FRS 119: Employee Benefits

Nurhafizah Alias Surina Ayob Nurul Izza Othman Zuharah Kahliep Khairiah Mt. Razali 0235670 0314688 0318304 0239308 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)

Wages, salaries, EPF & SOCSO Annual & sick leave

Example of STEB

Bonuses & profit sharing payable

Non-monetary benefits

SHORT TERM COMPENSATED LEAVE (STCL)

Carried forward any unconsumed leave

Cash payment

Expense in current period Non-accumulating compensated

Accumulating compensated absences

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) Cr Prov. for employee paid leave

1000 1000

PROFIT SHARING BONUSES

Obligation to pay bonuses @ share profit

Required to recognise the expected cost of profit sharing & bonus payment

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.

There are a number of steps in accounting for a defined benefit plan

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.)

Step 2: Projected Unit Credit Method Used to discount the present value of the entitys 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 RM

2 RM

3 RM

4 RM

5 RM

Benefits attributable Prior period Current period Current and prior yrs 0 5,856 5,856 5,856 11,712 17,568 23,424 5,856 5,856 5,856 5,858

11,712 17,568 23,424 29,282

The current and prior period cost is discounted because due for payment at the

Years

1 RM

2 RM

3 RM

4 RM

5 RM

Benefits attributable Prior period Interest (10% of bal b/f) Current period (discounted amt) 4,000 4,400 4,840 5,324 5,856 0 0 4,000 400 8,800 880 14,520 1,452 21,296 2,130

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) Interest on opening amount Current service cost Benefits paid xxx xxx xxx (xx) ___ xxx x

PV of obligations (at end of the year) Actuarial gain or loss

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) Returns Contributions Benefits paid xxx xxx xxx (xx) ___ xxx x

FV of plan assets (at end of the year) Actuarial gain or loss

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 3
Enterprise 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 Obligations
Plan assets Cash/Cash equivalent Income Statement in yr1 Employee benefit

4,000
4,000 3,500 3,500 RM4,000

Balance Sheet Year 1 Present value of obligations Fair value of plan assets Liability

4000 (3500) 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.

Present value of obligations 1.1.x2 Interest(10%) Current service cost Actuarial loss(gain)-bal amt Present value of obligations at 31.12.x2 Fair value of plan assets: Fair value of plan assets 1.1.x2 Expected returns(15%) Contributions Actuarial gain(loss)-bal amt Fair value of plan assets 31.12.x2

RM 4000 400 5000 500 9900

RM 3500 525 4500 1675 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 Interest (10%) Current service cost Actuarial loss (gain) balancing amt. PV of obligations (at end of the year) FV of plan assets 1.1.x3 Expected returns (18%) Contributions Actuarial gain (loss) balancing amt. FV of plan assets 31.12.x3 10,200 1,836 4,100 364 16,500 9,900 990 4,700 310 15,900

Net cumulative actuarial gain/ loss: Cumulative actuarial gain brought forward Net actuarial gain for year x3 Amount amortized Cumulative actuarial gain carried forward Income statement x3 Current service cost Interest Returns on plan assets Net actuarial (gain)/ loss recognized in the year Expense recognized in profit and loss account

Balance sheet as at 31.12.x3 PV of obligation FV of plan assets Unrecognized actuarial gains/(losses) Liability recognized in balance sheet Note Opening net obligations (end of year 2) Charge in income statement Contribution Liability 875 3,823 (4,100) 598 15,900 (16,500) (600) 1,198 598

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%.

Contd
The amendment will be: Obligation will be RM10,000 X 80%=RM8,000 Unrecognised actuarial gain:

RM500X80%= RM400

Contd
Before curtailment RM Curtailment Gain RM After curtailment RM

NPV of obligation FV of Plan assets

10,000 (9,000) 1,000 500 1,500

2,000 2,000 100 2,100

8,000 (9,000) (1,000) 400 (600)

Unrecognised gains

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.
Present value of obligations Fair value of plan assets The actuary has furnished the following information: Expected return on plan assets Discount rate to be used to determine obligation Current service cost Past service cost Contribution to the plan assets Benefits paid Cumulative actuarial loss b/f (1.1.x3) Average service lives of employees Year x2 6,000 6,000 Year x3 7,200 7,000 Year x3 8% 12% 600 360 780 570 660 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 unrecognised amount is RM240.

Step 3:
Calculate the net actuarial gain/loss for the year. Present value of obligations:
Present value of obligations 1.1.x3 Interest (12%) Current service cost Past service cost Benefits paid Actuarial loss (gain)-balancing amount Present value of obligations at 31.12.x3 RM 6,000 720 600 360 (570) 90 7,200

Fair value of plan assets:

Fair value of plan assets 1.1.x3 Expected returns (8%) Contributions Benefits paid Actuarial gain (loss)-balancing amount Fair value of plan assets 31.12.x2 RM 6,000 480 780 (570) 310 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 Current service cost Interest Past service cost Return on plan assets Net actuarial loss recognised in the year Expense recognised in profit and loss a/c RM 600 720 120 (480) 6 966

Obligation or Asset to be Disclosed in the BS

FRS 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 Present value of obligations Fair value of plan assets Unrecognised actuarial gains/(losses) Unrecognised past service cost Asset recognised in BS

RM 7,200 (7,000) 200 (434) (240) 474

Note: Actual return on plan assets was RM810 Reconciliation: Opening balance of net obligation(1.1.x3) Expenses P/L A/C Contribution RM (660) 966 (780) 474

RM Present value of obligation(31.12.x2) 6,000 Fair value of assets (6,000) nil Actuarial loss (660) (660)* The present value of the obligation and the fair value of the plan assets are to Be 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 cost b) present value of any refunds or reductions in future contributions

Example:
XEE enterprise has the following information about its defined benefit plan:
RM 12,000 13,100 560 110 34 Present value of obligations Fair value of plan assets Unrecognised actuarial losses Unrecognised past service costs Present value of future refunds The BS figure will be: Present value of obligations Fair value of plan assets Unrecognised actuarial losses Unrecognised past service costs RM 12,000 (13,100) (1,100) (560) (110) 1,770

Limited to:
Unrecognised actuarial losses Unrecognised past service costs Present value of future refunds RM 560 110 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

Disclosure
The 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) b) c) d) e) Current service costs Interest costs Actuarial gains and losses Past service costs 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 Plans
1) 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 Plans
3) 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.