeited no matte

what happens.(some accrued leave only lasts 1 year , or 2 years then it is forfeited, or if you leave job yo

dont get paid outfor it, but some must get paid out) It should be obvious from this that an obligationarises for leave pay daily as employee renders services and gets extra leave pay each day accumulated .

this leave pay MUST only be raised as a liability at time salaries/wages are done.(??when??reporting da

though.)

ii. NON-VESTING LEAVE PAY: Adjustment at year end: Accrued leave Pay : this is leave which can be poss

forfeited if employee leaves work- so it may be used as leave or may be forfeited cause it cannot be cla

as actual moneyever. IAS 19 says entity must estimate how many days will probably be used/taken as

leave in future , and how many will probably be forfeited. ONLY that which will be used/taken as holida

must be raised as a LIABILITY- per IAS19

a. Note: for non-vesting type it also depends on company policy how much of accumula

leave should be raised as a liability. If policy is leave pay only accumulates for 1 followin

year then is forfeited, and leave is 15 days per year , and you estimate next year employ

will take 20 days leave , and he has 14 days accumulated so far still from this year : if po

is either eg :

i. Policy=first use current years leave days , then accumulated leave : raise 5 days

liability accrued leave.: the rest -9- will be forfeited since it runs out end of next year

ii. Policy=First use accumulated leave then current years : raise 14 days liability .: (re

: none of accumulated leave is expected to be forfeited: it will all be used first next y

iii. At end of fin yr if any unused leave is able to be carried forward to the following year and be actually Eit

used or / paid out to employee as explained above , then a LIABILITY must be raised for unused balance

reporting date.

iv. ONLY done at reporting date year end. This is not done during the year, only if leave is left untaken at

end.v. METHOD:

1. 1st work out how many working days per year eg 250

2. Divide Gross Salary by no. working days = Rands earned per day

3. Multiply rands per day by Leave Days = Liability

4. Cash payout for accumulated leave- Versus -Actually Taking days off work :

a. There is a difference between what the Accrued Leave Pay amount will be dependin

whether worker decides to take it in cash or as days off. The only difference between th

is the company contributions to med aid OR pension etc, that are NOT deducted from

workers salary but are a contribution by company itself are added EXTRA .

i. Cash payout: if the worker expects to take a cash payout this amount that must be

accrued at year end will be less than if worker decides to take days off.- if a cash pa


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is expected it will NOT include the company still paying in a company contribution

med aid/pension etc, because they will pay it as normal staff costs when the work

works those weeks inso it need not do to accrued leave pay BUT:

ii. Take the days off: if he estimates he will take the days off, then the accrued leave p

adjustment will be more because these company contributions (that are not part of

salary, but separate) will need to be paid to med aid specially,on the days he is on

vacation, and this must get added to accrued leave pay.

5. Salary Increases : if the next year after the reporting date accrued leave pay adjustment , a saincrease is expected , then the Gross Salary used to do the calculation is the NEW salary, becaus

this is what the employee will be getting for free on those days when he is on holliday next yea

using these accrued days ,ALSO if there is a accrued leave pay remaining from previous years st

then this old liability from previous yrs. must also be adjusted upwards to next yrs new salary le

.(if there is a salary increase next year, does an employee who takes it in cash get last years whe

did not go on holiday or this years new salary rate?)

6. Journals:

a. RECORDING ACCUMULATED LEAVE AT END OF YEAR:

Dr Staff Costs R500 ( becomes a expense for this yearmatching prin

Cr Accrued Leave Pay R500 (like yr end adjustments- now a liability)

b. RECORDING USE for holliday OF ACCUMULATED LEAVE THE FOLLOWING YEARS.

Dr Accrued Leave Pay R500 (reverse last yr end adjustments- nowout ofliabi

Cr Staff Costs R500 ( this just reduces current years staff cost expense for thisas it was put in SCI last year already.ie : what was paid to him for paid holiday leave he took this

goes into staff costs for the month he took holiday separately from this, and is treated exactly the s

as if it were not even from last year , in the accounting cycle, BUT then this adjustment above bring

costs DOWN to correct matching principle amount since it was accounted for last yr in staff cost

accrued )

c. RECORDING employee taking a cash payout instead THE NEXT YEAR of ACCUMULATED

LEAVE .

Dr Accrued Leave Pay R500 (reverse last yr end adjustments- nowout ofliabi

Cr Bank R500 ( this is a liability paid from bank) this one does not go through COSTS at all for the year, it is a separate transaction completely where worker redeems a liability ow

to him by the firm basicly- like any other debtor-creditor transaction.

d. RECORDING employee taking a cash payout instead THE CURRENT YEAR of CURRENT YE

LEAVE .

Dr Staff Costs R500 (or more specifically Dr Creditor: Employee CONTRA to

costs, not staff costs itself-just the books way of showing it)

Cr Bank R500 ( this is a liability paid from bank) this one does not go throughAccrued Leave Pay at all for the year, it is a separate transaction completely where worker redeems

liability owed to him by the firm basicly- like any other debtor-creditor transaction.

e. [Rem if a employee may take current years leave as cash instead of holiday it is Dr staffcosts Cr bank for those days, as well as Dr staff costs Cr bank again for actually also wor

on those days.]

7. Also rem in a exam question to do the actual entire gross salary for entire year in 1 entry as if it

never recorded , just to show for points :

Dr Staff Costs R10000

Cr Bank R10000

b. NON-ACCUMULATING LEAVE PAY: eg: maternity leave : this cannot be saved and used in following year so a

liability is NOT raised.


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PROFIT SHARING & BONUS PLANS (due within 12 mnths)

1. Recognition (perIAS 19)

An entity shall recognise the expected cost of profit-sharing and bonus payments under paragraph 10 when, aonly when:

a. the entity has a present legal or constructive obligation to make such payments as a result of past evenand

b. a reliable estimate of the obligation can be made.

2. Measurement :

3. Journal:

Dr Staff Costs R500 ( becomes a expense for this yearmatching principle)

Cr Accrued Profit Sharing & Bonus Plan R500

1. Constructive in sentence (a) above means : Eg: if entity has an informal practice of paying bonuses, and a change in

these practices would cause irreparable damage to relationship with employees , or also if bonus must be paid per

employment contract..

2. Reliable estimate means : either amount is determined before fin stats are issued , OR past practice, or a formula etc

3. An accrual must be raised at fin.yr. end if above conditions exist and this yrs. Bonus gets paid after end of fin. yr.

4. If contract states workers must stay a certain period (Eg :another year) before getting last yrs bonus, you still raise a

liability, but according to an estimate of how many % of workers will remain for an extra year and fulfil this conditionif they must remain for 2 years extra before they get it, it is NO LONGER a SHORT TERM BENEFIT .(ie :not to be paid

within next 12 mnths) so it must get treated as per rules of a LONG TERM BENEFITin same way as a defined benef

plan

5. Funny calc. : if ques say they get 3% of profit AFTER taking this bonus out of profit : it is 3/103 * profit. If it says BEFOR

is 3/100*profit.

NON-MONETARY BENEFITS ( incl. fringe benefits eg: car, housing , subsidized goods /services , low interest loans etc)

1. Eg incl. fringe benefits eg: car, housing , subsidized goods /services , low interest loans etc

2. All costs the company actually incurs in providing these benefits are to be accounted as staff costs in the SCI in perio

incurred (earned by employee)

3. Except for saying it is all incl. in the scope of statement, it does not say much more. There is no requirement to fair vathese things unless required by another IASs say.(eg low interest loans are IAS 39).

4. All low interest loans to employees MUST be accounted for using IAS 39.

OST EMPLOYMENT BENEFITS :

1. THESE ARE employee benefits other than terminaton benefits, that are formal or informal arrangements that the en

provides post-employment benefits for one or more employees eg : pension paid after retirement, post employment

insurance or med-aid.

2. IAS 19 applies to all these benefits, irrespective of whether or not a separate entity has been established to receive

contributions and pay benefits .

3. There are 2 types:a. DEFINED CONTRIBUTION PLANS

i. Entitys legal or constructive obligation limited to : amount it agrees to contribute to fund.

ii. Amount employee receives when he retires is based on the amount contributed to fund by employe

well as by himself, plus any investment earnings of fund.

iii. Actuarial risks (benefits less than expected) as well as Investment risk (assets invested insufficient to

meet expected benefits) falls on employee.

b. DEFINED BENEFIT PLANS

i. Entitys legal or constructive obligation limited to : to make certain they provide the agreed benefi

to the employees, irrespective of amount of contributions made or the investment returns earned by

ii. Amount employee receives when he retires is based on the amount contributed to fund by employe


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well as by himself, plus any investment earnings of fund. PLUS if performance of fund is poor then

company must also pay in extra to him to make up.

iii. Actuarial risks (benefits less than expected) as well as Investment risk (assets invested insufficient to

expected benefits) falls on company cause it must make certain he gets it.

1- POST EMPLOYMENT BENEFITS : DEFINED CONTRIBUTION PLANS

1. Characteristics ofDefined Contribution Plan:

a. Entitys legal or constructive obligation limited to : amount it agrees to contribute to fund.

b. Amount employee receives when he retires is based on the amount contributed to fund by employer as wel

by himself, plus any investment earnings of fund.

c. Actuarial risks (benefits less than expected) as well as Investment risk (assets invested insufficient to meet

expected benefits) falls on employee.

2. Method:

a. Recognition : When an employee has rendered service to an entity during a period, the entity shall recogni

the contribution payable to a defined contribution plan in exchange for that service:

i. (a) as a liability (accrued expense), after deducting any contribution already paid. If the contributio

already paid exceeds the contribution due for service before the end of the reporting period, an en

shall recognise that excess as an asset (prepaid expense) to the extent that the prepayment will leafor example, a reduction in future payments or a cash refund; AND

ii. (b) as an expense, unless another Standard requires or permits the inclusion of the contribution in t

cost of an asset (see, for example, IAS 2 Inventories and IAS 16 Property, Plant and Equipment).

Where contributions to a defined contribution plan do not fall due wholly within twelve months after the e

of the period in which the employees render the related service, they shall be discounted using the discoun

rate specified

(Any part that must be contributed by employee himself forms part of Gross Salary Expense of compa

NOT a separate company contribution. )

b. Measurement : Ifentitys contributions fall due within 12 mnths they are not discounted, if ( rarely) they fall

after 12mnts after employee rendered service they must be discounted to PV(RAISING A LIABILITY). (you procarry on discounting it up to last day at fin. Yr. end if only 6 mnths left , after first 12 mnths is over, per norma

accounting practice it is probably again PVd to 6mnths ) The rate you use to discount is the year end market

yields on high quality corporate bonds, or in countries where no such deep market exists, then government b

market yield.the currency & term of bond measured & obligation being PVd are to be the same.i think

changed to only 1.

1. Any excess paid above what is due so far by end of period is an Asset : Pre-Paid Expense in books of entity.

2. According to IAS 19.51, the total contribution payable to a defined contribution plan in exchange for services, should

recognised as an expense. No distinction is made between current and additional contributions, or between current a

retired employees.

1. Journals :

a. Allways try to put the company contributions staff costs and gross salary staff costs in similar but differen

headings to show for points. (rather i think put them all in ONE GO CONTRA 1 STAFF COSTS AMOUNT : FOR

UNISA)

b. Dr Gross Salary : Staff Costs R1000

i. CR creditor : Employee R500 (cash )

ii. CR creditor : Med Aid R100 (deduction from salary to be paid over to med. aid on behalf of

employee)

iii. CR creditor :SARS R150 (tax)

iv. CR creditor: provident fund R 250 (pension)

c. DR Company Contributions for Benefits:Staff Costs R500

i. CR creditor : Med Aid R250 (company contribution not a deduction but paid by company

ii. CR creditor : provident fund R 250 (company contribution not a deduction but paid by compa


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d. (rem if question says it is paid in month after incurring, always raise the 1-creditor and 2-bank payments acco

separately in line with this.,AND REM each mnth one must first pay last mnths contributions CONTRA bank, a

then only do other journal entries for the mnth.

e. (rem if question says same as above but ; do all of fin yrs journals in one go, it means do them for end of yr

basicly,so put all salaries in 1 figure etc., and rem to put contributions from last mnth, to be paid in following

separately as a separate liability as well.

2- POST EMPLOYMENT BENEFITS :DEFINED BENEFIT PLANS

1. Characteristics ofDefined Benefit Plan :

a. Entitys legal or constructive obligation limited to : to make certain they provide the agreed benefits to th

employees, irrespective of amount of contributions made or the investment returns earned by fund

b. Amount employee receives when he retires is based on the amount contributed to fund by employer as wel

by himself, plus any investment earnings of fund. PLUS if performance of fund is poor then company must als

pay in extra to him to make up.

c. Actuarial risks (benefits less than expected) as well as Investment risk (assets invested insufficient to meet

expected benefits) falls on company cause it must make certain he gets it.

2. Funded or Unfunded: funded means there is a separate fund as a separate legal entity, which handles it and to wh

contributions are paid and benefits are paid from. Unfunded means there is not.

3. Employers Staff Costs to be Expensed & Underwriting of Benefits: as employer is in substance underwriting the actu& investment risks of the plan,the benefit the employee obtains is NOT just the contributions by employer BUT it is th

actual benefit eventually payable to employee that needs to be expensed in accounts of employer .

4. RECOGNITION: 57 changed see the new IAS19 .57 Accounting by an entity for defined benefit plans involves the following s

a. using actuarial techniques to make a reliable estimate of the amount of benefit that employees have earned in return fo

their service in the current and prior periods. This requires an entity to determine how much benefit is attributable to th

current and prior periods (see paragraphs 6771) and to make estimates (actuarial assumptions) about demographic

variables (such as employee turnover and mortality) and financial variables (such as future increases in salaries and med

costs) that will influence the cost of the benefit (see paragraphs 7291);

b. discounting that benefit using the Projected Unit Credit Method in order to determine the present value of the defined

benefit obligation and the current service cost (see paragraphs 6466);

c. determining the fair value of any plan assets (see paragraphs 102104);

d. determining the total amount of actuarial gains and losses and the amount of those actuarial gains and losses to berecognised (see paragraphs 9295);

e. where a plan has been introduced or changed, determining the resulting past service cost (see paragraphs 96101); and

f. where a plan has been curtailed or settled, determining the resulting gain or loss (see paragraphs 109115). Where an e

has more than one defined benefit plan, the entity applies these procedures for each material plan separately.

IAS 51 In some cases, estimates, averages and computational short cuts may provide a reliable approximation of the detailed

computations illustrated in this Standard.1. MEASUREMENT:

a.

THE ACTUARIAL EVALUATION METHOD

1. This is the method that is prescribed for doing the actuarial calculations involved for future costs.

2. Projected Unit Credit Method :(check example in book very important) ONLY 1 method : the Projected Unit Cre

Method is allowed for working these out.

a. This method sees each period of service as giving rise to an additional unit of benefit entitlement and meas

each unit separately to build up the final obligation.

b. METHOD:

i. 1st Year : You work out the benefit that this years work will cause in the final year when it becomes d

per plan formula. Then you discount it to PV .- that is this years ANSWER.

ii. Next years: you must either:

1. Add +1 year worth of interest back to last years figure to bring to this yrs date PLUS then add

expense this years work will cause in the end year when it becomes due - discounted back to

today.

2. OR just say Y1+Y2 in Final Yr discounted back to today.


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iii. EXCEPTION: there is 1 exception: When in later yrs the formula has a materially higher percentage

later years ( like 10 % in yr 1-8 but 20% of salary from after 8 yrs service) THEN : The entity should

apportion benefits on a straight line basis from

1. FROM : The date when service by employee first leads to benefits under the plan (whether o

the benefits are conditional upon further service.)

2. TO : the date when no further material increases will take place in the % rate used, OTHER th

plain salary increases (they are not counted).The way they do this is just to divide all employe

up into those expexted to leave in 20 yrs/ 10 yrs etc into all the categories where the % of bewould be different. Then you say eg those who stay +20 yrs get 50 % medical fees paid- so

50/20=2.5% per year that is a straight line basis now. Then for other categories eg expected

leave before 10Yrs @10% medical costs to be paid : we say 10%/ 10yrs = 1% per year on a

straight line basis..

3. This means: EXAMPLE from IAS19 :a. 4. A post-employment medical plan reimburses 10% of an employees post-employment medical cost

the employee leaves after more than ten and less than twenty years of service and 50% of those costthe employee leaves after twenty or more years of service.Service in later years will lead to a materially higher level of benefit than in earlier years. Therefore, foemployees expected to leave after twenty or more years, the entity attributes benefit on a straight-lineunder paragraph 68. Service beyond twenty years will lead to no material amount of further benefits.Therefore, the benefit attributed to each of the first twenty years is 2.5% of the present value of the

expected medical costs (50% divided by twenty).For employees expected to leave between ten and twenty years, the benefit attributed to each of the ften years is 1% of the present value of the expected medical costs.For these employees, no benefit isattributed to service between the end of the tenth year and the estimated date of leaving. For employeexpected to leave within ten years, no benefit is attributed.

THE NET LIABILITY

1. The net liability is where a defined benefit plan is FUNDED and the entity sets aside assets into the fund each yr (calle

plan assets) to help be able to pay the obligations later- then the PV of the Benefit Obliation Liability LESS the Plan

Assets= this is the Net Liability.

THE DEFINED BENEFIT OBLIGATION:

6. The Defined Benefit Obligation (the liability in the books) is built up through a process, in the following steps:c. CURRENT SERVICE COST: this is the Current Years value : of the amount that this years service will cause in t

final year, per plan formula, when it becomes due. Then you discount it to PV .- that is this years ANSWER th

must be added to Staff Costs as this years .

1. Journals:

a. DR Staff Costs: current service cost (expense) 500

CR Defined benefit Obligation (liability) 500

e. PAST SERVICE COST:

i. This is where: Past periods of service a worker already has accrued are affected by either: benefits are

introduced for the first time, OR where a change is made by the company to the formula for calculating

benefits, NOT for current years service but for PRIOR PERIODS OF SERVICE only.OR even where all/some

benfits are stopped and a settlement payout is made to employees to make up for the loss.

ii. Note: straight line method: if you recognize something on a straight line method, you only of course

recognize the first installment at THE END of the first year, not begin of 1st

yr. So a yr must pass 31 Dec

before you recognise the 1st

yr of an Avg vesting period of say 3 yrs at 1 Jan.

iii. Past Service Costs are RECOGNISED AT THE EARLIER of the following dates:

1. When plan amendment occours

2. OR when entity recognises related restructuring or curtailment costs.

iv. Method: (

1. This is now to be recognized whether vested or unvested in year 1 immediately .I ti recognised

normal staff costs in P&L. whether vested or unvested, immediately.( no more holding acco

or Unrecognised Past Service Costaccounts just simple as below)


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2. CHANGED : 1st:Funny part : First send to a SFP HOLDING account called CONTRA Defined Be

Obligation liability account.NB: PUT ON SAME SIDE IN SFP AS IT WOULD BE FOR AN

EXPENSE/INCOME. it is an EQUITY account, so a DR in SFP would reduce equity (expense) and

would increase equity (income)( not sure if first is a liability acc or what since the Defined Ben

Ob;igation acc is the liability acc- maybe its an an Equity account?under which heading in SFP

it go ans:seems to be an equity holding account! )

a. (note: POSITIVE past service costs means yes it is a expense , NEGATIVE means it is anincomeso a negative cost is a income basicly IT JUST REDUCES your staff costs for

b. Journals:

i. Positive past Servixce Cost initial recording:

ii. DR Staff Costs : Past Service Costs: (SCI) 500

CR Defined benefit Obligation (SFP) (liability) 500

iii. Negative Past Service Cost initial recording:

iv. CR Defined benefit Obligation (SFP) (liability) 500

DR Staff Costs : Past Service Costs: (SCI) 500

f. SETTLEMENT GAINS OR LOSSES:i. A settlement is where a payout occours that is NOT part of the plan, in order to curtail or stop the bene

plan completely the settlement is a payment to employees to make up for loss of plan.ONLY if the

payment is made and is NOT UNDER THE TERMS OF THE PLAN

ii. It is not part of Past Costs calculation at all but basicly just falls in that category .

iii. You simply reduce the Defined benefit Obligation by the PAYOUT made,CONTRA bank OR plan assets,

whichever is used to pay it, and if the payout is worth more or less than the Defined Benefit Obligation

getting rid of/settlingthen there is a gain or loss on settlement and that is the ONLY thing that wou

affect STAFF COSTS that year to do with the settlement otherwise staff costs would not be affected at

iv. JOURNALS:

1. Defined Benefit Obligation SFP

a. BANK (if any part of bank was used to pay)

b. DEFINED BENEFIT PLAN ASSETS : (if any part of this was used to pay)

c. GAIN or LOSS on SETTLEMENT (if there is a difference between payout and defined benefitobligation portion it gets rid of- could be DR if it was a loss.)

g. INTEREST COST:

i. This is all the interest from prior periods Benefits that were put in the Defined benefit Obligation liabi

account at last years PV. So you must bring them to this yrs PV by adding interest.

ii. Method: simply add 1 Yrs interest to last years END OF LAST YEAR PV , as interest this year.(LEARN THIS

NOT USE THIS YEARS FIGURES AT ALL- ONLY END OF LAST YEARS PV IS USED-ONLY, and BEGIN OF THI

DISCOUNT RATE!- not end of yrs discount)

3. ALSO: Movements in the year : if there were any additions or subtractions from the DEFINED BEN.OBLIGATION .

ACCOUNT during the year, one must use this same interest rate at begin of year , and work out what the additiona

interest gain/loss from these are for eg 6 mnths if it was paid/received in the middle of the year.So divide interest by 12 to * 6 to get rate for 6 mnths, and use this to calc the extra interest that you would get. ( it could even be less

interest if the def.ben.oblig. decreased .This gets added same as other interest in journals below.(per textbook verta

(so how is one supposed to adjust for changes in last years defined benefit obligation during the year : eg new past

Service Costs + people leaving the firm&scheme?- like ias 19 says adjust for changesand in GAAP it says taking into

account changes in the year-like it says above.

i.

1. Use DISCOUNT RATE at START of Current year X Defined Benefit Obligation AT END OF LAS

YEAR taking into account material changes in the obligation.

2. Journals:

a. Interest recording:

b. DR Staff Cost - Interest Cost (P&L) expense 500

CR Defined Benefit Obligation (SFP) (liability)


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b. BENEFITS PAID: when benefits are paid the Defined Benefit Obligation (SFP) (liability) REDUCES of course. The

benefits can be paid from either assets of employer ie Bank (unfunded case) or from plan assets( funded cas

1. Note: this NEVER becomes a staff costDONT MAKE IT A STAFF COST EVER! because it is m

paying a pension to a creditor , which creditor casued a staff cost yrs ago when he qualified for

pension he is receiving that day.

2. Journals:

a. Benefits Paid recording:b. DR Defined Benefit Obligation (SFP) (liability

CR Plan Assets (SFP) (assets) (or BANK if it is a unfunded scheme)

c. THE ACTUARIAL VALUATION OF THE OBLIGATION:

i. Conclusion: Once the above are processed, the following will be recorded in the Defined Benefit Obliga

general ledger account.:

1. O/B : xxx

2. Current Service Cost : xxx

3. Past Service Cost: xxx

4. Interest Cost: xxx

5. Benefits Paid: (xxx)

6. Answer : Obligation: = yyyii. Actuarial Gains /Losses : IAS 19 requires that the Defined benefit Obligation must be Actuarially valued

1. The difference from the Actuaries valuation and the Book Value then reduces/increases the

Defined Benefit Obligation Account to bring it to the actuaries level. The CONTRA account is N

in P&L, but rather it is OCI : Acturial Gain on Remeeasurment OR OCI :Actuarial Loss on

Remeasurement Rem : Note : An incr. in defined benefit obligation acc. from actuarial valuatio

actually a LOSS- so it decreases OCI : rem OCI decreases on the DR side and increases on the CR

since it is EQUITY.

2. OCI : Acturial Gain on Remeasurement OR OCI :Actuarial Loss on Remeasurement are 2

accounts that go in OCI. They are of a type that can NEVER be transferred to P&L .

3. Journals:

a. ACTUARIAL VALUATION HIGHER

b. DR OCI : Acturial Loss on Remeasurement xxx

CR Defined Benefot Obligation (SFP) xxx

c. ACTUARIAL VALUATION LOWER

d. DR Defined Benefit Obligation (SFP) xxx (decreases it)

i. CR OCI : Acturial Gain on Remeasurement

4. Actuarial valuation: details:

a. IAS 19 says:( see IAS 19 for details : preferably by actuary, but may be done by account

himself.

b. Regularly done so fin stats reflect correct figures

c. To be unbiased( nor imprudent nor over conservative) & mutually compatable ( mustreflect current inflation/slaray increases/discount rates)

d. Actuarial Assumptions: to comprise demographics eg: mortality , employee turnover et

financial assumptions (discount rate, future salary increases, etc)

5. Discount rate: to use rate of high quality corporate bonds in a deep market, else if no deep mar

then Gov Bonds.- at the same timeframe as maturity of obligation ie 10yr bonds or 5 yr bonds r

etc. This is changing to ONLY former , not latter anymore.

PLAN ASSETS: ( learn method below by heart !)

DEFINITION:

1. These are: assets ( eg: bonds) that are put aside each year by entity to pay benefits with. They must fall in EXA


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IAS 19 definition of Plan Assets or else they do not qualify and must be put uner other headings, NOT as plan a

eg: IAS 39 for bonds etc. This is very important!

2. Net Liability : Plan assets are NEVER shown as such in Fin Stats, they are always Netted against the Defined

Benefit Liability account to give = what is called the Net Liability

3. Definition of Plan Assets:

Plan assetscomprise:

(a) assets held by a long-term employee benefit fund; AND AND AND AND(b) AND AND AND AND qualifying insurance policies.

Assets held by a l ong-term employee benefi t fundare assets (other than non-transferable financial instruments issued by the repoentity) that:(a) are held by an entity (a fund) that is legally separate from the reporting entity and exists solely to pay or fund employeebenefits; and(b) are available to be used only to pay or fund employee benefits, are not available to the reporting entitys own creditors (evbankruptcy), and cannot be returned to the reporting entity, unless either:

(i) the remaining assets of the fund are sufficient to meet all the related employee benefit obligations of the plan or the repoentity; or(ii) the assets are returned to the reporting entity to reimburse it for employee benefits already paid.

A quali fying insurance policyis an insurance policy* issued by an insurer that is not a related party (as defined in IAS 24 RelateParty Disclosures ) of the reporting entity, if the proceeds of the policy:

(a) can be used only to pay or fund employee benefits under a defined benefit plan; and

(b) are not available to the reporting entitys own creditors (even in bankruptcy) and cannot be paid to the reporting entity,unless either:

(i) the proceeds represent surplus assets that are not needed for the policy to meet all the related employee benefitobligations; or(ii) the proceeds are returned to the reporting entity to reimburse it for employee benefits already paid.

BENEFITS PAID

1. REM that all benefits paid NEVER go to staff costs they are a creditor payment onlyof a creditor raised long

depending if Plan Assets were used to pay them or if normal Bank was used to pay them . DEFAULT is always

assets account if nothing mentioned in exam on which is used to pay the benefits. The creditor payment is

BETWEEN Plan Assets/or Bank and Defined Benefits Obligation account. This is because the defined benefits is

a pension the staff costs only come into it as the employee builds up his pension fund by work. BUT when th

are paid out to him it is NOT a staff cost anymore, but a pension payout from the Defined Benfits Plan .

2. Journals: Note : not Staff costs CONTRA Plan Assets at all !!! Just:

a. Defined Benefit Obligation Liability: (SFP) 500

i. Plan Assets (SFP) 500

CONTRIBUTIONS TO THE PLAN: See Example 12.15 in GAAP now! Pg: 290)

1. Employer contributions to the Plan Assets are NOT expensed, BUT treated as an increase in PLAN ASSETS so

an asset transfer from one account to another. Only actually paying out or incurring vested benefits is an exp

staff costs.

2. Journals:

a. Employer contributions

DR Plan Assets (SFP) xxxCR Bank (SFP) xxx

3. Employee contributions:

a. LEARN THIS ONE OFF BY HEART: it is done in a funny way that must be memorized:

b. Funny thing 1: ( MUST quickly see example 12.15 GAAP bk pg 290) If employee pays % of his salary

toward Plan Assets ,then what is deducted from his GROSS SALARY is not shown as part of Staff Costs t

month.- It is transferred directly to Plan Assets from bank account , same as for employer contributio

aboveexactly the same. WHY: because all the Current service cost, Interest cost, Past service cost

calculations from Defined Benefit Obligation account are the ones that increase his Staff Cost Expense

Gross Salary Level-(REM DR Staff Cost :(Current Service Cost CONTRA CR Defi.Ben.Obligation ) : and h

personal contribution to the Asset Fund mnthly must be worked into the formula used for these Def

Benefit Obligation account expenses ( Current Service Cost, Interest etc) before it ever even starts to

deducted from his salary- so this salary deduction is not shown in the books at all .- only in an excel wo


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sheet.- See Journals Below.

i. So you DO NOTsay Dr Staff costs CONTRA Cr Plan Assets creditor :Employee Salary Deduct

as seems logical you just leave it out completely from staff costs , and ONLY book: Dr Plan

Assets Cr Bankthats it the other workings above must balance this out because Plan

Assets&DefinBenOblig. Get netted off against each other anyway and DefinBenOblig has bec

like a creditor like employee/or SARS /or Med Aid etc which are contra staff costs

c. Funny Thing 2: If all above pension fund deductions are only processed in following mnth each mnth

i. IAS 19 says fair value of plan assets should exclude unpaid contributions due by the entity tthe Plan Assets

ii. Therefore : you will NEVER raise a liability for entity saying it owes Plan Assets fund R500 from

deducted employee contributions AND employer contributions. You simply forget it and the n

month remember to do the transfer Dr Plan Assets CONTRA Cr Bank see journals below.

iii. This is because : the plan assets are NETTED off against the Defined Benefit Liability anywa

the fin stats so any increase in Plan Assets REDUCES the LIABILITY of the Defined Benefit Liab

accountso the company owes less, But is you do not credit the Plan Assets as being owed

ccompany, then the Defined Benefit Liability account stays higher, so IT shows the liability

outstanding ALREADY no need to show it twice in different places basiclyjust usage of

accountants over the yrs it seems.

4. Journals: See Example 12.15 book GAAP now! Pg 290a. If Gross Salary is 120000, but 9600 is deducted each mnth to pay to Plan Assets = 110400, BUT it is on

paid in following month in this entity,for some reason,, so remains owed by company to fund for a m

each time. ( if the company also contributes separately to Plan Assets, its contribution can just be inclu

in the plan assets/bank journal entry below AND it also follows IAS 19 funny rule 2 above)

b. Employee contributions - note : no extra creditor deductions are raised CONTRA staff costs for the

deduction from employees salary: it remains invisible , and only shows in next mnths bank/plan asset

transfer.

DR Plan Assets (SFP) xxx ( this is last mnths contribution being paid only now !)

CR Bank (SFP) xxx

INTEREST INCOME EXPECTED RETURN ON PLAN ASSETS:

1. Plan Assets: Return onCapital Invested = interest,dividends,other revenue, + realised & unrealized gains or lo

on the plan assets, LESS admin costs & taxes on plan but costs counted by actuary are not counted again he

they are incl. in the valuation of Defined Benefit Obligation itself.

2. IAS 19 REQUIRES that the market expectations at beginning of period be used to recognize any Return on the

Assets , NOT end of year figures BUT begin of yr figures for EVERYTHING ! you use the following to calc. CURR

YEARS expected return : Simple:

a. Begin Yr Expected Discount Rate of any possible Returns.

b. Begin Yr PLAN ASSETS ACCOUNT balance at fair value .( 1 Jan)

3. ALSO: Movements in the year : if there were any contributions during the year, or plan benefits paid out on

must use this same interest rate at begin of year , and work out what the additional interest gain from these a

eg 6 mnths if it was piad/received in the middle of the year.So divide interest rate by 12 to * 6 to get rate for

mnths, and use this to calc the extra interest that you would get.This gets added same as other interest in jour

below.(per textbook vertabim)

4. Any wrong estimate gets corrected at end of year when Fair Value of the Plan Assets gets done, of course.

5.

6. So any EXPECTED Returns REDUCE the Staff Costs for the year ( is this strictly so so does this get Cr to norma

costs for the year MAIN ACCOUNT, where all the other staff costs accumulate . & can one actually have all th

costs in a main chief account and the sub costs in sub accounts beneath it Staff Costs : Returns on investme

and Staff costs: Current Service Costs, and Pension Contributions etc for all the journals ? can you also write t

all like that in exam?)

7. Journals: (or visa versa for an expected loss below)


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ax.

a. Dr Plan Assets (SFP)

i. CR Staff Costs : Interest : Expected Return on Plan Assets (staff costs) (P&L) [reduces staff

costs!]

8. In the PROFIT BEFORE TAX NOTE : Blocked off under the Employee Staff Costs line item, one can show how

NET EXPENSE , which comes first in blocked off area , comes from current service costs, past service costs e

just the net expense/income alone asablocked off item)

9.

FAIR VALUE done at yr end : VALUATION OF PLAN ASSETS

1. Once all above journals completed, the Plan Assets Account will look like this:

a. O/B xxx

b. Contributions: xxx

c. Expected Return on Plan assets: xxx

d. Benefits paid: (xxx)

e. TOTAL Recognised Assets: ` XXX

2. Now all thats left is Plan Assets must be Fairly Valued & changed as required by IAS 19.

a. Fair value : excludes any amount owed to fund by entity and excludes any non-transferrable financial

instruments issued by the entity.

b. OCI: RETURN ON PLAN ASSETS :RE-MEASUREMENT ACCOUNT.: any loss/increase in the plan assets go

direct to the OCI,same as for def.ben.oblig. .Here it is called RETURN ON PLAN ASSETS :RE-

MEASUREMENT account. It may never be transferred to P&L.

c. Journal:

i. For actuarial loss:

ii. Dr RETURN ON PLAN ASSETS :RE-MEASUREMENT (OCI)

a. Cr Plan Assets (SFP)

iii. For actuarial gain:

Dr Plan Assets (SFP)

Cr RETURN ON PLAN ASSETS :RE-MEASUREMENT(OCI)

REIMBURSEMENT RIGHTS

1. If another partly MUST reimburse some/all of cost required to settle a Defined Benefit Obligation eg:non-

qualifying insurance policy etc. this

2. This MUST be recognized as a SEPARATE ASSET ie some normal asset,when it is virtually certain it will be paid.

NOT AS PLAN ASSETS, so it may not be offset aginst defined benefit obligation. so it does NOT go in Plan Asse

Account- it gets its own account .BUT: Funny Thing: The asset MUST get treated the same as plan assets in all o

respects: so it must :

i. Be measured at fair value & record actuarial gains/lossessame way

ii. Must record expected returns on the asset in its same own account .

A quali fying insurance policyis an insurance policy* issued by an insurer that is not a related party (as defined in IAS 24 RelateParty Disclosures ) of the reporting entity, if the proceeds of the policy:

(a) can be used only to pay or fund employee benefits under a defined benefit plan; and(b) are not available to the reporting entitys own creditors (even in bankruptcy) and cannot be paid to the reporting entity,unless either:

(i) the proceeds represent surplus assets that are not needed for the policy to meet all the related employee benefitobligations; or(ii) the proceeds are returned to the reporting entity to reimburse it for employee benefits already paid.

FAIR VALUE OF INSURANCE POLICIES

1. Any insurance policy which covers any benefits to be paid, is Fair Valued at the exact PV of those future benef

be paid less of course any part not covered fully.


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DETERMINING AMOUNT OF NET LIABILITY IN THE SFP

1. The Defined Benefit liability presented in the SFP is DIFFERENT to the General Ledger Defined Benefit Liability accoun

is because Per IAS 19 it it is the Net Amount of the following amounts:

2. Defined liability Obligation & Plan Assets : these 2 are just offset against each other.

a. Adjusted for any effect of the asset ceiling.

3. Reconcilliation :Note: a reconcilliation ofthe above must be done in the Notes in Defined Contribution Plan Note.

REMEMEBER the o/bmust be last years NET defined liability not just plan assets or obligationsBUT THE FULL NETT

OFF AMOUNT.

a. Take o/b, add net expense( all yrs staff costs & income etc ) and minusing contributionsion / Actuarial

gains/losses etc etc , see IAS 19 for full list : includes foreign exchange differences and various other things.

4. OFFSETTING 2 DIFFERENT SEPARATE PLANS liabilities & assets IN FIN STATS:

i. Firm may only offset 2 SEPARATE plans liabilities VS assets if they : (otherwise separate amounts mus

shown in fn stats for each-)

1. Legally enforceable right to use surplus in one plan to settle obligations in other AND Intends

settle on a net basis or reaslise surplus in one plan and settle obligation in other simultaneou

DEFINED BENEFIT ASSETS AND THE ASSET CEILING

1. REMEASUREMENTS of the THE NET DEFINED BENEFIT OBLIGATION consists of all in OCI

i. Actuarial Gain s& Losses (in defined benefit OBLIGATION that goes to OCI)

ii. Return on Plan Assets (the Remeasurement /Valuation change in Plan assets that goes to OCI )

iii. Any change in the effect of the asset ceiling *(excl. interest on plan assets of course)

b. These all may NEVER be reclassified to P&L, BUT may be transferred within equity from one component to anot

2. DEFINED BENEFIT ASSET CEILING:

a. It can happen that the plan assets are more than the defined benefit obligation liabilities. When this happens th

NET DEFINED BENEFIT OBLIGATION can have a positive balance as an asset.

b. IAS19.24 limits the resulting asset to the lower of :

i. The surplus in the defined benefit plan

ii. The asset ceiling , determined using the disount rate applicable to the obligation.c. The Asset Ceiling is the PV ofany future economic benefits available from the plan to THE ENTITY ITSELF in the

of:

i. Refunds from plan (Note : IFRIC 14 : ONLY if the law of that country allows refunds , or how much refun

allows etc)

ii. OR reductions in CONTRIBUTIONS Note : IFRIC 14 : ONLY if the law of that country allows refunds , or ho

much refunds it allows etc)

iii. Note : IFRIC 14 : ONLY if the law of that country allows refunds , or how much refunds it allows OR

reductions in contributions etc )

d. To Calc. The ASSET CEILING : you simply get the PV of the (POSITIVE) DIFFERENCE BETWEEN DEFINED BENEFIT

OBLIGATION account and the PLAN ASSETS account.i. So if thePV ie: Asset Ceiling is lower than the surplus in the NET DEFINED BENEFIT OBLIGATION , then y

have to lower the NET DEFINED BENEFIT OBLIGATION to the level of the asset ceiling, so the amount sh

in the SFP will be the lowered amount;

ii. This is done by using the OCI it does not go throgh P&L at all.

e. REm: There are 3 different OCI accounts for Emloyees Benefits :

i. The Change in asset ceiling (Remeasurement ) allowance account (OCI) Asset ceiling

ii. The Return on Plan Assets Remeasuremnt Account (OCI) Plan Assets

iii. The Actuarial gain/loss on remeasurement account (OCI) : Defined Benefit Obligation

f. If last year the Asset ceiling Allowance account was 200 due to a limitation on the asset ceiling, this year that ol

limitation must be reversed so it does not CONTRA reduce the Plan Assets so also the Net def.Liab. in the fin st

SFP at year end when it is all netted off as contra accounts(Rem there are 3 contra accounts here : Plan Assets,

Def.liab.oblig and this Asset Ceiling Allowance account all get netted off to form 1 figure in SFP.


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g. JOURNAL ENTRY :

i. DR Change in asset ceiling (Remeasurement ) account (OCI)

1. CR Asset ceiling Allowance Account (SFP) this one is offset against the Plan Asssets account A

the Defined Benefit Obligation account when one works out the SFP NET DEFINED BENEFIT

OBLIGATION line item that must go to N-C ASSETS in the SFP.

IFRIC 14 AVAILABILITY OF REFUNDS ETC. AND MINIMUM FUNDING REQUIREMENTS:

1. AVAILABILITY OF REFUNDS: CERTAIN COUNTRIES LAWS, or funds rules, restrict refunds from funds to employer.

a. Ifric 14 : says avialbility means: can be at any point in life of fund not just at reporting date, matters not what

purpose it will be used for, can be a combination of refund or contribution lessening, amount is not affected by

possible future changes to the amount , plus depends on rules and laws.

b. Ifric 14 rules: u if full surplus is to be refunded, not an exact amount , at future date PV need not be worked o

since it will grow at same rate anyway, PV need only be worked out if it is an exact amount at future date.

c.

2. AVAILABILITY OF CONTRIBUTION REDUCTIONS: (by firm, not employees!)

a. IN rsa: (AC 504 see)law states refunds not permitted, so only reduction in contributions is allowed for ANY

difference at all, whether in fund employer surplus account or in fund employee surplus account or fund itself.i. Pension Funds Act 1956 law rules over these funds. Must be actuarially tested 3 yrs, above two accoun

must be calc. every so often etc. See Act futher details.

b. IFRIC 14: must assume a stable workforce unless there is a planned reduction , and assume no change to plan

benefits until plan is actually amended.

3. MINIMUM FUNDING FEQUIREMENTS: IF THE laws of country have a min funding requirement, there could be liability a

reporting date for any shortfall in plan assets.

a. REFUNDS: simple work it out

b. CONTRIBUTION REDUCTIONS:

c. HIDDEN LIABILITY: only the part that is not refundable to entity is to be written up as a liability for obvious reas

d. Special Formula for working it out: See IAS 19. ?? : :

i. Journals:1. STAFF COST: Minimum Funding Requirement (P&L) xxx

Minimum Funding LIABILITY (SFP) xxx

CURTAILMENTS AND SETTLEMENTS:

1. MAIN ISSUE: IMMEDIATELY reduce all affected accounts DIRECTLY against Staff Costs:Curtailment & Settlements.DO

first send to any EQUITY HOLDING ACCOUNT ie: Unrecognised Actuarial or Unrecognised Past Service costs. Instead the

must reduce directly against Staff costs if they happen to be affected too.

2. CURTAILMENTS: this is where eg a plant is closed etc or benefits are reduced : so number of employees drops-curtailed

amount of benefits drops one of the 2.

a. Distinguishing between curtailments and negative Past Service cost:

i. The critical factor that disctinguishes between the 2 is whether the change is related to FUTURE SERVICCOSTS or not. If it is related to future service costs it is a CURTAILMENT, if not it is a past service cost.

ii. So- if a change in benefits relating to future salary increases is linked to/affects past service costs then i

CURTAILMENT.

3. SETTLEMENTS: where firm pays out a settlement to employees in exchange for reducing the future benefits payable.

4. Method:

a. IMMEDIATELY reduce all affected accounts DIRECTLY against Staff Costs:Curtailment & Settlements. Instead t

must reduce directly against Staff costs

b. Should be accounted for as soon as it happens.

c. Gain/loss can consists of ONLY of the following 4 SFP Accountsnever P&L accounts at all: just these 4:

i. Plan Assets Account : Resulting Plan assets Fair Value change if paid out from here


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ii. Defined Benefit Obligation Account : Resulting PV of Defined Benefit Obligation change

iii. Past Service Cost Any Past Service Cost change from a curtailment,not a settlement.

5. DISTINGUISHING BETWEEN CURTAILMENTS AND NEGATIVE PAST SERVICE COST:

a. The critical factor that disctinguishes between the 2 is whether the change is related to FUTURE SERVICE COST

not. If it is related to future service costs it is a CURTAILMENT, if not it is a past service cost.

b. So- if a change in benefits relating to future salary increases is linked to/affects past service costs then it is a

CURTAILMENT.

6.7. Journals:

a. Defined benefit Obligation (SFP) xxx

b. Not sure if OCI ActuarialGains account must also be changed?ask!

i. Staff Costs: Gain on Curtailment P&L (income) R xxx

OTHER CONSIDERATIONS:

1. BUSINESS COMBINATIONS: measured at date as difference between PV of Def. Ben liability & Fair Value Assets. All

Unrecognised past service costs & Deferred (Unrecognised) Actuarial gains /losses are recognized immediately. This w

affect Goodwill.

a. An (NET) asset is recognised only to extent it is available as refunds/contribution reductions.

MULTI EMPLOYER PLANS

b. Can be Defined Contribution OR Benefit plans OTHER than state plans, that pool the benefits from entities

are NOT under common control

c. They should provide benefits to employees without distinguishing from which firm they come.

d. ACCOUNTNG:

i. Defined Contribution Plans: as per usual

ii. Defined Benefit Plans: the entity records its Pro-Rata share of all the plan accounts, and discloses th

the same as usual all pro-rata UNLESS :

1. Treated like a Defined Contribution Plan : If enough info is not available to do the above, the

the plan is treated like a Defined Contribution Plan, EXCEPT that special disclosures must be

made:

a. Reasons Acceptable For not get enough info: 1-entity not allowed access to the info

actuarial assumptions use employees data from other firms as well that disallows pro

pro-rata ing beteen firms of all accounts.

2. Disclosures:

a. MUST disclose that it is a special benefit plan

b. AND : reasons why sufficient info. is not available

c. AND : Expected contributions for next fin year

d. AND : level of participation by entity in plan compared to other entities in it.

e. Surplus/ Deficit: if there is one for the whole plan ,

i. DISCLOSE : firm must disclose : IAS 19.148 (in disclosures at end)

1. Any info on it2. Basis used to determine it

3. Implications for entity due to it.

4. Plus other things see IAS19

ii. IF there is an agreement on how to apportion it between firms, THEN any

surplus/deficit must be accounted for in the books , as well as the contributio

that are accounted for anyway of course since it is being treated as a Define

Contribution Plan.

2. DEFINED BENEFIT THAT SHARE RISKS BETWEEN VARIOUS ENTITIES UNDER COMMON CONTROL.:

a. IAS 19 gives Specific set of rules to use how to treat these plans:

b. If there is a contract or policy : on how costs are to be charged to various entities in group:

i. Firm recognizes costs per agreement


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c. IF there is no policy or contract : then Parent recognizes Net Defined benefit cost in its separate accounts, an

subsidiaries only recognise contributions like a Defined contribution plan.

d. RELATED PARTY TRANSACTION: as this is one, following disclosures need to be made in EACH firms fin stats.

i. Contract /policy for charging costs etc, or fact that there is none.

ii. Policy for determining contributions by that entity

iii. If Net Defined Benefit is allocated to individual firms: all normal disclosures for Defined Benefit Plan

iv. If ONLY contributions are accounted for: : then special disclosures see: IAS 19 .34B.d.

3. GROUP ADMINISTRATION PLANS:a. THESE are plans where many firms belong to a single scheme to share admin costs and pool investments, but

risks& actuarial stuff is segregated, so that each employee can treat his share of the plan as a separate Define

Benefit Plan .( normally happens in a big group company)

4. STATE PLANS: if they are Defined Benefit Plans they areaccounted for as a multi-employer plan, but normally they a

operated as a Defined Contribution Plan though.

5. INSURED BENEFITS: if a employer contributes to an Insurance policy, to fund a Defined benefit plan :

a. It should be treated as a Defined Contribution Plan UNLESS:

i. Employer will be liable to pay out employees if insurance is not enough OR:

ii. Must pay employee directly when benefits become due- so insurance does not pay direct buit pays

employer instead.

b. If treated as a Defined Benefit plan, insurance will be plan assets if qualifies else reimbursement rights

OTHER LONG TERM EMPLOYEE BENEFITS

1. These are employee benefits other than TERMINATION BENEFITS and POST EMPLOYMENT BENEFITS that are not due

be settled within the first 12 months AFTER THE END OF PERIOD in which employee renders the service. part is in

current 12 mnths and part is in future 12 mnths it is seens as OTHER LONG TERM BENEFITS since short term definiti

includes the term wholly.

a. Eg : Long service or Sabbatical leave

b. Long term disability benefits

c. Profit sharing /bonuses payable more than 12 mnths after END OF PERIOD in which service s rendered,

d. Deferred Compensation etc.( note : not after date service was rendered, but after end of period).,

2. Note: , Since these are not subject to same degree of uncertainty as Defined Benefit Plans, a simpler method is allow

here . These are ONLY recognised in P&L , never in OCI at all. - other comprehensive income- is not available.

3. They are done in exactly the same way as a Defined Benfit Plan , exept youjust call the Accounts eg:Sabbatical Leave

Defined Benefit Obligation, and Sabbatical Leave Plan Assets.

4. RECOGNITION:

a. Long Term Employee benefits works exactly the same as Defined Benefit Obligations, except for 2 things:

i. One may not recognise it in OCI at all.

ii. Plus all changes in following are recognized in P&L immediately, no Equity Account is allowed at all:

1. current service cost

2. interest cost

3. the expected return on any plan assets (and on any reimbursement right recognised as an as

4. actuarial gains and losses, which shall all be recognised immediately;

5. past service cost, which shall all be recognised immediately; and

6. the effect of any curtailments or settlements

b. Amount recognized as liability for other long term employee benefits is net total of (same as Def.Ben.Obligation

i. PV of defined benefit obligation at reporting date MINUS

ii. MINUS Fair value at reporting date ofplan assets if any out of which the obligations are to be settled

directly.

5. LONG-TERM DISABILITY BENEFIT.: THIS IS A FUNNY THING :


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a. If the level of benefit depends on the length of service, an obligation arises when the service is rendered.

Measurement of that obligation reflects the probability that payment will be required and the length of time fo

which payment is expected to be made.

b. If the level of benefit is the same for all employees regardless of time worked or anything, then the expected c

of those benefits is recognized when an event occurs that causes a long-term disability.

6. DISCLOSURE- OTHER LONG TERM EMPLOYEE BENEIFTS

a. IAS 19 does not require any special disclosurefor these, ONLY IAS 1 employee benefit disclosures, and IAS24 Rel

Party Disclosures are required.b. So: even if the same method of accounting must be used as for a defined benefit plan , one DOES NOT NEED TO

ALL THE DISCLOSURES.

c.

ERMINATION BENEFITS

1) There are 2 main rules for defining it:

a) If employee says he wants to leave it is NOT a termination benefit, ONLY if employer offers this benefit in return for

leaving then it is one (like restructuring or retrenchment)

b) IN THIS case the past event that results in a present obligation, to pay termination benefits, is the termination itself,NOT employee service as it accrues along. So if a factory closes in 10 mnths, and to 120 employees R30 is offered if

employee continues work for last 10 mnths , and R10 if he leaves anytime before 10 mnths is up: Then Termination

benefit = R10 * 120(all employees can get it auto) and the rest is a Short Term Service benefit of 30-10=R20 for those

stay 10 mnths longer . This service benefit DEPENDS ON SERVICE BEING DELIVERED , so it is a short term employee be

see journals below. It is written up MNTHLY as service is delivered. The 10 termination is written up as soon as earli

when uncancellable OR when restructuring costs are written up (see rule below)

2) Usually Term.Benefit is lump sum payments, or continued salary for a few mnths, or as an addition to and as part of a

Defined benefit Obligation (but only Paid by it and not part of it as such )

3) RECOGNITION : An entity shall recognise termination benefits as a liability and an expense at the earlier of : when, and

when, the entity:

i) Cannot any longer withdraw the offer (when employee accepts or if some legal restriction applies)

ii) OR on date entity recognizes costs for a restructuring that is within scope of IAS37

b) An entity is demonstrably committed to a termination when, and only when, the entity has communicated a formal p

to the employees meeting all following criteria.

i) the location, function, and approximate number of employees whose services are to be terminated;

ii) the termination benefits in sufficient detail

iii) Actions indicate it is unlikely significant

ACCA 3 DIPAC Employee benefits_Leases_Events after Reporting Period.docx

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