SEMINAR ON IFRSs/IPSASs AT APC MBUNJU FROM 19 TH - 20 TH FEBRUARY,2016.

Transcription

1 SEMINAR ON IFRSs/IPSASs AT APC MBUNJU FROM 19 TH - 20 TH FEBRUARY,2016. ACCOUNTING FOR EMPLOYEES BENEFITS AS PER IAS 19. 1

2 A PRESENTATION BY: A PRESENTATION BY JUMA. A. M. MUHIMBI Managing Director /CEO- IMMMA Consultancy Services LTD VIEWS EXPRESSED HEREIN ARE THOSE OF THE PRESENTER IN HIS PERSONAL CAPACITY AND NOT OTHERWISE. 2

3 SIGNIFICANCE OF IAS 19 q Entities achieve their objectives through employees who are among the major users of FS as per the accounting framework q It is relevant to all employers/enterprises 3

4 OUTLINE OF THE PRESENTATION v WHAT IS EMPLOYEE BENEFITS AND WHAT DOES IAS 19 TRY TO ACHIEVE? v CATEGORIES OF EMPLOYEE BENEFITS v ACCOUNTING FOR SHORT TERM EMPLOYEE BENEFITS AND DISCLOSURE REQUIREMENTS v ACCOUNTING FOR POST EMPLOYMENT BENEFITS AND DISCLOSURE REQUIREMENTS v ACCOUNTING FOR OTHER LONG TERM EMPLOYEE BENEFITS AND DISCLOSURE REQUIREMENTS v TERMINATION BENEFITS AND DISCLOSURE REQUIREMENTS v CONCLUDING REMARKS 4

5 1.0 What is employee benefits? v Whatever an employee gets in exchange for the services rendered to the employer v Employees receive a variety of benefits in return for providing services to their employer. v Some benefits are received from the employer almost immediately the services are rendered e.g. wages and salaries and allowances v Some, such as an annual bonuses, are determined and paid sometime after the year-end when the FS are finalised. 5

6 What is employee benefits (continued)? v Some are paid when employees have served the employer for a minimum number of years/period i.e. long service awards etc. vothers, such as pensions, are paid many years in the future i.e. after the employee has retired. vyet others are paid on termination of services i.e in cases of redundancies. 6

7 What is employee benefits (continued)? v IAS 19 prescribes the accounting and disclosure requirements by employers/enterprises in respect of employee benefits v The std requires a liability to be recognized if employee benefits are to be paid in the future and an expense when the enterprise receives service from an employee in return for benefit. v The benefits are a cost to be allocated in a fair and rational basis to the relevant accounting periods. N.B The cost should be recognized in the period in which the benefits were earned by the employee and not when the benefits are paid ( the matching concept). 7

8 SCOPE OF IAS 19 valthough most benefits are paid in cash or in kind some settlements could also (albeit in rare occasions) be made in shares. Such cases are not covered in IAS 19. vifrs 2 Share based payments addresses the accounting issues involved in such cases. v IFRS 2 also covers situations where the shares of the company are used to pay for other goods and services. 8

9 SCOPE OF THIS PRESENTATION Furthermore, Accounting for employee benefits in the non business public sector is also beyond this presentation as it is specifically covered in IPSAS 25 (even as the principles are more or less the same.) 9

10 2. CATEGORIES OF EMPLOYEE BENEFITS v Four categories are recognized in IAS 19 as follows: Ø Short term employee benefits Ø Post employment benefits Ø Other long term employee benefits Ø Termination benefits v We will in our presentation deal with each of these four categories in turn. 10

11 3. SHORT TERM EMPLOYEE BENEFITS vshort term employee benefits are those (other than termination benefits) that are payable within twelve months after the services have been rendered such as salaries, wages and social security contributions, paid annual and paid sick leave, profit sharing and bonuses and non monetary benefits such as medical care housing, cars and free or subsidized goods or services for current employees. 11

12 3.2 RECOGNITION AND MEASUREMENT vthe undiscounted amount of the benefits that are expected to be paid in respect of services rendered by employees in a period should be recognised in that period as follows: (IAS 19.10). DR S T benefits expense XX S T benefits payable CR XX 12

13 3.2 RECOGNITION AND MEASUREMENT When payment is done: S T benefits payable Bank DR xx CR xx Being settlement of short term benefits for the period 13

14 EXCEPTION TO THIS RULE Where another IAS requires/permits the inclusion of the benefits in the cost of an asset (e.g. inventories as per IAS ( ) and PPE as per IAS ( ) 14

15 3.3 SHORT TERM COMPENSATED ABSENCES v Employees may be compensated for absence when on vacation, sickness and short term disability, maternity or paternity etc. Two categories of entitlements are recognized : a) Accumulating i.e. where it can be carried forward to be used in future periods. ( Additionally, could be described as vesting or not vesting). (whether on leaving the entity the employee is entitled to a cash payment) a) Non accumulating are not carried forward but lapses if not taken in current period 15

16 3.3.1 RECOGNITION AND MEASUREMENT vthe expected cost of short term compensated absences should be recognised as the employees render services that increase their entitlement or in the case of non accumulating absences, when the absences occur (IAS 19.11). DR CR ST employee benefit XX Accrued expenses XX 16

17 3.3.1 RECOGNITION AND MEASUREMENT DR Accrued expenses XX Bank CR XX So make sure that you accrue annual leave that is due please! 17

18 3.4 PROFIT SHARING AND BONUS PAYMENTS v3.4.1 Profit sharing and bonuses may not be known until some time after the yearend and this raises questions about when they should be recognised and how much should be accrued? 18

19 3.4.1 PROFIT SHARING AND BONUS PAYMENTS The enterprise should recognize the expected cost of profit sharing and bonus payment when and only when it has a legal or constructive obligation to make such payments as a result of past events and a reliable estimates of the expected cost can be made (IAS 19.17) 19

20 3.4.1 PROFIT SHARING AND BONUS PAYMENTS A present obligation exists when, and only when, the enterprise has no realistic alternative but to make the payments. When the right to a bonus is in a contract of employment this will give a legal obligation assuming other conditions (e.g. relating to performance or profitability) are met. Where a bonus is not in a contract of employment but a company has an established practice of paying bonuses then a constructive obligation will exist. 20

21 3.4.1 PROFIT SHARING AND BONUS PAYMENTS v In measuring the amount to include in the financial statements, the details of bonus arrangements need to be looked at. If the payment of the bonus is conditional on employees still being with the entity at some date in the future, allowance should be made for likely departures before that date. 21

22 3.4.1 EXAMPLE v Ø ABC LTD includes a bonus system in its contracts of employment for all its staff. Key terms are: If profits increase by more than 10% in any one year a bonus equivalent to 2% of gross wages and salaries (excluding employers Pension Fund Contribution) is payable to staff; the bonus is payable at the end of month 6 of the following year to all employees who worked in the year and are still employed by the company on the date the bonus is payable. 22

23 EXAMPLE CONTINUED In the year to 31 December 2014 gross wages and salaries totalled Tshs14m and employers PFC was Tshs1.792m. PAYE and employees PF deduction average 32% of payroll. Payments to TRA are paid one month in arrears. Profits in 2013 and 2014 equalled Tshs 6.3m and Tshs 7.1m respectively. Staff details are as follows: Date Number At Of which 12 left between and The accounts for the year to 31 December 2014 are being completed in July Employers SSC is 12.8% of the gross wages and salaries. 23

24 EXAMPLE CONTINUED. Required: (a) assuming those that left earned the average wage, calculate the total short-term employment cost for ABC LTD for the year to 31 December 2014; and (b) calculate the liability relating to employee benefits as at 31 December

25 SOLUTION Total short-term employment cost will be : Wages and salaries 14,000,000 PFC on wages and salaries 1,792,000 Annual bonus (See working below) 309,627 Total S. Term Employment Cost 16,101,627 There is a legal obligation to pay a bonus if the conditions are met. % increase in profits = 12.7%, therefore bonus will be paid as it exceeds 10%. Number of staff eligible = =

26 SOLUTION CONTINUED Bonus = 2% x 598/610 x Tshs 14m =Tshs 274,492 PFC on bonus(12.8%=tshs 35,135 Gross bonus Tshs 309,627 Liability at 31 December 2014 Annual bonus payable Tshs 309,627 PAYE &PFC (32% x Tshs 14m/12 + Tshs m/12) (= Tshs 373,333 + Tshs 47,787) = Tshs 421,120 Thus the total liability is Tshs 730,747 26

27 3.4.1 IS IT AN EXPENSE OR AN APPROPRIATION? van obligation under profit sharing and bonus plans results from employee service and not from a transaction with the entity s owners and therefore it is an expense and not an appropriation. 27

28 3.5 DISCLOSURE REQUIREMENTS FOR SHORT TERM EMPLOYEE BENEFITS vias 19, as such does not require specific disclosures about short term employee benefits. However, IAS 24 paragraph 16 requires disclosure about employee benefits for key management personnel. vfurthermore, IAS 1 paragraphs 91 and 93 require disclosure of employee benefits expense. OBSERVE THIS IN YOUR FSs PLEASE! 28

29 4. POST EMPLOYMENT BENEFITS v These are employee benefits (other than termination benefits) which are payable after the employee s RETIREMENT. v Post employment benefits include: a) Retirement benefits such pensions; and b) Other post employment benefits such as post employment life insurance and post employment medical care 29

30 POST EMPLOYMENT BENEFITS CONTINUED v A pension is an arrangement whereby an employer agrees to provide certain benefits (a steady income) to employees, after the employees retire, in recognition of the employees years of service with the entity 30

31 4.3 TYPES OF POST EMPLOYMENT BENEFIT PLANS vthere are generally two types of pension plans The accounting treatment for a post employment benefit plan will be determined according to whether the plan is a defined contribution or defined benefit 31

32 CONTROVERSIAL DEFINITIONS vdefined contribution plan is defined differently in IAS 19.7 and IAS 26.8 The current definition (IAS 19.7) is as follows. Are post employment benefit plans under which an entity pays fixed contributions into a separate entity (a fund) and will have no legal or constructive obligation to pay further contributions if the fund does not hold sufficient assets to pay all employee benefits relating to employee service in the current and prior periods 32

33 DEFINED CONTRIBUTION PLAN AS PER IAS (26.8) Defined contribution plans are retirement benefit plans under which amounts to be paid as retirement benefits are determined by contributions to a fund together with investment earnings thereon 33

34 CONTROVERSIAL DEFINITION vthis controversy will be observed later when dealing with IAS 26.8 especially in an attempt to address the following question i.e. Is PPF/NSSF/PSPF/LAPF/GEPF a defined contribution or defined benefit plan? v For employers in Tanzania PPF/NSSF/PSPF/LAPF/GEPF are defined contribution schemes as the relevant definition is that of

35 Defined Contribution Plans continued vunder a defined contribution scheme, (the employer does not guarantee the plan's future performance) the enterprise pays fixed contributions into a separate fund but has no legal or constructive obligation to make further payments if that fund does not have sufficient assets to pay all of the employees entitlements to post employment benefits. Compare and contrast between NSSF/PPF/PSPF/LAPF s/gepf traditional or mandatory products with their supplementary/ voluntary products of the likes of Deposit Administration Scheme etc 35

36 Defined Contribution Plans continued vfor defined contribution plans (including multi employer plans, state plans and insured schemes where the obligations of the employer are similar to those arising in relation to defined contribution plans) the cost to be recognised in the period is the contribution payable in exchange for the service rendered by the employees during the period (IAS 19.44) 36

37 Defined Contribution Plans continued vif contributions do not fall due during the next twelve months after the employees have rendered the services they should be discounted to their present value (IAS 19.45). 37

38 Defined Contribution Plans continued vemployers in Tanzania are statutorily required to make monthly contributions equivalent to 20% -25% of the employees salaries to either of the state owned Social security funds. Once they comply WITH THIS they have no legal or constructive obligations to making further contributions towards their employees pensions even if the relevant funds go under. 38

39 Accounting for Defined Contribution Plans vany contribution by the employee is deducted from their salary as part of the salaries system and is paid over to the pension scheme. Any amount deducted but not paid over to the pension scheme at the year end is a liability of the employer to the Pension Fund. vany unpaid or pre-paid part of the company s contribution is an accrual or prepayment. vthe company charges its share of the contribution to the pension scheme to the income statement (unless it is to be included in the cost of PPE, inventories etc.). 39

40 4.4.7 ACCOUNTING FOR DEFINED CONTRIBUTION PLANS vaccounting for defined contribution plans is straight forward/not controversial because the employer s obligation for each period is determined by the amounts to be contributed during the reporting period. vthe obligations are measured on an undiscounted basis: PF Contributions DR XX PF Contributions Payable CR XX 40

41 WORKED EXAMPLE XYZ LTD contributes to a defined contribution plan under which employees pay 5% of BASIC salary and the employer 15% thereof. Payments are made to the pension scheme and TRA 14 days after the end of each month. Basic salaries for November 2014 were Tshs 5,000,000. PAYE deductions were Tshs1,000,000. Required: (a) calculate the total employment cost for November 2014; (b) prepare journal entries to record the relevant transactions. 41

42 Solution Employment cost Basic salary is Tshs 5,000,000 Employer s PFC= (15% thereof) =Tshs 750,000 Total 5,750,000 42

43 JOURNAL ENTRIES At 30 November 2014: DR CR STEB) 5,750,000 PAYE payable 1,000,000 PFC Payable 1,000,000 Bank 3,750,000 Being payroll adjustments for November

44 JOURNAL ENTRIES CONTINUED 7 th December 2014 DR PAYE Payable1,000,000 PFC Payable 1,000,000 CR Bank 2,000,000 Being payment of deductions for November 2014 to relevant Authorities 44

45 JOURNAL ENTRIES CONTINUED v Note that under defined contributions, if November 2014 was the year end, payment by the employer of Tshs 1,000,000 to the pension scheme removes all the liability (both legal and constructive) the Employer has for pensions. 45

46 4.4.8 DISCLOSURES van entity shall disclose the amount recognised as an expense for defined contribution plans. (IAS 19.46) vcontributions on account of key management personnel should be disclosed (IAS 24) read together with IAS

47 4.5 Defined Benefit Plans v4.5.1according to IAS 19.7 defined benefit plans are those other than defined contribution plans. v According to IAS 26.8 however, "Defined benefit plans are retirement benefit plans under which amounts to be paid as retirement benefits are determined by reference to a formula usually based on employee's earnings and/or years of service The mandatory products of PPF/PSPF/NSSF /GEPF are thus defined benefit plans 47

48 Defined Benefit Plans vin a defined benefit scheme the benefits that the employee will receive at retirement is defined by way of a formula which embodies a number of variables such as length of service and salary at the time of retirement. The actual amount to be paid as a pension will not be known until retirement. 48

49 Defined Benefit Plans continued v Employees pay a fixed contribution to the plan. Employers are required to pay contributions (which may increase in future) to the scheme to meet the projected pension liability. This is obviously less risky for the employees, but it leaves the risk (both actuarial as well as investment ) with the employer. These plans are becoming less common in the world and probably with the exception of the State Funds (which are guaranteed by the state) e.g. PPF,PSPF,LAPF & NSSF/GEPF they virtually do not feature in Tanzania. 49

50 Defined Benefit Plans continued vdefined benefit schemes create pension liabilities which are related to a variety of unknown factors: salaries at time of retirement, length of retirement, probability of death in service, etc. This makes the liability extremely difficult to measure. Pension assets are usually accumulated to meet these liabilities. Assessing how much should be put into a pension scheme each year (normal cost) to build up the necessary assets is also a difficult task. 50

51 Measurement of assets and liabilities continued vliabilities are discounted to present value (PV) at the current rate of return on a high quality corporate bond of equivalent terms and currency of the liability; v PV of liabilities and FV of assets should be determined regularly so that amounts in the financial statements approximate to the amounts at the year-end. 51

52 EXAMPLE CHABE LTD whose accounting year ends on 31 st Dec each year is operating a defined benefit plan for its staff. The PV of the obligation and market value the plan assets were both at Tshs 1B at Following information is availed by the actuary: 52

53 EXAMPLE2 Year Discount rate at start 10% 9% Exp rate of return on PA at Start of year 12% 11% Current service cost.18 B.14 B Benefits paid.15b.18b Contributions Paid.09B.1B PV of oblig 31 st Dec 1.1B 1.38B Market value of PA1.19B1.372B 53

54 EXAMPLE 3 The focus of IAS 19 is to ensure that the B sheet portrays the company s position regarding the promised obligation to the employees. If the PV of the obligations and the FV of the plan assets are the same there will be no impact as would be the case say on 31 st Dec 2014, whereby the pension Fund Assets and Fund liabilities were at Tshs 1B each 54

55 BUT DO WE HAVE PRIVATE/EMPLOYER SPONSORED FUNDS IN TZ? Fortunately, Tanzania doesn t have Employer owned Retirement Benefit Funds obviously due to historical reasons. The commanding heights of the economy was placed under the state and as such the public sector became the major employer for which several State owned Retirement Benefit Funds were established. 55

56 5. OTHER LONG TERM EMPLOYEE BENEFITS These include: a) Long term compensated absences such as long service or sabbatical leave b) Jubilee or other long service benefits c) Long term disability benefits 56

57 OTHER LONG TERM EMPLOYEE BENEFITS CONTINUED d) Profit sharing and bonuses payable twelve months or more after end of period when the employee rendered related service e) Deferred compensation paid 12 months or more after the end of the period in which it was earned 57

58 5.2 OTHER LONG TERM EMPLOYEE BENEFITS CONTINUED The amount recognized as a liability in this case shall be the net total of the following (IAS ): a) The present value of the defined benefit obligation at the balance sheet date b) Minus the fair value at the balance sheet date of plan assets (if any) out of which the obligations are to be settled directly 58

59 5.2 TYPICAL EXAMPLES IN TZ Long service Awards! Group Endowment Schemes! Contract Gratuities of two or more years! IAS recommends a simplified method of accounting for other long term employee benefits How are these handled? 59

60 6. TERMINATION BENEFITS 6.1 These arise when the employee s services are terminated usually on account of retrenchments or redundancies 6.2 An entity shall recognize termination benefits as a liability and expense when and only when, the entity is demonstrably committed to either: a) Terminate the employment of an employee or group of employees before the normal retirement date or 60

61 TERMINATION BENEFITS CONTINUED b) Provide termination benefits as a result of an offer made in order to encourage voluntary redundancy Therefore there should be a formal plan for the termination with no possibility of withdrawal. The detailed plan shall at the minimum include: 61

62 TERMINATION BENEFITS CONTINUED a) The location,function and approximate number of employees whose services are to be terminated; b) The termination benefits for each job classification or function and c) The time at which the plan will be implemented which should be as soon as possible to avoid material changes to the plan 62

63 TERMINATION BENEFITS CONTINUED Termination benefits do not provide an entity with future economic benefits and as such are recognized as an expense immediately. When the benefits fall due more than 12 months after the balance sheet date, they shall be discounted by using government bonds 63

64 6.3 DISCLOSURE Termination benefits,if material will require to be disclosed as per IAS 1.86 May also be disclosed as per IAS d where it relates to key management personnel. 64

65 8.0 CONCLUDING REMARKS This presentation has attempted to discuss, albeit briefly, the accounting and principle disclosure requirements of employee benefits which employers in TZ have to comply as required by IAS 19The standard is relevant to all enterprises. Employers in Tanzania don t have to worry about the risks and complications of accounting for defined benefits schemes since the same are state sponsored. 65

66 END Mr. Chairman, Participants Ladies and Gentlemen. Thanks so much indeed for your attention. 66