FRS 119:Employee Benefits

Nurhafizah Alias 0235670

Surina Ayob 0314688

Nurul Izza Othman 0318304

Zuharah Kahliep 0239308

Khairiah Mt. Razali 0313172

FRS 119

• Objectives: to prescribe the accounting and disclosure for

employee benefits

• Scope: This standards should be applied by an employer in accounting for employee benefits

Employee Benefits• recognised when it is earned, not when it is paid or

payable• include benefits provided to either employees or

their dependents• it may be settled either directly to the employees,

dependents or insurance companies• covers short term and long term benefits• formal plans or agreement between the enterprise

& employees or their representatives) by legislative requirement or through constructive obligations

Employee Benefits

• 4 categories:

1)Short term employee benefits, both monetary & non monetary

2)Post-employment benefits

3)Other long-term benefits

4)Termination benefits

Employer to employees

SHORT TERM EMPLOYEE BENEFITS

(STEB)

X discounting

involve

Payable within 12

monthExpense & liabilities

Example of STEB

Wages, salaries, EPF & SOCSO

Annual & sick leave

Bonuses & profit sharing payable

Non-monetary benefits

SHORT TERMCOMPENSATED

LEAVE(STCL)

Carried forward any unconsumed leave

Cash payment

Accumulating compensated absences

Expense in current period

Non-accumulating compensated

Example 1

• 5 employees unable to enjoy all their leave• Between them they carried forward 12 days• Assume that the employees get RM100 wages per day• Therefore, entity has to charge cost of 12 days leave as expense for

the current year

Dr staff cost (12 days x RM 100) 1000

Cr Prov. for employee paid leave 1000

PROFIT SHARINGBONUSES

Obligation to pay bonuses @ share profit

Required to recognise the expected cost of profit sharing & bonus payment

POST EMPLOYEMENT

BENEFITS

Defined contribution plan

Defined benefit plan

Contribution Plan

• Employer make contribution for the employee to a fund.

• Employee not guaranteed with specific amount.

• Employee will receive the contribution made to the and returns on the contribution

BENEFIT PLAN

•The employee is guaranteed a specific amount of benefit that will be receive by them•Receive in term of

-lump sum payment eg: gratuity

-periodic payment eg: pension•The actuarial risk and investment risk will be borne by the entity•Rely on the expertise to estimate the amount of contribution to the fund•The obligation measure in each B/S date are discounted because its only settled a much later date

Benefit Plan

Unfunded Funded

Internal Fund External Fund

The fund grows by the contribution made by the entity and the income (returns) earned by the assets in the plan.

When more than one defined benefit plan, the measurement procedure

are applied separately.

Step 1: Current and Past Services Costs• Use the actuarial technique• It is the best estimation because its determine the

ultimate amount of benefit accruing to the employees• Actuarial assumptions deal with the profile of the current

and former employees and their dependents• These assumptions includes

i. Demographic assumptions (e.g. rate of employee turnover, disability, early retirement, etc.)

ii. Financial assumption (e.g. future salary, discount rate, future medical costs, etc.)

There are a number of steps in accounting for a defined benefit plan

Step 2: Projected Unit Credit Method

• Used to discount the present value of the entity’s obligations and current service cost

• Current estimate of the present value of ultimate obligation is spread over the vesting period or over the period of service provided

• Each period of service gives rise to an additional unit of accruing to the employee

Example

Ahmad is entitled to a gratuity on leaving the service at the end of 5 years of 10% of his last drawn salary for each year of service. His current salary is RM40,000 per annum. Actuarial assumption is that salary will increase by 10% per annum and the appropriate discount rate is 10%.

Table showing the built up of the obligations as follows:

Years 1 2 3 4 5

RM RM RM RM RM

Benefits attributable

Prior period 0 5,856 11,712 17,568 23,424

Current period 5,856 5,856 5,856 5,856 5,858

Current and prior yrs 5,856 11,712 17,568 23,424 29,282

The current and prior period cost is discounted because due for payment at the

Years 1 2 3 4 5

RM RM RM RM RM

Benefits attributable

Prior period 0 4,000 8,800 14,520 21,296

Interest (10% of bal b/f) 0 400 880 1,452 2,130

Current period

(discounted amt) 4,000 4,400 4,840 5,324 5,856

Current and prior yrs 4,000 8,800 14,520 21,296 29,282

• At the year end, the PV of obligations is measured (or estimated):

RM– PV of obligations (at beginning of the year) xxx– Interest on opening amount xxx– Current service cost xxx– Benefits paid (xx)

___– PV of obligations (at end of the year) xxx– Actuarial gain or loss x

Step 3: Fair Value of Plan Assets

• Set aside assets to settle the obligations as they fall due• Actuary determine the amount to be set aside• Amount of assets contributed to the plan assets will take

into consideration the returns on the plan assets and changes in the fair value of the plan assets

• Assets will also grow by the annual contributions made by the enterprise to the fund

• At the year end, the FV of plan assets is measured (or estimated):

RM– FV of plan assets (at beginning of the year) xxx– Returns xxx– Contributions xxx– Benefits paid (xx)

___– FV of plan assets (at end of the year) xxx– Actuarial gain or loss x

Step 4: Actuarial Gains and Losses• Arise because actuarial assumption and actual outcome

are differ• Obligation > expected = actuarial loss

Fair value > expected = actuarial gain• FRS 119, a minimum recognition requirement in the IS.

In the current yr, the cumulative net actuarial gain/loss brought forward is tested for the 10% corridor limit

• The net cumulative actuarial gain/loss that exceeds the 10% of the higher of opening present value (defined obligation and fair value of the plan assets as at the beginning of the yr) is written over the expected average remaining working lives of the employees who participate in the plan

• Enterprise can adopt any systematic method but it must consistently applied

• Consequence of deferred recognition of the actuarial gain/losses

-the amount recognized in the B/S is a timing difference• Immediate recognition is more meaningful relevant

treatment. However, it may cause the reported earnings to be volatile (transparent but unattractive)

Example 3Enterprise XYZ was newly established and started a defined benefit scheme which was funded in year 1. in year 1 the current service cost was determined as RM4,000 and the interest/disc rate is 10%. The contribution made to the plan assets was also RM3,500 and the expected return was 15%.Journal entries in yr 1 RM RM

P & L 4,000 Obligations 4,000

Plan assets 3,500 Cash/Cash equivalent 3,500Income Statement in yr1

Employee benefit RM4,000

Balance Sheet Year 1

Present value of obligations 4000

Fair value of plan assets (3500)

Liability 500

In year 2, interest rate is 10% and expected rate of return is 15%. Current service cost was RM5000 and contribution made to the plan assets was RM4500. At 31.12.x2, the present value of the obligations was RM9900 and the fair value of the plan assets was RM10200.

RMPresent value of obligations 1.1.x2 4000Interest(10%) 400Current service cost 5000Actuarial loss(gain)-bal amt 500Present value of obligations at 31.12.x2 9900

Fair value of plan assets: RMFair value of plan assets 1.1.x2 3500Expected returns(15%) 525Contributions 4500Actuarial gain(loss)-bal amt 1675Fair value of plan assets 31.12.x2 10200

Amortisation of actuarial gain/loss

10% of higher of opening present value of obligations and fair value of plan assets. Fair value of the plan assets is more than the present value of obligations.

10% x RM10200 = RM1020

Actuarial gain b/f = RM1175

Excess RM1175 – RM1020 = RM155

Expected average working lives of employees = 5yrs

Amount amortised RM155/ 5 = RM31

*Record in the I/S and B/S as an example in pg 330

• PV of obligations

RM

1.1.x3 9,900

Interest (10%) 990

Current service cost 4,700

Actuarial loss (gain) – balancing amt. 310

PV of obligations (at end of the year) 15,900

FV of plan assets

1.1.x3 10,200

Expected returns (18%) 1,836

Contributions 4,100

Actuarial gain (loss) – balancing amt. 364

FV of plan assets 31.12.x3 16,500

Net cumulative actuarial gain/ loss:

Cumulative actuarial gain brought forwardNet actuarial gain for year x3Amount amortizedCumulative actuarial gain carried forward

Income statement x3

Current service costInterestReturns on plan assetsNet actuarial (gain)/ loss recognized in the yearExpense recognized in profit and loss account

Balance sheet as at 31.12.x3

PV of obligation 15,900FV of plan assets (16,500)

(600)Unrecognized actuarial gains/(losses) 1,198Liability recognized in balance sheet 598

Note

Opening net obligations (end of year 2) 875Charge in income statement 3,823Contribution (4,100)Liability 598

STEP 5:Past Service Costs (PSC)

• Arise when a defined Plan is introduced or

changes to the plan introduced.

• PSC which are vested are recognised

immediately.

• Those, which not vested will be spread over

the average period of employees services

lives on straight line basis.

Illustration:

• An enterprise introduces a defined benefit plan for all its employee who have served 5 years or more.10 employees have worked for more than 5 years and the rest have on the average worked for 3 years.

The benefits for 10 employees is recognised immediately and for others, the benefits are spread over the average vesting period of 2 years on a straight line basis….(FRS 119, pg 330-331)

STEP 6: Curtailment

• Occurs when enterprise is committed to make

material deductions in the number of employees

covered by the plan or;

• Employees who eligible for reduced benefits

• Closure of an operation or restructuring may

give rise to curtailment

Settlement

• Occurs when an enterprise terminates all legal and constructive obligations– When the employees are paid lump-sum cash

payments or;– Payments are made either to the employees

or on behalf of them to another post employment benefit plan.

• EX: an enterprise that has a defined benefit plan transfers plan assets to a contribution scheme for the employees.

Gains/Losses (Recognition)

• Gains/losses on curtailment or settlement of a plan

are recognised when the curtailment occurs. The

gain or losses comprise:

– Change in the PV of the defined benefit obligation

– Change in FV of plan asset

– Unrecognised PSC and unrecognised related

actuarial gains and losses.

Illustration:

• An enterprise discontinues a business segment.

The employees in this segment will not earn any

further benefits. This is a curtailment.

• The PV of the obligation was RM10,000 and The

FV of the plant assets was

RM9000.Unrecognised actuarial gains were

RM500.Suppose, the curtailment reduces the

obligation by 20%.

Cont’d

• The amendment will be:

– Obligation will be RM10,000 X 80%=RM8,000

– Unrecognised actuarial gain:

RM500X80%= RM400

Cont’d

Before curtailment

RM

Curtailment

Gain

RM

After curtailment

RM

NPV of obligation 10,000 2,000 8,000FV of Plan assets (9,000) - (9,000)

1,000 2,000 (1,000)

Unrecognised gains

500 100 400

1,500 2,100 (600)

Expenses Recognised for the Period

FRS 119 requires the net total of following to be disclosed as expenses: Current service cost Interest cost (apply the discount rate on the present value of the obligation at the beginning of the period) Expectation return on plan assets Actuarial gains and losses (amount ‘amortised’ for the period Past service cost Gain/loss on curtailment and settlement

Example:The following data relate to a defined benefit plan of Yee Bhd.

Year x2 Year x3Present value of obligations 6,000 7,200Fair value of plan assets 6,000 7,000The actuary has furnished the following information:

Year x3Expected return on plan assets 8%Discount rate to be used to determine obligation 12%Current service cost 600Past service cost 360Contribution to the plan assets 780Benefits paid 570 Cumulative actuarial loss b/f (1.1.x3) 660Average service lives of employees 10 years

Past service cost applies to an improvement in the plan and is fully vested in 3 years

Step 1:Calculate the actuarial loss that is amortised in year x3. Fair value of net assets and the present value of obligations at 1.1.x3 are the same. 10% of fair value of net assets or obligations is RM600 and cumulative actuarial

losses are RM660.Year x3

Fair value of plan assets 600 Cumulative actuarial loss 660 Excess 60

Amount written off in year x3 will be 60/10 years=6

Step 2:Past service cost amortised RM360/3 years=RM120. The unrecognisedamount is RM240.

Step 3:Calculate the net actuarial gain/loss for the year.Present value of obligations:

RMPresent value of obligations 1.1.x3 6,000Interest (12%) 720Current service cost 600Past service cost 360Benefits paid (570)Actuarial loss (gain)-balancing amount 90Present value of obligations at 31.12.x3 7,200

Fair value of plan assets: RM

Fair value of plan assets 1.1.x3 6,000Expected returns (8%) 480Contributions 780Benefits paid (570)Actuarial gain (loss)-balancing amount 310Fair value of plan assets 31.12.x2 7,000

The net actuarial loss for year x3 is RM220. The amount of net cumulative

Actuarial gain/loss is:

RM

Cumulative actuarial loss b/f 660

Net actuarial gain for year x3 (RM310-RM90) (220)

Amount written off in x3 (6)

Cumulative actuarial loss c/d 434

Income statement x3

RM

Current service cost 600

Interest 720

Past service cost 120

Return on plan assets (480)

Net actuarial loss recognised in the year 6

Expense recognised in profit and loss a/c 966

Obligation or Asset to be Disclosed in the BSFRS 119 requires the net total of the following to be disclosed as defined

benefit liability:

a) Present value of the defined benefit obligations at BS date

b) Minus fair value of plan assets as at the BS date

c) Plus any unrecognised actuarial gains or minus actuarial losses not recognised

d) Minus any past service cost not yet recognised

Example (cont…)

BS as at 31.12.x3

RM

Present value of obligations 7,200

Fair value of plan assets (7,000)

200

Unrecognised actuarial gains/(losses) (434)

Unrecognised past service cost (240)

Asset recognised in BS 474

Note:

Actual return on plan assets was RM810Reconciliation:

RMOpening balance of net obligation(1.1.x3) (660)Expenses – P/L A/C 966Contribution (780)

474 RM

Present value of obligation(31.12.x2) 6,000Fair value of assets (6,000)

nilActuarial loss (660)

(660)*The present value of the obligation and the fair value of the plan assets are toBe regularly determined and the services of a qualified actuary are encouraged*if negative figure(giving rise to an asset), then disclosed to amount lower of:i) Amount calculated in (a-d) ii) The net total of:

a) any unrecognised actuarial losses and past service costb) present value of any refunds or reductions in future contributions

Example:XEE enterprise has the following information about its defined benefit plan:

RMPresent value of obligations 12,000Fair value of plan assets 13,100Unrecognised actuarial losses 560Unrecognised past service costs 110Present value of future refunds 34

The BS figure will be:RM

Present value of obligations 12,000Fair value of plan assets (13,100)

(1,100)Unrecognised actuarial losses (560)Unrecognised past service costs (110)

1,770

Limited to:

RM

Unrecognised actuarial losses 560

Unrecognised past service costs 110

Present value of future refunds 34

704

RM704 is disclosed as an asset. Also to disclosed that the limit has reduced the

carrying amount of the asset by RM1,770 – RM704 = RM1,066

DisclosureThe following are disclosed for defined benefit plan:

a) Accounting policy for the recognition of actuarial gain / losses

b) General description of the plan

c) A detailed reconciliation of the assets and liabilities recognised in the BS

d) Amounts included in fair value of plan asset for financial instruments of the enterprise and any property occupied or other assets used by the reporting enterprise

e) The movement in the net liability or asset during the period

f) Amount charged in the IS, giving details

g) The actuarial return on plan assets

h) The main actuarial assumptions used

Other long term employee benefits

• Long term compensated absences:– Sabbatical leaves– Long term disability benefits

• Method of accounting– Actuarial gains and losses are recognised

immediately– All past service cost is recognised

immediately

Recognition and Measurement

• B/S:The amount recognised as liability: PV of defined benefit obligation less: FV of the plan assets

• I/S: exp charged in the I/S will comprise:a) Current service costsb) Interest costsc) Actuarial gains and losses d) Past service costse) Gains/losses on curtailment or settlement

Termination Benefits

• Recognised as an expense and liability when the enterprise is demonstrably committed to:-– Termination before the normal retirement– Voluntarily leave

Other Plans1) Multi-employer Plans

Manage by separate entity. It has to classify whether it is a contribution plan or defined benefit plan

If it is accounted as a defined benefit plan – enterprise has to account for proportionate share of the defined benefit obligation, plan assets & costs associated in the same way as a stand alone plan .

If there is insufficient information to account as defined benefits plan, then it has to treat as a contribution plan.

Other Plans

2) State plans established by legislation operated by national or state government not subject to control or influence by

reporting enterprise Can be either

i. contribution

ii. benefit plans – treated as multi employer plans

Other Plans3) Insured benefits

Generally contribution plans - Insurance policy

If the insurer does not pay all the benefits due to the employee for current and future period and the enterprise has a legal or constructive obligation to pay the benefits or further amount directly to the employees, then it should account as defined benefit plan.