Section 23 – Employee Beneﬁts

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Section 23 – Employee Beneﬁts

Section 23 deals with the recognition for short and long term employee benefits, including the accounting treatment for defined benefit and contribution schemes and termination payments. It also provides guidance on the disclosure requirements.

Scope of this section

Extract from FRS 105 – Section 23.1

23.1 Employee beneﬁts are all forms of consideration given by a micro-entity in exchange for service rendered by employees, including directors and management. This section applies to all employee beneﬁts, except for share-based payment transactions, which are covered by Section 21 Share-based Payment. Employee beneﬁts covered by this section will be one of the following four types:

(a) short-term employee beneﬁts, which are employee beneﬁts (other than termination beneﬁts) that are expected to be settled wholly before 12 months after the end of the reporting period in which the employees render the related service;

(b) post-employment beneﬁts, which are employee beneﬁts (other than termination beneﬁts and short-term employee beneﬁts) that are payable after the completion of employment;

(c) other long-term employee beneﬁts, which are all employee beneﬁts, other than short-term employee beneﬁts, post-employment beneﬁts and termination beneﬁts; or

(d) termination beneﬁts, which are employee beneﬁts provided in exchange for the termination of an employee’s employment as a result of either:

(i) a micro-entity’s decision to terminate an employee’s employment before the normal retirement date; or

(ii) an employee’s decision to accept voluntary redundancy in exchange for those beneﬁts.

OmniPro comment

Section 23 has a very wide scope. Under old GAAP/FRSSE short terms benefits did not have a specific standard and were dealt with by FRS 12 in the main. FRS 102 does have a section for employee benefits. Section 23.1 makes it clear that it applies to all employees including directors and management.

General recognition principal for all employee benefits

Extract from FRS 105 – Section 23.2-23.4

23.2 A micro-entity shall recognise the cost of all employee beneﬁts to which its employees have become entitled as a result of service rendered to the micro-entity during the reporting period:

(a) As a liability, after deducting amounts that have been paid 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, a micro- 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

(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 10.8) or property, plant and equipment (in accordance with paragraph 12.9).

Short-term employee beneﬁts

Examples

23.3 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

23.4 When an employee has rendered service to a micro-entity during the reporting period, the micro-entity shall measure the amounts recognised in accordance with paragraph 23.2 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 FRS 105 – Section 23.5-23.6

23.5 A micro-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. A micro-entity shall recognise the expected cost of accumulating compensated absences when the employees render service that increases their entitlement to future compensated absences. The micro- entity shall measure the expected cost of accumulating compensated absences at the undiscounted additional amount that the micro- entity expects to pay as a result of the unused entitlement that has accumulated at the end of the reporting period. The micro-entity shall present this amount as falling due within one year at the reporting date.

23.6 A micro-entity shall recognise the cost of other (non-accumulating) compensated absences when the absences occur. The micro-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 23.6 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 are 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 PRSI of 10% being CU560.

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 PRSI of 10% being CU504.

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 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

23.7 A micro-entity shall recognise the expected cost of proﬁt-sharing and bonus payments only when:

(a) the micro-entity has a present legal or constructive obligation to make such payments as a result of past events (this means that the micro-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 16-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 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.

Post-employment benefits: Defined Contribution Plan – recognition and measurement

Extract from FRS 105 – Section 23.2 and Section 23.8 – 23.9(a), Sections 23.10-23.11

23.2 A micro-entity shall recognise the cost of all employee beneﬁts to which its employees have become entitled as a result of service rendered to the micro-entity during the reporting period:

(a) As a liability, after deducting amounts that have been paid directly to the employees or as a contribution to an employee beneﬁt fund2. If the amount paid exceeds the obligation arising from service before the reporting date, a micro- 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

(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 10.8) or property, plant and equipment (in accordance with paragraph 12.9).

23.8 Post-employment beneﬁts include, for example:

(a) retirement beneﬁts, such as pensions; and

(b) other post-employment beneﬁts, such as post-employment life insurance and post-employment medical care.

Arrangements whereby a micro-entity provides post-employment beneﬁts are post- employment beneﬁt plans. A micro-entity shall apply this section to all such arrangements whether or not they involve the establishment of a separate entity to receive contributions and to pay beneﬁts. In some cases, these arrangements are imposed by law rather than by action of the micro-entity. In some cases, these arrangements arise from actions of the micro-entity even in the absence of a formal, documented plan.

23.9 Post-employment beneﬁt plans are classiﬁed as either deﬁned contribution plans or deﬁned beneﬁt plans, depending on their principal terms and conditions:

(a) Deﬁned contribution plans are post-employment beneﬁt plans under which a micro-entity pays ﬁxed contributions into a separate entity (a fund) and has no legal or constructive obligation to pay further contributions or to make direct beneﬁt payments to employees if the fund does not hold sufﬁcient assets to pay all employee beneﬁts relating to employee service in the current and prior periods. The amount of the post-employment beneﬁts received by the employee is determined by the amount of contributions paid by a micro-entity (and perhaps also the employee) to a post-employment beneﬁt plan or to an insurer, together with investment returns arising from the contributions.

Recognition and measurement – requirements applicable to all plans

23.10 When contributions to a deﬁned contribution or deﬁned beneﬁt plan are not expected to be settled wholly within 12 months after the end of the reporting period in which the employees render the related service, the liability recognised in accordance with paragraph 23.2(a) shall be measured at the present value of the contributions payable using the methodology for selecting a discount rate speciﬁed in paragraph 23.11. The unwinding of the discount shall be recognised as interest expense in proﬁt or loss in the period in which it arises.

23.11 A micro-entity shall determine the rate used to discount the future payments by reference to market yields at the reporting date on high quality corporate bonds. In countries with no deep market in such bonds, the micro-entity shall use the market yields (at the reporting date) on government bonds. The currency and term of the corporate bonds or government bonds shall be consistent with the currency and estimated period of the future payments.

OmniPro comment

Appendix I of FRS 105 defines post-employment benefits plans as ‘formal or informal arrangements under which an entity provides post-employment benefits for one or more employees’.

Defined contribution scheme

Section 23.9(a) defines what a defined benefit contribution is and makes it clear that any plan that is not a defined contribution plan is by default a defined benefit plan. For a defined contribution scheme the contributions that are payable are usually based on a percent of the employees’ salary and can be set at a maximum amount depending on the rules of the scheme. The only liability the entity is exposed to is the contributions that it has agreed to pay. The employee takes on the investment risks. If the pension losses money it is not the responsibility of the employer to make up this deficit. Whatever is left in the pension fund at the employees retirement date will be what can be used to purchase an annuity etc. Determination as to whether a pension scheme is a defined contribution scheme or defined benefit scheme can be determined by reviewing the detailed rules of the scheme. Note employers are not legally required to contribute towards a defined contribution scheme in Ireland, they are just required to give employees access to a scheme.

Where future payments are payable after 12 months from year end the discount rate to use is the market yield on high market government bonds at the reporting date or if these are not available the market yield on government bonds at the reporting date. The bond should be for the same period and be in the same currency as the term and currency of the pension payment.

Example 8: Defined contribution scheme

The company has provided employees access to a defined contribution scheme. The Company has agreed that it will contribute an amount up to a maximum of 5% of the employee’s salary. In this case, the employer is only liable for this 5%. If it is not paid within the year it should be accrued. If we assume the amount payable to the defined pension scheme in the year is CU100,000 and CU70,000 was paid up by the year end. The journals required under a defined contribution scheme would be to:

	CU	CU
Dr pension costs in P&L	100,000
Cr pension accrual		30,000
Cr bank		70,000

Being journal to reflect the cost to the employer for the year.

Post-employment benefit plans – Defined benefit pension – Recognition and measurement

Extract from FRS 105 – Section 23.2, Section 23.9(b), Sections 23.10 – 23.13

23.2 A micro-entity shall recognise the cost of all employee beneﬁts to which its employees have become entitled as a result of service rendered to the micro-entity during the reporting period:

23.9 Post-employment beneﬁt plans are classiﬁed as either deﬁned contribution plans or deﬁned beneﬁt plans, depending on their principal terms and conditions:

(a) Deﬁned beneﬁt plans are post-employment beneﬁt plans other than deﬁned contribution plans. Under deﬁned beneﬁt plans, the micro- entity’s obligation is to provide the agreed beneﬁts to current and former employees, and actuarial risk (that beneﬁts will cost more or less than expected) and investment risk (that returns on assets set aside to fund the beneﬁts will differ from expectations) are borne, in substance, by the micro-entity. If actuarial or investment experience is worse than expected, the micro-entity’s obligation may be increased, and vice versa if actuarial or investment experience is better than expected.

23.11 A micro-entity shall determine the rate used to discount the future payments by reference to market yields at the reporting date on high quality corporate bonds. In countries with no deep market in such bonds, the micro-entity shall use the market yields (at the reporting date) on government bonds. The currency and term of the corporate bonds or government bonds shall be consistent with the currency and estimated period of the future payments.

23.12 When a micro-entity participates in a deﬁned beneﬁt plan (which may include a multi- employer plan or state plan) and has entered into an agreement with the plan that determines how the micro-entity will fund a deﬁcit (such as a schedule of contributions), the micro-entity shall recognise a liability for the contributions payable that arise from the agreement (to the extent that they relate to the deﬁcit) and the resulting expense in proﬁt or loss in accordance with paragraphs 23.2 and 23.10.

23.13 Where a micro-entity participates in a deﬁned beneﬁt plan that shares risks between entities under common control it shall recognise a cost equal to its contribution payable for the period. If a micro-entity is legally responsible for the plan and has entered into an agreement with the plan that determines how a deﬁcit will be funded, the micro-entity shall recognise a liability for the contributions payable that arise from the agreement (to the extent that they relate to the deﬁcit) and the resulting expense in proﬁt or loss in accordance with paragraphs 23.2 and 23.10.

OmniPro comment

Defined benefit scheme

The key distinction between the defined benefit scheme and the contribution scheme is that the entity is legally or constructively obliged to contribute to the scheme so as to provide the agreed benefits to the current and former employees which compares to the contribution scheme where the entity is only liable for what it has agreed to contribute. In essence the entity bears both the investment and actuarial risk which is not the case for the defined contribution scheme.

Given the long timescales in relation to a defined benefit scheme, section 23 requires the cash flows to be discounted at a rate which incorporates the time value of money. The discount to be used is usually bonds which are ‘AA’ rated by credit agencies.

Given that most micro entities will not have a DB scheme in operation, if the micro entity does, then it should only recognise:

An expense for the contributions paid/payable to the scheme
a liability for a schedule of contributions to the extent that it relates to the deficit on the DB scheme. All costs should be recognised as an expense in the profit and loss account regardless of whether they relate to re-measurement or not.

The journals would be to:

	CU	CU
Dr Pension Cost in P&L	XXX
Cr Defined Benefit Pension Liability		XXX

Being journal to post the actual employer contributions payable in the year

	CU	CU
Dr Defined Benefit Pension Liability	XXX
Cr Bank		XXX

Being journal to post the payment of the employer contributions to the pension scheme in the year

	CU	CU
Dr/Cr Pension Cost in P&L	XX	XX
Dr interest cost in P&L for unwinding of the discount	XX
Cr/Dr Defined Benefit Pension Liability	XX	XX

Being journal to reflect the required liability on the defined benefit scheme based on the amount committed to in order to rectify the deficit and to show correct charge in P&L

Group plans

Section 23.13 makes it clear that where a group defined pension scheme is in operation, at least one entity has to recognise the defined pension liability on its balance sheet which is usually the entity legally responsible for the scheme. In this case the entity responsible should follow the guidance mentioned above with regard to accruing for the liability which the entity has committed to as part of the agreement to fund the deficit. All other companies should account for the scheme in line with the requirements of a defined contribution scheme.

Multi-employer defined benefit scheme

Multi-employer plans other than a state plan is defined in Appendix I of FRS 105 as ‘defined contribution or defined benefit plans that:

Pool assets contributed by various entities that are not under common control; and
Use those assets to provide benefit to employees of more than one entity, on the basis that contribution and benefits levels are determined without regard to the identity of the entity that employs the employees’.

A State plan as defined by Appendix I of FRS 105 ‘as an employee benefit plan established by legislation to cover all entities (or all other entities in a particular category, for example a specific industry) and operated by national and local government or another body (for example, an autonomous agency created specifically for this purpose (which is not subject to control or influence by the reporting entity)’.

Where the entity’s allocation of the pension schemes assets and liabilities cannot be determined, the entity can account for the scheme as a defined contribution scheme. As a result contributions to the scheme are expensed as incurred. However as detailed in 23.12 above where an entity has committed to funding the pension scheme an accrual should be created for the amount committed at that time.

Where previously an entity has treated a multi-employer pension scheme as a defined contribution scheme and subsequently enough data becomes available to allow defined benefit accounting to be performed, Section 23 does not state how these assets and liabilities should be brought on to the balance sheet. There are two ways in which this can be done:

1) recognise an immediate charge/credit to the profit and loss for the entity’s portion of the deficit/surplus; or

2) recognise a prior year adjustment for a change in accounting policy.

Both methods are acceptable.

Insured benefits

Where under the agreement the insurers can request the employer to contribute benefits directly when they fall due or the employer is required to pay if the insurer does not pay then the pension should be accounted for as a defined benefit plan with the insurance policies shown as a plan asset. If not they can be accounted for as a defined contribution scheme as the insurer bears the investment and actuary risk.

Other long-term employee benefits

Extract from FRS 105 – Section 23.14 – 23.15

23.14 Other long-term employee beneﬁts include items such as the following, if not 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) long-term paid absences such as long-service or sabbatical leave;

(b) other long-service beneﬁts;

(c) long-term disability beneﬁts;

(d) proﬁt-sharing and bonuses; and

(e) deferred remuneration.

23.15 A micro-entity shall recognise a liability for other long-term employee beneﬁts measured at the present value of the beneﬁt obligation at the reporting date calculated using the methodology for selecting a discount rate in paragraph 23.11. The unwinding of the discount shall be recognised as interest expense in proﬁt or loss in the period in which it arises.

OmniPro comment

For all employee benefits payable in periods greater than 12 months, then these need to be present valued at a discount rate similar to what would be used in the calculation of a defined benefit/contribution scheme i.e. a discount rate that reflects the time value of money but not the investment or actuarial risk which would usually reflect the market yields of high quality AA grade corporate bonds of equivalent currency and terms in which the amount is to be repaid.

Example 9: Other long term employee benefits

Company A implements a bonus scheme for its key employees whereby they will receive a bonus of CU50,000 in 3 years’ time provided they continue to stay employed by the entity for this period. In this instance, the cost of CU50,000 will be spread over the 5 year period which incorporates present value.

Termination benefits

Extract from FRS 105 – Section 2.16 – 23.21

A micro-entity may be committed, by legislation, by contractual or other agreements with employees or their representatives or by a constructive obligation based on business practice, custom or a desire to act equitably, to make payments (or provide other beneﬁts) to employees when it terminates their employment. Such payments are termination beneﬁts.

Recognition

Because termination beneﬁts do not provide a micro-entity with future economic beneﬁts, a micro-entity shall recognise them as an expense in proﬁt or loss immediately.

A micro-entity shall recognise termination beneﬁts as a liability and an expense only when the micro-entity is demonstrably committed either:

(a) to terminate the employment of an employee or group of employees before the normal retirement date; or

(b) to provide termination beneﬁts as a result of an offer made in order to encourage voluntary redundancy.

A micro-entity is demonstrably committed to a termination only when the micro-entity has a detailed formal plan for the termination3 and is without realistic possibility of withdrawal from the plan.

Measurement

A micro-entity shall measure termination beneﬁts at the best estimate of the expenditure that would be required to settle the obligation at the reporting date. In the case of an offer made to encourage voluntary redundancy, the measurement of termination beneﬁts shall be based on the number of employees expected to accept the offer.

When termination beneﬁts are due more than 12 months after the end of the reporting period, they shall be measured at their discounted present value using the methodology for selecting a discount rate speciﬁed in paragraph 23.11.

OmniPro comment

Appendix I of FRS 105 defines termination benefits as ‘employee benefits provided in exchange for the termination of an employee’s employment as a result of either:

(a) an entity’s decision to terminate an employee’s employment before the normal retirement date; or

(b) an employee’s decision to accept voluntary redundancy in exchange for those benefits’.

Termination payments which are legally required to be paid and known at the outset should not be accounted for in accordance with the above instead these should be accounted for as other long term benefits and accrued over the employees life.

A termination benefit should be recognised in the profit and loss immediately. Where it is payable in greater than one year it should be discounted using the discount rate similar to that required when valuing a defined benefit liability as detailed above i.e. a discount rate being the return on an AA grade corporate bond or government bond of similar length.

The conditions in which a provision should be included at the end of the reporting period mirror the requirements of Section 16 – Provisions which details when a provision can be made. In essence a formal communication would have to be made to staff before year end and there must be a formal plan in place and the cost should be able to be reliably measured.

Example 10: Termination benefits

Company A has announced a plan to make 20 employees redundant. A formal plan is in place. The company has offered CU1,000 ex-gratia payment to each staff member that comes forward and accepts voluntary redundancy. If 20 employees do not come forward, the entity made it clear in its communication that forced redundancies will occur. If forced redundancies are given a CU500 ex-gratia payment is offered.

The entity assumes based on past experience that 10 employees will take voluntary redundancy and the other 10 may be forced. On this basis a provision for CU15,000 ((10*CU1,000)+(10*CU500)) should be made at year end assuming it is payable within 12 months.

Transition exemptions

Section 28 of FRS 105 provides no exemptions on transition to FRS 105. Therefore, any differences between old GAAP/FRSSE/FRS 102 and FRS 105 must be stated retrospectively. Detailed below are the principal transition adjustments expected.

Principal transition adjustments

Note the below are just the primary differences from previous GAAP

1) Holiday accrual (applicable to entities transitioning from old GAAP/FRSSE)

Under old GAAP there was no specific requirement in the standard to accrue for holiday pay however in reality it probably should have been. FRS 105 specifically requires this to be accrued. Therefore on transition, the balance at the date of transition will have to be restated to include the accrual and the corporation tax effect of this accrual.

Given that if FRS 105 had of applied from inception the corporation tax deduction would have been claimed in the year of accrual, on transition, there is a requirement to show the corporation tax charge and the related liability as it would have been under FRS 105 in the first set of FRS 105 financial statements. Given that this deduction was not allowed in the 2015 tax computation or previously under revenue guidelines this will be tax deductible over a 5 year period.

Example 11: Holiday accrual

Company A did not previously accrue for untaken holiday pay. The company pays employees who leave the value of the employees untaken leave. The date of transition is 1 January 2015. At 1 January 2015 the company estimates the holiday accrual should be CU10,000 and the accrual at the 31 December 2015 and 31 December 2016 should be CU15,000 and CU17,000 respectively. Assume the corporation tax rate is 10%.The adjustments required on transition are:

Journals required to be posted to the opening balance sheet at 1 January 2015 are:

	CU	CU
Dr Profit and Loss Reserves	10,000
Cr Holiday Accrual		10,000

Being journal to reflect required accrual under FRS 105

	CU	CU
Dr Corporation Tax in Balance Sheet	1,000
Cr Profit and Loss Reserves (CU10,000*10%)		1,000

Being journal to reflect the corporation tax on the holiday accrual which will be allowed for tax purposes in the future and to allow the accounts to show the correct tax liability had FRS 105 applied from inception.

Journals required to be posted to the 31 December 2015 old GAAP TB assuming the journals above are re-posted to retained earnings:

	CU	CU
Dr Wages and Salaries in P&L (CU15,000 less prior year accrual of CU10,000)	5,000
Cr Holiday Accrual		5,000

Being journal to reflect additional accrual required for holiday pay at 31 December 2015

	CU	CU
Dr Corporation Tax in Balance Sheet	500
Cr Corporation Tax in P&L (CU5,000*10%)		500

Being journal to reflect movement on corporation tax so as to show the corporation tax refundable on CU15,000 at the year end and to allow the accounts to show the correct tax charge/liability in 2015 had FRS 105 applied from inception

Journals required to be posted to the 31 December 2016 old GAAP TB assuming the journals above are re-posted to retained earnings:

Dr Wages and Salaries in P&L

(CU17,000 less prior year accrual of CU15,000)

2,000

Cr Holiday Accrual

2,000

Being journal to reflect additional accrual required for holiday pay at 31 December 2016

Note there is no corporation tax journal in 2016 as under tax law this accrual is fully allowable as the tax return has not been submitted and relates to the current year. This deduction will be recognised as part of the normal tax computation for the year. Under Irish tax law the holiday accrual up to 31 December 2015 of CU15,000 will be allowed as a deduction for the next 5 years

	CU	CU
Dr Corporation Tax in P&L	300
Cr Corporation Tax in Balance Sheet		300

Being journal to reflect the additional deduction for 1/5th of the expense not previously given up to 31/12/15 which has therefore fallen out under FRS 105. Note this assumes that the tax journal posted will include the transition tax adjustment for the CU300 when it is finally recognised. If there was no corporation tax in 2016, then the CU300 would still be recognised as a debit to the P&L as it would no longer be payable to the tax authorities. As no deferred tax can be recognised under FRS 105 it cannot be held as deferred tax asset on the balance sheet as a timing difference. The remaining CU1,200 (CU1,500-CU300) will still be included as an asset at the year end in the corporation tax nominal and released over the remaining 4 yrs.

2) Group defined benefit pension scheme treated as defined contribution scheme under old GAAP/FRSSE now required to be brought on balance sheet

Under old GAAP/FRSSE, where a group company had a defined benefit pension scheme but the allocation of the assets and liabilities of the group could not be determined, then the entities within the group could account for the pension scheme as if it was a defined contribution scheme. FRS 105 does not provide this exemption. Instead it states that the assets and liabilities should be allocated between the group companies based on a contractual agreement or where this does not exist it should be accounted for by the entity in the group that is legally responsible for the plan. FRS 105 requires that the entity only recognise a liability for a schedule of contributions to the extent that it relates to the deficit on the DB scheme and the entity has entered a plan/commitment to rectify this AND the pensions contributions paid/payable to the scheme. All costs should be recognised as an expense in the profit and loss account regardless of whether they relate to re-measurement or not. The unwinding of the discount is recognised as an interest cost.

Note no deferred tax is required to be recognised on this adjustment as Section 24 does not permit deferred tax to be recognised. Current tax is not applicable in this instance as even if the expense had of been recognised under FRS 105 a tax deduction would not have been given as it is not given until the pension contribution is paid.

Example 12: Group defined benefit pension scheme treated as defined contribution scheme under old GAAP/FRSSE now required to be brought on balance sheet where there is a commitment to make contributions to the deficit on the DB scheme

Company A is part of a group of companies. A group defined benefit scheme is in operation. Under old GAAP/FRSSE all group companies accounted for the scheme as a defined contribution scheme as a split of the asset and liabilities could not readily be determined. The total pension contributions during 2015 and 2016 was CU100,000 which was recognised as an expense in that year. Assume the date of transition is 1 January 2015. On transition to FRS 105, the group did a detailed analysis and identified the that Company A was bound to making a contribution of CU15,000, CU10,000 and CU8,000 to the pension scheme at 1 January 2015, 31 December 2015 and 31 December 2016 respectively to overcome a deficit on the scheme. Assume the figures above are the present value figures and the unwinding of the discount is not deemed material. The adjustments required on transition are:

Journals required to be posted to the opening balance sheet at 1 January 2015 are:

	CU	CU
Dr Profit and Loss Reserves	15,000
Cr Defined Benefit Pension Liability		15,000

Being journal to recognise the defined benefit liability at the date of transition for the amounts committed to in order to fund the deficit

Journals required to be posted to the 31 December 2015 old GAAP TB assuming the journals above are re-posted to retain earnings at:

	CU	CU
Dr Defined Benefit Pension Liability (CU15,000-CU10,000)	5,000
Cr Pension Cost in P&L		5,000

Being journal to reflect the required liability on the defined benefit scheme based on the amount committed to in order to rectify the deficit and to show correct charge in P&L

Journals required to be posted to the 31 December 2016 old GAAP TB assuming the journals above are re-posted to retain earnings at:

	CU	CU
Dr Defined Benefit Pension Liability (CU10,000-CU8,000)	2,000
Cr Pension Cost in P&L		2,000

Being journal to reflect the required liability on the defined benefit scheme based on the amount committed to in order to rectify the deficit and to show correct charge in P&L in 2016

If the unwinding of the discount was material, the journal in the 2015 and 2016 year would be similar to the below with the balance of the movement recognised in the journals above:

	CU	CU
Dr interest cost in P&L	XXXX
Cr Defined Benefit Pension Liability		XXX

Being journal to reflect the unwinding of the discount each year

3) Multi-employer defined benefit pension scheme treated as defined contribution scheme under old GAAP – commitment to fund the deficit now required to be accrued (applicable to entities transitioning from FRSSE/old GAAP)

Section 23 requires a liability to be recorded for deficit funding commitments where a multi-employer scheme has been accounted for as a defined contribution scheme. If the entity cannot determine their portion of the assets and liabilities, then it can still be recorded as a defined contribution scheme. Old GAAP also permitted such a scheme to be accounted for as a defined contribution scheme. What differs is that Section 23 requires that where an agreement has been entered into with the plan that determines how an entity will fund a deficit, then the entity is required to recognise a liability for the contributions payable from the agreement and record the resulting expense in the profit and loss (this was not required under old GAAP/FRSSE). This will result in additional liabilities being recognised than was required under old GAAP/FRSSE at the date of transition and a reversal of the accrual in the comparative year. No corporation tax or deferred tax adjustment is required as this is at timing difference.

Example 13: Multi-employer defined benefit pension scheme treated as defined contribution scheme under old GAAP/FRSSE – now required to recognise a liability on balance sheet where there is a commitment to make contributions to fund the deficit on the DB scheme

Company A is part of a multi-employer defined benefit scheme of which it cannot determine its portion of the scheme assets or liabilities. Under old GAAP/FRSSE all companies within the scheme accounted for the scheme as a defined contribution scheme as a split of the asset and liabilities could not readily be determined. The total pension contributions during 2015 and 2016 was CU100,000 which was recognised as an expense in that year. Assume the date of transition is 1 January 2015. On transition to FRS 105, the company did a detailed analysis and identified the that Company A was bound to making a contribution of CU15,000 in total, reducing to CU10,000 and CU8,000 to the pension scheme at 1 January 2015, 31 December 2015 and 31 December 2016 respectively to overcome a deficit on the scheme. Assume the figures above are the present value figures and the unwinding of the discount is not deemed material. The adjustments required on transition are:

Journals required to be posted to the opening balance sheet at 1 January 2015 are:

	CU	CU
Dr Profit and Loss Reserves	15,000
Cr Accrual for Pension Liability		15,000

Being journal to recognise the liability at the date of transition for the amounts committed to in order to fund the deficit

Journals required to be posted to the 31 December 2015 old GAAP TB assuming the journals above are re-posted to retain earnings at:

	CU	CU
Dr Accrual for Pension Liability (CU15,000-CU10,000)	5,000
Cr Pension Cost in P&L		5,000

Being journal to reflect the required liability on the pension scheme based on the amount committed to in order to rectify the deficit and to show correct charge in P&L

Journals required to be posted to the 31 December 2016 old GAAP TB assuming the journals above are re-posted to retain earnings at:

	CU	CU
Dr Accrual for Pension Liability (CU10,000-CU8,000)	2,000
Cr Pension Cost in P&L		2,000

Being journal to reflect the required liability on the pension scheme based on the amount committed to in order to rectify the deficit and to show correct charge in P&L

If the unwinding of the discount was material, the journal in the 2015 and 2016 year would be similar to the below with the balance of the movement recognised in the journals above:

	CU	CU
Dr interest cost in P&L	XXXX
Cr Accrual for Pension Liability		XXX

Being journal to reflect the unwinding of the discount each year

4) Requirement for entities under FRS 105 that have a defined benefit scheme to only recognise a liability for the contributions committed to in order to fund the deficit at the year end. No further liability needs to be recognised. No deferred tax needs to be recognised. All costs are recognised in the profit and loss account as there is no STRGL/OCI under FRS 105

Under old GAAP/FRS 102 where a company operated a defined benefit pension scheme it was required to recognise the full defined pension scheme assets and liabilities and the related deferred tax. Any re-measurement differences on the pension scheme is recognised in the STRGL under old GAAP and OCI under FRS 102. The cost recognised in the P&L related to the estimated current service cost as opposed to the actual employer pension contribution made. Instead the employer pension scheme contributions are posted to the defined benefit pension scheme asset or liability.

Therefore on transition to FRS 105 for such entities, an adjustment will be required to only show a liability for the defined benefit pension scheme deficit to which it has committed to rectify. In addition an adjustment would be required to:

derecognise deferred tax; and
reverse the notional amounts posted to the P&L and OCI/STRGL recognised under FRS 102/old GAAP; and
recognise the actual employer contributions payable for the year

Given the size of a micro entity it is unlikely that such entities will hold defined benefit schemes. In the unlikely event that it does the journals required are (assuming a defined benefit liability exists):

Journals required to be posted to the opening balance sheet at date of transition

	CU	CU
Dr Defined Benefit Pension Liability	XX
Cr Deferred tax Asset recognised on defined pension benefit		XX
Cr Profit and Loss Reserves		XX

Being journal to only reflect the defined benefit liability at the date of transition to be equal to the amounts committed to in order to fund the deficit

Journals required to be posted to the 31 December 2015 old GAAP TB assuming the journals above are re-posted to retain earnings at:

	CU	CU
Cr Defined Benefit Pension Liability	XXX
Dr Pension Cost in P&L		XXX

Being journal to reclassify the actual employer contributions payable in the year from the balance sheet to the P&L as required under FRS 105

	CU	CU
Dr Defined Benefit Pension Liability	XXX
Cr Current Service cost		XX
Cr Finance costs (expected return on plan assets less interest on liabilities)		XX
Cr/Dr OCI/STRGL with Actuarial loss/gain		XX

Being journal to reclassify the actual employer contributions payable in the year from the balance sheet to the P&L as required under FRS 105

	CU	CU
Dr/Cr Deferred tax in P&L	XX
Cr/Dr Deferred tax in OCI/STRGL	XX
Cr Deferred tax asset		XXX

Being journal to derecognise the deferred tax from the balance sheet and P&L as previously recognised under previous GAAP (reversed as deferred tax not permitted under FRS 105)

The journals required in 2016 will be the same as those in 2015.

Disclosures in the notes

Extract in FRS 105 – Section 23.22

23.22 A micro entity shall disclose any commitment not recognised in the statement of ﬁnancial position concerning pensions separately from other ﬁnancial commitments, guarantees and contingencies (see paragraph 6A.2).

OmniPro comment

See below examples for the disclosures required to cover off the above:

ROI entities also need to disclose the value of any pension accruals/liabilities stated on the balance sheet at each period end.

Examples of disclosures – Specific to ROI entities only.

An amount of €XX (2014: €XX) was included in accruals with regard to pension contributions withheld which is due for payment after year end to the defined contribution scheme. A further €XX was included in accruals for future payments required to fund a deficit which the company has committed to.

OR
The company operates a defined benefit scheme. The liability recognised on the balance sheet at year end was €XXX (2014: €XXX) ^{^[1]}.

ROI entities are also required to disclose the accounting policies. See examples below:

[1] Sch 3B(35)(5) requires disclosure of retirement benefit commitments recognised on the balance sheet.

Example 25: extract of the accounting policy note for pensions which are defined contribution schemes (applicable for ROI entities only)

(a) Employee Benefits

(i) Defined contribution pension plans

The Company operates a defined contribution plan. A defined contribution plan is a pension plan under which the company pays fixed contributions into a separate fund. Under defined contribution plans, the company has no legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to employee service in the current and prior periods.

For defined contribution plans, the company pays contributions to privately administered pension plans on a contractual or voluntary basis. The company has no further payment obligations once the contributions have been paid. The contributions are recognised as employee benefit expense when they are due. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in the future payments is available.

Example 27: Extract from the accounting policy notes for DB Benefit Scheme (Applicable to ROI entities only)

Example – multi-employer DB Scheme

The company is a member of a multi-employer defined benefit scheme. The company has accounted for this as defined contribution scheme as allowed under Section 23 of FRS 105 on the basis that the Company’s share of the assets and liabilities of the scheme cannot be determined. Where the group have committed to a plan to fud the scheme, provision has been made at the year end. The amount recognised in the profit and loss reflects the contributions made to the scheme in the year.

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