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General recognition principle for all employee benefits
Extract from FRS102: Section 28.3-28.5
28.3 An entity shall recognise the cost of all employee benefits to which its employees have become entitled as a result of service rendered to the entity during the reporting period:
(a) As a liability, after deducting amounts that have been paid either directly to the employees or as a contribution to an employee benefit fund. If the amount paid exceeds the obligation arising from service before the reporting date, an entity shall recognise that excess as an asset to the extent that the prepayment will lead to a reduction in future payments or a cash refund.
(b) As an expense, unless another section of this FRS requires the cost to be recognised as part of the cost of an asset such as inventories (for example in accordance with paragraph 13.8) or property, plant and equipment (in accordance with paragraph 17.10).
Short-term employee benefits
Examples
28.4 Short-term employee benefits include items such as the following, if expected to be settled wholly before 12 months after the end of the annual reporting period in which the employees render the related service:
(a) wages, salaries and social security contributions;
(b) paid annual leave and paid sick leave;
(c) profit-sharing and bonuses; and
(d) non-monetary benefits (such as medical care, housing, cars and free or subsidised goods or services) for current employees.
Measurement of short-term benefits generally
28.5 When an employee has rendered service to an entity during the reporting period, the entity shall measure the amounts recognised in accordance with paragraph 28.3 at the undiscounted amount of short-term employee benefits expected to be paid in exchange for that service.
OmniPro comment
The accounting treatment for short term benefits is very simplistic whereby an expense is charged for services rendered during the period. Where an advance payment is made, then this should be deferred on the balance sheet for the future services to be performed by an employee. There is no requirement to discount the liabilities as they are short term i.e. payable within 12 months. The sections below consider some of these.
Recognition and measurement: Short-term compensated absences
Extract from FRS102: Section 28.6-28.7
28.6 An entity may compensate employees for absence for various reasons including annual leave and sick leave. Some short-term compensated absences accumulate – they can be carried forward and used in future periods if the employee does not use the current period’s entitlement in full. Examples include annual leave and sick leave.
An entity shall recognise the expected cost of accumulating compensated absences when the employees render service that increases their entitlement to future compensated absences. The entity shall measure the expected cost of accumulating compensated absences at the undiscounted additional amount that the entity expects to pay as a result of the unused entitlement that has accumulated at the end of the reporting period. The entity shall present this amount as falling due within one year at the reporting date.
28.7 An entity shall recognise the cost of other (non-accumulating) compensated absences when the absences occur. The entity shall measure the cost of non-accumulating compensated absences at the undiscounted amount of salaries and wages paid or payable for the period of absence.
OmniPro comment
Section 28.6 specifically requires a provision to be included for holiday leave carried forward. Accumulated compensation is where the employee is entitled to take the holidays in the following year i.e. if they do not use all the annual leave days they can be taken forward into the following years.
With regard to sick leave, this is not usually accumulated so no provision should be made for any unused element.
Example 1: Holiday pay accrual – carry forward of holiday leave including payment on leaving
Company A has 20 employees. The company provides 20 days annual leave per year (which is earned throughout the year) and employees can carry forward any unused leave to a future period and is entitled to be paid for the untaken leave if they leave the company. At 31 December 2014, 10 of the employees had taken only 15 days and 2 employees had taken 17 days. The average pay rate per employee is CU100 per day assuming they are all in the same grade. Assume the rate of ER PRSI is 10%. The entity assumes that all employees will stay on to take the unused leave. The accrual required to be booked at 31 December 2014 is:
(10 employees at CU100 per day for 5 days) + (2 employees at CU100 per day for 3 days) =(10*CU100*5)+(2*CU100*3)= CU5,600 (plus ER NI/PRSI assumed of 10% being CU560) = CU6,160.
Example 2: Holiday pay accrual
If we take example 1 and this time assume based on past experience only 90% of employees will remain on the following year based on past experience. In this case even though we believe 90% will stay on, we cannot accrue 90% of the cost as the employees are entitled to be paid in cash on leaving.
Example 3: Holiday pay accrual – no cash payment for untaken holidays on leaving
If we take example 1 and this time assume the Company does not pay employees for any unused holidays on leaving. If based on past experience, 10% of employees leave in the following year and usually do not take all the unused holiday entitlement. In this case as a cash payment is not required, at the year-end an accrual should be created as follows:
((10 employees*90%) at CU100 per day for 5 days) + ((2 employees*90%) at CU100 per day for 3 days) =((10*.9)*CU100*5)+((2*.9)*CU100*3)= CU5,040 (plus ER NI/PRSI assumed 10% being CU504) = CU5,544
Example 4: Holiday year differs to accounting year
Company A has a 30 June year end. It has 20 employees. The holiday entitlement runs on a calendar year. Management expect all employees will take their annual leave within the calendar year. All employees are salaried and the number of working days in the year is 270 days. At 30 June all 20 employees had taken 7 days leave since 1 January. If we assume 10 of the employees are administrative staff and get paid CU30,000 per annum and the other 10 are management staff and get paid CU60,000 per year. The accrual that would be required at 30 June is as follows:
Total annual cost for 10 administrative employees = 10 * CU30,000 = CU300,000
Total annual cost for 10 management employees = 10 * CU60,000 = CU600,000
Total cost per day for each administrative staff = CU30,000/270 days= CU111
Total cost per day for each management staff = CU60,000/270 days= CU222
Total annual leave earned for all 20 employees = 20 days annual leave / 12 months= 1.67 earned per month * 6 months leave earned= 10 days
Total days to be accrued= 10 days earned less 7 days taken pre 30 June= 3 days
Accrual required for admin staff= CU111*3 days= CU333*10 employees= CU3,333
Accrual required for managerial staff= CU222*3 days= CU666*10 employees= CU6,666
Employer NI/PRSI would also be accrued on these amounts.
Example 5: Holiday year differs to accounting year
Take example 4 but this time based on past experience management know that only 90% will take their annual leave entitlement and remaining 10% will lose the untaken leave. In this particular case the accrual would be reduced by 10% to 90%.
Recognition: Profit-sharing and bonus plans
Extract from FRS102: Section 28.8
28.8 An entity shall recognise the expected cost of profit-sharing and bonus payments only when:
(a) the entity has a present legal or constructive obligation to make such payments as a result of past events (this means that the entity has no realistic alternative but to make the payments); and
(b) a reliable estimate of the obligation can be made.
OmniPro comment
Although an employee’s contract may not state that they are legally obliged to pay a bonus, the entity may have created a constructive obligation as a result of having a history of paying employees a bonus. If this constructive obligation exists, then a provision is required. Where a bonus is expected to be paid after more than one year, then the bonus should be present valued. In effect this is the same principal as is detailed in Section 21-Provisions.
Example 6: Bonus payments
Company A operates a factory. It has a history of paying bonuses to administrative and finance staff. The bonus is only paid if the employee is in existence at the year end and is usually based on the performance of the plant. If we assume that 90% of the staff stayed the full year, in this case an accrual should be created for the cost of the staff’s bonus that were still employed at the end of the year as there is a present obligation as a result of a past event. ER NI/PRSI would also be accrued.
If in the above example, an employee starts part way through the year then the employees entitlement to the bonus would be apportioned based on the length of service.
Example 7: Bonus payment
If in example 6 above, the employee did not receive entitlement of the bonus if they are not in employment at the time of the payment, then at the year end the accrual would be the best estimate of how many staff that will be employed at that date which is usually after year end. Obviously this will usually be known by the date the financial statements are signed.
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