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Employee benefits (Short term employee benefits (Entity must recognise…
Employee benefits
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Pensions
Two types
Defined contribution plans: post employment benefit plans under which one entity pays fixed contributions into a separate entity and will have no legal or constructive 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 or prior period
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Defined contribution pensions accounting is straightforward. The entity has no further obligation beyond the contributions it has agreed to make to a fund from which the employee will benefit, and that ultimate benefit will depend on the returns the fund makes over time. To the extent any payment is outstanding or prepaid at the end of the period, this will be shown as a liability or an asset and the contributions due are recorded as an expense.
With defined benefit pension accounting, the entity has an obligation to pay an amount related to final (or sometimes career average) salary of the employee, a fraction of which is earned for each year of service (the service cost). These long term liabilities are discounted to reflect the time value of money which means there is a financing charge each year as the payment date of the pension draws closer
Defined benefit pensions are often funded by the entity making payments into a scheme vehicle which is separate from the entity. The scheme assets must also be accounted for as well as any return on the assets, which is used to offset an interest expense arising from the discount rate
Defined benefit pensions are becoming rarer, and some companies have closed existing schemes, leading to concerns about adequacy of pension provision. Over the last 20 years or so, estimates of longevity have increased so the total cost of the pension promise has grown considerably, putting pressure on the finances of the company that sponsors the scheme as they have to pay more and more in to the scheme to meet the expected obligations. In addition, companies are exposed to a lot of volatility of measurement of the scheme obligations and assets each period.
IAS 19 does not require defined benefit pension schemes to be consolidated by the employing entity, instead the entity shows the net deficit or surplus in the scheme on its balance sheet
If the fair value of the scheme assets exceed the calculated liability, there is a surplus and therefore an asset (if the entity can assess the surplus through reduced future contributions /refunds)
If the pension scheme liability exceeds the fair value of the assets, there is a deficit and a liability
In the statement of profit or loss, the entity will show
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Measurement of the pension lability is carried out by an actuary and the standard lays out the methodology to be used. Because of the long term nature of the scheme any change can create a large re-measurement gain or loss. These actuarial gains and losses are permitted to be shown in other comprehensive income rather than profit or loss because of their size and volatility
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In fulfilling the objective of IAS 19 which is to prescribe the accounting and disclosure for employee benefits, the standard requires an entity to recognise
A liability when an employee has provided service in exchange for employee benefits to be paid in the future
An expense when the entity consumes the economic benefit arising from service provided by an employee in exchange for employee benefits
Time value of money
Based on the principle that money available at the present time is worth more than the same amount in the future due to its potential earning capacity
Assuming a 5% interest rate £100 invested today will be worth £105 in one year 100 received one year from now is only worth £95.24 today (£100 divided by 1.05), assuming a 5% interest rate. Put another way, using common finance terminology, £95.24 is the net present value of £100 received in one year at a discount rate of 5%.
Termnation benefitd
Provided in exchange for the termination of an employees employment as a result of an entity's decision to terminate employment or a employees decision to accept an offer of benefits in exchange for the termination of employment
For most businesses one of their major expenses is the cost of paying employees, in terms of direct pay but also indirect pay such as holiday pay, sickness absence, employees national insurance and parental leave
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