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FRS 119:Employee Benefits
Nurhafizah Alias 0235670
Surina Ayob 0314688
Nurul Izza Othman 0318304
Zuharah Kahliep 0239308
Khairiah Mt. Razali 0313172
FRS 119
• Objectives: to prescribe the accounting and disclosure for
employee benefits
• Scope: This standards should be applied by an employer in accounting for employee benefits
Employee Benefits• recognised when it is earned, not when it is paid or
payable• include benefits provided to either employees or
their dependents• it may be settled either directly to the employees,
dependents or insurance companies• covers short term and long term benefits• formal plans or agreement between the enterprise
& employees or their representatives) by legislative requirement or through constructive obligations
Employee Benefits
• 4 categories:
1)Short term employee benefits, both monetary & non monetary
2)Post-employment benefits
3)Other long-term benefits
4)Termination benefits
Employer to employees
SHORT TERM EMPLOYEE BENEFITS
(STEB)
X discounting
involve
Payable within 12
monthExpense & liabilities
Example of STEB
Wages, salaries, EPF & SOCSO
Annual & sick leave
Bonuses & profit sharing payable
Non-monetary benefits
SHORT TERMCOMPENSATED
LEAVE(STCL)
Carried forward any unconsumed leave
Cash payment
Accumulating compensated absences
Expense in current period
Non-accumulating compensated
Example 1
• 5 employees unable to enjoy all their leave• Between them they carried forward 12 days• Assume that the employees get RM100 wages per day• Therefore, entity has to charge cost of 12 days leave as expense for
the current year
Dr staff cost (12 days x RM 100) 1000
Cr Prov. for employee paid leave 1000
PROFIT SHARINGBONUSES
Obligation to pay bonuses @ share profit
Required to recognise the expected cost of profit sharing & bonus payment
POST EMPLOYEMENT
BENEFITS
Defined contribution plan
Defined benefit plan
Contribution Plan
• Employer make contribution for the employee to a fund.
• Employee not guaranteed with specific amount.
• Employee will receive the contribution made to the and returns on the contribution
BENEFIT PLAN
•The employee is guaranteed a specific amount of benefit that will be receive by them•Receive in term of
-lump sum payment eg: gratuity
-periodic payment eg: pension•The actuarial risk and investment risk will be borne by the entity•Rely on the expertise to estimate the amount of contribution to the fund•The obligation measure in each B/S date are discounted because its only settled a much later date
Benefit Plan
Unfunded Funded
Internal Fund External Fund
The fund grows by the contribution made by the entity and the income (returns) earned by the assets in the plan.
When more than one defined benefit plan, the measurement procedure
are applied separately.
Step 1: Current and Past Services Costs• Use the actuarial technique• It is the best estimation because its determine the
ultimate amount of benefit accruing to the employees• Actuarial assumptions deal with the profile of the current
and former employees and their dependents• These assumptions includes
i. Demographic assumptions (e.g. rate of employee turnover, disability, early retirement, etc.)
ii. Financial assumption (e.g. future salary, discount rate, future medical costs, etc.)
There are a number of steps in accounting for a defined benefit plan
Step 2: Projected Unit Credit Method
• Used to discount the present value of the entity’s obligations and current service cost
• Current estimate of the present value of ultimate obligation is spread over the vesting period or over the period of service provided
• Each period of service gives rise to an additional unit of accruing to the employee
Example
Ahmad is entitled to a gratuity on leaving the service at the end of 5 years of 10% of his last drawn salary for each year of service. His current salary is RM40,000 per annum. Actuarial assumption is that salary will increase by 10% per annum and the appropriate discount rate is 10%.
Table showing the built up of the obligations as follows:
Years 1 2 3 4 5
RM RM RM RM RM
Benefits attributable
Prior period 0 5,856 11,712 17,568 23,424
Current period 5,856 5,856 5,856 5,856 5,858
Current and prior yrs 5,856 11,712 17,568 23,424 29,282
The current and prior period cost is discounted because due for payment at the
Years 1 2 3 4 5
RM RM RM RM RM
Benefits attributable
Prior period 0 4,000 8,800 14,520 21,296
Interest (10% of bal b/f) 0 400 880 1,452 2,130
Current period
(discounted amt) 4,000 4,400 4,840 5,324 5,856
Current and prior yrs 4,000 8,800 14,520 21,296 29,282
• At the year end, the PV of obligations is measured (or estimated):
RM– PV of obligations (at beginning of the year) xxx– Interest on opening amount xxx– Current service cost xxx– Benefits paid (xx)
___– PV of obligations (at end of the year) xxx– Actuarial gain or loss x
Step 3: Fair Value of Plan Assets
• Set aside assets to settle the obligations as they fall due• Actuary determine the amount to be set aside• Amount of assets contributed to the plan assets will take
into consideration the returns on the plan assets and changes in the fair value of the plan assets
• Assets will also grow by the annual contributions made by the enterprise to the fund
• At the year end, the FV of plan assets is measured (or estimated):
RM– FV of plan assets (at beginning of the year) xxx– Returns xxx– Contributions xxx– Benefits paid (xx)
___– FV of plan assets (at end of the year) xxx– Actuarial gain or loss x
Step 4: Actuarial Gains and Losses• Arise because actuarial assumption and actual outcome
are differ• Obligation > expected = actuarial loss
Fair value > expected = actuarial gain• FRS 119, a minimum recognition requirement in the IS.
In the current yr, the cumulative net actuarial gain/loss brought forward is tested for the 10% corridor limit
• The net cumulative actuarial gain/loss that exceeds the 10% of the higher of opening present value (defined obligation and fair value of the plan assets as at the beginning of the yr) is written over the expected average remaining working lives of the employees who participate in the plan
• Enterprise can adopt any systematic method but it must consistently applied
• Consequence of deferred recognition of the actuarial gain/losses
-the amount recognized in the B/S is a timing difference• Immediate recognition is more meaningful relevant
treatment. However, it may cause the reported earnings to be volatile (transparent but unattractive)
Example 3Enterprise XYZ was newly established and started a defined benefit scheme which was funded in year 1. in year 1 the current service cost was determined as RM4,000 and the interest/disc rate is 10%. The contribution made to the plan assets was also RM3,500 and the expected return was 15%.Journal entries in yr 1 RM RM
P & L 4,000 Obligations 4,000
Plan assets 3,500 Cash/Cash equivalent 3,500Income Statement in yr1
Employee benefit RM4,000
Balance Sheet Year 1
Present value of obligations 4000
Fair value of plan assets (3500)
Liability 500
In year 2, interest rate is 10% and expected rate of return is 15%. Current service cost was RM5000 and contribution made to the plan assets was RM4500. At 31.12.x2, the present value of the obligations was RM9900 and the fair value of the plan assets was RM10200.
RMPresent value of obligations 1.1.x2 4000Interest(10%) 400Current service cost 5000Actuarial loss(gain)-bal amt 500Present value of obligations at 31.12.x2 9900
Fair value of plan assets: RMFair value of plan assets 1.1.x2 3500Expected returns(15%) 525Contributions 4500Actuarial gain(loss)-bal amt 1675Fair value of plan assets 31.12.x2 10200
Amortisation of actuarial gain/loss
10% of higher of opening present value of obligations and fair value of plan assets. Fair value of the plan assets is more than the present value of obligations.
10% x RM10200 = RM1020
Actuarial gain b/f = RM1175
Excess RM1175 – RM1020 = RM155
Expected average working lives of employees = 5yrs
Amount amortised RM155/ 5 = RM31
*Record in the I/S and B/S as an example in pg 330
• PV of obligations
RM
1.1.x3 9,900
Interest (10%) 990
Current service cost 4,700
Actuarial loss (gain) – balancing amt. 310
PV of obligations (at end of the year) 15,900
FV of plan assets
1.1.x3 10,200
Expected returns (18%) 1,836
Contributions 4,100
Actuarial gain (loss) – balancing amt. 364
FV of plan assets 31.12.x3 16,500
Net cumulative actuarial gain/ loss:
Cumulative actuarial gain brought forwardNet actuarial gain for year x3Amount amortizedCumulative actuarial gain carried forward
Income statement x3
Current service costInterestReturns on plan assetsNet actuarial (gain)/ loss recognized in the yearExpense recognized in profit and loss account
Balance sheet as at 31.12.x3
PV of obligation 15,900FV of plan assets (16,500)
(600)Unrecognized actuarial gains/(losses) 1,198Liability recognized in balance sheet 598
Note
Opening net obligations (end of year 2) 875Charge in income statement 3,823Contribution (4,100)Liability 598
STEP 5:Past Service Costs (PSC)
• Arise when a defined Plan is introduced or
changes to the plan introduced.
• PSC which are vested are recognised
immediately.
• Those, which not vested will be spread over
the average period of employees services
lives on straight line basis.
Illustration:
• An enterprise introduces a defined benefit plan for all its employee who have served 5 years or more.10 employees have worked for more than 5 years and the rest have on the average worked for 3 years.
The benefits for 10 employees is recognised immediately and for others, the benefits are spread over the average vesting period of 2 years on a straight line basis….(FRS 119, pg 330-331)
STEP 6: Curtailment
• Occurs when enterprise is committed to make
material deductions in the number of employees
covered by the plan or;
• Employees who eligible for reduced benefits
• Closure of an operation or restructuring may
give rise to curtailment
Settlement
• Occurs when an enterprise terminates all legal and constructive obligations– When the employees are paid lump-sum cash
payments or;– Payments are made either to the employees
or on behalf of them to another post employment benefit plan.
• EX: an enterprise that has a defined benefit plan transfers plan assets to a contribution scheme for the employees.
Gains/Losses (Recognition)
• Gains/losses on curtailment or settlement of a plan
are recognised when the curtailment occurs. The
gain or losses comprise:
– Change in the PV of the defined benefit obligation
– Change in FV of plan asset
– Unrecognised PSC and unrecognised related
actuarial gains and losses.
Illustration:
• An enterprise discontinues a business segment.
The employees in this segment will not earn any
further benefits. This is a curtailment.
• The PV of the obligation was RM10,000 and The
FV of the plant assets was
RM9000.Unrecognised actuarial gains were
RM500.Suppose, the curtailment reduces the
obligation by 20%.
Cont’d
• The amendment will be:
– Obligation will be RM10,000 X 80%=RM8,000
– Unrecognised actuarial gain:
RM500X80%= RM400
Cont’d
Before curtailment
RM
Curtailment
Gain
RM
After curtailment
RM
NPV of obligation 10,000 2,000 8,000FV of Plan assets (9,000) - (9,000)
1,000 2,000 (1,000)
Unrecognised gains
500 100 400
1,500 2,100 (600)
Expenses Recognised for the Period
FRS 119 requires the net total of following to be disclosed as expenses: Current service cost Interest cost (apply the discount rate on the present value of the obligation at the beginning of the period) Expectation return on plan assets Actuarial gains and losses (amount ‘amortised’ for the period Past service cost Gain/loss on curtailment and settlement
Example:The following data relate to a defined benefit plan of Yee Bhd.
Year x2 Year x3Present value of obligations 6,000 7,200Fair value of plan assets 6,000 7,000The actuary has furnished the following information:
Year x3Expected return on plan assets 8%Discount rate to be used to determine obligation 12%Current service cost 600Past service cost 360Contribution to the plan assets 780Benefits paid 570 Cumulative actuarial loss b/f (1.1.x3) 660Average service lives of employees 10 years
Past service cost applies to an improvement in the plan and is fully vested in 3 years
Step 1:Calculate the actuarial loss that is amortised in year x3. Fair value of net assets and the present value of obligations at 1.1.x3 are the same. 10% of fair value of net assets or obligations is RM600 and cumulative actuarial
losses are RM660.Year x3
Fair value of plan assets 600 Cumulative actuarial loss 660 Excess 60
Amount written off in year x3 will be 60/10 years=6
Step 2:Past service cost amortised RM360/3 years=RM120. The unrecognisedamount is RM240.
Step 3:Calculate the net actuarial gain/loss for the year.Present value of obligations:
RMPresent value of obligations 1.1.x3 6,000Interest (12%) 720Current service cost 600Past service cost 360Benefits paid (570)Actuarial loss (gain)-balancing amount 90Present value of obligations at 31.12.x3 7,200
Fair value of plan assets: RM
Fair value of plan assets 1.1.x3 6,000Expected returns (8%) 480Contributions 780Benefits paid (570)Actuarial gain (loss)-balancing amount 310Fair value of plan assets 31.12.x2 7,000
The net actuarial loss for year x3 is RM220. The amount of net cumulative
Actuarial gain/loss is:
RM
Cumulative actuarial loss b/f 660
Net actuarial gain for year x3 (RM310-RM90) (220)
Amount written off in x3 (6)
Cumulative actuarial loss c/d 434
Income statement x3
RM
Current service cost 600
Interest 720
Past service cost 120
Return on plan assets (480)
Net actuarial loss recognised in the year 6
Expense recognised in profit and loss a/c 966
Obligation or Asset to be Disclosed in the BSFRS 119 requires the net total of the following to be disclosed as defined
benefit liability:
a) Present value of the defined benefit obligations at BS date
b) Minus fair value of plan assets as at the BS date
c) Plus any unrecognised actuarial gains or minus actuarial losses not recognised
d) Minus any past service cost not yet recognised
Example (cont…)
BS as at 31.12.x3
RM
Present value of obligations 7,200
Fair value of plan assets (7,000)
200
Unrecognised actuarial gains/(losses) (434)
Unrecognised past service cost (240)
Asset recognised in BS 474
Note:
Actual return on plan assets was RM810Reconciliation:
RMOpening balance of net obligation(1.1.x3) (660)Expenses – P/L A/C 966Contribution (780)
474 RM
Present value of obligation(31.12.x2) 6,000Fair value of assets (6,000)
nilActuarial loss (660)
(660)*The present value of the obligation and the fair value of the plan assets are toBe regularly determined and the services of a qualified actuary are encouraged*if negative figure(giving rise to an asset), then disclosed to amount lower of:i) Amount calculated in (a-d) ii) The net total of:
a) any unrecognised actuarial losses and past service costb) present value of any refunds or reductions in future contributions
Example:XEE enterprise has the following information about its defined benefit plan:
RMPresent value of obligations 12,000Fair value of plan assets 13,100Unrecognised actuarial losses 560Unrecognised past service costs 110Present value of future refunds 34
The BS figure will be:RM
Present value of obligations 12,000Fair value of plan assets (13,100)
(1,100)Unrecognised actuarial losses (560)Unrecognised past service costs (110)
1,770
Limited to:
RM
Unrecognised actuarial losses 560
Unrecognised past service costs 110
Present value of future refunds 34
704
RM704 is disclosed as an asset. Also to disclosed that the limit has reduced the
carrying amount of the asset by RM1,770 – RM704 = RM1,066
DisclosureThe following are disclosed for defined benefit plan:
a) Accounting policy for the recognition of actuarial gain / losses
b) General description of the plan
c) A detailed reconciliation of the assets and liabilities recognised in the BS
d) Amounts included in fair value of plan asset for financial instruments of the enterprise and any property occupied or other assets used by the reporting enterprise
e) The movement in the net liability or asset during the period
f) Amount charged in the IS, giving details
g) The actuarial return on plan assets
h) The main actuarial assumptions used
Other long term employee benefits
• Long term compensated absences:– Sabbatical leaves– Long term disability benefits
• Method of accounting– Actuarial gains and losses are recognised
immediately– All past service cost is recognised
immediately
Recognition and Measurement
• B/S:The amount recognised as liability: PV of defined benefit obligation less: FV of the plan assets
• I/S: exp charged in the I/S will comprise:a) Current service costsb) Interest costsc) Actuarial gains and losses d) Past service costse) Gains/losses on curtailment or settlement
Termination Benefits
• Recognised as an expense and liability when the enterprise is demonstrably committed to:-– Termination before the normal retirement– Voluntarily leave
Other Plans1) Multi-employer Plans
Manage by separate entity. It has to classify whether it is a contribution plan or defined benefit plan
If it is accounted as a defined benefit plan – enterprise has to account for proportionate share of the defined benefit obligation, plan assets & costs associated in the same way as a stand alone plan .
If there is insufficient information to account as defined benefits plan, then it has to treat as a contribution plan.
Other Plans
2) State plans established by legislation operated by national or state government not subject to control or influence by
reporting enterprise Can be either
i. contribution
ii. benefit plans – treated as multi employer plans
Other Plans3) Insured benefits
Generally contribution plans - Insurance policy
If the insurer does not pay all the benefits due to the employee for current and future period and the enterprise has a legal or constructive obligation to pay the benefits or further amount directly to the employees, then it should account as defined benefit plan.
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