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Other long-term employee benefits
Extract from FRS102: Section 28.29-28.30
28.29 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.
28.30 An entity shall recognise a liability for other long-term employee benefits measured at the net total of the following amounts:
(a) the present value of the benefit obligation at the reporting date (calculated using the methodology for selecting a discount rate in paragraph 28.17); minus
(b) the fair value at the reporting date of plan assets (if any) out of which the obligations are to be settled directly.
An entity shall recognise the change in the liability in profit or loss, except to the extent that this FRS requires or permits their inclusion in the cost of an asset.
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 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.
The projected unit credit method should be used to measure the obligation at each period end. An illustration of the projected unit credit method is shown in example 13 above.
Example 18: 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 using the method detailed in example 13 (which incorporates present valuing).
Termination benefits
Extract from FRS102: Section 28.31-28.37
28.31 An 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
28.32 Because termination benefits do not provide an entity with future economic benefits, an entity shall recognise them as an expense in profit or loss immediately.
28.33 When an entity recognises termination benefits, the entity may also have to account for a curtailment of retirement benefits or other employee benefits.
28.34 An entity shall recognise termination benefits as a liability and an expense only when the 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.
28.35 An entity is demonstrably committed to a termination only when the entity has a detailed formal plan for the termination13 and is without realistic possibility of withdrawal from the plan
Measurement
28.36 An 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.
28.37 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 28.17.
OmniPro comment
Appendix I of FRS 102 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 benefits liability as detailed above i.e. a discount rate being the return on an AA grade corporate 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 21 – 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 19: 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.
Group plans
Extract from FRS102: Section 28.38
28.38 Where an entity participates in a defined benefit plan that shares risks between entities under common control it shall obtain information about the plan as a whole measured in accordance with this FRS on the basis of assumptions that apply to the plan as a whole. If there is a contractual agreement or stated policy for charging the net defined benefit cost of a defined benefit plan as a whole measured in accordance with this FRS to individual group entities, the entity shall, in its individual financial statements, recognise the net defined benefit cost of a defined benefit plan so charged. If there is no such agreement or policy, the net defined benefit cost of a defined benefit plan shall be recognised in the individual financial statements of the group entity which is legally responsible for the plan. The other group entities shall, in their individual financial statements, recognise a cost equal to their contribution payable for the period.
OmniPro comment
Section 28.38 makes it clear that where a group defined pension scheme is in operation, at least one entity has to recognise the defined pension liability/asset on its balance sheet which is usually the entity responsible for the scheme. If there is a stated agreement as to the method in which this is allocated, then the scheme should be split on that basis and recognised in each individual entities financial statements. This contrasts with old GAAP where all entities could treat the defined benefit scheme as a defined contribution scheme on the basis that the assets could not be split.
Where one entity in the group recognises the full defined benefit liability/asset, then all other parties in the group can account for its contributions under the scheme in line with a defined contribution scheme.
Deferred tax on the defined benefit pension scheme liability/asset
OmniPro comment
Deferred tax should be recognised at the rate in which the timing difference is expected to reverse. Therefore where the pension scheme is in a deficit it would be the expected timing of future contributions by the employer.
The deferred tax asset/liability should be shown separately within the deferred tax asset/liability line in the balance sheet. It should not be netted against the defined benefit carrying amount. The deferred tax on each posting follows where the journals were posted to recognise the movements on the pension liability/asset during the year. Example 10 above shows the deferred tax calculation and the amount posted to the profit and loss and other comprehensive income in the period. The general rule is that the deferred tax on the actuarial gain/loss and actual versus expected return on plan assets is posted to other comprehensive income. The remainder is posted to the tax line in the profit and loss.
Example 20: Recognising deferred tax
If we take example 10 above, the net defined benefit pension liability was CU15,975. Therefore the deferred tax asset to be recognised assuming the expected tax rate is 10% is CU1,598 (CU15,975*10%). This is a deferred tax asset as the expense has hit the profit and loss or other comprehensive income but has not yet been allowable for tax. Therefore when the pension contributions are made to reduce this liability they will be allowable for tax purposes.
The same approach should be taken in relation to a net defined pension asset i.e. a deferred tax liability should be recognised. Given that a defined benefit asset is only recognised where it is deemed recoverable, if an asset is shown then it is appropriate to recognise a deferred tax liability on this asset.
Deferred tax on the defined contribution pension scheme
OmniPro comment
In accordance with Section 29, a deferred tax asset should be recognised for any accrued pensions at the year-end as pensions are only allowed for tax purposes when paid.
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