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Employee
Compensation:
Payroll, Pensions,
and Other
Compensation
Issues
Learning Objectives
 Account for payroll and payroll taxes, and
understand the criteria for recognizing a
liability associated with compensated
absences.
 Compute performance bonuses and recognize
the issues associated with postemployment
benefits.
 Understand the nature and characteristics of
employer pension plans, including a detailed
discussion of defined benefit plans.
2
Learning Objectives
 Use the components of prepaid/accrued
pension costs and changes in the
components to compute the periodic
expense associated with pensions.
 Prepare required disclosures associated
with pensions, and understand the
accounting treatment for pension
settlements and curtailments.
3
Learning Objectives
 Describe the few remaining differences
between U.S. pension accounting
standards and the provisions of IAS 19.
EXPANDED MATERIAL
 Explain the differences in accounting
for pensions and postretirement benefits
other than pensions, and be able to
account for postretirement benefits other
than pensions.
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Employee Compensation
Event Line
Payroll
Compensated
Absences
Stock Options
and Bonuses
Postemployment
Benefits
Pensions and
Postretirement Benefits
Other Than Pensions
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Payroll and Payroll Taxes
Social security and income tax legislation
impose four taxes based on payrolls:
 Federal old-age, survivors’, disability, and
hospital insurance (tax to both the employee
and employer).
 Federal unemployment insurance (tax to
employer only).
 State unemployment insurance (tax to employer
only).
 Individual income tax (tax to employee only).
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Salary Expenses and Liabilities
 The employee’s gross earnings are an expense
to the employer.
 Withholdings are an expense to the employee,
not to the employer.
 Withholdings become a liability to the
employer only because the employer keeps
money earned by employees and pays
obligations on their behalf.
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Accounting for a Payroll
Employers make this entry to record expense for
salaries paid to employees:
Salaries Expense
2,000
FICA Taxes Payable
Employees Income Taxes Payable
Cash
1,327
To record payment of payroll and related
employee withholdings.
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540
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Accounting for a Payroll
Payroll taxes are:
 An expense to the
employer.
 A liability to the
employer until they are
paid.
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Accounting for a Payroll
Employers make this entry to record their portion
of FICA and other payroll taxes:
Payroll Tax Expense
204
FICA Taxes Payable
State Unemployment Taxes Payable
Federal Unemployment Taxes Payable
To record the payroll tax liability
of the employer.
133
50
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Compensated Absences
Compensated absences
include payments by
employers for vacation,
holiday, illness, or other
personal activities.
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Compensated Absences
S&N Corporation has 20 employees
who are paid an average of $350 per
week. During 2001, a total of 40
vacation weeks was earned by all
employees, but only 30 weeks of
vacation were taken.
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Compensated Absences
The entry to record the accrued vacation on
December 31, 2001, would be:
Wages Expense
3,500
Vacation Wages Payable
To record accrued
vacation wages ($350 x
10 weeks).
3,500
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Compensated Absences
In 2002, when the additional vacation weeks
are taken, the average rate has increased to
$400 per week.
Wages Expense
500
Vacation Wages Payable
3,500
Cash
4,000
To record payment at
current rates of previously
earned vacation time
($400 x 10 weeks).
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Major Categories of
Pension Plans
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 Government plans,
primarily social security
 Individual plans, such
as individual retirement
accounts (IRAs)
 Employer plans
Pension Fund Characteristics
•
•
•
•
•
Noncontributory
Contributory
Defined Contribution
Defined Benefit
Vested Benefits
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Potential Measures of
Pension Liability
Benefits for vested and nonvested employees
at future salaries
Benefits for vested and nonvested employees at current
salaries
Accumulated
Benefits for
Benefit
Vested
vested
Obligation
Benefit
employees
Obligation
at current
salaries
PV of Expected
Cash Flows
Projected
Benefit
Obligation
(GAAP)
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Defined Benefit Pension Plans
Services
Employer
Contributions
Wages and Salaries
Current
Employees
Pension
Fund
Defined Benefits
Retired
Employees
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Defined Benefit Pension Plans
It says that vesting occurs
when an employee has met
certain specified
requirements...
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Defined Benefit Pension Plans
…and is eligible to receive
pension benefits at
retirement even if the
employee stops working
for the employer.
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Calculating Pension Costs
A Spreadsheet Approach
2
1
The Basic Spreadsheet
Formal Accounts
Annual
Pension
Expense
Beginning Balances
(a) Service Cost
(b) Interest Cost
(c) Actual Return on Assets
(d) Benefits Paid
(e) PSC Amortization
(f) Transition Amortization
(g) Deferred Gain
(h) Amort. of Deferred Loss
Summary Journal Entries
(1) Annual Pension Cost Acc.
(2) Annual Pension Contri.
(3) Min. Liab. Adjustment
Cash
Prepaid/
Accrued
Pension
Cost
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Memorandum Accounts
Periodic
Pension
Cost
Items
PBO
Unamortized Unrecognized
Fair Value
Deferred
Transition Prior Service
of Plan
Gain/Loss
Gain/Loss
Cost
Assets
Memorandum Accounts
Projected
Benefit
Obligation
Fair Value
of Plan
Assets
Deferred
Gain/Loss
Unamortized
Transition
Gain/Loss
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Unrecognized
Prior Service
Cost
Memorandum Accounts
Projected
Benefit
Obligation
Fair Value
of Plan
Assets
Deferred
Gain/Loss
Unamortized
Transition
Gain/Loss
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Unrecognized
Prior Service
Cost
• Actuarial present value of pension benefits.
• Uses the benefits per year of service approach.
• Assumes future compensation levels.
Retirement
Change in
PBO PBO Service Interest
=
+
+
- Benefits ± Actuarial
Cost
EoY BoY Cost
Paid
Assumptions
Memorandum Accounts
Projected
Benefit
Obligation
Fair Value
of Plan
Assets
Deferred
Gain/Loss
Unamortized
Transition
Gain/Loss
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Unrecognized
Prior Service
Cost
• Amount that could be received from the sale of
plan assets in a current sale between a willing
buyer and seller.
• Increased by employer/employee contributions.
• Decreased by benefits paid.
Actual
Benefits
FVPA FVPA
=
+ Contributions ± Return
Paid
BoY
EoY
on Assets
Memorandum Accounts
Projected
Benefit
Obligation
Fair Value
of Plan
Assets
Deferred
Gain/Loss
Unamortized
Transition
Gain/Loss
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Unrecognized
Prior Service
Cost
• The difference between the actual and expected
return.
• The FASB decided to minimize the volatility of
net periodic pension expense by allowing
deferral of some gains and losses and
amortization over future periods rather than
requiring immediate recognition.
Memorandum Accounts
Projected
Benefit
Obligation
Fair Value
of Plan
Assets
Deferred
Gain/Loss
Unamortized
Transition
Gain/Loss
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Unrecognized
Prior Service
Cost
• The difference between the PBO and the
FVPA at the time FASB Statement No. 87 was
adopted by a company.
• If the PBO was the larger of the two values at
the transition date, the difference was a loss.
Memorandum Accounts
Projected
Benefit
Obligation
Fair Value
of Plan
Assets
Deferred
Gain/Loss
Unamortized
Transition
Gain/Loss
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Unrecognize
d
Prior Service
Cost
• When a pension plan is initially adopted or
amended to provide increased benefits,
employees are granted additional benefits for
services performed in years prior to the plan’s
adoption or amendment.
Corridor Amortization
• Amortization is required only on portion
of unrecognized net gain or loss that
exceeds 10% of the greater of:
– PBO, or
– market-related value of
plan assets at the
beginning of the year.
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Corridor Amortization
• May use any amortization method that
– equals or exceeds straight-line amortization
over remaining expected service years of
covered employees, and
– is consistently applied.
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Periodic Memorandum Entries
Service cost
Interest cost
Actual return on plan assets
Benefits paid
Prior service cost amortization
Transition amortization
Deferred gain/loss
Amortization of deferred gain/loss
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Periodic Memorandum Entries
Service Cost
Periodic
Pension
Cost
XXX
Projected
Benefit
Obligation
(XXX)
Present value of additional benefits
earned by employees during the year
• Increases periodic pension cost (debit).
• Increases PBO (credit).
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Periodic Memorandum Entries
Interest Cost
Periodic
Pension
Cost
Projected
Benefit
Obligation
XXX
(XXX)
Calculated as settlement interest rate
multiplied by beginning of year PBO-represents increase in PBO due to interest.
• Increases periodic pension cost (debit).
• Increases PBO (credit).
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Periodic Memorandum Entries
Periodic
Pension
Cost
Fair Value
of Plan Assets
Actual Return on (XXX)
XXX
Plan Assets
Measures actual earnings on pension
assets.
• Decreases periodic pension cost (credit).
• Increases fair value of plan assets (debit).
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Periodic Memorandum Entries
Benefits Paid
Projected
Benefit
Obligation
Fair Value
of Plan Assets
XXX
(XXX)
Records payments to pension
beneficiaries.
• Decreases PBO (debit).
• Decreases fair value of plan assets (credit).
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Periodic Memorandum Entries
Periodic
Pension
Cost
XXX
Unrecognized
Prior Service
Costs
(XXX)
Prior Service
Cost Amortization
Records amortization of prior service
costs.
• Increases periodic pension cost (debit).
• Decreases unrecognized prior service cost
(credit).
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Periodic Memorandum Entries
Transition
Amortization
Periodic
Pension
Cost
Unamortized
Transition
(Gain)/Loss
(XXX)
XXX
XXX
(XXX)
Records amortization of unrecognized
transition gain or loss.
• Impacts periodic pension cost and unamortized
transition gain/loss.
• Nature of debits and credits varies by gain or loss
status.
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Periodic Memorandum Entries
Deferred Gain/
Loss
Periodic
Pension
Cost
Unrecognized
Net Pension
(Gain)/Loss
XXX
(XXX)
XXX
(XXX)
Records deferral of net pension gain or loss.
• Impacts periodic pension cost and unrecognized
net pension gain/loss.
• Nature of debits and credits varies by gain or
loss status.
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Periodic Memorandum Entries
Periodic
Pension
Cost
Amortization
XXX
of Deferred
(XXX)
(Gain)/Loss
Records corridor amortization.
Unrecognized
Net Pension
(Gain)/Loss
(XXX)
XXX
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Formal Accounts
Net
Pension
Expense
Cash
Prepaid/
Accrued
Pension
Cost
Periodic
Pension
Cost
Items
• Records total pension costs accrued.
• Debited for the sum of all periodic
pension cost items.
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Formal Accounts
Net
Pension
Expense
Cash
Prepaid/
Accrued
Pension
Cost
Periodic
Pension
Cost
Items
• Records cash expended for contributions
to plan assets.
• Debited for actual amount of cash
contributed to pension fund.
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Formal Accounts
Net
Pension
Expense
Cash
Prepaid/
Accrued
Pension
Cost
Periodic
Pension
Cost
Items
• Reflects changes in net pension asset or
liability.
• Debited for cash contributions to pension
plan assets.
• Credited for net pension cost.
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Formal Accounts
Net
Pension
Expense
Cash
Prepaid/
Accrued
Pension
Cost
Periodic
Pension
Cost
Items
• Records noncurrent asset arising from
recognition of additional pension liability for
unfunded pension plans.
• Account balance should not exceed the sum of
unrecognized transition loss plus prior service
costs.
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Summary Journal Entries
 Annual Pension
Cost Accrual
 Annual Pension
Contribution
 Minimum Liability
Adjustment
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Summary Journal Entries
Pension
Cost
Prepaid/
Accrued
Pension
Cost
Annual Pension
XXX
(XXX)
Cost Accrual
• Records sum of periodic pension cost
items.
• Increases pension cost (debit).
• Increases pension liability (credit to
Prepaid/Accrued Pension Cost).
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Summary Journal Entries
Cash
Prepaid/
Accrued
Pension
Cost
Annual Pension
(XXX)
XXX
Contribution
• Records contributions to plan assets.
• Decreases pension liability (debit to
Prepaid/Accrued Pension Cost).
• Decreases Cash (credit).
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Summary Journal Entries
Minimum Liability
Adjustment
Prepaid/
Accrued
Pension
Cost
Pension
Cost
(XXX)
XXX
• Records minimum pension liability.
• Increases pension liability (credit to
Prepaid/Accrued Pension Cost).
• Increases Pension Cost (credit).
Minimum Pension Liability
• Net amount of pension liability that must
be reported for underfunded plans.
• Measured as difference between ABO
and Fair Value of Plan Assets.
Minimum Pension ABO - FV Plan
=
Liability
Assets
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The End