Topic 8: Accounting for
Employee Benefits
Financial Accounting BFA201
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Readings & references
• Read Deegan Chapter 12
• AASB 119 Employee Benefits
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Learning Objectives
• Understand the various forms of benefits
employees can receive from employers
• Be able to account for the various forms
of employee benefits
• Understand whether particular employee
entitlement obligations should be
recorded at their nominal value or at their
discounted present value
• Be able to provide the necessary
disclosures in conformity with AASB 119
Employee Entitlements
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Topics
1. Overview of employee benefits
2. Salaries and wages
3. Annual leave
4. Personal leave
5. Long service leave
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Overview of Employee Benefits
• AASB 119 - Purpose and Scope
• ‘Employee’ = a natural person appointed
under a contract of service
• ‘Employee benefits’:
– All forms of consideration given by an
entity in exchange for service rendered
by employees (para 7)
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Overview of Employee Benefits
Wages & salaries
Annual leave
Personal leave
Long service
leave
Superannuation
Share
entitlements
Bonuses
Other entitlements
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Regulation of employee
benefits
• National Employment Standards (NES)
sets minimum conditions. Individual
awards and agreements add extra.
• Annual leave accumulates, 4 wks per yr,
accumulates, vesting.
• Personal leave (includes carer’s leave,
sick leave) 10 days per yr, accumulates.
• Long service leave not specified – rely on
awards & agreements & State laws.
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AASB 119: Employee Benefits
.
Short term
benefits
Postemployment
benefits
Categories
Termination
benefits
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Other long-term
employee
benefits
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Short term benefits: para 10
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.
Salaries and Wages
Payable after
12 months or
more
• Discount to
PV
Payable within • No need to
12 months
discount
• Only when
Liability arises
services
rendered
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Wages expense may
include:
* PAYG tax; medical
benefits
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Salaries & wages
1. Entry at Reporting date
Dr
Salaries & wages expense
Cr
PAYG tax payable
Cr
Medical benefits payable
Cr
Salaries & wages payable
2. Entry when paid after Reporting date
Dr
Dr
Salaries & wages expense (incurred since reporting)
Salaries & wages payable (owing at reporting date)
Cr
PAYG tax payable
Cr
Medical benefits payable (since reporting date)
Cr
Cash (payment to employees)
3. Remittance to ATO & medical fund
Dr
Dr
PAYG tax payable
Medical benefits payable
Cr
Cash
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See Handout
Lecture Example 1
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Example 1
Vege Ltd employs Iva Bean on a one-year contract
at an annual salary package of $52,000. Income tax
of $350 per week is deducted from Bean’s salary.
Vege Ltd also deducts $65 per week for health
insurance premiums payable to Medibank Private.
• What would the journal entry be each week to record
and pay Bean’s salary?
• What would the journal entry be when the amounts
collected on behalf of others are remitted?
• What would be the journal entry if on reporting date
four days wages are owing?
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Compensated absences para 11
Annual Leave
• Vacation
Personal (sick) Leave
• Short-term disability
Service
• Jury duty
• Military service
Parental Leave
• Maternity
• Paternity
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Compensated absences
2 categories
Nonaccumulating
entitlement
OR
Use it or lose it!
Recognise only when
the absence occurs
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Accumulating
entitlement – yr 3
year 2
year 1
Carry
forward
unused leave
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Accumulating
compensated absences
2 Types
Vesting
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Non-vesting
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Annual leave entitlement
4 weeks
Leave loading (17.5%)
If payable within 12
months – no PV calc
Expense & liability accrues DAILY
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Accounting for annual leave
•
To recognise annual leave obligation throughout
the year:
Dr
•
Annual leave expense
Cr
Provision for annual leave
When annual leave taken:
Dr
Provision for annual leave
Cr
PAYG tax payable
Cr
Cash at bank
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See Handout
Lecture Example 2
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Example 2
Iva Bean’s annual salary of $52,000 comes with an
entitlement to 4 weeks’ annual leave with a 17.5%
annual leave loading.
• What is the cost of the leave to Vege Ltd?
• What entry is required each non-leave week?
What is the entry required each week when Bean
is on leave?
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‘On-costs’
‘
Workers’
comp
Payroll tax
Superannuation contributions
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Example of Tasmanian on-costs
Total
18.72%
http://www.flinders.edu.au/hr-files/documents/TAS%20Oncosts%201-Jul-2013.pdf
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Accounting for personal leave
Accumulating:
• obligation arises as service is rendered
• Vesting: accrues daily (as per annual leave)
• Non-vesting: Only paid upon a valid claim for
personal leave by the employee
• Journal entry each week:
Dr Personal leave expense
Cr
Provision for personal leave
Provision should be based on past experience
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Accounting for personal leave
• If employees are sick:
Dr Provision for personal leave
(wages during personal leave)
Dr Salaries and wages
(wages for rest of period)
Cr PAYG tax payable
Cr Cash at bank
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Question:
How does your employer
account for sick leave?
See Handout
Lecture Example 3
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Example 3
Vege Ltd has a weekly payroll of $70,000. A normal
working week is Monday to Friday. Its employees
are entitled to 10 working days’ non-vesting
personal leave each year. Experience suggests that
85% of its employees will take their full personal
leave entitlement each year.
• Calculate the annual personal leave expense and the
weekly amount of the expense.
• Show the journal entry required each week to account
for the personal leave.
• Show the journal entry if Iva Bean, who has a weekly
salary of $1,000, takes personal leave of two days.
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Long service leave
Extended leave after working for an
employer for a specific number of
years
Employer must recognise an expense
and an associated liability as LSL
accrues
Measured at its present value
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LSL entitlement categories
Pre-conditional
Conditional
No
entitlement
Entitlement Unconditional
under certain
circumstances Entitlement
Years of service
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Long service leave
• Many judgements required
• For example:
– probability employee will stay
until such time as they have a
LSL entitlement
– salary being earned at the time
of receiving the LSL entitlement
(inflation, promotion prospects
etc.)
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Accounting standards for LSL
• AASB119 (para 128) requires the
recognition of a liability for LSL to equal
the net total of:
– The present value of the defined benefit
obligation at the reporting date
– Minus the fair value at the reporting date of
plan assets (if any) out of which the
obligations are to be settled directly
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Calculating LSL liability:
need to calculate…
Projected
salary
current
salary ×
(1 + inflation
rate)n
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a
t
e
d
L
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b
e
n
e
f
i
t
Present
value of
LSL
obligation
Probability
LSL
benefit will
be paid
LSL
liability
= TOTAL to be shown on financial position statement
Calculating LSL liability
– Projected salary
• current salary × (1 + inflation rate)n
– Accumulated LSL benefit
• Projected salary multiplied by
• Years worked / total years to be served before leave
can be taken multiplied by
• weeks of LSL entitlement / 52
– Present value of LSL obligation
• accumulated LSL benefit/(1 + appropriate bond rate)n
– Probability that LSL will be paid (experience
based)
– LSL liability = PV of LSL obligation x probability
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Appropriate bond rate
PV calculated by discounting the liability
using extrapolated yields on Fixed Rate
Commonwealth bonds with maturities
matching the term to settlement (rates
available on the Reserve Bank website
http://www.rba.gov.au/finservices/index.html under the Small
Investor Bond Facility – Quarterly Bond
Prices, CGS Valuation – Bond Prices, for
valuation purposes).
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Accounting entries for LSL
• Entry to recognise the LSL expense:
Dr
Long service leave expense
Cr
Provision for long service leave
NOTE:
 LSL liability = Balance required in provision
account;
 Expense = Difference between existing balance
& required balance
– provision broken up into current and non-current
portion
Entry when LSL is subsequently taken:
Dr
Provision for long service leave
Cr
Cash at bank
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See Handout
Lecture Example 4
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Example 4
Inflation rate is 2% and wages are expected to keep
pace with inflation. The interest rate on bonds on
with 2 & 6 yrs to maturity is 6%. 13 wks LSL for
15 yrs service, 10 yrs pro-rata.
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Calculating projected
salaries
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Calculating accumulated
LSL benefit
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Calculating LSL liability
Total
LSL expense 80 288
Provisions for LSL
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80 288
80 288
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Next Week
Week 9 - Accounting for Income Taxes
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