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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.
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.
Example 9: Defined benefit plan
Company A has set up a defined benefit scheme for its employees. Under the scheme it has legally agreed to provide employees with a set retirement amount based on a percent of the employees final salary. Based on advice from its actuary the Company contributes towards this scheme. The employees also contribute to the scheme. If the pension assets which the pension fund owns decrease in value, this decrease will have to be made up by the Company. Likewise, if former employees live longer than expected, the entity will have to contribute to the fund. On a yearly basis the Company’s actuary provides it with an a report which values the assets and liabilities of the scheme on the basis of various assumptions. The journals usually required where a defined benefit scheme exists (assuming the employer contributions are posted to the pension liability and not to the profit and loss account) are:
|
|
CU |
|
Cr/Dr Defined Benefit Liability |
XXX |
|
Dr Current/Past Service Costs |
XXX |
|
Dr/Cr Interest Cost |
XXX |
Being journal to reflect the movement on the pension scheme liability at the year-end which would be obtained from the actuary valuation.
|
|
CU |
CU |
|
Dr Defined Benefit Liability |
CUXXX |
|
|
Cr Bank |
|
CUXXX |
Being journal to reflect the payments made into the pension scheme during the year
|
|
CU |
|
Cr/Dr Actuarial Gain/Loss/Return on Plan Assets in OCI |
XXX |
|
Dr/Cr Defined Benefit Liability |
XXX |
Being journal to reflect the actuarial gain/loss as per the Actuaries valuation
|
|
CU |
|
Dr/Cr Deferred Tax on Actuarial Gain/Loss Posted to OCI |
XXX |
|
Cr/Dr Deferred Tax in P&L on All Other Postings |
XXX |
|
Dr/Cr Deferred Tax in Balance Sheet |
XXX |
Being journal to recognise the movement on the deferred tax on the net defined benefit liability/asset
|
|
CU |
CU |
|
Dr Defined Benefit Liability |
XXX |
|
|
Cr Bank/Wage Control Account |
|
XXX |
Being journal to reflect the employees contributions withheld from the employees pay and paid over to the pension scheme on the employees behalf
Example 10: Calculating the net defined benefit asset/liability
See below extract from an actuarial report detailing the movement in the plan assets during the year. See below the way in which this will be presented in the financial statements and the journals required to reflect these movements. Assume the prior year discount rate was 3.49% and the 2015 discount rate is 2.6%:
Changes in the present value of the defined benefit obligation are as follows:
|
|
2015 |
2014 |
|
|
CU |
CU |
|
Benefit obligation at start of year |
(26,724) |
(26,236) |
|
Current Service Cost |
(615) |
(689) |
|
Interest Cost |
(1,325) |
(1,270) |
|
Plan participants’ contributions |
(334) |
(334) |
|
Actuarial gain/(loss) |
(10,148) |
1,601 |
|
Benefits paid |
313 |
204 |
|
Curtailment |
122 |
0 |
|
Benefit obligation at end of year |
(38,711) |
(26,724) |
Changes in the fair value of plan assets are as follows:
|
|
2015 |
2014 |
|
|
CU |
CU |
|
Fair Value of Plan Assets at start of year |
18,030 |
17,318 |
|
Expected Return on Plan Assets |
1,093 |
1,161 |
|
Employer contribution |
1,250 |
1,535 |
|
Plan participants’ contributions |
334 |
334 |
|
Benefits paid |
(313) |
(204) |
|
Actuarial gain (Actual less expected) |
2,342 |
(2,114) |
|
Fair Value of Plan Assets at end of year |
22,736 |
18,030 |
The net pension liability as at 31 December 2014 and 2015 is analysed as follows:
|
|
2015 |
2014 |
|
|
|
CU |
CU |
|
|
Present value of defined obligations |
(38,711) |
(26,724) |
|
|
Fair Value of Plan Assets |
22,736 |
18,030 |
|
|
Net Pension Liability |
(15,975) |
(8,964) |
|
See below the journals required in the entity’s financial statements assuming a deferred tax rate of 12.5%. How each of the main figures are determined is discussed in the sections that follow.
Example 11: Calculating the net defined benefit asset/liability
If in the above example this was a net defined benefit asset, then this asset could only be recognised where the company can reduce the future contributions or alternatively receive a refund. It must be certain that the refund or reduction of future pension benefits will occur. If the asset was not deemed to be recoverable, that element would be posted through other comprehensive income.
Example 12: Non-vesting conditions
Company A’s defined benefit scheme provides a lump sum benefit of CU100 for every year of service for the first 20 years and will only be applied to the employees’ pension if they stay for 15 years. In this instance, even though the condition is unvested in years 1-15 the standard requires an amount of CU5 to be included in the present value of the pension liabilities for each year the employee is present at each year end. A percentage can then be applied to this CU5 if the entity believes some employees will leave in this period. Also where benefits increase after a certain period of time the costs should be apportioned over the total life.
Example 13: Projected unit credit method
Company A operates a defined benefit scheme which pays a lump sum on termination of 5% of final salary for each year of service. Assume an employee joins in year 1 on a salary of CU30,000 and salaries are assumed to increase by 6% per year. Assume the discount rate is 5% and the employee will retire after 4 years.
See below the amounts to be built up as a defined benefit obligation:
Expected salary at the end of year 4 = CU30,000*(1.06^3)=CU35,730
Therefore the expected obligation at each year end at a rate of 5% of final salary is CU1,787 (CU35,730*5%)
Therefore, the service charge per year = CU1,787 as this is the amount earned for every year in employment.
|
|
Year 1 |
Year 2 |
Year 3 |
Year 4 |
|
Estimated salary |
30,000 |
31,800 |
33,708 |
35,730 |
|
Benefit attributable to current year |
1,787 |
1,787 |
1,787 |
1,787 |
|
Benefit attributable to prior years |
0 |
1,787 |
3,573 |
5,360 |
|
Total benefit payable |
1,787 |
3,573 |
5,360 |
7,146 |
|
|
|
|
|
|
|
Opening pension obligation |
– |
1,543 |
3,241 |
5,105 |
|
Interest @ 5% of opening obligation |
– |
77 |
162 |
254 |
|
Current service cost* |
1,543 |
1,621 |
1,702 |
1,787 |
|
Closing pension obligation |
1,543 |
3,241 |
5,105 |
7,146 |
*Year 1 = 1,787/((1.05)^3), Year 2 = 1,787/((1.05)^2)+ Year 3 = 1,787/((1.05)^1)+ Year 4 = 1,787
We start with year three here as we are present valuing from the end of year 1.
Example 14: Curtailment
During the year the company agreed with the pension scheme trustees that going forward the pension payment to retired members would not increase in line with inflation (or no further benefits will accrue for future years of service). This has resulted in the liability decreasing by CU300,000. Given that the entity is irrevocably committed the CU300,000 credit should be recognised in the profit and loss account. If the change was not certain, then it would be recognised in other comprehensive income.
Example 15: Settlement
Prior to the year end a decision was made by the company to cease business 3 months after the year end. As part of negotiations the company agreed with the pension scheme trustees that the pension scheme would be closed and the fair value of the pensions would be determined by an actuary and transferred to a defined contribution scheme for the employees. The valuation showed that the difference between the carrying amount of the pension liability and the actual valuation performed that a gain of CU100,000 existed. As at year end the company had obtained agreement from all parties, this credit should be posted as a credit to the profit and loss account.
Example 16: Plan changes
Company A operates a defined benefit scheme. During the year the company agreed to increase the pension whereby the percentage of final salary per year of service as a pension would increase from 1% to 2% for anyone who has in excess of 5 years of service.
An actuarial valuation indicates that this will result in additional liabilities for past service for members with over 5 years of CU100,000 and CU20,000 for members who have yet to reach the five year mark.
In this instance the full CU120,000 would have be recognised in the profit and loss as vested and non-vested rights must be included.
Example 17: Reimbursements
Company A has an insurance policy which will cover any liability on a defined benefit scheme. In this example, the amount which is recognised as a separate asset is subject to any maximum stated on the policy.
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).
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.
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.
Example 21: Reclassification of deferred tax from the carrying amount of the defined benefit balance
Company A operates a defined benefit pension scheme. Assume the date of transition is 1 January 2014 and the deferred tax rate is 10%. The defined benefit pension liability was CU10,000. A deferred tax asset of CU1,000 was netted against this balance in the 2013 TB. Assume the date of transition is 1 January 2014. The journal required on transition is:
1 January 2014
|
|
CU |
CU |
|
Dr Deferred Tax in Balance Sheet |
1,000 |
|
|
Cr Defined Benefit Liability (CU10,000*10%) |
|
1,000 |
Being journal to reclassify the deferred tax balance from the defined benefit liability.
Note a similar journal will be required for the 31 December 2014 year end. If there was a defined benefit asset in existence the journals would be the opposite way around.
Example 22: 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. Assume the date of transition is 1 January 2014. At 1 January 2014 the company estimates the holiday accrual should be CU10,000 and the accrual at the 31 December 2014 and 31 December 2015 should be CU15,000 and CU17,000 respectively. Assume the deferred tax rate is 10%. The adjustments required on transition are:
Journals required to be posted to the opening balance sheet at 1 January 2014 are:
|
|
CU |
CU |
|
Dr Profit and Loss Reserves |
10,000 |
|
|
Cr Holiday Accrual |
|
10,000 |
Being journal to reflect required accrual under FRS 102
|
|
CU |
CU |
|
Dr Deferred Tax in Balance Sheet |
1,000 |
|
|
Cr Profit and Loss Reserves (CU10,000*10%) |
|
1,000 |
Being journal to reflect the deferred tax on the holiday accrual which will be allowed for tax purposes in the future
Journals required to be posted to the 31 December 2014 old GAAP TB assuming the journals above are re-posted to be retained earnings etc.:
|
|
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 2014
|
|
CU |
CU |
|
Dr Deferred Tax in Balance Sheet |
500 |
|
|
Cr Deferred Tax in P&L (CU5,000*10%) |
|
500 |
Being journal to reflect movement on deferred tax so as to show the deferred tax on CU15,000 at the year end.
Journals required to be posted to the 31 December 2015 old GAAP TB assuming the journals above are re-posted to retained earnings etc.:
|
|
CU |
CU |
|
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 2015
Note there is no deferred tax in 2015 as under tax law this accrual is fully allowable as the tax return has not been submitted. Under tax law it is likely the holiday accrual up to 31 December 2014 of CU15,000 will be allowed as a deduction over the period defined by the relevant tax authorities for an adjustment of this nature. In this instance a period of 5 years has been assumed. So therefore the deferred tax recognised up to the end of 2014 (that being CU1,500 i.e. CU15,000*10%) will be released as the deduction is given in the tax computation. The journal to reflect this in 2015 assuming a deduction of 1/5th of the CU1,500 (CU300) is allowed in the 2015 tax computation is:
|
|
CU |
CU |
|
Dr Deferred Tax in P&L |
CU300 |
|
|
Cr Deferred Tax in Balance Sheet |
|
CU300 |
Being journal to reflect reversal of deferred tax recognised on the holiday accrual at 31 December 2015.
For each year for the next 4 years this journal for CU300 will need to be posted.
Example 23: Group defined benefit pension scheme treated as defined contribution scheme under old GAAP now required to be brought on balance sheet
Company A is part of a group of companies. A group defined benefit scheme is in operation. Under old GAAP 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 2014 was CU100,000. Assume the date of transition is 1 January 2014. On transition to FRS 102, the group did a detailed analysis and identified the assets and liabilities of the scheme which were attributable to Company A. It determined the allocation of the scheme liabilities and assets were CU650,000 and CU500,000 respectively. Assume a deferred tax rate of 10%.The adjustments required on transition are:
Journals required to be posted to the opening balance sheet at 1 January 2014 are:
|
|
CU |
CU |
|
Dr Profit and Loss Reserves (CU650,000 liabilities less CU500,000 assets) |
150,000 |
|
|
Cr Defined Benefit Pension Liability |
|
150,000 |
Being journal to recognise the defined benefit liability at the date of transition
|
|
CU |
CU |
|
Dr Deferred Tax Balance Sheet |
15,000 |
|
|
Cr Profit and Loss Reserves (CU150,000*10%) |
|
15,000 |
Being journal to recognise deferred tax on the defined benefit liabilities
Journals required to be posted to the 31 December 2014 old GAAP TB assuming the journals above are re-posted to retain earnings at:
|
|
CU |
CU |
|
Dr Defined Benefit Pension Liability |
100,000 |
|
|
Cr Pension Cost in P&L |
|
100,000 |
Being journal to reverse the actual contributions made from P&L to set it against the liability as the service cost will be posted to the P&L as provided by the actuary report.
Note based on the actuary valuation of the schemes assets and liabilities attributable to Company A at 31 December 2014, Company A will have to post this movement into the profit and loss account. The journals to be posted will be similar to the journals posted in example 10 above. These journals will also be required for 2015.
Example 24: Past service costs not-vested recognised in full under FRS 102
During 31 December 2014, Company A agreed with the pension trustees to a change to the plan whereby the percentage of final salary per year of service as a pension would increase from 1% to 2% for everyone who has in excess of 5 years of service. An actuarial valuation indicates that this will result in additional liabilities for past service for members with over 5 years of service of CU100,000 and CU20,000 for members who have yet to reach the five year mark. Under old GAAP any unvested rights were charged on a straight line over the period in which the benefits vested. In this particular case they were charged at CU5,000 (CU20,000/5years). Under old GAAP all past service costs vested were expensed i.e. total expensed in 31 December 2014 period was CU105,000 (CU100,000+5,000). Assume the date of transition is 1 January 2014 and the deferred tax rate is 10%.
FRS 102 would require the full CU120,000 to be recognised in the profit and loss as vested and non-vested rights must be included. The transition adjustments required in the 2014 financial statements are:
|
|
CU |
CU |
|
Dr Service Costs in P&L (CU120,000 required less CU105,000 booked) |
15,000 |
|
|
Cr Defined Benefit Liability |
|
15,000 |
Being journal to expense all un-vested rights
|
|
CU |
CU |
|
Dr Deferred Tax in Balance Sheet (CU15,000*10%) |
1,500 |
|
|
Cr Deferred Tax in P&L |
|
1,500 |
Being journal to reflect deferred tax on the above journal
In the 2015 year an adjustment would be required to reverse the CU5,000 posted (i.e. credit service cost in P&L and debit profit and loss reserves) for the past service costs in the old GAAP TB as it would have been recognised in 31 December 2014 period under FRS 102 through the journal above. Deferred tax of CU500 would also have to be reversed on this CU500.
If in the above example, the change occurred in 2013, then the CU15,000 would be posted to profit and loss reserves and the 2014 journal would be similar to the 2015 journal above.
Example 25: Determination of net interest on defined benefit scheme
Company A operates a defined benefit scheme. At 31 December 2014, under old GAAP the expected return on plan assets posted as a credit to interest costs in the profit and loss account was CU20,000. The discount rate was 8% at 31/12/14 and 10% at 31/12/13. The fair value of plan liabilities at 31/12/13 and 31/12/14 was CU100,000 (split CU250,000 to liabilities and CU150,000 to assets) and CU150,000 (split CU300,000 to liabilities and CU150,000 to assets) respectively. Assume there were no contributions or payments out of the scheme during the year for simplicity and that the date of transition is 1 January 2014. Assume the deferred tax rate is 10%. FRS 102 requires an entity to show the net interest cost calculating the return on plan assets at the discount rate
The transition adjustment for 31 December 2014 is:
|
|
CU |
CU |
|
Dr Interest Cost in P&L |
15,000* |
|
|
Cr Actuarial Gain in Other Comprehensive Income |
|
15,000 |
Being journal to transfer the difference to OCI
*the net interest cost is obtained by multiplying the opening discount rate of 10% by the net opening pension liability of CU100,000 = CU10,000, therefore the return on the opening assets= CU150,000*10%= CU15,000. Hence this is the finance income to be shown in interest cost under FRS 102. The difference of CU15,000 between the CU20,000 posted under old GAAP is posted to OCI above.
|
|
CU |
CU |
|
Dr Deferred Tax in OCI |
1,500 |
|
|
Cr Deferred Tax in P&L (CU15,000*10%) |
|
1,500 |
Being journal to reclassify deferred tax from the P&L to OCI as a result of the above adjustment.
Example 26: Extract of notes to the accounting policies for short-term and long term employee benefits
(a) Employee Benefits
The company provides a range of benefits to employees, including annual bonus arrangements, paid holiday arrangements and defined contribution pension plans.
(i) Short term benefits
Short term benefits, including holiday pay and other similar non-monetary benefits, are recognised as an expense in the period in which the service is received.
(ii) Annual bonus plans
The company recognises a provision and an expense for bonuses where the company has a legal or constructive obligation as a result of past events and a reliable estimate can be made.
Example 26A: extract of the accounting policy note for pensions which are defined contribution schemes
(b) Employee Benefits
(iii) 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 notes to the financial statements
RETIREMENT BENEFITS
|
|
2015 |
2014 |
|
|
CU |
CU |
|
Retirement Benefit costs |
46,746 |
43,289 |
The company operates an externally funded defined contribution scheme that covers substantially all the employees of the company. The assets of the scheme are vested in independent trustees for the sole benefit of these employees.
[Provide an explanation of any material variation in the pension charge from that of the previous period. Provide also any commitment by the company to make additional contributions for a limited number of years – for example, the pension charge for the year 2015 included CU(AMOUNT) in respect of past service liabilities that are being written off over ten years being the average remaining service less of the current employees.] Contributions outstanding at year end amounted to CU1,000 (2014: CU500).
Applicable for multi-employer defined benefit scheme where it is accounted for as a defined contribution 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 28 of FRS 102 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 fuud 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.
EMPLOYEES
The average number of employees was:
|
|
2015 |
2014 |
|
Administration |
4 |
4 |
|
Distribution |
2 |
2 |
|
Construction |
8 |
8 |
|
|
14 |
14 |
|
|
|
|
|
|
2015 |
2014 |
|
Operating costs |
CU |
CU |
|
Staff costs: |
|
|
|
– Wages and salaries |
550,567 |
725,805 |
|
– Social welfare costs |
61,133 |
76,189 |
|
– Retirement Benefits – defined contribution plans |
46,746 |
43,289 |
|
– Share based payments |
XXXX |
XXXX |
|
– Other compensation costs – termination payments |
XXXX |
XXXXX |
|
Net staff costs included in operating costs |
658,446 |
845,283 |
Example 28: Extract from the accounting policy notes and notes to the financial statements
Defined benefit obligations
Defined benefit pension scheme assets are measured at fair value. Defined benefit pension scheme liabilities are measured on an actuarial basis using the projected unit credit method. The excess of scheme liabilities over scheme assets is presented on the balance sheet as an asset or liability. Deferred tax is shown separately within deferred tax. The defined benefit pension charge to operating profit comprises the current service cost, past service costs, introductions, curtailments and settlements. The net interest cost on the scheme liabilities is presented in the profit and loss account as other finance expense. Actuarial gains and losses arising from changes in actuarial assumptions and from experience surpluses and deficits are recognised in other comprehensive income for the year in which they occur together with the return on plan assets, less amounts included in net interest.
Critical Accounting Judgements and Estimates
The preparation of these financial statements requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses.
Judgements and estimates are continually evaluated and are based on historical experiences and other factors, including expectations of future events that are believed to be reasonable under the circumstances.
The company makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.
(a) Pension benefits
The present value of the pension obligations depends on a number of factors that are determined on an actuarial basis using a number of assumptions. The assumptions used in determining the net cost (income) for pensions include the discount rate. Any changes in these assumptions will impact the carrying amount of pension obligations.
The Company determines the appropriate discount rate at the end of each year. This is the interest rate that should be used to determine the present value of estimated future cash outflows expected to be required to settle the pension obligations. In determining the appropriate discount rate, the company considers the interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid and that have terms to maturity approximating the terms of the related pension obligation.
Other key assumptions for pension obligations are based in part on current market conditions. Additional information is disclosed in note X.
Example 29: Extract from the notes to the financial statements
Retirement benefit obligations
The company operates both defined benefit and defined contribution pension schemes.
Defined contribution pension plans
For defined contribution plans, the company pays contributions to trustee administered funds on a mandatory, 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. At the year-end CUXXXX (2014: CUXXXX) was included in other payables in respect of contribution liabilities.
Defined benefit pension plans
Actuarial valuations – funding requirements
For defined benefit plans, the funding requirements are assessed in accordance with the advice of independent and qualified actuaries and valuations are prepared in this regard at triennial intervals. The most recent actuarial valuation was carried out during the year ended 31 December 201X. The assumptions which have the most significant effect on the results of the valuation are those relating to the rate of return on investments and the rate of increase in salaries and pensions. It was assumed that the long term investment returns would be XXX% per annum and that salary increase would average XX% per annum. Actuarial valuation reports are available for inspection by plan members but not by the public.
Financial assumptions
The financial assumptions employed in the valuation of the defined benefit liabilities arising on pension plans are as follows:
Plan Liabilities
The major long-term assumptions used by the Company’s actuaries in the computation of plan liabilities as at 31 December 2015 and 31 December 2014 are as follows:
|
|
2015 |
2014 |
|
Active Retirement Age |
65 years |
65 years |
|
Rate of wage inflation |
2.00% |
3.00% |
|
Rate of benefit increase – in payment |
2.00% |
4.00% |
|
Discount Rate |
4.50% |
4.90% |
|
Expected rate of return on Plan Assets |
4.80% |
4.40% |
The mortality assumptions employed in determining the present value of the plan liabilities under Section 28 are in accordance with the underlying funding valuations and have been determined based on actuarial best practice, taking account of mortality experience and industry circumstances. The rates are based on the most up-to-date mortality tables, which in the case of non-pensioners are PNL00 XX% (males) and PNL00 XX% (females) and in the case of pensioners are PNL00 XX% (males) and PNL00 XX% (females). Based on these tables, the assumed life expectations on retirement are:
|
|
2015 Years |
2014 Years |
||
|
|
Male |
Female |
Male |
Female |
|
Pensioners |
22.4 |
24.1 |
21.4 |
23.1 |
|
Non-pensioners |
22.0 |
24.1 |
21.0 |
23.1 |
Plan Assets
Plan assets attributable to the company are as follows:
|
|
2015 |
2014 |
||
|
|
CU |
CU |
||
|
Equity instruments |
12,757 |
56.1% |
10,980 |
60.9% |
|
Debt instruments |
9,469 |
41.7% |
6,202 |
34.4% |
|
Property |
341 |
1.5% |
361 |
2.0% |
|
Cash |
169 |
0.7% |
487 |
2.7% |
|
|
22,736 |
100% |
18,030 |
100% |
The long-term rates of return expected at 31 December 2015 and 31 December 2014, determined in conjunction with the Company’s actuaries and analysed by class of investment, are as follows:
|
|
2012 |
2011 |
|
Equity securities |
6.00% |
8.00% |
|
Debt securities |
4.00% |
4.00% |
|
Real Estate |
3.50% |
6.00% |
|
Others |
2.00% |
0.00% |
(a) Impact on Income Statement
The total expense charged to the Income Statement in respect of the defined benefit pension plan is as follows:
|
|
2015 |
2014 |
|
|
CU |
CU |
|
Current Service cost – recognised in cost of sales |
(615) |
(689) |
|
Interest Cost |
(1,325) |
(1,270) |
|
Expected return on plan assets – interest income |
1,093 |
1,161 |
|
Curtailment |
122 |
– |
|
Pension expense – included in staff costs (note X) |
(725) |
(798) |
(b) Actuarial gains and losses recognised in other comprehensive income
|
|
2015 |
2014 |
|
|
CU |
CU |
|
Actuarial return on scheme assets |
3,435 |
XXX |
|
Less: amounts included in net interest on the net defined liability |
(1,093) |
(XXX) |
|
|
2,342 |
XXX |
|
Other actuarial gains and losses |
(10,148) |
(513) |
|
Total remeasured losses recognised in other comprehensive income |
(7,906) |
(513) |
(c) Impact on Statement of Financial Position
The net pension liability as at 31 December 2015 and 31 December 2014 is analysed as follows:
|
|
2015 |
2014 |
|
|
|
CU’000 |
CU’000 |
|
|
Present value of defined obligations |
(38,711) |
(26,724) |
|
|
Fair Value of Plan Assets |
22,736 |
18,030 |
|
|
|
|
|
|
|
Net Pension Liability |
(15,975) |
(8,694) |
|
Changes in the present value of the defined benefit obligation are as follows:
|
|
2015 |
2014 |
|
|
CU |
CU |
|
Benefit obligation at start of year |
(26,724) |
(26,236) |
|
Current Service Cost |
(615) |
(689) |
|
Interest Cost |
(1,325) |
(1,270) |
|
Plan participants’ contributions |
(334) |
(334) |
|
Actuarial gain/(loss) |
(10,148) |
1,601 |
|
Benefits paid |
313 |
204 |
|
Curtailment |
122 |
0 |
|
Benefit obligation at end of year |
(38,711) |
(26,724) |
Changes in the fair value of plan assets are as follows:
|
|
2015 |
2014 |
|
|
CU |
CU |
|
Fair Value of Plan Assets at start of year |
18,030 |
17,318 |
|
Expected Return on Plan Assets |
1,093 |
1,161 |
|
Employer contribution |
1,250 |
1,535 |
|
Plan participants’ contributions |
334 |
334 |
|
Benefits paid |
(313) |
(204) |
|
Actuarial gain (Actual less expected) |
2,342 |
(2,114) |
|
Fair Value of Plan Assets at end of year |
22,736 |
18,030 |
Extract from other comprehensive income showing foreign exchange differences on retranslation
|
Statement of Other comprehensive income |
2015 |
2014 |
|
|
CU |
CU |
|
|
|
|
|
Profit for the year |
Xxxxx |
Xxx |
|
|
|
|
|
Exchange differences on retranslation of subsidiary undertakings |
Xxxxx |
Xxx |
|
Actuarial loss in respect of the pension scheme |
(xxx) |
(xxx) |
|
|
|
|
|
Deferred tax on actuarial loss |
xxxx
|
Xxxx
|
|
|
|
|
|
Total other comprehensive income for the year |
xxxx
|
Xxxxx
|
Example 30: Extract of notes to the accounting policies for short-term and long term employee benefits
(c) Employee Benefits
The company provides a range of benefits to employees, including annual bonus arrangements, paid holiday arrangements and defined contribution pension plans.
(i) Short term benefits
Short term benefits, including holiday pay and other similar non-monetary benefits, are recognised as an expense in the period in which the service is received.
(ii) Annual bonus plans
The company recognises a provision and an expense for bonuses where the company has a legal or constructive obligation as a result of past events and a reliable estimate can be made.
Example 31: Extract from notes to the financial statements
|
Provisions for liabilities |
Warranty Provision |
Redundancy provision CU |
Onerous lease provision CU |
|
|
|
|
|
|
At 1 January |
XXXXX |
XXXXX |
XXXXX |
|
Utilised during the year |
(XXXXX) |
(XXXXX) |
(XXXXX) |
|
Additions in the year |
XXXXX |
XXXXX |
XXXXX |
|
Unused amounts reversed to profit and loss |
(XXXXX) |
(XXXXX) |
(XXXXX) |
|
Capitalised in cost of asset |
(XXXXX) |
(XXXXX) |
(XXXXX) |
|
Exchange adjustment |
XXXXX |
XXXXX |
XXXXX |
|
Unwinding of the discount (not required) |
(XXXX)
|
(XXXXX)
|
(XXXXX)
|
|
|
XXXXXX
|
XXXXXX
|
XXXXXXX
|
(i) Maintenance warranty provision
A provision is recognised on warranty claims on products sold during the last 2 years. It is expected the majority of these will be settled in the next year and all will have settled within two years.
(ii) Redundancy provision
During the year the company announced a detailed restructuring plan to cease the production of certain raw materials for its finished product and instead outsource this from the supplier. As a result of this decision XX staff will have to be made redundant. It is expected these staff will be made redundant in the next financial year.
(iii) Onerous lease
As a result of the decision to cease production, the premises in which this production was carried out is no longer required however the company is contractually committed to continue to lease the premises from the landlord for a further 5 years for which a tenant cannot be secured. As a result an onerous lease provision has been created.
Note to be included where the costs are considered exceptional in nature
|
Exceptional item |
2015 CU |
2014 CU |
|
Employee termination costs |
XXXXX |
– |
|
Inventory write down |
XXXXX |
– |
|
Fixed asset impairment |
XXXXX
|
–
|
|
|
XXXXXX |
– |
(i) The exceptional item arises from a fundamental restructuring of the company as a result of a decision to cease trading at one of the companys factories. As a result of the decision to cease certain employees are to be made redundant.
Extract from notes to the financial statements – employee benefits
EMPLOYEES
The average monthly number of employees was:
|
|
2015 |
2014 |
|
|
|
|
|
Administration |
4 |
4 |
|
Distribution |
2 |
2 |
|
Construction |
8 |
8 |
|
|
14 |
14 |
|
|
|
|
|
|
2015 |
2014 |
|
Operating costs |
CU |
CU |
|
|
|
|
|
Staff costs: |
|
|
|
– Wages and salaries |
550,567 |
725,805 |
|
– Social welfare costs |
61,133 |
76,189 |
|
– Redundancy costs |
61,133 |
76,189 |
|
– Retirement Benefits – defined contribution/benefit plan |
46,746 |
43,289 |
|
|
|
|
|
Net staff costs included in operating costs |
658,446 |
845,283 |
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