Employee benefit & Inventories


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IAS 19- Employee Future Benefits and ASPE 3462
Inventory and Biological Assets

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Employee benefit & Inventories

  1. 1. 1
  4. 4. IAS 2 – INVENTORIES 4
  5. 5. INVENTORIES – IAS 2 • Are assets that are either:  Held for sale  In the process of production for sale  Materials/supplies to be consumed in production or rendering services 5
  6. 6. MEASUREMENT • Measured at lower of cost and net realizable value (NRV) • Costs include:  Costs of purchase  Costs of conversion  Other costs 6
  7. 7. COSTS OF PURCHASE • Include purchase price, import duties and other taxes • Trade discounts, rebates and similar items are deducted 7
  8. 8. COSTS OF CONVERSION • Includes costs directly related to production • Fixed and variable production overheads required to convert materials into finished goods  Fixed is allocated on normal capacity  Variable is based on actual use OTHER COSTS • Incurred to bring inventories to their present location and condition 8
  9. 9. EXCLUDED COSTS Excluded costs include: Abnormal amounts of wasted materials Storage costs Selling Costs 9
  10. 10. COST OF INVENTORIES OF A SERVICE PROVIDER • Measured at cost of production • Includes labour and other costs of direct personnel • Sales and general administrative personnel are expensed in the period 10
  11. 11. WOLF CHALLENGE# 1 Dunder Mifflin Inc. (DM) produces inventory, with a selling price of $500. The materials bought to produce the inventory cost $300 and $200 was spent in direct labour for it. Additionally, the depreciation on the production plant was $150. The inventory production used 20% of the plant. There is a rebate of $35. What is the value of the inventory? 11
  12. 12. TECHNIQUES FOR MEASUREMENT OF COST OF INVENTORIES 1. Standard cost method – cost takes into account normal levels of materials and supplies, labour, efficiency and capacity utilization 2. Retail method – Used in the retail industry for rapidly changing items with similar margins  Based on the known relationship between cost and retail prices of inventory 12
  13. 13. COST FORMULAS • Specific ID is used for items not ordinarily interchangeable or used for specific projects • All other inventories use one of the following:  First-in, first-out (FIFO)  Weighted average • Must use same formula for items of similar nature and use 13
  14. 14. COST FORMULAS ILLUSTRATIVE EXAMPLE DATE DESCRIPTIO N UNITS UNIT COST TOTAL COST March 1 Beginning inventory 200 $10 $2,000 March 14 Inventory purchased 300 $12 $3,600 March 17 Inventory purchased 100 $15 $1,500 Total 600 $7,100 The beginning balance, purchase and sales of inventory of Dunder Mifflin are shown below. 150 units were sold in March 14
  15. 15. COST FORMULAS ILLUSTRATIVE EXAMPLE FIFO WEIGHTED AVERAGE Per unit cost $7,100/600units =$11.83 COGS = 150*$10 COGS =$11.83*150 =$1,500 =$1,775 Ending Inventory =(50*$10) + (300*$12) + (100*$15) Ending Inventory =$11.83*450 = $5,600 =$5,324 15
  16. 16. COST FORMULAS • Same cost formula must be used for inventories that are similar • If the NRV is lower than cost, inventories will be written down  Reassessed every subsequent period for potential reversal 16
  17. 17. RECOGNITION AS AN EXPENSE • The carrying amount of the inventory will be recognized as an expense in the period the related revenue is recognized 17
  18. 18. DISCLOSURE • Disclosure of the following: • Accounting policies used • Cost formulas • Carrying amounts • Inventories recognized as an expense • Write-downs and reversals ASPE 3031 vs. IAS • ASPE requires less detailed disclosures when compared to IAS 2 18
  19. 19. IAS 41 - AGRICULTURE 19
  20. 20. AGRICULTURE – IAS 41 • Applied to the following when related to agricultural activity • Biological assets (BA) • Agricultural produce at the point of harvest • Government grants 20
  21. 21. AGRICULTURAL ACTIVITY • Agricultural activity has three common features 1. Capability to change 2. Management of change 3. Measurement of change BIOLOGICAL ASSET AGRICULTURAL PRODUCE PRODUCTS RESULTING Sheep Wool Yarn, carpet Bushes Leaf Tea Vines Grapes Wine 21
  22. 22. RECOGNITION AND MEASUREMENT • Three conditions required for recognition: 1. Entity controls the asset from past events 2. Economic benefits to the entity are probable 3. The FV of the asset can be measured reliably • BAs and agricultural produce are measured on initial recognition at FV less costs to sell • BA can be measured at cost if FV is not available • Agricultural produce is always measured at FV 22
  23. 23. RECOGNITION AND MEASUREMENT • In certain situations, costs can approximate FV is little biological transformation has taken place or is not material • BAs in a package • Gains and losses in P&L 23
  24. 24. GOVERNMENT GRANTS • Unconditional government grant related to BA • Recognized in P&L at FV less costs to sell when it is receivable • Conditional grants are recognized once all conditions are met 24
  25. 25. DISCLOSURE General • Gains/losses • Description • Changes in CA • Changes in FV • Description of BA • Why measure is not reliable • Useful life and depreciation • Gains/losses • If FV becomes available • Nature of grant • Unfulfilled conditions • Any major decrease expected Government Grants When FV not reliable 25
  27. 27. CONCEPTUAL FRAMEWORK LIABILITY EXPENSE  Present obligation  Arising from past events  Expected future outflow of economic benefits  Decrease in economic benefits or incurrence of liability  Allocated to the income statement systematically and rationally EMPLOYEE EMPLOYER RENDER SERVICES PROVIDE BENEFITS MATCHING PRINCIPLE 27
  28. 28. DEFINED BENEFIT V/S DEFINED CONTRIBUTION Economic substance of determines its classification as defined benefit or defined contribution DEFINED CONTRIBUTION PLAN DEFINED BENEFIT PLAN Is the entity’s legal or constructive obligation limited to the amount that it agrees to contribute to the fund? Are the investment and actuarial risk borne by the employee? Is the entity’s obligation to provide the agreed benefits to current and former employees? Are the investment and actuarial risk borne by the employer? 28
  29. 29. DEFINED CONTRIBUTION PLANS IFRS (IAS 19) ASPE 3462 An entity’s obligation for each period is determined by amounts to be contributed based on the plan No actuarial valuations are necessary to measure the liability or cost Obligations are measured on an undiscounted basis, except over 12 months There is no possibility of an actuarial gain or loss per above treatment Contributions due for a period after retirement are discounted, and actuarial gains/losses may occur WHY IS IFRS SILENT ON THIS MATTER? 29
  30. 30. DEFINED CONTRIBUTION PLANS IFRS (IAS 19) ASPE 3462 Recognize:  Liability: for any amounts after deducting contributions paid. Excess contributions are recognized as an asset (i.e. Prepaid pension expense) Recognize a cost for a period comprising:  Current Service cost  Past Service cost  Interest cost  Reduction in interest income on unallocated plan surplus  Amounts are expensed unless required to be capitalized under another Standard (i.e. IAS 16 PPE) Amounts are expensed or capitalized if required by another Standard (i.e. ASPE 3061 PPE) IFRS IS MORE VAGUE IN THIS MATTER 30
  31. 31. DEFINED CONTRIBUTION PLANS ILLUSTRATIVE EXAMPLE CONTRIBUTION JOURNAL ENTRIES Contributions not made: DR. Pension Expense XX CR. Contributions Payable XX Over-contributed: DR. Pension Asset X DR. Pension Expense XX CR. Cash XXX 31
  32. 32. WOLF CHALLENGE# 2Dunder Mifflin Inc. has a post-employment plan to which it is required to contribute a fixed amount of 5% of gross salaries to the fund, regardless of its performance. The monthly salaries were $75,000 in February 2014. Amounts are paid to the fund quarterly and the company has a December 31 year-end. Select the appropriate journal entry for February: a) DC Plan; Dr. Pension Expense $3,750 Cr. Accrued Pension Liab $3,750 b) DB Plan; Dr. Pension Expense $3,750 Cr. Accrued Pension Liab $3,750 c) DC Plan; Dr. Pension Expense $3,750 Cr. Cash $3,750 d) DB Plan; Dr. Pension Expense $3,750 Cr. Cash $3,750 32
  34. 34. FUNDING REQUIREMENTS • DBPs are funded by an entity and sometimes its employees, into a fund that is legally separate from the reporting entity. • The payment of funded benefits depends on the financial position and investment performance, and the entity’s ability and willingness to fund any shortfalls in the fund’s assets. (IAS 19.56) THE EXPENSE RECOGNIZED MAY NOT EQUAL THE PERIOD’S CONTRIBUTION PAID 34
  35. 35. ACCOUNTING FOR DBP 1. Determine the deficit or surplus 2. Determine amounts to include in profit and loss 3. Determine remeasurements in Other Comprehensive Income 4. Determine net defined benefit liability (asset) 35
  36. 36. 1. DETERMINE DEFICIT OR SURPLUS • Use the projected unit credit method to make a reliable estimate of the ultimate cost to the entity of the benefit that employees have earned in the current and prior periods • Discount the benefit to determine the present value (PV) of the defined benefit obligation (DBO) and service costs • Deduct the fair value of plan assets from the PV of DBO 36
  37. 37. PROJECTED UNIT CREDIT METHOD • Under this method each period gives rise to an additional amount of benefit to the employee.  Straight line or  Benefit/years of service approach Total benefit of $XXX ÷ Number of attribution years of service 37
  38. 38. OTHER INPUTS  Discount rate: 1. Market yields on high quality corporate bonds 2. If unavailable, use yield on government bonds  Attribution years: Attributed on a straight line basis from a) date when service leads to benefits to b) date when service does not lead to material benefits  Actuarial assumptions:  Mortality rate  Employee turnover  Claim rates  Financial assumptions (i.e. discount rates) 38
  39. 39. ILLUSTRATIVE EXAMPLE REFER TO ILLUSTRATIVE EXAMPLE 2 IN HANDOUT 1. Estimate Final Salary: 10,000 x (1.07) 4 = CU 13,108 2. Compute yearly benefit: 13,108 x 1% = CU 131 3. PV of Year 1 obligation: PV of 131 at 10% for 4 years = CU 89 (apply for other years) 4. Year 2 interest: Opening Balance of 89 x 10% = CU 9 (apply for following years) Year 1 2 3 4 5 Benefit attributed to: – Prior years 0 131 262 393 524 – Current year (1% of final salary) 131 131 131 131 131 – Current and prior years 131 262 393 524 655 Opening obligation – 89 196 324 476 Interest at 10% – 9 20 33 48 Current service cost 89 98 108 119 131 Closing obligation 89 196 324 476 65539
  40. 40. WOLF CHALLENGE# 3A lump sum benefit is payable on retirement equal to 2% of the final salary. The plan pays the benefit only for each year of service excluding service before the age of 60 until retirement at age 65. The benefits vest immediately. Charlie joined Dunder Mifflin when he was 55 years old and his salary at age of 60 today is $100,000, expected to grow at 5% per year for 4 years. The market yield on junk corporate bonds are 12% and A+ bonds are 10%. 1. What is the attribution period for Charlie (Ages ___ to ___) 2. What is the discount rate? 3. Calculate the current service cost and obligation assuming the benefits attribute from ages 60 to 65. 40
  41. 41. 2. DETERMINE AMOUNTS IN P&L Current Service costs ±Past Service costs and curtailments ±Gain/loss on settlement ±Net interest on the net defined liability (asset) = Pension expense reported in Profit & Loss *Past service cost and gain/loss on settlement recognized at earlier of: 1) plan amendment and 2) when entity recognizes restructuring costs under IAS 37 41
  42. 42. ILLUSTRATIVE EXAMPLE Continuing illustrative example 2, assume that in Year 4, the entity changed its pension plan from 1% of final salary to 2%. Assuming no changes to actuarial assumptions on the final salary of $13,108, compute the past service cost. 1. Compute revised current service cost: 13,108 x 2% = CU 262 for year 4 and 5 2. Calculate past service costs as difference between amended and original DBO: 786 (262x3) - 393 (131x3) = 393 for the first 3 years 3. PV past service costs: PV of 393 at 10% for 1 year (Year 4-5)= CU 357 4. PV current service costs: PV of 262 at 10% for 1 year (Year 4-5) = CU 238 5. Expense the current and past service cost: CU 238 AND CU 357 BEFORE AMENDMENT 393 (131x3) POST AMENDMENT 786 (262x3) PAST SERVICE COST 393 PV of PAST SERVICE 357 42
  43. 43. 3. REMEASUREMENTS IN OCI • Actuarial gains and losses resulting from changes in the PV of DBO because of: 1) the differences between previous actuarial assumptions and what actually occurred (experience adjustments) or 2) changes in actuarial assumptions • The difference between actual return on plan assets and net interest on net defined liability (asset) • Changes in the asset ceiling (excluding amounts included in net interest on net defined liability) Remeasurements in OCI shall not be reclassified into P&L in a subsequent period. (IAS 19.122) 43
  44. 44. 4. DETERMINE NET DEFINED BENEFIT LIABILITY (ASSET) Current Service costs ±Past Service costs ±Gain/loss on settlement ±Net interest on the net defined liability (asset) ±Remeasurements in OCI = Defined Benefit Obligation Opening Balance +Contributions + Investment Returns - Benefits paid = Fair value of plan assets 44
  45. 45. 4. DETERMINE NET DEFINED BENEFIT LIABILITY (ASSET) Defined Benefit Liability - Fair value of plan assets = Net Defined Benefit Liability (Asset) NET DEFINED BENEFIT ASSET IS MEASURED AT LOWER OF : 1. SURPLUS IN DBP 2. ASSET CEILING 45
  46. 46. ILLUSTRATIVE EXAMPLE FOR YEAR 4 Journal Entries Memo Record Item Remeasure ments (Gain) loss OCI Pension Expense Cash Net Defined Benefit Liability / Asset Defined Benefit Obligation Plan Assets Opening Balance - - - 0 324 Cr. 324 Dr.1 Current Service 238 Dr. 238 Cr. Past Service 357 Dr. 357 Cr. Net Interest 32 Dr. 32 Cr. Expected Return 32 Cr. 32 Dr. Remeasurement s of return 12 Dr. 12 Cr.3 Contributions 600 Cr. 600 Dr.2 Actuarial gains/loss ? ? Expense entry 12 Dr. 595 Dr. 607 Cr. Contribution entry 600 Cr. 600 Dr. Ending Balance 7 Cr. 951 Cr. 944 Cr. 1 Defined benefit plan assumed to be fully funded at opening 2 Contributions is an assumed figure 3 Actual return assumed as 20 and no benefits were paid in yea46
  47. 47. WOLF CHALLENGE# 4 In addition to the current service costs of $1,660 from Wolf Challenge #3, assume that the pension plan was amended leading to an increased obligation for one of the employees by $3,600. There was also a revision to the plan as the mortality rates decreased before plans vested increasing obligation by $19,400 for other employees. Please prepare appropriate journal entries: DR. PENSION EXPENSE DR. OTHER COMPREHENSIVE INCOME CR. NET DEFINED BENEFIT LIAB. CR. NET DEFINED BENEFIT LIAB 47
  49. 49. ASPE 3462 • Formerly ASPE 3461 • Required starting Jan 1, 2014 • Apply retrospectively, in accordance with ACCOUNTING CHANGES 49
  50. 50. CHANGES IN THE STANDARD • Elimination of deferral and amortization approach • Measurement Date • Use of Valuation Prepared for Accounting Purposes • Past Service Costs for DCP 50
  51. 51. RECOGNITION For a defined benefit plan recognize: a) defined benefit liability(asset) in B/S; and b) costs of the plan either as an expense or an amount capitalized as part inventory or PPE 51
  52. 52. WHEN TO RECOGNIZE? Defined Benefit Obligation and Cost for Employee Future Benefits Post-Employment Benefits and Compensated Absences that do not Vest or Accumulate Employees Render Services in Return for the Benefits Event That Obligates the Entity Occurs 52
  53. 53. MEASUREMENT OF DBO Most recently completed actuarial valuation prepared for funding purposes but NOT prepared using a solvency, wind-up, or similar valuation basis; or The measurement policy chosen must be consistent across all plans 53 Separate actuarial valuation prepared for accounting purposesOR
  54. 54. MEASUREMENT – USING ACCOUNTING VALUATION 1. Projected benefit method prorated on services, which is the portion of the total estimated future benefit attributed to each year of service in the attribution period • Apply when future salary levels or cost escalation affect the amount of the employee future benefits 54
  55. 55. MEASUREMENT – USING ACCOUNTING VALUATION 2. Accumulated benefit method - benefits earned to date are based on the plan formula, the employee’s history of pay, and other factors, as of the date of determination • Apply when future salary levels and cost escalation do not affect the amount of the employee future benefits 55
  56. 56. RE-MEASUREMENT OF A DEFINED BENEFIT OBLIGATION • The actuarial valuation of DBO every 3 years • Between valuations, roll-forward technique used: a) amount from the last actuarial of the DBO; b) increase in obligation due to the passage of time; c) increase in obligation due to the rendering of service in the current year; and d) any benefit payments. 56
  57. 57. LIMIT ON THE CARRYING AMOUNT OF A DEFINED BENEFIT ASSET • FV of Plan Assets > DBO, plan surplus shall be recognized as a defined benefit asset on the B/S only to extent it is expected to be realized • Entity determines the expected future benefit that it expects to realize from the plan surplus 57
  58. 58. LIMIT ON THE CARRYING AMOUNT OF A DEFINED BENEFIT ASSET +PV expected future annual accruals - PV required employee contributions and min contributions the entity is required ± Amount of plan surplus that can be withdrawn = Expected Future Benefit 58
  59. 59. LIMIT ON THE CARRYING AMOUNT OF A DEFINED BENEFIT ASSET • The entity shall recognize a valuation allowance for any excess of the plan surplus over the expected future benefit. • A change in the valuation allowance shall be recognized in income for the period in which the change occurs. 59
  60. 60. ILLUSTRATIVE EXAMPLE 5 • Assume plan surplus for the year is $50,000 and the expected future benefit is $40,000. What would be the entry? What if afterwards the expected benefit increases to $45,000? JOURNAL ENTRIES Entry to set up valuation allowance: DR. Expense $10,000 CR. Valuation Allowance $10,000 Change in valuation allowance: DR. Valuation Allowance $5,000 CR. Expense $5,000 60
  61. 61. DETERMINATION OF THE COST FOR THE PERIOD The total cost of a defined benefit plan for a period comprises: (a) changes in the DBO other than those resulting from benefit payments to plan members; (b) the amount of any plan assets transferred and any payments made directly by the entity in connection with a settlement; (c) the actual return on plan assets; (d) Any changes in a valuation allowance. The total cost of a defined benefit plan is reduced by any employee contributions as it reduces the cost to the company. 61
  62. 62. DETERMINATION OF THE COST FOR THE PERIOD Actual Return on plan assets based: +FV of Plan Assets Beginning of Period - Benefit Payments or Settlements + Contributions to the Plan - FV of Plan Assets Ending of Period - Costs of Managing Assets Paid by Plan Sponsor = Actual Return on Plan Assets 62
  63. 63. COMPONENTS OF THE COST FOR THE PERIOD ±Current Service costs ±Finance Cost ±Re-measurements and Other Items = Pension expense reported in Profit & Loss 63
  64. 64. COMPONENTS OF THE COST FOR THE PERIOD Re-measurements and other item ± Difference between Actual Return on Plan Assets and Return calculated ± Actuarial Gains and Losses ± Effect of any valuation allowance ± Past Service Cost ±Gains/Losses arising from Settlements and Curtailments = Aggregate of Re-measurements and Other Items 64
  65. 65. WOLF CHALLENGE# 5 Dunder Mifflin Inc.’s (DM) accrued DBO at the beginning of 2014 is $1,450,000, the beginning 2014 FV of plan assets is $1,000,000 (return on plan assets same as expected for 2014 and no management fees), and discount rate used in determining the DBO at the start of the period is 10%. During 2014 DM contributed $225,000 and the plan paid out $125,000. During 2014, DM faced an actuarial gain of $20,000 due to changes in estimates and saw current service cost of $75,000. What is the 2014 cost of the plan under ASPE? (Hint use the components of the cost for the period) 65
  66. 66. MULTI-EMPLOYER VS. MULTIPLE EMPLOYER IFRS ASPE •Multi-employer plans can be either DC or DB (other than state plans) •Pools assets contributed by various entities •Account for its Proportionate share •If not sufficient information, apply DC •Group Administration Plan aggregation of single employer plans, but claims segregated, can be DB or DC •Account for Plan assets on its proportionate interest in the assets •Multiemployer plan are DB, two or more unrelated entities contribute •Pools assets contributed by various entities •Account for its Proportionate share •If not sufficient information, apply DC •Multiple-Employer plan, unlike Multiemployer maintains separate accounts for each entity and generally not collectively bargained •Account for Plan assets on its proportionate interest in the assets 66
  67. 67. DBP DISCLOSURES UNDER IAS 19 Under IAS 19, an entity must disclose information that: • explains the characteristics of the DB plans and risks associated with them, • identifies/explains amounts in its FS arising from its DB plans, and • describes how its DB plans may affect the amount, timing, and uncertainty of the entity’s future cash flows. *Under ASPE 3462, disclosure is much more general in nature. 67
  68. 68. DBP DISCLOSURES UNDER ASPE 3462 a) General description of each type of plan b) FV of plan assets at end of period c) DBO at end of period d) Plan surplus/deficit at end of period e) Difference between plan surplus/deficit at end of period f) Amount of re-measurements g) Effective date of most recent actuarial valuation h) Nature and effect of significant policies changes in contractual elements of plans during period i) Whether a funding or accounting valuation was used j) Any changes between type of valuation used to measure plan 68
  69. 69. BCE EXAMPLE 69
  70. 70. SHORT-TERM EMPLOYEE BENEFITS (IAS 19.9) Employee benefits expected to be settled wholly before 12 months after the end of the annual reporting period in which employees rendered service. Recognition and Measurement Entity recognizes the undiscounted amount of short-term benefits expected to be paid: (a) As a liability after deducting any amount paid. (b) As an expense, unless another IFRS requires inclusion of benefits in cost of asset. 70
  71. 71. I) SHORT-TERM PAID ABSENCES Two categories for short-term paid absences: (a) Accumulating absences, or (b) Non-accumulating absences 71
  72. 72. ACCUMULATING PAID ABSENCES Paid absences that carry forward and can be used in future periods, if not used fully in current period. Can be vesting or non-vesting. Recognition: Recognize the expected cost/liability of paid absences when the employees render service. Measurement: Measure the expected cost of accumulating paid absences as the additional amount the entity expects to pay, based on unused entitlement that has accumulated at the end of the period. 72
  73. 73. WOLF CHALLENGE #6 Dunder Mifflin’s employees are entitled to 5 working days of paid sick leave for each year. Unused sick leave may be carried forward until termination. Note that sick leave days are taken on a FIFO basis. Given the following information for Jim Halpert at December 31, 2013, what amount of short-term paid absences should the entity record at year- end as an obligation? Daily wage rate in 2013 Accumulated sick leave days as at 1/1/2013 Sick leave days earned in 2013 Sick leave days taken in 2013 Percentage wage increase effective 1/1/2014 $310 2 5 3 2% 73
  74. 74. NON-ACCUMULATING PAID ABSENCES Paid absences that do not carry forward, but instead expire at period end if not used in full. Note that these are non-vesting. RECOGNITION: Entity recognizes the cost/liability of paid absences when absences actually occur. 74
  75. 75. II) PROFIT SHARING AND BONUS PLANS Recognition: Entity recognizes the expected cost of profit sharing and bonus when: (a) The entity has a present legal or constructive obligation to make such payments, and (b) A reliable estimate of the obligation can be made. 75
  76. 76. OTHER LONG-TERM EMPLOYEE BENEFITS Employee benefits not expected to be settled wholly within 12 months after the end of the period in which employees rendered service. RECOGNITION AND MEASUREMENT IAS 19 prescribes a modified application of the post- employment benefit model for other long-term employee benefits. ASPE implicitly addresses long term benefits as compensated absences that best or accumulate. An entity recognizes a liability as employees render service (accumulating), or when an absences occur (non- accumulating). 76
  77. 77. TERMINATION BENEFITS (IAS) (IAS 19.159) Results from either an entity’s decision to terminate employment or an employee’s decision to accept an entity’s offer of benefits in exchange for employment termination. Recognition: Recognize liability and expense for termination benefits at earlier of: (a) When entity can no longer withdraw the offer of benefits, and (b) When entity recognizes costs for restructuring as per IAS 37 and involves termination benefits. 77
  78. 78. TERMINATION BENEFITS (IAS) Measurement: • If termination benefits to be settled wholly before 12 months  apply short-term employee benefits provisions • If termination benefits to be settled wholly after 12 months  apply other long-term employee benefits provisions 78
  79. 79. TERMINATION BENEFITS (ASPE) There are 2 types of termination benefits: (a) Special termination benefits, and (b) Contractual termination benefits 79
  80. 80. I) SPECIAL TERMINATION BENEFITS Benefits are not contractual and are offered to employees in exchange for voluntary or involuntary termination of service. Recognition: i) Voluntary: Liability and expense recognized when employee accepts termination offer and the amount can be reasonably estimated. ii) Involuntary: Liability and expense recognized in period in which several conditions must be met. 80
  81. 81. II) CONTRACTUAL TERMINATION BENEFITS Benefits that are required to be paid to employees under existing terms of a benefit plan, payable in event of involuntary termination if a specified event occurs. Recognition: Liability recognized when it is probable that employees will be entitled to benefits and the amount reasonably estimated. 81
  82. 82. DISCLOSURE IAS 19 : Disclosures about short-term employee benefits, other long-term employee benefits, or termination benefits not stipulated, but refers to IAS 24 and IAS 1 ASPE 3462: Entity discloses the nature and effect of any termination benefits provided in the period in the FS. 82
  83. 83. IFRIC 14 Major Issues: 1) When refunds or reductions in future contributions should be regarded as available, 2) How a minimum funding requirement affects the availability of reductions in future contributions, and 3) When a minimum funding requirement might give rise to a liability. 83
  84. 84. FUNDAMENTAL FRAMEWORK SHORT TERM BENEFITS POST EMPLOYMENT BENEFITS TERMINATION & OTHER LONG TERM BENEFITS Paid within 12 months. Apply to current employees Applies to benefits paid after- employment ends Termination benefits paid in exchange to terminate employees (i.e. Severance) Other long term benefits include deferred compensatio n, jubilee, and long-term leave 84
  87. 87. THANK YOU VIEWERS 87 Q1 Q2 Q3 Q4 Q5 Q6
  88. 88. Year 1 2 3 4 5 CU CU CU CU CU Benefit attributed to: – prior years - 131 262 786 1,049 – current year (1% of final salary) 131 131 131 262 262 – current and prior years 131 262 393 1,049 1,311 Opening obligation - 89 196 324 952 Interest at 10% - 9 20 32 95 Current service cost 89 98 108 238 262 Past Service cost 357 Closing obligation 89 196 324 952 1,310 APPENDIX: PAST SERVICE COSTS 88