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LEARNING OUTCOMES
 Discuss and distinguish the various categories of
employment benefits
 Calculate and pass journals to record the various
scenarios of employee benefits

 Apply and discuss the accounting treatment of

defined contribution and defined benefit plans
 Account for gains and losses on settlement and
curtailments
 Account for Asset ceiling test and the reporting of
actuarial gains and losses
FAST FORWARD QUESTIONS
1. How do you define an employee?
2. Why do we work?
3. What is an employees benefit?
4. What kind of benefits do you know?
5 How do you account for those benefits in the
financial statements?
6 Any disclosure requirements?
DEFINITIONS
 SHORT TERM EMPLOYEE BENEFITS
 POST EMPLOYMENT BENEFITS
 LONG TERM EMPLOYEE BENEFITS
 DEFINED CONTRIBUTION PLAN
 DEFINED BENEFIT PLAN
 ACCUMULATING PAID ABSENCES
 NON ACCUMULATING PAID ABSENCES
 VESTING ACCUMULATING ABSENCES
 NON- VESTING ACCUMULATED ABSENCES
INTRODUCTION
Employee benefits are all forms of consideration given by
an entity ( Employer) in exchange for services rendered by
employees or for the termination of employment.
These can be :
 Cash ( e.g cash salary)
 Goods ( free products)
 Services( Free medical check ups)

The term employee, includes full-time, part time, permanent,

casual, temporary, management, directors and even their
spouses or dependants where benefits are paid to them
TYPES OF BENEFITS
 Short term benefits
 Long term benefits
 Post employment benefits
 Termination benefits
TYPES OF EMPLOYEE BENEFITS
• SHORT TERM BENEFITS
 Due to be settled wholly within 12
months after the end of the period in
which the employee rendered the
service .
 This excludes terminal benefits
CATEGORIES OF SHORT TERM BENEFITS
 Wages, Salaries and social security
contributions ( e.g. Medical aid)
 Paid leave ( e.g. Annual sick leave
 Profit sharing/ or bonuses
 Non- monetary benefits . E.g Medical care
housing &free/ subsidised goods/ services
ACCOUNTING FOR SHORT TERM BENEFITS
Short term benefits are recognised when
the employee renders the
service( Accrual concept)
 An expense is recognised( Debit) and
 The liability is recognised ( Credit) or
Bank ( Credit ) if paid
1. Employee benefits expense Dr
Wages payable Cr
Recognising short term employee benefits
incurred.
2. When the benefit is paid the journal entry is
Wages payable Dr
Bank Cr
Payment of short –term employee benefits
3. In case of underpayment or overpayment
of employee:
 overpayment will not result into employee
returning the cash
Journal will be:
Employee benefit expense Dr
Wages payable CR
Overpayment of short term employee benefits
expensed
Short term employee benefit can also be
capitalised in situation where the labour is
a direct cost . Eg. Construction of asset.

Asset ( Inventory) Dr
Employee benefit expense Cr
A portion of the short-term employee benefit
expense that is related to …………
EXAMPLE 1
Miss Small works for Lingua college and has
earned the following as a salary for the month of
March 2016.
Basic salary 50 000
Provident fund contribution 3 750
Medical aid fund contribution 4 500
unemployment insurance fund 500
Paye ( Pay as you earn) 10000
Loan by Lingua 1 250
Net pay 30 000
EXAMPLE CONTINUED
Let us assume that Lingua also contributes the same
amount as the employee to provident fund, medical
aid fund and unemployment insurance fund
Provident fund 3 750
Medical aid fund 4 500
Unemployment insurance 500
Total Contribution 8 750

Required:
Prepare the payroll journal for the above scenarios
(1)journalise the short term employee benefits
Dr Cr
Salaries 50 000
Provident fund 3750
Medical aid 4500
Unemployment insurance 500
PAYE 10 000
Loan 1250
Salaries payable 30 000

March 2016 salaries

2. Journalise the employers contribution
Dr Cr
Salaries 8750
Provident fund 3750
Medical aid 4 500
Unemployment insurance 500

March 2016 employers contribution

3. Journalise the settlement of liabilities to
various accounts payables
Dr Cr
Provident fund contribution 3750
Medical aid 4500
Unemployment insurance 500
Paye 10 000
Salaries 30 000
Bank 48 750
4. JOURNALISE EMPLOYERS PAYMENTS

Provident fund 3 750

Medical aid 4 500
Unemployment fund 500
Bank 8 750

March 2016 payroll payments

 Total cost to company
Basic salary 50 000
Employers contribution :

Provident fund contribution 3750

Medical aid fund contribution 4 500
Unemployment insurance fund 500
Total employee benefits 58 750
SHORT TERM PAID ABSENCES
 Referred to as PAID LEAVE
 Employers continue to pay employees during the periods
they are absent from work
 Are categorised as
 Accumulating paid absences- carried forward and used
in a future period
 Non- accumulating paid absences- forfeited if unused
at end of the period.
Accumulating paid absences may be classified as

 Vesting benefits – These can be paid (encashed )

Upon leaving employment e.g. accumulated annual
leave
 Non- vesting benefits – these cannot be encashed
upon leaving employment

All non- accumulated paid absences do not entitle

employees cash payments upon leaving employment
NON- ACCUMULATING PAID ABSENCES
 If an employee fails to take all the leave that
was owing to him and this leave is non-
accumulating leave then the used leave will be
forfeited
EXAMPLE:
Moore ltd has one employee . His name is guy
 Guy is owed 22 days per year
 Guy is paid N$ 90 000 Per year
 The year is 365 days and guy is expected to
work 5 days a week
 Guy took 8 days leave in 2014 and his leave is
non-accumulating
Required:
Show all journals and calculate leave provision at
31 December 2014 year end.
SOLUTION
• No leave pay provision is recognised at 31
December 2014 for the 14 days that guy did not
take this is because the leave is non-accumulating:
there fore

Employee benefits 90 000

Salaries payable 90 000

Salary owed to guy for 2014 (includes leave taken)

TEST YOUR UNDERSTANDING-
Lee Limited operates a five day working week. At Lee limited ‘s
financial year ended 31 December 2014
 There are 50 similarly paid employees
 Each earning an average annual salary of N$ 50000
 And earning 20 days annual leave per year of service
The leave entitlement of 20 days is non- cumulative and has
remained the same for years and will remain the same years to
come. Similarly the salary of 50 000 will remain unchanged for years
The following are the actual average leave statistics
 End of prior year 2013: an average of 10 days was used, all earned
in 2013
 End of current year 2014 an average of 12 days was used all
earned in 2014
The estimated future leave statistics for the year ended December
2015
 An average of 14 days will be taken all earned in 2015
ignore public holidays
Required: Calculate the leave pay provision for Lee limited
financial year ended 31 December 2014 assuming the annual leave
does not accumulate
SOLUTION
Leave that is taken is simply recognised as part of
the salary of N$ 50 000 which would have been
debited to the salaries account and credited to
the bank account

10 days forfeited in 2013

8 days forfeited in 2014
ACCUMULATING LEAVE
 If employee fails to take all the leave that is owing
and this leave is accumulating leave the unused
leave will continue to be owed to the employee.
 A LIABILITY For unused leave must be recognised
and its only recognised when the employee has
rendered the service that entitles him to that leave.
 The measurement of the provision for leave liability
depends on how many days are owing multiply by
what his average salary per day is expected to be
when he takes this leave.
The measurement of the provision is further
affected by whether the leave is

 VESTING – unused leave can be taken in the

future or can be exchanged for for cash
 NON- VESTING – Unused leave can be taken in
the future but cannot be exchanged for cash
 Example 3: Short term paid leave: accumulating vesting
vs non- vesting.
Mark limited has one employee. His name is scott.
 Scot is paid N$ 365 000 per year But this is expected to
increase by 10% in 2015
 The year is 365 days and Scott is expected to work 5
days a week
 Scott is owed 30 days leave per year
 Scott took 20 days in 2014. Scott’s leave is accumulating
 Marks financial year end is 31 December 2014
 Required
Calculate any leave pay provision at 31 December 2014 and show all
journals assuming
A. The leave is accumulating and vesting(i.e Scott is entitled to to
convert his unused leave into cash) past experience suggests that
Scott will only take 90% of his unused leave balance before he finally
either resigns or retires from Mark limited
B. The leave is accumulating and non- vesting(that is Scott may not
convert unused leave into cash) Past experience suggests that Scott will
only take 90% of his unused balance before he finally either resigns or
retires
C. The leave is accumulating for a limited period and non- vesting. It
accumulates for one year only after which unused leave will be forfeited:
Past experience suggests that SCOTT will only take 3 days leave in 2015
from his 2014 leave entitlement carried forward
SOLUTION

The provision is based on the expected daily cost

of employing Scott. The cost per day is :
 Average salary per day = 365 000 x110%/365
days = N$ 1100
 Effective cost per day = 1100 x 7/5 = N$ 1540
Dr Cr
Employee benefits 365 000
Salaries payable 365 000
Salary owed to Scott for 2014 including leave taken
SOLUTION CONTINUED
Dr Cr
Employee benefits 15 400
Provision for leave pay 15
400

Leave still owing to Scott at 31 December 2014

SOLUTION
B.

( 30 – 20 days ) x 90 % x 1540 = 13860

Employee benefits 13 860

Provision for leave pay 13 860
C.
3 days x 1540 = 4620

Employee benefits 4620

Provision for leave 4620
PROFIT SHARING AND BONUSES
 Profit sharing and bonuses given to
employees are also short term employee
benefits but must meet two additional
criteria for recognition.

1. There is a legal or constrictive obligation to

pay arising from past events( liability) and
2. A reliable estimate of the obligation cab ne
measured realiably
Note that if the profit sharing or bonus plans are
not wholly payable within twelve months after
the current year end in which employees
rendered their services, the amount should be
classified as other long term employee benefits
 A Characteristic of profit sharing and bonuses
are that they accrues over a period of time ad
may end up being partially earned or even
forfeited if an employee leaves before the
payment date
 This characteristic will impact on the
measurement of the provision: The probability
that the employee/s may leave before they
become entitled to the benefit must be factored
into the calculation.
POST EMPLOYMENT BENEFITS
TYPES OF PENSION PLANS
A pension plan ( sometimes called a post
employment benefit scheme) consists of a pool
assets and a liability for pensions owed to
employees. Pension plans assets normally
consists of investments, cash and ( sometimes )
properties. The return earned on the assets is
used to pay the employees
 Its important to note that is it’s the service that he provided
whilst employed that entitle him to these benefits after
employment

Since the obligation arises during the employee’s work like, the
journal recognising the obligation and related costs must be
processed as and when the services are provided.

Dr Cr
Employee benefit expense xx
Post employment benefit xx
Post employment benefit provided for
TYPES OF PENSION PLANS
There are two main types of pension
plans

 Defined contribution plans

 Defined benefit plan
DEFINED CONTRIBUTION PLAN
 Defined contribution plans are post employment
benefit plans in which the entity and the employee
agree to make a contribution to a fund.
 Upon resignation or retirement, the contribution
together with any gains or losses are paid to the
employee
 The employers is only obliged to pay a fixed
percentage of the employee’s salary and has no
further obligation after this amount is paid
 The risk therefore belongs to the employee that the
benefit will be less than expected.
 Amount recognised as an expense in the SOCI is the
contribution payable by the employer to the defined
contribution fund
Dr Cr
Employee benefits xx
Contribution payable xx

Post- employment benefit: defined contribution provided for

EXAMPLE
Matthew Limited's annual salary expense for 2014 is as follows:
 Gross salary of N$ 4 000 000
 N$ 1200 000 is employees tax which was withheld ( payable to the tax
authorities)
 7% was withheld payable to the employee to a defined contribution plan
 The balance thereof was paid to the employees
 Company contribution to the defined contribution plan : 10% of gross
salaries
Required
Provide the following for Matthew Limited's financial year ended 31
December 2014.
A. The relevant journals(on an annual basis despite in reality being
journalised on a monthly basis
B. Profit before tax note
SOLUTION
Dr Cr
Employee benefit expense 4 000000
Current tax payable 1 200 000
Defined contribution ( 4 000 000 x 7%) 280 000
Employee payable (net salary) (bal fig 2 520 000
Gross salaries for the year, tax and DCP
 Dr Cr
Employee benefit expense 400 000
(4 000 000 X 10%
Defined contribution payable 400 000
Matthews (the employer)contribution to the DCP
PROFIT BEFORE TAX WILL BE AFFECTED BY
N$ 4 00 000 PLUS EMPLOYEE CONTRIBUTION OF N$ 400 000
TEST YOUR UNDERSTANDING
A company makes contributions to the pension
fund of employees at a rate of 5% of gross salary.
The contribution made are N$ 10 000 per month
for convenience with the balance being
contributed in the first month of the following
accounting year. The wages and salaries for 2015
are N$ 2 700 000.
Required
Calculate the pension expense for 2015 and the
accrual/ prepayment at the end of the year/
SOLUTION

This appears to be a defined contribution plan

the charge to income should be
2 700 0000 x 5% = 135 000

The SOFP will therefore show an accrual of N$

15 000, being the difference between the 135000
and the 120 000 paid in the year.
DEFINED BENEFIT PLAN
Where an entity guarantees (promises) that
certain benefits will be payable to its
employees after employment we have a
defined benefit plan.
The pension payable on retirement normally
depends on either the final salary or the
average salary of the employee during their
career
RISK BELONGS TO THE COMPANY
DEFINED BENEFIT PLANS
 The employer undertakes to finance a
pension income of a certain amount , e.g,
2/3 x final salary x (years of service/40 years
 The employer has an ongoing obligation to make
sufficient contributions to the plan to fund
pensions

 An Actuary calculates the amount that must

be paid into a plan each year in order to
provide the promised pension
DEFINED BENEFIT PLAN
 The calculation is based on various estimates
and assumptions including
 Life expectancy
 Investment returns
 Wages inflation
There fore the cost of providing pensions is not
certain and varies from year to year
DEFINED BENEFIT PLAN : BASIC PRINCIPLE
 When recognising a defined benefit plan we
must recognise both
 The plan obligation( benefits that it owes to its
employees) and
 The plan asset( those amounts set aside in
order to settle the obligation)
The entity recognises both the liability for future
pension payments and the plan asset
 If the liability exceeds the asset, there is a
deficit(the usual situation) and a liability is
reported in the SOFP
 If the plan asset exceeds the liability , there is a
surplus and an asset is reported in the SOFP
 MEASURING THE LIABILITY AND THE ASSETS
In practice , the actuary measures the plan assets and
liabilities using a number of estimates and assumptions.
 The plan liability is measured at the present value of the
defined benefit obligation using the projected unit
credit method. This is an actuaries valuation method
 Discounting is necessary because the liability will be
settled many years in the future and therefore the effect
of time value of money is material .
 The discount rate used should be determined by market
yields on high quality corporate bonds at the reporting
date.
 Plan assets are measured at fair value. This is
normally market value. Where no market value
is available , fair value is estimated ( for
example , by calculating the present value of
expected future cash flows)
 Valuations should be carried out with
sufficient regularity to ensure that the amounts
recognised in the financial statements do not
differ materially from actual fair values at the
reporting date.
Where there are unpaid contributions at the year
end, these are not included in the plan assets .
Unpaid contributions are treated as an ordinary
liability , they are owed by the entity/employer
to the plan
RECOGNISING THE AMOUNTS IN THE
FINANCIAL STATEMENTS( DEFINED BENEFIT
PLAN

1. Statement of comprehensive income

 Current/ Past service costs
 Interest cost
 Expected return on assets
 Settlements or curtailments
 Actuarial gains and losses
2. Statement of financial position
 Plan asset
 Plan liability
EXPLANATION OF THE TERMS USED
 Current service cost- is the increase in the actuarial
liability (present value of the defined benefit
obligation) resulting from employee service in the
current period.
 Past service cost is the increase in the actuarial
liability relating to employee service in the previous
periods but only arising in the current period. Past
service costs usually arise because there has been
an improvement in the benefits provided under the plan
 Interest costs is the increase in the pension liability
arising from the unwinding of the discount as the
liability is one period nearer to be settled.
 Interest cost is the increase in the pension
liability arising from the unwinding of the
discount as the liability is one period nearer to
being settled
 Expected returns on assets is the expected
return earned from the pension plan assets
 Curtailments and settlements are the gains and
losses arising when major reductions are made
to the number of employees in the plan or the
benefits promised to them.
Actuarial gains and losses
are increases and decreases in the pension asset
or liability that occur either because the
actuarial assumptions have changed or because
of differences between the previous actuarial
assumptions and what has actually happened .
For example the investment income from the
asset may have been greater than expected.
EFFECTS ON PROFIT OR LOSS FOR THE
PERIOD
The changes in the defined benefit asset/liability in the period are treated
as follows.

1. The current service cost = Dr Income

Cr Liability
2. The interest cost = Dr Income
Cr Liability
3. Expected return on assets = Dr Asset
Cr Income
4. Past service cost = Dr Income
Cr Liability
5. Curtailments / settlements Dr Income
Cr Liability
EXAMPLE: ACCOUNTING FOR DEFINED
BENEFIT PLAN
The following information is given about a defined benefit plan . All
transactions are assumed to occur at the year end. The present value of
the obligation and the fair value of the plan asset were both N$ 1000 at
January 2013
2013 2014 2015
Discount rate at start 10% 9% 8%
Expected return of plan asset 12% 11.1% 10.3%
Current service cost 130 220 150
contribution received 90 100 110
Benefits paid 150 180 190
Present value of obligation as
@ 31st December 1141 1197 1295
Fair value of plan asset
@31 December 1092 1109 1093
Required
Show how the pension scheme would be shown in the accounts for
2013,2014 and 2015 given the immediate recognition of the actuarial
gain/loss arsing in the year in income
SOLUTION
STEP 1. Determine the amount of the actuarial
gains or losses for the period
 This is done by analysing the change in asset
and in the pension obligation. The actuarial
gains or losses are balancing figures
 The calculations are made year by year
because the closing figures for each year form
the opening figures for the following year
it may be difficult to understand which figures
appear in the obligation calculations and which
in the asset calculation
 Actual cash receipts and payments appear in
the plan asset calculations
 Contribution received increase the plan asset and
benefits paid reduce the plan asset
 Benefit paid appear in both calculations because
the payment reduces assets but also reduces
liability.
LIABILITY
2013 2014 2015
Present value of obligation 1000 1141 1197
Interest costs ( discounted) 100 103 96
Current service cost( given) 130 220 150
Benefit paid(given ) (150) (180) (190)
Actuarial (gain)/loss on obligation 61 (87) 42
(Balancing figure)
Present value @ December 31 1 141 1 197 1295
ASSET
2013 2014 2015
Fair value of plan asset 1 Jan 1000 1092 1109
Expected return 120 121 114
Contributions received 90 100 110
Benefits paid (150) (180) (190)
Actuarial gains ( loss) balancing
figure 32 (24) (50)
Fair value of plan asset
@31 December 1092 1109 1093
STEP 2. Calculate liability / asset
This is the difference between the plan obligation and
plan asset( Net liability)
2013 2014 2015
Present value of obligation 1141 1197 1295
Fair value of plan asset (1092) (1109) (1093)
Liability recognised in SOFP 49 88 202
Step 3. Calculate the charge to profits
2013 2014 2015
Current service cost 130 220 150
Interest costs 100 103 96
Expected return on asset (120) (121) (114)
NET actuarial loss(gain)
Recognised in the year 29 (63) 92
Expense recognised P/L 139 139 224
TEST YOUR UNDERSTANDING ???
OTHER LONG TERM BENEFITS
 All Employee benefits other than short
term benefits, post employment or
termination benefit.
 long term benefits are due after
twelve months after the end of the
period during which the employee
rendered the service.
Examples include:
 Long term disability benefits
 Log term compensated absences and
profit sharing or bonuses that are
simply not payable within 12 months
of reporting date.
MEASUREMENT
 Other long term benefits are recognised
in the same way as post employment
benefits as except that changes in the
carrying amounts of the liabilities are
recognised in the profit or loss( e.g.
remeasurements of other long term
benefits are not recognised in other
comprehensive income
The line item in the SOFP is thus
calculated simply as
Plan obligation ( PV of future obligation) xx
Less plan asset ( Fair value of plan asset) xx
Liability/Asset xx
The line items in the SOCI include
Interest cost xx
current service cost xx
Past service costs xx
Curtailments or settlements xx
Expected returns on assets (xx)
Actuarial gain /losses xx
Income/ expense xx
TERMINATION BENEFITS
Employee benefits that are payable as a result of
either the
 The entity ‘s decision to terminate employment
before normal retirement date, or
 The employees decision to accept an offer of
benefits in exchange for termination of
employment.
RECOGNITION
Note carefully:
If the benefit payable on termination does not
relate to either a forced termination or an offer
for a voluntary termination, the benefit is
recognised as a post employment benefit and not
a termination benefit
This means if an employee requests early
termination (i.e is not offered or forced into
early termination) this would be recognised as a
post employment benefit and not a termination
benefit
RECOGNITION
The terminal benefits are recognised as an
expense and related Liability at the earliest of
 When the entity can no longer withdraw the offer
of those benefits, and
 When the entity recognises the related
restructuring costs in terms of IAS 37 and
involves the payment of termination benefits.
MEASUREMENT
1. If the benefits are entirely payable within 12 months
after the end of the reporting period( i.e they are payable
in the short term) they are measured like short term
benefits. These would not be discounted to present
values
2. if the benefits are not entirely payable within 12 months
after the end of the reporting period( i.e they are payable in
the long-term) they are measured like long-term employee
benefits these would be discounted to present values
3. if the benefits are enhancements of existing post –
employment benefits , then they will be measured like post
– employment benefits
 When the termination benefit is an offer of
benefits that is made to encourage
termination, the measurement of the benefit
 will be based on the number of employees
who will probably accept the offer
 If we are unable to estimate the number of
employees who may accept the offer, we wont
recognise a liability will disclose a contingent
liability instead
SOMETHING TO DO
Explain what is meant by ASSET CEILING and
explain how it is measured
 End

Any questions ??