M10 Employee Benefits

8/17/2019 M10 Employee Benefits

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THE INSTITUTE OFCHARTERED ACCOUNTANTS

OF SCOTLAND

FINANCIAL REPORTING

CONTENTS

Page

EMPLOYEE BENEFITS...............................................................................................1

10.1 INTRODUCTION................................................................................................1

10.2 OBJECTIVES.......................................................................................................1

10.3 SHORT-TERM EMPLOYEE BENEFITS............................................................2

10.3.1 Accounting treatment – all short-term benefits.............................................2

10.3.2 Profit sharing and bonus plans.....................................................................2

10.4 POST-RETIREMENT BENEFITS: AN OVERVIEW............................. ......... ..4

10.4.1 Types of plans................................................................................................

10.5 ACCOUNTIN FOR DEFINED CONTRIBUTION PLANS.............................!

10." ACCOUNTIN FOR DEFINED BENEFIT PLANS..........................................#

10.!.1 "easurement of assets and liabilities...........................................................#

10.!.2 $ecognition in profit and loss and balance sheet..........................................%

10.!.3 &isclosure....................................................................................................14

10.!.4 Alternati'e to the corridor...........................................................................1(

10.! IFRS 2 SHARE BASED PAYMENT....................................................... ..........1$

10.(.1 )cope of *+$) 2...........................................................................................20

10.(.2 Types of share-based payment transactions................................................20

10.(.3 $ecognition..................................................................................................20

10.(.4 ,uity-settled share-based transactions para 10 – 2%/.............................20

10.(. ash-settled share-based payment transactions para 30 – 33/.................2!

10.(.! )hare-based payment transactions ith cash alternati'es para 34 – 43/. 2(

10.(.( &isclosure....................................................................................................2%

10.# FINANCIAL REPORTIN STANDARDS............................................ .......... .30

10.$ SUMMARY........................................................................................................31

©ICAS 7


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TPS – FINANCIAL REPORTING

EMPLOYEE BENEFITS

10.1 INTRODUCTION

Employees receive a variety of benets in return for providingservices to their employer. Some benets are received from

the employer almost immediately the services are performedeg wages and salaries. Some, such as an annual bonus, aredetermined and paid after the year-end. Others, such aspensions, are not paid until many years in the future when theemployee retires.

One thing these benets have in common is that they are acost to the employer and this cost should be recognised as thebenets are earned or accumulated by the employee.

IAS !, "Employee #enets$, addresses the above issues.

Employee benets are included in the syllabus at level %. As aresult some parts of IAS ! are omitted. &hese include'

Short-term compensated absences (paras -)*.

+ost-employment benets ' multi-employer plans (paras%!-*

' state plans (paras )-*' insured benets (paras !-%*' attributing benet to periods of service (paras )/-/*

' business combinations (para 0*' transitional provisions (paras 1-1)*' dened benet plans that share ris2s(para , A and #*

' dened benet plans that share ris2s(para , A and #*.

3ost benets are paid by companies in cash. +ayment of somebenets in shares of the company is also 4uite common. I56S% 7Share based payments8 addresses the accounting issuesinvolved. It also covers situations where the shares of thecompany are used to pay for other goods and services. &he

module covers these aspects of I56S %.

10.2 OBJECTIVES

On completing this module you should be able to'

. apply the provisions of IAS ! in accounting for short-termemployee benets9

%. identify the 2ey features of dened contribution anddened benet pension plans9

. apply the provisions of IAS ! in accounting for dened

contribution and dened benet plans9

notes


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MODULE 10 TPS – FINANCIAL REPORTING

. describe the principal disclosure re4uirements relating topost-employment benet plans9

1. describe the principal di:erences between IAS ! and 56S/.

). describe and apply the re4uirements of I56S %.

&his will help you meet the second, third and si;th learningob


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of employment this will give a legal obligationassuming other conditions (eg relating to performanceor protability* are met. >here a bonus is not in acontract of employment but a company has anestablished practice of paying bonuses then aconstructive obligation will e;ist.

notes


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In measuring the amount to include in the nancialstatements, the details of bonus arrangements need tobe loo2ed at. If the payment of the bonus isconditional on employees still being with the rm atsome date in the future, allowance should be made forli2ely departures before that date.

@ou should assume that employers8 =I will arise on thepayment of any bonus being recognised and thisshould also be accrued.

Exampl 1

Nairn plc include a !"nu #$e% in i$ c"n$rac$ "& e%pl"#%en$"& all $a&&' (e# $er% are)

*i+ i& pr"&i$ increae !# %"re $,an 10- in an# "ne #ear a !"nue.ui/alen$ $" 2- "& r" ae and alarie *ecludine%pl"#er NI+ i pa#a!le $" $a&&3

*ii+ $,e !"nu i pa#a!le a$ $,e end "& %"n$, 4 "& $,e &"ll"in#ear $" all e%pl"#ee ," "r5ed in $,e #ear and are $ille%pl"#ed !# $,e c"%pan# "n $,e da$e $,e !"nu i pa#a!le'

In $,e #ear $" 61 Dece%!er 2007 r" ae and alarie$"$alled 819% and e%pl"#er NI a 81'7%' PA:E ande%pl"#ee NI a/erae 62- "& pa#r"ll' Pa#%en$ $" $,e Re/enueare paid "ne %"n$, in arrear' Pr"&i$ in 2009 and 2007 e.ualled84'6% and 8;'1% repec$i/el#'

S$a&& de$ail are a &"ll")

Da! N"m#$ A$ 61'12'07 410O& ,ic, le&$ !e$een 1'1'04 and 60'4'04 12

T,e acc"un$ &"r $,e #ear $" 61 Dece%!er 2007 are !einc"%ple$ed in


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So$uton(a* &otal short-term employment cost

000>ages and salaries ,000Employers =I on wages and salaries ,100

Annual bonus 0!1,0!

Annual bonus

&here is a legal obligation to pay a bonus if theconditions are met.

B increase in prots C %./B, therefore bonus will bepaid.

=umber of sta: eligible C )0 D %C 1!

#onus C %B ; 1!)0 ; m C %/,! C appro;%/,000

=I on bonus (%.B* C 1,1 C appro;1,000

0!,000

(b* Fiability at ?ecember %001

Annual bonus 0!

+A@E and =I (%B ; m% G .1%*(C /, G %1,000* !0/

@ou should now be able to achieve the rst learning ob


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&he employee8s contribution is a deduction from gross salaryand is accounted for in the same way as other deductions eg+A@E and =I. T&e "an accountng ,!o($e" % -t& t&ee",$oe!/% cont!(uton # -&c& % a co%t to t&e co",an n a++ton to t&e g!o%% %a$a! o t&e e",$oee.

4

notes


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10..1 T,e% o ,$an%&here are two types of pension plan' dened contribution anddened benet.

De)ne+ cont!(uton ,$an% (or money purchase schemes*re4uire the company to ma2e an agreed level of contributionsto the scheme. &he pensioners will en


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T,e ac$uarial pr"!le% i $" !uild up a &und !# ae 40 u&&icien$ $"&und an annui$# "& 860>000 1070 84>000 per annu%' T,e"!lia$i"n $" &und $,e peni"n i a peni"n lia!ili$#

=

notes


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reviewed and changed in the future.

@ou should now be able to achieve the second learningob


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10., *CCOUNTIN FOR DEFINED CONTRIBUTION PL*NS

Accounting for dened contribution plans is straightforward asthe company8s obligation is determined by the amountsto be contributed for the period. Once the companypays this there is no further liability. &he main pointsare'

• any cont!(uton ( t&e e",$oee is deducted from theirsalary as part of the salaries system and is paid over to thepension scheme. Any amount deducted but not paid over tothe pension scheme at the year end is a liability of thecompany.

• any unpaid or pre-paid part of the co",an/%

cont!(uton is an accrual or prepayment.

• the company charges its share of the contribution to the

pension scheme to the prot and loss account (unless it isto be included in the cost of ;ed assets, stoc2 etc.*.

Exampl 3

Pi$c,er plc "pera$e a de&ined c"n$ri!u$i"n plan under ,ic,e%pl"#ee pa# 7- "& r" alar# and $,e e%pl"#er 16-'Pa#%en$ are %ade $" $,e peni"n c,e%e and $,e Re/enue 19da# a&$er $,e end "& eac, %"n$,'

Gr" alarie &"r N"/e%!er 2009 ere 8700>000' PA:E and NIdeduc$i"n ere 8100>000' E%pl"#er NI e.ualled 874>000 &"r

$,e %"n$,'

R%"&$'(*a+ calcula$e $,e $"$al e%pl"#%en$ c"$ &"r N"/e%!er 20093*!+ prepare @"urnal en$rie $" rec"rd $,e rele/an$ $ranac$i"n'

So$uton

(a* Employment cost

ross salary 100,000Employer8s =I 1),000

Employer8s pension contribution (B ; 100,000*)1,000

)%,000

(b* Pournal entries

0 =ovember %00?r >ages and salaries )%,000

Lr Inland 6evenue 1),000+ension liability !0,000#an2 /1,000

being payroll for =ovember %00

?ecember %00?r Inland 6evenue 1),000

notes


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+ension liability !0,000Lr #an2 %),000

being payment of deductions

12

notes


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=ote'(i* &otal payments (/1,000 G %),000* e4ual the total

wages and salaries e;pense.

&he net salary paid to employees is'

ross salaries 100,000

less' +A@E and =I (00,000* ' pension (1B* (%1,000*

/1,000

(ii* If 0 =ovember %00 was the company year-end therewould be liabilities of %),000'

Inland 6evenue (00,000 G 1),000* 1),000+ension scheme ()1,000 G %1,000* !0,000

(iii* Hnder a dened contribution plan, payment of !0,000to the pension scheme removes all the liability thecompany has for pensions.

10. *CCOUNTIN FOR DEFINED BENEFIT PL*NS

As described in 0. dened benet plans are more comple;than dened contributions plans and the company,rather than the employee, is e;posed to the principalris2s. As a result the accounting and disclosurere4uirements are more detailed.

&he approach adopted is that although the pension assets and

liabilities are normally held by a separate legal entity(usually a trust* they should appear in the company8sbalance sheet as the company bears the ultimate ris2sand rewards of the performance of the plan8sinvestments, through higher or lower levels of contributions.

&he accounting entries are mainly based on details supplied byactuaries.

10.6.1 ea%u!e"ent o a%%et% an+ $a($te%ea%u!e"ent of dened benet scheme assets and liabilities'

(a* assets are measured at fair value (5K* at the balancesheet date9

(b* liabilities are measured at an appro;imation of fair value, using a particular actuarial method (the pro


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10.6.* Recognton n ,!o)t an+ $o%% account an+(a$ance %&eet

&he following e;ample will be used to illustrate the re4uiredamounts to be recognised in the prot and loss account andbalance sheet.

Exampl )

Fi$r"# L$d ,a a de&ined !ene&i$ peni"n plan &"r i$ e%pl"#ee'T,e c,e%e ae$ and lia!ili$ie ere a &"ll")

61'12'07 61'12'098% 8%

Ae$ – %ar5e$ /alue 67 600Lia!ili$ie – ac$uarial /alue 677 270

T,e epec$ed ra$e "& re$urn "n ae$ i ;'2- and $,e dic"un$ra$e i 7'7-' C"n$ri!u$i"n "& 820% ere paid a$ $,e #ear?end

and $,e curren$ er/ice c"$ a 826%'

Pa#%en$ "& 87% $" peni"ner ere %ade in $,e #ear'

Au%e an# peni"n ae$ i rec"/era!le'

T,e a/erae re%ainin "r5in li/e "& $a&& in $,e plan i $en#ear a a$ 1


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89 P!o)t an+ $o%% account

&here are si; items that can arise. &he rst four areperiodic costs and the last two are non-periodic costs.

(a* the cu!!ent %e!2ce co%t (the increase in theactuarial liability e;pected to arise from employee

service in the current period*. &his represents thenet cost to the employer of providing an e;tra

year8s benets to employees.

&he


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&he e;pected return for 5itNroy is'

return B ; opening assets

ie /.%B ; 00m C %.)m

?r +ension account %.)Lr Sta: account %.)

(d* actua!a$ gan% an+ $o%%e% can arise on planassets when e;pected and actual returns di:erand can arise on scheme liabilities when there aredi:erences between actuarial assumptions andactual e;perience and from changes in actuarialassumptions.

A company need not recognise all of its actuarialgains and losses immediately. =one of the gains

or losses need be recognised if they fall within a10: co!!+o! . &he boundaries of the corridorare the greater of'

(a* 0B of +K of plan liabilities at the lastbalance sheet date9 and

(b* 0B of 5K of plan assets at that date.

If the net cumulative unrecognised actuarial gainsand losses at the last balance sheet date e;ceedthe corridor a portion should be recognised asincome or e;pense. &he portion is the e;cessover the corridor divided by the e;pected averageremaining wor2ing lives of employees who aremembers of the plan. A systematic method of faster recognition is acceptable if appliedconsistently (0.).*.

If an actuarial gain or loss is being recognised the


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6ecognise in year (0*

&he actuarial gain recognised for 5itNroy is'

?r +ension account Lr Sta: costs

(e* ,a%t %e!2ce co%t% (increases or decreases inpension liabilities related to employee service inearlier periods arising in the current period as aresult of the introduction of, or changes to, post-retirement benets* should be recognised as ane;pense immediately.

&he


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net actuarial gain recognised (.0*past service cost %.0curtailment ( ) .0*=et e;pense %0 .

1=

notes


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In the case of 5itNroy this gives'm

opening asset 0 ?r

net credit to pension account from prot and loss entries %0. Lr

net debit to pension account from contributions and benet payments %0 ?r

closing asset ! .! ?r

Always use this approach unless you are re4uired toproduce a disclosure note in which case you will have touse the formal approach.

10.6.3 D%c$o%u!e

De)ne+ cont!(uton ,$an%&he e;pense for the year should be disclosed (para )*.

De)ne+ (ene)t ,$an%?ue to the more comple; nature of these plans there are

signicant disclosure re4uirements. &hese aredetailed in paragraph %0A. &he more important onesare as follows.

=ote that the references below are consistent with those inparagraph %0. &here appear to be gaps in the se4uencebelow but this is when the item is omitted because it is eitherof less signicance or is outwith the scope of the syllabus.

Illustrative disclosures in Appendi; # to IAS ! are useful.

An entity should disclose the following information aboutdened benet plans'

(a* the enterprise8s accounting policy for recognisingactuarial gains and losses9

(b* a general description of the type of plan9

(c* a reconciliation of opening and closing balances of thepresent value of the dened benet obligation showingseparately, if applicable, the e:ects during the periodattributable to each of the following'

(i* current service cost,(ii* interest cost,(iii* actuarial gains and losses,(iv* benets paid,(v* past service cost,

(vi* curtailments and(vii* settlements.

20

notes


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(e* a reconciliation of the opening and closing balances of thefair value of the plan assets showing separately, if applicable, the e:ects during the period attributable toeach of the following'

(i* e;pected return on plan assets,(ii* actuarial gains and losses,(iii* contributions by the employer,(iv* contributions by plan participants,(v* benets paid and(vi* settlements.

(f* a reconciliation of the present value of the dened benetobligation in (c* and the fair value of the plan assets in (e*to the assets and liabilities recognised in the balancesheet, showing the net actuarial gains or losses notrecognised in the balance sheet (see paragraph !%*. &hisis the 7formal8 presentation and calculation of the balance

sheet total.

(g* the total e;pense recognised in prot or loss for each of the following, and the line item(s* in which they areincluded'

(i* current service cost9(ii* interest cost9(iii* e;pected return on plan assets9(iv* actuarial gains and losses9(v* past service cost9 and

(vi* the e:ect of any curtailment or settlement.

(h* the total amount recognised in the statement of recognised income and e;pense for actuarial gains andlosses.

(i* for entities that recognise actuarial gains and losses inthe statement of recognised income and e;pense inaccordance with paragraph !A, the cumulative amountof actuarial gains and losses recognised in the statementof recognised income and e;pense.

(m* the actual return on plan assets.

(n* the principal actuarial assumptions used as the balancesheet date, including, when applicable'

(i* the discount rates9(ii* the e;pected rates of return on any plan assets for

the periods presented in the nancial statements9(iii* the e;pected rates of salary increases (and of

changes in an inde; or other variable specied in theformal or constructive terms of a plan as the basis

for future benet increases*9(iv* medical cost trend rates9 and(v* any other material actuarial assumptions used.

notes


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An entity shall disclose each actuarial assumption inabsolute terms (for e;ample, as an absolute percentage*and not


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Assume in E;ample that a disclosure note was also re4uired.

Accounting policy for recognising actuarial gains and losses Actuarial gains and losses that e;ceed 0B of the greater of plan liabilities and plan assets are amortised over the e;pectedaverage remaining service lives of employees in the plan. +astservice costs are recognised immediately.

General description of the plan&he company operates a dened benet pension plan on behalf of its employees.

Changes in the present value of dened benet obligation and fair value of plan assets are as follows:

Obligation Assets £m £m

Opening amount (%10* 00

Service cost (%* -Interest cost (./* -E;pected return - %.)

Actuarial gains(losses* ()/.* 1.+ast service costs (%.0* -Lurtailment ).0 -Lontributions paid - %0.0#enets paid 1 .0 (1 .0*

(11 .0* !1 .0

=otes'

. &he gures, e;cept for actuarial gainslosses are allderived from the


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way described earlier and should only be done whena disclosure note is re4uired in the 4uestion.

29

notes


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Total expenses recognised in prot or loss&his has been detailed earlier (see page %*

Actual return on plan assetsE;pected return on assets %.)

Actuarial gain on plan assets 1 .0 .0

rincipal actuarial assumptions?iscount rate applied to plan obligations 1.1BE;pected return on plan assets /.%B

>or2ing

Hnrecognised gains or losses have to be calculated as follows'

Hnrecognised amount at start of the period 0 gain Actuarial gain(loss* on liabilities ()/.* Actuarial gain(loss* on assets 1.6ecognised in year (from corridor wor2ing* ( .0*

0 .

10.6. A$te!nat2e to t&e co!!+o! An amendment to IAS ! introduced, from H AA+, an

alternative approach to actuarial gains and losses(para !A-?*. &his permits a company to recognise allactuarial gains and losses immediately in the period in

which they arise. &he following conditions must bemet'

• it must be applied to all of its dened benet plans9

• it must include all actuarial gains and losses as at thecurrent balance sheet date9

• presentation must be through the statement of recognisedincome and e;pense ie a company must produce thisstatement. It cannot be reported through the full changesin e4uity statement9

• it must recognise the actuarial gains and losses in protand loss reserve and not a separate reserve.

&he


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Exampl ,

Au%e $,a$ Fi$r"# d"e n"$ appl# $,e c"rrid"r %e$,"d !u$ ad"p$$,e al$erna$i/e appr"ac, "u$lined a!"/e' All $,e da$a i $,e a%ea in Ea%ple 9 ecep$ $,a$ in uin $,e al$erna$i/e appr"ac, $,e&ull di&&erence !e$een ae$ and lia!ili$ie a$ 61 Dece%!er 2009

"uld ,a/e !een rec"nied ie a 870% ae$'

R%"&$'(

*a+ calcula$e $,e a%"un$ $,a$ "uld appear in $,e pr"&i$ and l"acc"un$ and $a$e%en$ "& rec"nied inc"%e and epene "& Fi$r"#&"r $,e #ear $" 61 Dece%!er 2007 and $,e !alance ,ee$ a a$ $,a$da$e3 and

*!+ prepare dicl"ure n"$e'

So$uton

(a* rot and loss account

&he only di:erence is that there will be no gure foractuarial gain or loss as these are reported through theSO6IE. All the other gures will be e;actly the same.&his gives'

mLurrent service cost %Interest cost ./E;pected return on assets (%.)*+ast service cost %.0Lurtailment () .0*

% .

!tatement of recognised income and expense

Actuarial loss on liabilities ()/.* Actuarial gain on assets 1 .*=et actuarial loss presented ( .!*

"alance sheet

=on-current assets=et pension asset 0

=ote' the pension asset is the net of pension assets andliabilities.

(b* #isclosure note

&he disclosure would be identical to that for the originalE;ample e;cept for the following'

Accounting policy for recognising actuarial gains andlosses

All actuarial gains and losses are recognised

24

notes


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immediately through the statement of recognisedincome and e;pense. +ast service costs are recognisedthrough prot and loss immediately.

notes


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The amount recognised in the balance sheet

+resent value of obligations 115air value of plan assets (1*=et pension asset at ?ecember %001 (0*

=ote' under this approach all gains and losses arerecognised immediately therefore none areunrecognised.

Total expense recognised in prots or loss As indicated in (a* this would now e;clude the mactuarial gain.

@ou should now be able to achieve the forth learning outcomeof the module.

10./ IFRS 2 SH*RE B*SED P*YMENT

It is 4uite common for companies to ma2e payments in theform of shares or share options or to base a cash payment onthe value of shares or share options. &his is particularly thecase with payments to employees where part of theremuneration pac2age may be in the form of shares or options.

&he company is issuing or granting these shares and options inreturn for goods and services received.

Exampl

L$d pa# a !"nu $" i$ $a&& in $,e &"r% "& ,are "p$i"n' Under $,i c,e%e a $"$al "& 70>000 "p$i"n $" ac.uire "rdinar# 81 ,areere ran$ed in $,e #ear $" 61 Dece%!er 2007' T,e "p$i"n ,adan a/erae &air /alue "& ;7p eac, and an a/erae eercie price "& 81'07' T,e# can !e eercied "n 61 Dece%!er 2004 !u$ n"$!e&"re $,a$ da$e'

T,e acc"un$an$ "& L$d i unure ," $" deal i$, $,ee in $,e&inancial $a$e%en$ &"r $,e #ear $" 61 Dece%!er 2007 and ,aa5ed $,ree c"lleaue ? A> H and C'T,eir ue$i"n are)

A A $,e "p$i"n ,a/e n"$ !een eercied a$ 61 Dece%!er 2007$,ere i n"$,in $" rec"rd a$ $,a$ da$e' I& $,e "p$i"n are eercied$,e# ,"uld !e rec"rded a$ 61 Dece%!er 2004'

H A $,e "p$i"n ,a/e !een ran$ed and %a# !e eercied 872>700,"uld !e rec"nied a a de!$"r and added $" "rdinar# ,arecapi$al'

C

A $,e "p$i"n iued are $" e%pl"#ee in re$urn &"r er/icerendered 86;>700 *$,e &air /alue "& $,e "p$i"n+ ,"uld !erec"nied a an epene and credi$ed $" reer/e'

2=

notes


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R%"&$'(B" ,"uld L$d acc"un$ &"r $,e ,are iued and "p$i"n ran$ed

notes


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So$uton+rior to the issue of I56S % there was no accounting standardin this area and many companies adopted the suggestion of A.

After prolonged review and e;tensive lobbying by companiesthat ma2e e;tensive use of options for the status 4uo, I56S %was issued. As we shall see it re4uires the approach suggestedby L.

10.7.1 Sco,e an+ +e)nton%I56S % applies to all share-based payment transactions withlimited e;ceptions.

&he main e;ception is accounting for the issue of shares in ata2eover. 3odule %% deals with this situation.

&wo denitions are important'

grant date D the date at which the entity and another party

(including an employee* agree to a share-based paymentarrangement.

vesting period D the period during which all the specied vesting conditions of a share-based payment arrangement areto be satised.

10.7.* T,e% o %&a!e'(a%e+ ,a"ent t!an%acton%&he standard identies three types of transaction (para %*.

E5ut'%ett$e+ %&a!e (a%e+ t!an%acton%

&he company gives shares or options in return for goods andservices received.

Ca%&'%ett$e+ %&a!e'(a%e+ ,a"ent t!an%acton%&he company gives an amount of cash, based on the value of the company8s shares, in return for goods and servicesreceived. 5or e;ample, employees may receive a bonus paid incash based on the increase in the share price of the companyover a particular period of time.

Ca%& o! %&a!e'%ett$e+ t!an%acton%&he company or the other party can either settle in cash orshares (or options* in return for goods and services given orreceived. 5or e;ample, a company or its employees may have achoice as to whether part of the remuneration pac2age isgiven in cash or shares.

10.7.3 Recognton A company should (paras / R *'(a* recognise the goods or services received or ac4uired in ashare-based transaction when the goods and services arereceived (ie not when payments are made or shares areactually issued*. If the goods and services do not 4ualify to be

recognised as assets they should be written-o: to prot andloss as e;penses. 3ost payments to employees will bee;penses as no future benet is to come9 and

60

notes


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(b* recognise a liability if payment is to be in cash or as anincrease in e4uity if it is to be e4uity-settled.

10.7. E5ut'%ett$e+ %&a!e'(a%e+ t!an%acton% 8,a!a10 # *


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It % ,!e%u"e+ t&at t&e a! 2a$ue o %e!2ce% ,!o2+e+ ( e",$oee% cannot (e e%t"ate+ !e$a($ an+ t&e!eo!et&e 2a$ue o t&e %&a!e% g2en &a% to (e u%e+.

If the e4uity instruments vest immediately (ie the employeesbecome unconditionally entitled to the shares* it is presumedthat the company has already received the benet of theservices and the full amount is recognised on the grant date of the e4uity instrument.

If the e4uity instruments do not vest immediately the companyshould assume that the benets received in return for thee4uity will be received over the vesting period. &hey should beaccounted for as services received over the vesting period(normally debited to prot and loss* with a correspondingincrease in e4uity.

If the vesting condition is merely the passing of time the

company should assume that the benets are received fromthe grant date to the vesting date.

If the vesting condition is based on the mar2et price of theshares of the company (eg an employee is granted ,000 shareoptions that will vest when and if the share price of thecompany e;ceeds 1 per share* the company estimates the

vesting period and does not change that estimate.

If the vesting condition is not based on the mar2et price of theshares (eg on when a particular sales target is met* the

company also should estimate the vesting period but changethe estimate when new information becomes available.

5or transactions that are measured by reference to the fair value of the e4uity granted the fair value should be calculatedat the measurement date based on mar2et prices or, wherethese are not available, an acceptable valuation techni4ue egan option pricing model.

5or transactions with employees measurement date is grantdate. 5or others it is the date of receipt of the goods andservices involved.

If the situation changes during the vesting period theestimated number of shares to be issued is ad


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A c"%pan# ,a ran$ed ,are "p$i"n $" i$ 1>000 e%pl"#ee "n$,e &"ll"in !ai' Eac, e%pl"#ee ill !e en$i$led $" 700 "p$i"n i& $,e# re%ain i$, $,e c"%pan# &"r 6 #ear' A$ $,e da$e "& ran$ eac,"p$i"n i e$i%a$ed $" ,a/e a /alue a$ 86'70 eac,'

A$ $,e end "& #ear "ne 70 $a&& ,a/e le&$ and $,e c"%pan#e$i%a$e a $"$al "& 100 ill lea/e "/er $,e ne$ $" #ear'

notes


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Durin #ear $" 40 $a&& lea/e and i$ i n" e$i%a$ed $,a$ 77 illlea/e in #ear $,ree'

Durin #ear $,ree 97 $a&& lea/e'

R%"&$'(Calcula$e $,e a%"un$ $,a$ ,"uld appear in $,e &inancial $a$e%en$ in

eac, "& $,e $,ree #ear'

69

notes


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So$uton As the options vest over a three year period it is assumed thatthe options relate to services provided by the employees overthe three year period. &he cost of these services should berecognised over the three years with estimates revised basedon new information. &his gives the following gures'

Sta: costs Lumulative increasein e4uity

@ear (,000 D 10* ; .10 ; 100 ; !1, !1,

@ear %(,000 D )1* ; .10 ; 100 ; %less !1, /, !/,))

@ear

(,000 D 11* ; .10 ; 100less !/,)) 10,1 ,/,/10

Exampl

A c"%pan# ran$ a $"$al "& 100>000 ,are "p$i"n $" i$ 9eecu$i/e direc$"r "n 1


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So$uton

At ?ecember %00 it is anticipated that the earnings targetof more than 1B over the three years will be met andtherefore the share options will have an e;ercise price of and a value at grant date of .)0.

At ?ecember %00 earnings have dipped and are note;pected to average over 1B during the three year period.&he options would therefore be e;pected to be issued at 1with a value of each.

At ?ecember %001 it is conrmed that the growth rate inearnings is less than 1B.&he amounts to appear in the accounts for each year are asfollows'

@ear Sta: cost Lumulative increasein e4uity

%00(00,000 ; .)0* ; 1, 1,

%00(00,000 ; * ; % D 1,, )),))/

%001

(00,000 ; * ; D )),))/, 00,000

Exampl

A c"%pan# ac.uired a pr"per$# "n $,e 61 Marc, 2007'C"nidera$i"n a 1% "rdinar# 70p ,are' T,e pr"per$# ,ad ane$i%a$ed %ar5e$ /alue "& 86'7% a$ $,e da$e "& ac.uii$i"n' A$ $,a$da$e $,e "rdinar# ,are "& $,e c"%pan# ere $radin a$ 86'77'

R%"&$'(Prepare $,e @"urnal en$r# $" rec"rd $,e ac.uii$i"n "& $,e pr"per$#'

So$uton

?r +roperty D cost ,100,000 Lr Share capital 100,000 Share premium ,000,000being purchase of property

I56S % re4uires that the fair value of the goods received isused as the basis of measuring the transaction unless noreliable estimate of fair value is available. &here is noindication that the gure of .1m is not reliable therefore itshould be used.

64

notes


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&he above treatment will ensure that the goods and servicesreceived are recognised over the period to vesting.Irrespective of what happens after the vesting date no changeis made to total e4uity. &ransfers within e4uity are permittedand may be appropriate. 5or e;ample, if shares are issued onsettlement the entry will be'

?r Other reserves Q Lr Share premium

Q

If share options are not e;ercised any balance on otherreserves should be transferred to prot and loss reserve by'

?r Other reservesLr +rot and loss reserve

Exampl 10

Re&errin $" ea%ple = $,e direc$"r ere iued i$, a $"$al100>000 87 "p$i"n' T,e direc$"r eercied 90>000 "& $,e "p$i"nin earl# 2004' B"e/er due $" a decline in $,e ,are price $" !el"87 n"ne "& $,e "$,er "p$i"n ere eercied and $,e# laped "n 61Dece%!er 2004'

T,e "p$i"n ere in repec$ "& $,e c"%pan# 27p "rdinar# ,are'

R%"&$'(

Prepare @"urnal en$rie $" rec"rd $,e a!"/e e/en$'

So$uton

E;ercised options

?r Other reserves(0B ; 00,000* 0,000 Lr Share premium 0,000 being issue of shares on e;ercise of options

Issue of shares?r #an2 %00,000

Lr Share capital 0,000 Share premium !0,000

being issue of shares of 1 each

Hne;ercised options

?r Other reserves )0,000 Lr +rot and loss reserve )0,000being transfer of share options on lapse

&he e;ercised options become capital and should be recordedas such in the usual manner.

notes


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6=

notes


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&he lapsed options should be removed from other reserves.+rot and loss reserve can be credited as the company has noobligation to issue e4uity instruments.

10.7.= Ca%&'%ett$e+ %&a!e'(a%e+ ,a"entt!an%acton% 8,a!a 30 # 339

>ith these transactions the amount to be paid for the goodsand services is (a%e+ on the value of the company8s shares butis ,a+ in cash. &he standard refers to these as shareappreciation rights (SA6s*. If payment is not made at the dateof the transaction (the normal situation* a liability e;ists. &heinitial cost of the goods and services is the fair value of theliability. &he entries are as follows.

At date of transaction

?r oodsservices Q Lr Lreditors Q

At date of payment

?r Lreditors Q Lr #an2 Q

A% t&e $a($t 2a!e% -t& t&e 2a$ue o t&e co",an/%%&a!e% t %&ou$+ (e !e'"ea%u!e+ at eac& (a$ance %&eet+ate unt$ %ett$e"ent. Any change is ta2en to the prot andloss account. &he SA6s should be measured using an optionpricing model.

Exampl 11

Par$ "& $,e c"n$rac$ "& e%pl"#%en$ "& $,e $a&& "& a c"%pan# i $,eri,$ $" recei/e pa#%en$ in ca, e.ui/alen$ $" ;7- "& $,e increaein /alue "& a n"$i"nal nu%!er "& $,e c"%pan# ,are durin $,e#ear' On a/erae eac, "& $,e c"%pan# 270 e%pl"#ee recei/e;7- "& $,e increae "n 1>000 ,are'

Durin $,e #ear $" 61 Dece%!er 2007 $,e ,are price increaed&r"% 970p per ,are $" 720p'

Pa#%en$ i %ade "n 61 Marc, 2004'

R%"&$'(Calcula$e $,e a%"un$ $" appear in $,e acc"un$ "& $,e c"%pan# &"r $,e#ear $" 61 Dece%!er 2007'

So$uton

Amount payable%10 ; ,000 ; /1B ; (1.%0 D .10* ,%10

&his would appear as an employment cost and would be a

liability at the year-end as payment was not until 3arch%00).

notes


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If the rights to a cash-settled amount vest over a period of timethe same approach as to e4uity-settled transactions applies.

90

notes


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Exampl 12

A c"%pan# ran$ 700 SAR $" eac, "& i$ 600 e%pl"#ee> "nc"ndi$i"n $,a$ $,e e%pl"#ee re%ain i$, $,e c"%pan# &"r $,e ne$$" #ear' T,e SAR %u$ !e eercied a$ $,e $ar$ "& #ear 6'

Durin #ear "ne 10 $a&& lea/e and $,e c"%pan# e$i%a$e $,a$an"$,er 12 ill lea/e in #ear 2' Durin #ear $" 17 $a&& lea/e $,ec"%pan#' A$ $,e end "& #ear 2 $,e SAR "& $,"e re%ainin ine%pl"#%en$ /e$'

T,e e$i%a$e "& $,e &air /alue "& $,e SAR &"r eac, #ear a lia!ili$#ei$ are a &"ll")

Fair /alue8

:ear 1 12'00:ear 2 19'60

R%"&$'(Calcula$e $,e a%"un$ $" appear in $,e pr"&i$ and l" acc"un$ and $,e!alance ,ee$ "& $,e c"%pan# &"r #ear 1 and 2'

So$uton

Sta: costs Fiability

@ear (00 D %%* ; 100 ; % ; %,000 ,000

@ear %(00 D %1* ; 100 ; .0less ,000 ,%,%10 ,!)),%10

10.7.6 S&a!e'(a%e+ ,a"ent t!an%acton% -t& ca%&a$te!nat2e% 8,a!a 3 # 39

&hese are transactions where either the counterparty or thecompany has the choice whether the transaction is settled incash or e4uity instruments. 7Lash8 refers to cash and otherassets. &ransactions with employees are by far the mostcommon and only these are covered.

&hese should be t!eate+ a% ca%&'%ett$e+ %&a!e'(a%e+t!an%acton if the company has incurred a liability to settle incash or other assets, ot&e!-%e a% an e5ut'%ett$e+ %&a!e#(a%e+ ,a"ent t!an%acton.

&he company has an obligation if either'

(a* the counterparty has the choice, or

notes


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(b* the company has the choice but the settlement in e4uityoption has no commercial substance or the company hasa past practice or stated policy of settling in cash.

92

notes


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Stuaton -&e!e an o($gaton e%t%&he accounting treatment where an obligation e;ists is thesame as a cash-settled share-based payment transaction as in0./.1 above.

One di:erence is that the counterparty might choose not toreceive cash on the date of settlement. If this is the case theliability built up is transferred to e4uity as it represents theconsideration received for the e4uity. 5or settlement in sharesthe entry would be'

?r Lreditors Q Lr Share capital Q Share premium Q

Exampl 13

A c"%pan# ran$ e%pl"#ee $,e c,"ice "& 700 70p "rdinar#,are eac, "r $,e ca, e.ui/alen$' T,e ri,$ /e$ "n $,ec"%ple$i"n "& 2 #ear er/ice' An# e%pl"#ee lea/in i$,in $,e $"#ear peri"d &"r&ei$ $,e ri,$ $" recei/e ca, "r ,are'

Durin $,e $" #ear peri"d a lia!ili$# "& 846>900 i !uil$ up inrela$i"n $" 2;= elii!le $a&&> !ein 2;= 700 89'40 *89'40 a$,e ,are price a$ 61 Dece%!er 2007+'

On $,e e$$le%en$ da$e "& da# 1 "& #ear 6> 200 "& $,e elii!le $a&& "p$ &"r pa#%en$ in ca,' T,e re%ainin "p$ &"r ,are'

R%"&$'(Prepare @"urnal en$rie $" rec"rd $,e e$$le%en$ "n da# 1 "& #ear 6'

So$uton&wo hundred sta: opt for cash and / for payment in shares.&he cash payments reduce the liability by )0,000 (%00 ; 100; .)0*. &he remaining /!,00 ()!,00 less )0,000* of the liability is e:ectively the proceeds form the issue of !,000(/ ; 100* 10p ordinary shares. &he re4uired


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Stuaton -&e!e no o($gaton e%t%&he transaction should be accounted for as an e4uity-settledshare-based payment transaction as in 0./. above.

If the company chooses to settle in cash then no new e4uityarises and the amount built up over the period has to beremoved. &he accounting entry is'

?r Other reserves Q Lr #an2 Q

If settlement is in shares there will be a transfer within e4uityD from other reserves to share capital and share premium.

Exampl 1)

A c"%pan# ,a crea$ed a reer/e "& 81>000>000 i$,in JO$,er

reer/e in rela$i"n $" a ,are?!aed pa#%en$ c,e%e ,ere $,ec"%pan# ,ad $,e c,"ice "& e$$lin in ca, "r ,are' A $,ec"%pan# ,ad in$ended $" e$$le in ,are $,i reer/e ,a !een!uil$ up "/er $,e /e$in peri"d'

A$ $,e e$$le%en$ da$e $,e c"%pan# decided $" e$$le "ne?.uar$er "& $,e a%"un$ in ca, and $,e re%ainder $,r"u, $,e iue "& 81"rdinar# ,are $,a$ ere "r$, 87 a$ $,a$ da$e'

R%"&$'(Prepare $,e @"urnal en$rie "n e$$le%en$'

So$uton?r Other reserves %10,000 Lr #an2 %10,000being cash settlement of share-based payment

?r Other reserves /10,000 Lr Share capital 10,000 Share premium )00,000being capitalisation of reserves in issue of shares

10.7.7 D%c$o%u!e

+aragraphs to 1% of the standard cover disclosure. &hereare three broad areas covered'

(a* information about the nature and scope of share-basedpayment arrangements that e;isted during the period(paras and 1*. A description of the arrangementsand detail of share options outstanding, granted,e;ercised etc during the period.

(b* ow any fair values were determined (paras ) D !*.Information about the use of fair values and how thesewere arrived at need to be given.

(c* E:ect on the prot and loss account and balance sheet

(paras 10 D 1%*. &he total e;pense (with the total fore4uity-settled share-based payment transactions

99

notes


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separately identied* and the total lability and howmuch of this is vested at the year-end.

notes


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10. FIN*NCI*L REPORTIN ST*ND*RDS

IAS ! and 56S / 76etirement #enets8 adopt the sameapproach to post-retirement benets with one ma


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10. SUMM*RY

1' S,"r$?$er% !ene&i$

• an# a%"un$ unpaid – lia!ili$#

• c,are a epene in PL unle included in c"$ "& an ae$

• pr"&i$ ,arin and !"nu plan) accrue ,en "!lia$i"n arie'

2' P"$ – re$ire%en$ !ene&i$

a' De&ined c"n$ri!u$i"n

PL – c,are &"r #ear HS – an# unpaidprepaid a%"un$

!' De&ined !ene&i$

*1+ Pr"&i$ and l"Curren$ er/ice c"$

Dr PL ? $a&& c"$ Cr Peni"n ac

In$ere$ c"$Dr PL – $a&& c"$

Cr Peni"n ac Epec$ed re$urn "n ae$

Dr Peni"n ac Cr PL $a&& c"$

Ac$uarial ain "n ae$Dr Peni"n ac

Cr PL *ain+ *"pp"i$e &"r l"+

Ac$uarial ain "n lia!ili$ieDr Peni"n ac

Cr PL *ain+ *"pp"i$e &"r l"+

ORTa5e all ac$uarial ain*l"e+ $" PL reer/e andrep"r$ $,r"u, $a$e%en$ "& rec"nied inc"%e and

epene'

Pa$ er/ice c"$Dr PL – $a&& c"$

Cr Peni"n ac

Se$$le%en$cur$ail%en$Dr Peni"n ac

Cr PL – "pera$in inc"%e Cr Peni"n ae$

*"pp"i$e &"r ne$ c"$+

notes

A%"un$ a$ la$ !alance,ee$ da$e &allin"u$ide 10- c"rrid"r'

Spread "/er a/eraere%ainin "r5in li/e'


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*2+ C"n$ri!u$i"n paidDr Peni"n ac

Cr Han5

Hene&i$ paid reduce !"$, ae$ and lia!ili$ie

*6+ Halance ,ee$Halance a$ $ar$ "& #ear

E&&ec$ "& PL en$rieC"n$ri!u$i"n paid !alance a$ end "& #ear

*9+ Dicl"ure

De&ined c"n$ri!u$i"n

• C"$ &"r peri"d

De&ined !ene&i$

• decrip$i"n and acc"un$in p"lic#

• rec"ncilia$i"n "& ae$ and lia!ili$ie

• rec"ncilia$i"n "& rec"nied ainl"e

• anal#i "& $"$al epene

• ac$ual re$urn "& plan ae$

• principal au%p$i"n

6' S,are?!aed pa#%en$

•

M"$ rela$e $" e%pl"#ee !ene&i$ pac5ae

• E.ui$#?e$$led ,are?!aed pa#%en$ $ranac$i"n

Meaure a$ FK "& ""d and er/ice recei/edI& n" relia!le FK ue FK "& ,are i/enSpread c"$ "/er /e$in peri"d uin appr"pria$e e$i%a$e


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• S,are?!aed pa#%en$ $ranac$i"n i$, ca, al$erna$i/e'

Trea$ a ca,?e$$led ,are?!aed $ranac$i"n i& $,ec"%pan# ,a an "!lia$i"n'

O$,erie $rea$ a e.ui$#?e$$led ,are?!aed pa#%en$$ranac$i"n'

9' FRS 1;

• deal i$, re$ire%en$ !ene&i$ "nl#

• de&ined !ene&i$ plan – i%ilar appr"ac, !u$

− all ac$uarial ain and l"e rec"nied i%%edia$el#

$,r"u, STRGL'

− N" c"rrid"r i applied

notes


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notes

M10 Employee Benefits

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