Ateneo de Zamboanga University

School of Management and Accountancy

Accountancy Department

LEARNING PACKET
FINACC6 – Special Topics in Accounting
Session 2, First Semester, SY 2020-21

LEARNING PACKET NO. 1 DATE: October 18,2020

TOPIC: Employee Benefits – Part 1 ( Short-Term Benefits) Week No.: 1
Session: 2

INTENDED LEARNING OUTCOME:

At the end of this learning units, the learners shall:

1. Understand the kinds of employee benefits

2. Account for compensated absences
3. Compute for bonuses ( bonus –sharing plans )

I. CONCEPT NOTES

IAS19 : Employee Benefits

Effective Periods beginning on or after 1 January 2013

date
Scope  IAS 19 shall be applied by an employer in accounting for all employee benefits,
except those to which IFRS 2 Share-based Payment applies.
 This Standard does not deal with reporting by employee benefit plans (see IAS 26
Accounting and Reporting by Retirement Benefit Plans).
 The employee benefits to which this Standard applies include those provided:
a. under formal plans or other formal agreements between an entity and
individual employees, groups of employees or their representatives;
b. under legislative requirements, or through industry arrangements, whereby
entities are required to contribute to national, state, industry or other multi-
employer plans; or
c. by those informal practices that give rise to a constructive obligation. Informal
practices give rise to a constructive obligation where the entity has no realistic
alternative but to pay employee benefits. An example of a constructive
obligation is where a change in the entity’s informal practices would cause
unacceptable damage to its relationship with employees.
 Employee benefits include:
a. short-term employee benefits, such as the following, if expected to be settled
wholly before twelve months after the end of the annual reporting period in
which the employees render the related services:
i. wages, salaries and social security contributions;
ii. paid annual leave and paid sick leave;
iii. profit-sharing and bonuses; and
iv. non-monetary benefits (such as medical care, housing, cars and free or
subsidized goods or services) for current employees;
b. post-employment benefits, such as the following:
i. retirement benefits (e.g. pensions and lump sum payments on
retirement); and
ii. other post-employment benefits, such as post-employment life insurance
and post-employment medical care;
c. other long-term employee benefits, such as the following:
i. long-term paid absences such as long-service leave or sabbatical leave;
ii. jubilee or other long-service benefits; and
iii. long-term disability benefits; and
d. termination benefits.
 Employee benefits include benefits provided either to employees or to their
dependents or beneficiaries and may be settled by payments (or the provision of
 goods or services) made either directly to the employees, to their spouses, children
or other dependents or to others, such as insurance companies.
 An employee may provide services to an entity on a full-time, part-time, permanent,
casual or temporary basis. For the purpose of this Standard, employees include
directors and other management personnel.
Objective The objective of IAS 19 is to prescribe the accounting and disclosure for employee
benefits. The Standard requires an entity to recognize:
a. a liability when an employee has provided service in exchange for employee
benefits to be paid in the future; and
b. an expense when the entity consumes the economic benefit arising from service
provided by an employee in exchange for employee benefits.

Definitions
Employee benefits
1. employee benefits – all forms of consideration given by an entity in exchange for service
rendered by employees or for the termination of employment.
2. short-term employee benefits – employee benefits (other than termination benefits) that are
expected to be settled wholly before twelve months after the end of the annual reporting period in
which the employees render the related service.
3. post-employment benefits – employee benefits (other than termination benefits and short-term
employee benefits) that are payable after the completion of employment.
4. other long-term employee benefits – all employee benefits other than short-term employee
benefits, post-employment benefits and termination benefits.
5. termination benefits – 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;
b. an employee’s decision to accept an offer of benefits in exchange for the termination of
employment.

Short-term Employee Benefits

 Short-term employee benefits include items such as the following, if expected to be settled wholly
before twelve months after the end of the annual reporting period in which the employees
render the related services:
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 subsidized goods or
services) for current employees.
Recognition and Measurement
 When an employee has rendered service to an entity during an accounting period, the entity shall
recognize the uiscounted amount of short-term employee benefits expected to be paid in exchange
for that service:
a. as a liability (accrued expense), after deducting any amount already paid. If the amount
already paid exceeds the undiscounted amount of the benefits, an entity shall recognize that
excess as an asset (prepaid expense) to the extent that the prepayment will lead to, for
example, a reduction in future payments or a cash refund.
b. as an expense, unless another IFRS requires or permits the inclusion of the benefits in the
cost of an asset (see, for example, IAS 2 and IAS 16).
 An entity shall recognize the expected cost of short-term employee benefits in the form of paid
absences as follows:
a. in the case of accumulating paid absences, when the employees render service that increases
their entitlement to future paid absences. An entity shall measure the expected cost of
accumulating paid absences as the additional amount that the entity expects to pay as a
result of the unused entitlement that has accumulated at the end of the reporting
period.
b. in the case of non-accumulating paid absences, when the absences occur.
 An entity shall recognize the expected cost of profit-sharing and bonus payments when, and only
when:
a. the entity has a present legal or constructive obligation to make such payments as a result of
past events (a present obligation exists when, and only when, the entity has no realistic
 alternative but to make the payments); and
b. a reliable estimate of the obligation can be made.
Disclosure
 Although IAS 19 does not require specific disclosures about short-term employee benefits, other
IFRSs may require disclosures. For example, IAS 24 requires disclosures about employee benefits
for key management personnel. IAS 1 Presentation of Financial Statements requires disclosure of
employee benefits expense.

Compensated absences
- Accumulating – recognise expense when service that increases entitlement is rendered. e.g. leave pay
( Carried forward and can be used in future periods )
- Non-accumulating – recognise expense when absence occurs.

Further classification of accumulating compensated balances

Vesting – Employees are entitled to cash payment for unused settlement on leaving the entity
Non-vesting – Employees are not entitled to cash payment for unused settlement on leaving the entity

BONUS FORMULAS

Before tax, before bonus

= Profit before tax X Bonus Rate

Before tax, after bonus

= Profit before tax / (1+ Bonus Rate )

After tax, before bonus

= Profit before tax X ( 1- Tax Rate ) X Bonus Rate
1 – ( Bonus Rate X Tax Rate )

After tax , after bonus

= Profit before tax X ( 1- Tax Rate ) X Bonus Rate
1 + Bonus Rate - (Bonus Rate X Tax Rate )

Formulas

Bonus –Sample Problem

CURIOUS Co. grants its managerial employees bonus in the form of profit sharing. Information on
operations in 20x1 is shown below:
Profit before tax ₱1,000,000
Bonus rate or percentage 10%
Income tax rate 30%

1. How much is the bonus “Before tax, before bonus?”

2. How much is the bonus “Before tax, after bonus?”
3. How much is the bonus “After tax, before bonus?”
4. How much is the bonus “After tax , after bonus?”

Before tax, before bonus = 1,000,000 x 0.1 = P100,000

Before tax, after bonus = (1,000,000/ 1.1) X 0.1 = 90,909
After tax, before bonus
= Profit before tax X ( 1- Tax Rate ) X Bonus Rate
1 – ( Bonus Rate X Tax Rate )
= P1,000,000 X ( 1- 30% ) X 10%
1 – ( 10% X 30% )
= [ (1,000,000 X0.7) / (1-0.03)] X 10%
= 72,165
After tax , after bonus;
= Profit before tax X ( 1- Tax Rate ) X Bonus Rate
1 + Bonus Rate - (Bonus Rate X Tax Rate )
= P 1,000,000 X ( 1- 30% ) X 10%
1 + 10% - (10% X 30% )
=[ (1,000,000 X0.7) / (1+0.07)] X 10%
= 65,421

II. CHECKING FOR UNDERSTANDING

Problem 1:

Balvin Co. grants all employees two weeks of paid vacation for each full year of employment. Unused
vacation time can be accumulated and carried forward to succeeding years and will be paid at the salaries
in effect when vacations are taken or when employment is terminated. There was no employee turnover
in 20X6. Additional information relating to the year ended December 31, 20X6, is as follows:

Liability for accumulated vacations at 12/31/X5 ₱35,000

Pre-20X6 accrued vacations taken from 1/1/X6 to 9/30/X6
(the authorized period for vacations) 20,000
Vacations earned for work in 20X6 (adjusted to current rates) 30,000

Balvin granted a 10% salary increase to all employees on October 1, 20X6, its annual salary increase date.
For the year ended December 31, 20X6, Balvin should report vacation pay expense of

30k + (15,000 x 10% increase in salary) = 30000 +1500 =31500

Journal Entries
Vacation pay liability 20000
Cash 20000
Vacation Pay Expense 31500
Vacation pay Liability 31500

V. INDEPENDENT LEARNING

Problem 1:

A company gives each of its 50 employees (assume they were all employed continuously through 2018
and 2019) 12 days of vacation a year if they are employed at the end of the year. The vacation
accumulates and may be taken starting January 1 of the next year. The employees work 8 hours per day.
In 2018, they made P21 per hour and in 2019 they made P24 per hour. During 2019, they took an
average of 9 days of vacation each. The company’s policy is to record the liability existing at the end of
each year at the wage rate for that year. What amount of vacation liability would be reflected on the
2018 and 2019 balance sheets, respectively?

Problem 2:

Luck Company reported that employees are each entitled to two weeks of vacation leave. During the year,
the employees earned 500 weeks of vacation leave and used 400 weeks. The current salary of the
employees is an average of P5,000 a week and the salary is expected to increase by P500 per week or a
future weekly salary of P5,500

1.) If the benefit is non-accumulating and non-vesting , how much is the vacation pay expense ?
2.) If the benefit is accumulating and vesting , how much is the vacation pay expense ?

Problem 3:

HANDSOME Co. provides an incentive compensation plan under which its president receives a bonus
equal to 10% of HANDSOME’s profit before tax but after deduction of the bonus. HANDSOME’s profit after
tax and after bonus for the year is ₱2,545,456. Income tax rate is 30%. How much is the bonus?