Professional Documents
Culture Documents
The content of this video lecture has not been specifically discussed by the Council
of the Institute or any of its Committees and the views expressed herein may not be
3 taken to necessarily represent the views of the Council or any of its committees
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This e-Lecture was Recorded on:
May 23, 2014
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Objective Scope
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Accounting and disclosure of Employee Benefits
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Formal
Plan/Agreements
Employee Legislative
Benefits Requirements
Informal
Practices
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Short Term Long Term Post Employment Termination
Employee Benefits Benefits Benefits Benefits
Sabbatical
Salary, wages Gratuity Retrenchment
Leave
Long Term
annual paid
Disability Medical Care
leaves
Benefits
Medical,
housing, car
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Benefits provided to employees, spouse, children, dependents
Employee may be
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Applicable to employer and not to employee benefit plans
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Short Term
Compensated
Absences
Short Term
Employee Benefits
Payable during the Profit Sharing and
Service Bonus
Other Long Term
Benefits
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Employee benefits other than termination benefits which fall due
wholly within 12 months after the end of the period in which employee
renders the related service
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Non-accumulating
compensated absences - Do
Accumulating compensated not carry forward. They lapse
absences - Carried forward if the current periods
and can be used in future entitlement is not used in
periods if the current full and do not entitle
periods entitlement is not employees to a cash
used in full payment for unused
entitlement on leaving the
enterprise.
Vesting - entitled to a cash
payment for unused
entitlement on leaving the
enterprise
ICAI 15
Expenses and
Vesting e.g.
liability/asset
Privilege
when services
Leaves
are rendered
Accumulating
Expenses and
liability/asset
Non Vesting - applying
Compensated e.g. Sick probability i.e.
Absences leaves how many
leaves shall be
Non
Expense and availed
Accumulating
liability only
e.g.
when absence
maternity/pat
occurs
ernity leaves
ICAI 16
100 employees
Each entitled to 5 working days of leave for each year
Unused leave may be carried forward for one calendar year
Leave shall be utilized on LIFO basis
At 31 December 2012, the average unused entitlement is 2 days per employee
The enterprise expects, based on past experience that 92 employees will take 5 days of
leave and 8 employees will take 6.5 days each
What shall be number of days for which the liability shall be recognized in the year 2012?
Answer:-
The enterprise expects that it will pay an additional 12 days of pay as a result of the
unused entitlement that has accumulated at 31 December 2012 (one and a half days
each, for eight employees).
Therefore, the enterprise recognizes a liability, as at 31 December 2012, equal to 12
days of pay
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Profit Sharing
Minimum period with Company
Increase in the obligation as the period of service increases
Reflects the possibility of exit of employee before completion of the period
Bonus
May not be a legal obligation
No realistic alternative but to pay due to past practices
Reliable estimate
Formula for determining the amount of the benefit
The amounts to be paid before the financial statements are approved
past practice gives clear evidence of the obligation to be paid
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Long-term compensated
Jubilee or other long-service
absences such as long-service Long-term disability benefits
benefits
or sabbatical leave
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Balance Sheet Profit and Loss A/c
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Post employment retirement benefits
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post-employment benefit plans under which an enterprise pays fixed
contributions
will have no obligation to pay further contributions if the fund does not hold
sufficient assets to pay all employee benefits relating to employee service in the
current and prior periods
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Obligation limited to amount agreed to contribute
Actuarial Risk i.e. benefits will be less than expected borne by employee
Undiscounted basis except where they do not fall due wholly within twelve
months after the end of the period in which the employees render the
related service.
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Multi-
employer
Non-
State Plan
controlled
Funded
DCP Insured
(Mostly)
Trust/Legal
Controlled
Entity
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Obligation to provide agreed benefits
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At balance sheet date
Present
Unrecog Defined
value of Fair
nized Benefit
Defined value
Past Liability
Benefit of Plan
Service (DBA if
Obligatio Assets
Cost negative)
n
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In P&L A/c Total of below
current service cost
interest cost
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Measure the present value of the post-employment
benefit obligations and the related current service cost.
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1% of final salary for each year of service, is payable on termination of service
7% increase (compound) in each year resulting in Rs. 13,100 at the end of year 5
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Year 1 2 3 4 5
Benefit attributed to:
- prior years 0 131 262 393 524
- current year (1% of final salary) 131 131 131 131 131
Interest at 10% - 9 20 33 48
Current Service Cost (see note 2) 89 98 108 119 131
Notes:
1. The Opening Obligation is the present value of benefit attributed to prior years.
2. The Current Service Cost is the present value of benefit attributed to the current year.
3. The Closing Obligation is the present value of benefit attributed to current and prior years.
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An enterprise should attribute benefit to periods of
service under the plans benefit formula
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Employee service gives rise to an obligation under a
defined benefit plan even if the benefits are not vested
E.g. A plan pays a benefit of Rs. 100 for each year of service. The
benefits vest after ten years of service
A benefit of Rs. 100 is attributed to each year. In each of the first
ten years, the current service cost and the present value of the
obligation reflect the probability that the employee may not
complete ten years of service
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A post-employment medical plan reimburses 40% of
medical costs if the employee leaves after more than 10 and
less than 20 years of service and 50% of those costs if the
employee leaves after twenty or more years of service.
Under the plans benefit formula, the enterprise attributes 4% of the
present value of the expected medical costs (40% divided by ten) to each
of the first ten years and 1% (10% divided by ten) to each of the second
ten years.
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Actuarial Assumptions Demographic assumptions
Enterprises best estimates of the Future characteristics of current
variables that will determine the and former employees (and their
ultimate cost of providing post- dependents) who are eligible for
employment benefits benefits
Financial assumptions
Market expectations, at the
balance sheet date, for the period
over which the obligations are to
be settled
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Mortality, both during and after employment;
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The discount rate
In the case of medical benefits, future medical costs, including, where material, the
cost of administering claims and benefit payments
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Currency and term of the
government bonds should be
Market yields at the balance sheet
consistent with the currency and
date on government bonds
estimated term of the post-
employment benefit obligations
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Estimated future salary increases
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Recognition of gains/losses
Recognized immediately in the statement of profit and loss
as income or expense
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unexpectedly high or low rates of employee turnover
early retirement
early mortality
increases in salaries
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Past service cost is the change in
the present value of the DBO for Past service cost may be either
employee service in prior periods, positive (where benefits are
resulting in the current period from introduced or improved) or negative
the introduction of, or changes to, (where existing benefits are
post-employment benefits or other reduced).
long-term employee benefits.
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Pension plan that provides a pension of 2% of final salary for each year of
service.
At the date of the improvement, the present value of the additional benefits
for service from 1 January 20X1 to 1 January 20X5 is as follows:
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Employees with more than five years service at 1/1/X5
- Rs.150
Answer:
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Fair value
Discounting expected future cash flows using a discount rate that reflects both
the risk associated with the plan assets and the maturity or expected disposal
date of those assets
When, and only when, it is virtually certain that another party will reimburse
some or all of the expenditure required to settle a defined benefit obligation, an
enterprise should recognize its right to reimbursement as a separate asset
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The expected return on plan assets is a component of the
expense recognized in the statement of profit and loss.
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At 1 January 20X1, the fair value of plan assets was Rs. 10,000.
On 30 June 20X1, the plan paid benefits of Rs. 1,900 and received
contributions of Rs. 4,900.
At 31 December 20X1, the fair value of plan assets was Rs. 15,000 and the
present value of the defined benefit obligation was Rs. 14,792.
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Interest and dividend income, after tax payable by the fund - 9.25%
For 20X1, the expected and actual return on plan assets are as follows
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Particulars Rs.
Return on Rs. 10,000 held for 12 months at 10.25% 1,025
Return on Rs. 3,000 held for six months at 5% (equivalent 150
to 10.25% annually, compounded every six months)
Expected return on plan assets for 20X1 1,175
Fair value of plan assets at 31 December 20X1 15,000
Less fair value of plan assets at 1 January 20X1 (10,000)
Less contributions received (4,900)
Add benefits paid 1,900
Actual return on plan assets 2,000
The difference between the expected return on plan assets (Rs.
1,175) and the actual return on plan assets (Rs. 2,000) is an
actuarial gain of Rs. 825. Therefore, the net actuarial gain of Rs.
765 (Rs. 825 Rs. 60 (actuarial loss on the obligation)) would be
recognized in the statement of profit and loss.
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A curtailment occurs when an enterprise either:
has a present obligation, arising from the requirement of a
statute/regulator or otherwise, to make a material reduction in the
number of employees covered by a plan
amends the terms of a defined benefit plan such that a material
element of future service by current employees will no longer
qualify for benefits, or will qualify only for reduced benefits
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A settlement occurs when an
A settlement occurs together
enterprise enters into a
with a curtailment if a plan is
transaction that eliminates all
terminated such that the
further obligations for part or
obligation is settled and the
all of the benefits provided
plan ceases to exist.
under a defined benefit plan
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An enterprise should recognize gains or losses on the curtailment or
settlement of a defined benefit plan when the curtailment or settlement
occurs
any resulting change in the present value of the defined benefit obligation;
any resulting change in the fair value of the plan assets;
any related past service cost that had not previously been recognized
Remeasure the obligation (and the related plan assets, if any) using current
actuarial assumptions
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Defined Benefit Obligation Fair Value Plan Assets of Unrecognized Past Service
with NPV Rs. 1000 Rs. 820 Cost Rs. 50
Of the previously
unrecognized past service
Increased net liability due cost and transitional
Curtailment reduces the
to adoption of Plan one amounts, 10% (Rs. 100/Rs.
NPV of obligation by Rs.
year before Rs. 100 to be 1000) relates to the part of
100
recognized over 5 years the obligation that was
eliminated through the
curtailment
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Particulars Before Curtailment After
curtailment Gain Curtailment
Net present value of 1000 (100) 900
obligation
Fair value of plan (820) - (820)
assets
180 (100) 80
Unrecognized past (50) 5 (45)
service cost
Unrecognized (80) 8 (72)
transitional
amount (100x4/5)
Net liability recognized (50) (87) (37)
in balance sheet
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An enterprise should offset an asset relating
to one plan against a liability relating to
another plan when, and only when, the
enterprise:
has a legally enforceable right to use a surplus in one
plan to settle obligations under the other plan; and
intends either to settle the obligations on a net basis, or
to realize the surplus in one plan and settle its obligation
under the other plan simultaneously.
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Accounting policy for recognizing
actuarial gains and losses
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Analysis of Funded and Non Funded Defined Benefit
Plans
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a narrative description of the basis used to determine the overall expected rate
of return on assets
the effect of an increase of one percentage point and the effect of a decrease of
one percentage point in the assumed medical cost trend rates
the amounts for the current annual period and previous four annual periods
present value of the defined benefit obligation, the fair value of the plan assets
and the surplus or deficit in the plan
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Termination benefits are employee benefits payable as a result
of either:
an enterprises decision to terminate an employees employment
before the normal retirement date; or
an employees decision to accept voluntary redundancy in exchange
for those benefits (voluntary retirement).
Legislation, contractual, obligation based on business practice,
custom or a desire to act equitably, to make payments to
employees when it terminates their employment. Such payments
are termination benefits.
The payment of such benefits is certain (subject to any vesting
or minimum service requirements) but the timing of their
payment is uncertain
Voluntary or Involuntary termination of service
Termination benefits are recognized as an expense immediately
Where there is uncertainty about the number of employees who
will accept an offer of termination benefits, a contingent liability
exists
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Defined contribution plans or defined
benefit plans that
pool the assets contributed by various enterprises
that are not under common control; and
use those assets to provide benefits to employees of
more than one enterprise, on the basis that
contribution and benefit levels are determined
without regard to the identity of the enterprise that
employs the employees concerned
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Where a multi-employer plan is a defined benefit plan,
an enterprise should:
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account for the plan as if it were a defined contribution plan;
disclose:
An enterprise may not be able to identify its share of the underlying financial position
and performance of the plan with sufficient reliability for accounting purposes
plan exposes the participating enterprises to actuarial risks associated with the
current and former employees of other enterprises
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GAP is merely an aggregation of single
employer plans combined to allow
participating employers to pool their
MEP are distinct from GAP.
assets for investment purposes and
reduce investment management and
administration costs.
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If there is a contractual agreement or stated
Defined benefit plans that share risks policy for charging the net defined benefit
between various enterprises under common cost for the plan as a whole to individual
control, for example, a parent and its group enterprises, the enterprise recognizes,
subsidiaries, are not multi-employer plans in its separate financial statements, the net
defined benefit cost so charged.
ICAI 75
An enterprise should account for a state plan in the same way as for a
multi-employer plan
State plans are established by legislation to cover all enterprises and are
operated by national or local government or by another body which is not
subject to control or influence by the reporting enterprise.
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Many state plans are funded in a manner such that contributions are set at a
level that is expected to be sufficient to pay the required benefits falling due in
the same period; future benefits earned during the current period will be paid
out of future contributions.
Nevertheless, in most state plans, the enterprise has no obligation to pay those
future benefits: its only obligation is to pay the contributions as they fall due
and if the enterprise ceases to employ members of the state plan, it will have no
obligation to pay the benefits earned by such employees in previous years.
For this reason, state plans are normally defined contribution plans
ICAI 77
An enterprise may pay insurance premiums to fund a postemployment benefit
plan. The enterprise should treat such a plan as a defined contribution plan
unless the enterprise will have an obligation to make the shortfall good.
Qualifying insurance policy is an insurance policy issued by an insurer that is not a related party of the
reporting enterprise, if the proceeds of the policy:
can be used only to pay or fund employee benefits under a defined benefit plan; and
are not available to the reporting enterprises own creditors (even in bankruptcy) and cannot be paid
to the reporting enterprise, unless either:
the proceeds represent surplus assets that are not needed for the policy to meet all the related
employee benefit obligations; or
the proceeds are returned to the reporting enterprise to reimburse it for employee benefits already
paid.
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Test Yourself MCQs
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Short-term employee benefits do not include
b) Bonuses payable more than 12 months after the end of the period in
which the related employee services are performed
c) Benefits in kind
Answer: Option B
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An employer's statement of financial position should show
a liability equal to the expected amount payable in the
following 12 months as a result of unused entitlement to
non-accumulating compensated absences. True or False
a) True
b) False
Answer: Option B
ICAI 81
Defined benefit plans are post-retirement benefit plans
where:
a) The employer pays an agreed level of contributions into the pension fund
each year and is not obliged to make any further contributions
b) The risk that benefits will be less than expected falls upon the employees
Answer: Option D
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In the case of a defined benefit plan, the employer's
statement of financial position should show
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In the case of a defined benefit plan, the expense
shown in the employer's statement of
comprehensive income should normally include
a) The present value of the current service cost for the reporting period
Answer: Option D
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The interest cost in relation to a defined benefit plan arises
because the accumulated benefits which employees had
earned at the end of the previous period are now one
period closer to being paid. True or False?
a) True
b) False
Answer: Option A
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In the case of a defined benefit plan, actuarial gains
may arise because
a) The actual returns on plan assets are less than the expected returns
b) The actual returns on plan assets are greater than the expected returns
c) There are adverse differences between actuarial assumptions made at the end of the
previous period and actual events which have occurred in the current period
d) There are adverse changes in actuarial assumptions between the start and the end of the
current period
Answer: Option B
ICAI 86
Which of the following items is always
treated as a long-term employee benefit?
a) A bonus payable within 12 months after the end of the period in which the related employee services are
performed
c) A bonus payable more than 12 months after the end of the period in which the related employee services
are performed
Answer: Option C
ICAI 87
Redundancy payments to employees should be recognized
as an expense as soon as the employer is considering
making those employees redundant. True or False
a) True
b) False
Answer: Option A
ICAI 88
As per Actuarial valuation there is surplus of Rs. 6 lakhs.
Company wants to reduce the contributions by Rs. 3 lakhs
for next 2 years and amortize the surplus over 2 years.
Correct or Incorrect?
a) Correct
b) Incorrect
Answer: Option B
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Types of Employee Benefits
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