EMPLOYEE BENEFITS AND
RETIREMENT PLANS
FRS119: EMPLOYEE BENEFITS
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EMPLOYEE BENEFITS
– Definition by FRS 119
“Employee benefits are all forms of
consideration given by an entity in
exchange for service rendered by
employees”
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EMPLOYEE BENEFITS
• Benefits provided to either employee or their
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dependents
Cost of providing employee benefits should be
recognised when is earned by employee, rather
than when it is paid or payable
This benefit can be directly paid to the
employees and their dependents or paid to other
parties such as insurance companies or clinics
for medical benefit.
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EMPLOYEE BENEFITS
• The employee benefits to which this
Standard applies include those provided:
• under formal plans or formal agreements:
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between an entity and individual employees,
groups of employees or their representatives
under legislative requirements: entities are
required to contribute to national, state, industry
or other multi-employer plans
Under informal practices: the entity has no
realistic alternative but to pay employee
benefits.
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4 categories of employee
benefits:
• Short-term employee benefit-
– Monetary (wages, salaries and social security contributions, paid
annual leave and paid sick leave, profit sharing and bonuses )
– Non-monetary (such as medical care, housing, cars and free or
subsidised goods or services) for current employees
• Post-employment benefits- pensions, other retirement
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benefits, post-employment life insurance and postemployment medical care
Other long-term employee benefits such as long serviceleave (sabbatical leave), jubilee or other long-service
benefits, long-term disability benefits.
Termination benefits; and
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REQUIREMENTS
(Standard and Statues)
• 9th Schedule
– Disclose a provision made for pension or
retirement benefits in Balance Sheet
– Not specified the basis of recognition and
method of measurement
– Retirement benefits expense is disclose under
operating expenses ( no need to disclose
separately from other expenses)
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REQUIREMENTS
(Standard and Statues)
• MASB 1
– Retirement benefits liability is not one of the
minimum line item in BS
– Retirement benefits expense is not included
as one of the minimum line item in IS
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SHORT-TERM EMPLOYEE BENEFIT
• Accounting for Short-term employee
benefits is straightforward
• RECOGNITION;
– When an employee has rendered service to
an enterprise
– Recognize as an expenses in IS
– Recognize as a liability (accrued expenses if
it is still unpaid)
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SHORT-TERM EMPLOYEE BENEFIT
• 1.short-term compensated leave
• Has to measure the expected cost of
accumulating compensated absences at
the BS date
• Refer example 1
• 2. Profit sharing & bonuses
• If have legal or constructive obligation
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POST-EMPLOYMENT BENEFITS
• Benefits paid to the employee after they had
ceased employment, such as:
– Retirement benefit,
– Pension,
– Post-employment medical benefits
• 2 types of paying post employment benefit:
– Defined contribution plan; and
– Defined benefit plan
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POST-EMPLOYMENT BENEFITS-
• Distinction between;
– Funded vs. Unfunded Benefit Plans
– Contributory vs. Non-Contributory
Benefits Plans
– Defined Contribution Plans VS.
Defined Benefit Plans
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Funded VS. Unfunded Benefit Plans
• Funded;
– The employer makes periodic payments (reduce
cash a/c) or contribution to a separate funding
agency which will administer the funds
– Funding is a process making payment to the
trustee.
• Unfunded Benefit Plans;
– No separate funding agency involved.
– No cash outflow
– Cost of retirement benefits and the related
liability are accrued in the account
– On retirement or termination of employment, the
payment is made to employee and accrued
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liability account is reversed
Contributory VS. Non-Contributory
Benefits Plans
• Contributory
– Employee contribute to the plans together
with the employer.
– Contribution is directly deducted from their
salaries.
– Example; EPF (12% Employer, 11%
employee)
• Non-Contributory
– Contribution comes from employer only
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DEFINED CONTRIBUTION PLANS
• Employer contribution is defined
• The enterprise’s legal or constructive obligation is
limited to the amount that it agrees to contribute
to the fund
• Example: EPF: employer must (mandatory) to
contribute 12% to the fund
• Amount to be paid as retirement benefits are
determined by contributions to a fund together
with investment earnings.
• Employee is not guaranteed any specific amount
that she/he will received.
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Cont..
Defined Contribution Plans
• The fund is managed by the trustee, which
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is separated from the employer
In form and in substance, the fund is
separate from the employer
The third party trustee act on behalf of the
employee
Any risk and benefits of gain are borne by
the employee
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RECOGNITION
Accounting treatment
• Recognized;
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– As current liability for amount not yet paid to
the fund (trustee)
– As an expense in Income Statement
Entry:
– Dr. Staff cost
xxx
• Cr. Cash/accrued liability
xxx
Disclosure;
– The amount recognized as an expense for
define contribution plans
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DEFINED BENEFIT PLANS
• Employees’ benefits are defined.
• The plan specifies the benefits that the
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employees will received at the time of
retirement.
– Payment could be in lump-sum such as
gratuity or periodic like pension.
The enterprise’s legal obligation is to provide the
agreed benefits to current and former
employees and to make sure that sufficient
contribution is made.
Actuarial risk (benefit will cost more than
expected) and investment risk are borne by the
enterprise
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Cont..Defined Benefit Plans
• The trustee act on behalf of the employer
• In form, the trustee is a separate legal entity who
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manage the fund, but in substance the plan
assets and the retirement liability belongs to the
employer.
Amount to be paid as retirement benefits are
determined by reference to a formula usually
based on employees’ earnings and /or years of
service.
The future funding is determined by accumulated
assets in the fund
The assets in the fund are referred as “plan
assets”
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Accounting for defined benefits
plan:
• Step 1:
– Using actuarial techniques make a reliable
estimate of the amount of benefit that
employees have earned in return for their
service in the current and prior periods.
– The actuarial assumptions include:
• demographic variables (such as employee
turnover and mortality)
• financial variables (such as future increases
in salaries and medical costs) that will
influence the cost of the benefit
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Accounting for defined benefits
plan:
• Step 2:
– 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 , spread over the vesting
/ service period
– PV bf + interest + current service cost + actuarial gain / (loss)
(bal fig) = PV cf
– Refer example 2
• Step 3:
– determining the fair value of any plan assets
– FV bf + expected return + contribution + actuarial gain / (loss)
(bal fig) = PV cf
• Step 4:
– determining the total amount of actuarial gains and losses = diff
between bal fig of step 2 and 3
– Refer example 3
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Accounting for defined benefits
plan:
• Step 5:
– determining the resulting past service cost
when the plan has been introduced or
changed
• Step 6:
– determining the resulting gain or loss when
the plan has been curtailed or settled
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RECOGNITION
Accounting treatment
• Expense should be recognized on an accrual
basis by reference to the services of employees
rendered or to be rendered
• Two types of expenses/costs under Defined
Benefit Plans
– Current service cost; and
– Past service cost
• Entry:
– Dt. Retirement benefit expense
• Cr. Defined benefit liability
xxx
xxx
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Other long term employee benefits
• This method differs from the accounting
required for post-employment benefits as
follows:
– actuarial gains and losses are recognised
immediately
– all past service cost is recognised immediately.
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disclosure
• Retirement benefit expense charge in income
statement will comprise:
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Current service cost
Interest cost
Actuarial gain or loss
Past service cost and
Gain or loss ob settlement
• Defined benefit liability in the Balance
sheet:
– Present value of defined benefit obligation and,
– Fair value of the plan assets
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Termination Benefits:
• It gives rise to an obligation is the termination
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rather than employee service.
Recognition: as a liability and an expense when,
and only when, the entity is demonstrably
committed to either:
– terminate the employment of an employee before the
normal retirement date
– provide termination benefits to encourage voluntary
leave.
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