Professional Documents
Culture Documents
Financial Accounting 2
Lecture 3
Part 1: Employee Benefits
Part 2: Liabilities, Provisions,
Contingencies
COMMONWEALTH OF AUSTRALIA
Copyright Regulations 1969
WARNING
The Lecture material contains content owned by Kaplan Business School and
other materials copyrighted by Hoggett J., Edwards L., Medlin J. Chalmers K.,
Hellmann A., Beattie C., and Maxfield J., “Accounting” 9th Edition, 2015, John
Wiley & Sons Australia, Ltd.
The material in this communication may be subject to copyright under the Act.
Any further reproduction or communication of this material by you may be the
subject of copyright protection under the Act.
2
Topic Outline
Employee Benefits
4
Lecture 03 Outline
Liabilities, provisions, contingent liabilities and assets
3
Reference
4
Part 1: Employee Benefits
Scope of AASB 119
5
Short-term employee
benefits
• wages, salaries, profit sharing plans and bonuses
• Annual leave and sick leave
Example
6
Types of salaries and wages
• Gross wages
1. • Tax withheld and payable to government
7
Salaries and wages
9
Short-term compensated
absences
10
Short-term compensated
absences
1. • Accumulating vs non-accumulating benefits:
11
Short-term compensated
absences
• Accounting treatment for different types of benefits is
1. as follows
12
Annual leave – example
• ABC has 4 employees who are entitled to 20 days annual leave
per annum.
• Leave loading of 17.5% is paid on the leave when taken.
• The provision for annual leave balance at 1 July 2014 was $7,200
and leave payments of $9,400 have been made during the year.
• At 30 June 2015 a total of 45 days leave was owing to the 4
employees.
• The average annual salary is $50,000.
• There are 260 working days in a year.
13
Annual leave – example
Current balance in provision account = $2,200 DR ($7,200- $9,400DR)
Provision at 30 June 2015
= 45 x ($50,000 x 1.175)/260 days
= $10,168 CR
14
Accumulating sick leave - example
15
Profit-sharing and bonus plans
Many companies use bonuses in management incentives schemes.
The bonus forms part of the management remuneration package and is
designed to align the interest of managers with the interests of the
equity holders.
16
Post-employment benefits
AASB 119 prescribes the employer’s accounting treatment for post-
employment benefit plans
Includes:
Superannuation plans
Employee retirement plans
Pension plans
17
Other long-term employee benefits
18
Long service leave - example
Smalltime has 1 employee who is eligible to be paid LSL.
Her employment contract states that LSL can be taken after 15 years, at
which time she is entitled to 13 weeks of leave.
After 10 years, pro-rata payment is allowed so that if she leaves after
serving 10 years, she will be entitled to a cash payment in relation to her
pro-rata entitlement to LSL.
At 30 June 2015 the employee has been employed by Smalltime for 8
years.
Her current salary is $75,000, which has increased by 5% for each year
since commencing employment. It is anticipated that this annual
increase will continue.
It is expected that the employee will remain with Smalltime for at least
another 2 years.
The market yield on corporate bonds with a 2 year period to maturity are
7%.
19
Long service leave - example
The LSL liability for Smalltime as at 30
June 2015 is:
Current salary $75,000
Years of service 8 years
Benefit (%age of annual salary) 13.3%
(8 *(13/15)) =6.93weeks/52weeks
Pro-rata amount (13.3% * 75,000) 9,995
Years until LSL vests 2 years
Salary increase factor (1.05 *1.05) 1.1025
Discount rate 7%
Discount factor (NPV tables) 0.8734
Long service leave liability $9,624
(9,995*1.1025*.8734)
20
Long service leave
example - alternative calculation
The LSL liability for Smalltime as at 30 June 2015 is:
Journal entries:
Wages and Salaries Dr 9625.00
Provision for Long Service Leave Cr 9625.00
21
Part 2: Liabilities, Provisions,
Contingencies
Introduction to AA SB 137
AASB 137 addresses the recognition, measurement
and presentation of:
Restructuring provisions
Onerous contracts
5
Definition of a Provision
• A provision is a subset of
What is it? liabilities
• Definition: A liability of
AASB 137 uncertain timing or amount
• What is a liability?
Liability
8
Definition of a Liability
• A present obligation
• Arising from a past event
• To result in an outflow of economic
Definition resources
9
What is a ‘’present obligation?”
10
Distinguishing provisions from
other liabilities
Warranties
Provisions
Restoration Restructuring
11
Contingent Liabilities
A contingent liability may arise in 2 scenarios:
Scenario 1:
For example:
A guarantee on a loan for another entity
13
Contingent Liabilities
A contingent liability may arise in 2 scenarios:
Scenario 2:
14
Contingent Liabilities
A contingent liability may arise in 2 scenarios:
Scenario 2:
For example
15
Contingent assets
• Possible asset whose existence will be confirmed by the
occurrence/non-occurrence of one or more uncertain
1. future events
• For example:
• Possible receipt of damages from a court case decided
3. in its favour.
16
Recognition criteria for
provisions
The following 3 criteria must be met:
1. Present obligation as a result of a past event
17
Measurement of provisions
• Estimates should be discounted to present value
1. where material
18
Measurement of provisions -
example
ABC sells goods with a 3 year warranty attached.
Warranty provisions are calculated as a percentage of annual sales,
based on historical data and are discounted to present value using
the government bond rate.
Relevant data is as follows:
2 3% 6.5%
3 5% 6.9%
Total sales for the year ended 30 June 2009 were $2 million
19
Measurement of provisions -
Required: example
Calculate the total provisions for warranties that should be set
aside in relation to 30 June 2009 financial year sales.
20
Restructuring Provisions
• May occur due to:
fundamental reorganisations
22
Restructuring Provisions
Necessary conditions to recognise a restructuring provision:
23
Restructuring provisions
– present obligation
• Present obligation is considered to arise when the entity has a
detailed plan identifying at least:
24
Restructuring provisions –
qualifying costs
• Costs must be directly and necessarily caused by the
restructuring and should not be associated with the ongoing
operations
25
Restructuring provisions –
qualifying costs
• Costs specifically excluded include:
Marketing costs
26