Accounting for Employee Benefits
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What is the key distinction between vesting and non-vesting sick leave entitlements?

  • Vesting sick leave can be taken before the employment period ends.
  • Non-vesting sick leave entitlements are cashed out upon resignation.
  • The probability of vesting sick leave being taken is 100%. (correct)
  • Non-vesting sick leave carries no liability for the employer.

According to AASB 119, how is the liability for sick leave entitlements measured?

  • At the anticipated pay rates at the time the leave is accrued. (correct)
  • On a discounted basis reflecting the time value of money.
  • Based on an estimated percentage of unused sick leave.
  • At the future expected market rates of compensation.

What happens to long-service leave benefits if employment ceases during the early periods?

  • Employees receive a partial cash payment.
  • Employees can transfer their benefits to a new employer.
  • Employees lose all accumulated entitlements. (correct)
  • Employees are entitled to full long-service leave benefits.

How does the accumulation of long-service leave typically function after the early employment period?

<p>It accumulates from the beginning of employment but cannot be taken during a specific pre-conditional period. (B)</p> Signup and view all the answers

What is the primary purpose of long-service leave?

<p>To reward employees for extended periods of service without interruption. (D)</p> Signup and view all the answers

In cases of vesting sick leave, how is the entitlement calculated?

<p>At 100% of the sick leave accumulated. (A)</p> Signup and view all the answers

What is one key reason remuneration packages have become widespread in Australia?

<p>They are considered tax effective. (C)</p> Signup and view all the answers

Which component of a remuneration package is designed to reduce tax revenue losses from non-taxed benefits?

<p>Fringe benefits tax (FBT). (C)</p> Signup and view all the answers

What does AASB 119 require with respect to accumulating sick leave?

<p>Liabilities are recognized as employees provide service increasing future entitlement. (D)</p> Signup and view all the answers

In the context of long-service leave, what does 'portable' refer to?

<p>Accumulated leave can be taken to a new employer under certain conditions. (C)</p> Signup and view all the answers

What happens to the after-tax benefit when a part of the remuneration package becomes non-taxable?

<p>It increases for the employee. (D)</p> Signup and view all the answers

Which of the following benefits is conditional upon the employee meeting specific criteria?

<p>Sick leave. (C)</p> Signup and view all the answers

What occurs when the second period of employment has expired regarding long-service leave?

<p>The employee continues to accumulate leave and can take it. (D)</p> Signup and view all the answers

What is the primary benefit of converting a cash salary to a non-taxable component in a remuneration package?

<p>It raises the employee's after-tax benefit. (C)</p> Signup and view all the answers

How does long-service leave function within the context of employee benefits?

<p>It is conditional and deferred until a future period. (D)</p> Signup and view all the answers

What defines the pre-conditional period of employment?

<p>It is a time with no entitlements to long-service leave. (C)</p> Signup and view all the answers

Why might an employer be less inclined to utilize remuneration packages effectively?

<p>They are required to pay fringe benefits tax. (C)</p> Signup and view all the answers

How does the conditional period affect long-service leave entitlements?

<p>Entitlements begin accruing only after the pre-conditional period. (D)</p> Signup and view all the answers

What happens to long-service leave liabilities when discounting amounts to present value?

<p>The liability may be materially changed. (C)</p> Signup and view all the answers

What does superannuation represent in terms of employee benefits?

<p>A deferred benefit until retirement. (D)</p> Signup and view all the answers

During which period are employees entitled to a cash payment if they resign or retire?

<p>During both the pre-conditional and conditional periods. (C)</p> Signup and view all the answers

What must be considered regarding the effect on long-service leave liability according to AASB 119?

<p>The combined effect is very likely to be material. (B)</p> Signup and view all the answers

What is the employee benefit when purchasing goods produced by the employer?

<p>The cost of the goods sold. (B)</p> Signup and view all the answers

What characterizes the unconditional period of long-service leave?

<p>Entitlements to take accumulated leave start. (D)</p> Signup and view all the answers

What is the total interest cost to Spring Ltd when it borrows $100,000 at an interest rate of 8%?

<p>$8,000 (A)</p> Signup and view all the answers

How does the interest charged to the employee compare to the interest cost to Spring Ltd?

<p>The employee is charged less interest, leading to an employee benefit expense. (D)</p> Signup and view all the answers

What is the calculation for the annual leave expense per week given a cost increase?

<p>$60,000 × 4/52 × 1.175 (D)</p> Signup and view all the answers

What is the total annual leave payable for Jones after considering the increase in salary?

<p>$1564.35 (D)</p> Signup and view all the answers

What does the difference between the loan interest received from the employee and the loan cost represent?

<p>The employee benefit expense (D)</p> Signup and view all the answers

What is the modern view regarding the recognition of liabilities as outlined by AASB 119?

<p>A present obligation from a past transaction should be recognized even if not currently payable. (D)</p> Signup and view all the answers

Under AASB 119, how should liabilities related to long-service leave earned in a reporting period be treated?

<p>They should be recognized as a liability if they meet measurement and probability criteria. (D)</p> Signup and view all the answers

Which measurement basis is mandated by AASB 119 for short-term employee benefits?

<p>Nominal basis or undiscounted basis for expected settlement within twelve months. (C)</p> Signup and view all the answers

What must be used to discount future cash flows according to paragraph 83 of AASB 119?

<p>Market yields as at the reporting date on high quantity corporate bonds. (D)</p> Signup and view all the answers

How are employee benefits that are expected to be settled after twelve months treated according to AASB 119?

<p>They are measured at a discounted amount. (A)</p> Signup and view all the answers

Which of the following statements about deferred benefits is accurate?

<p>They may lead to complications when recognizing salary expenses in the current period. (B)</p> Signup and view all the answers

What does ‘accrued’ imply in the context of liabilities with respect to the Framework (2014)?

<p>It indicates a liability is recognized regardless of payment status. (A)</p> Signup and view all the answers

In the context of salary expenses, why might a liability not be recognized at the reporting date?

<p>If the benefits are contingent on future services yet to be rendered. (D)</p> Signup and view all the answers

What is the total annual leave expense recorded after the salary increase based on the calculations provided?

<p>$208.65 (B)</p> Signup and view all the answers

What is the appropriate discount rate to be used for employees with 4 years of service?

<p>6.5% (A)</p> Signup and view all the answers

How much is the vesting sick leave entitlement for Regg Ltd?

<p>$14,000 (B)</p> Signup and view all the answers

How is the provision for long-service leave recorded on June 30, 2020?

<p>Dr $24,966 (C)</p> Signup and view all the answers

What is the calculation used to determine the annual leave payable after the adjustments?

<p>$208.65 - $104.29 (B)</p> Signup and view all the answers

What is the leave entitlement for employees after 15 years of continuous service according to company policy?

<p>13 weeks (A)</p> Signup and view all the answers

What is the result of subtracting the total long-service leave liability from the previous liability recorded?

<p>$24,966 (C)</p> Signup and view all the answers

In calculating the long-service leave liability at 8 years of service, which factor is applied?

<p>0.53333 times the wage (C)</p> Signup and view all the answers

Flashcards

Remuneration Package

A combination of benefits (like cash, car, or loans) given to an employee.

Tax-Effective Remuneration

A way of structuring employee compensation to reduce tax burden for both the employee and employer.

Fringe Benefits Tax (FBT)

A tax placed on the employer (not the employee) for non-taxed parts of an employee's compensation.

Conditional Benefit

A benefit not instantly given, it depends on certain conditions being met by the employee.

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Deferred Benefit

A benefit received at a later date rather than immediately.

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Sick Leave

A benefit for employees who are sick, paid while they take time off.

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Superannuation

A retirement savings plan where both employer and employee contribute.

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Long-service leave

Paid time off for employees who have worked for a company for a long period of time.

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Employee Benefit Expense

The cost to an employer of providing benefits to employees. This includes the difference between the interest rate the employer pays on a loan and the lower interest rate charged to the employee.

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Net Marginal Cost

The actual cost to the employer of providing a benefit after considering any revenue generated from the benefit.

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Annual Leave Payable

The amount of money owed to employees for accrued annual leave that hasn't been taken yet.

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Annual Leave Expense

The cost to the employer for employees taking annual leave, calculated based on current wage rates.

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Change in Wage Rates

An adjustment in the salary paid to employees, which impacts the expense and liability associated with annual leave.

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Conditional Employee Benefits

Employee benefits whose payment depends on uncertain future events.

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Measuring Salary Expense

Determining the portion of salary expense that should be recognized in the current reporting period.

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Liability Recognition (Modern View)

A liability should be recognized if a present obligation from a past transaction exists, even if not paid immediately.

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Short-Term Employee Benefits

Employee benefits expected to be settled within twelve months of the reporting period.

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Nominal Basis (Short-Term Benefits)

Using the stated value of benefits to record short-term employee benefits.

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Long-Term Employee Benefits

Employee benefits expected to be settled after twelve months of the reporting period.

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Discounted Measurement

Valuing long-term employee benefits by considering the time value of money.

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Discounting Method (Long-Term Benefits)

Using market yields on corporate bonds to calculate the present value of future employee benefit obligations.

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Pre-conditional period

The initial period of employment where an employee is not entitled to long-service leave.

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Conditional period

The period following the pre-conditional period where long-service leave entitlements accrue but cannot be taken.

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Unconditional period

The period after the conditional period where employees can finally take their accumulated long-service leave.

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Long-service leave liability

The financial obligation an employer has to pay for future long-service leave entitlements.

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Discounting to present value

Calculating the current value of future long-service leave payments, considering factors like inflation and interest rates.

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How does discounting affect long-service leave liability?

Discounting reduces the future value of long-service leave payments, potentially decreasing the liability for the employer.

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Employee benefit

The value of goods or services provided to an employee as part of their compensation.

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Cost of goods sold

The direct costs associated with producing and selling items to customers.

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Vesting Sick Leave

Sick leave that is guaranteed to the employee, regardless of whether they use it or not.

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Non-vesting Sick Leave

Sick leave that is only given to employees if they actually use it. The company estimates the probability of using it based on historical data.

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Probability of Sick Leave Usage

The likelihood that an employee will actually use their sick leave entitlement.

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AASB 119 and Sick Leave

This accounting standard requires companies to recognize a liability for sick leave entitlements.

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Liability for Sick Leave

The amount of money a company expects to pay out for employee sick leave.

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Portable Long-service Leave

Long-service leave that can be transferred to a new employer.

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Conditions for Long-service Leave

Specific requirements that must be met by an employee to qualify for long-service leave.

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Discount rate

The rate used to calculate the present value of future long-service leave liabilities.

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Corporate bond rate

The interest rate on bonds issued by corporations, used as a discount rate for long-service leave.

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Provision for long-service leave

An amount set aside by a company to cover future long-service leave payments.

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Vesting sick leave entitlement

The amount of sick leave employees are guaranteed to receive, even if they leave the company before using it.

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Outstanding liability

A debt or obligation that a company owes to others, like employees, and must pay in the future.

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Study Notes

Accounting for Employee Benefits

  • Remuneration Package: A set of benefits offered to an employee; these may include cash, vehicles, loans, school/club fees, expense accounts, entertainment allowances, and employee share options.

  • Why Remuneration Packages are Common in Australia: Because after-tax costs to the employer are often lower when part of the compensation is tax-free than when compensation is taxed fully.

  • Fringe Benefits Tax (FBT): Designed to reduce tax revenue losses from remuneration packages; the employer is taxed instead. FBT reduces employer incentives for remuneration packages.

  • Deferred or Conditional Components: Some components of remuneration packages are deferred or conditional upon events beyond the employer's control.

  • Sick Leave: A conditional benefit, paid only when the employee is sick.

  • Superannuation: A deferred benefit, paid when the employee retires. It is usually conditional on the employee meeting eligibility requirements of the plan.

  • Long-Service Leave: Also both conditional and deferred until the employee meets the eligibility criteria outlined in the scheme. The employee is not paid until a future period; the presence of these conditions/deferrals creates problems when measuring salary expense in the current accounting period.

  • Wages and Salaries Liability: The only liability that can arise from wages and salaries is the amount accrued at the end of the reporting period.

  • AASB 119 Requirements for Employee Benefits (Short-term): Short-term employee benefits that are expected to be settled within 12 months of the end of an accounting period are typically measured at their nominal amount.

  • AASB 119 Requirements for Employee Benefits (Long-term): Benefits that are settled after an accounting period are discounted to their present value, using market yields at the reporting date on high-quality corporate bonds.

    • Pre-tax bond rate is used.
    • Bonds must be from the nation whose currency will be used to settle the obligation.
    • Term of bonds is usually the weighted average of the term to expected settlement.

  • Short-term Employee Benefits: Employee benefits that are expected to be settled wholly within twelve months after the reporting period in which employees render the related service.

  • Modified Definition of Short-term Employee Benefits: AASB 119 was reissued to specify those benefits are expected to be settled wholly within 12 months of the reporting period.

  • Non-accumulating vs. Accumulating Sick Leave: Non-accumulating sick leave lapses if not used in a given year—a new entitlement begins the following year. Accumulating sick leave allows employees to carry forward unused sick leave.

  • Vesting vs. Non-Vesting Sick Leave: Vesting sick leave entitlements are paid out if the employee resigns or retires (entitlement is certain). Non-vesting sick leave (on retirement or resignation) is not paid out.

  • Accounting Treatment Differences: These different treatments affect the calculation of expenses and liabilities. Vesting leave has a certain outcome, whereas the outcome for non-vesting leave is less certain; it requires an estimate of the probability of the leave being taken.

  • Long-Service Leave (Definition): A reward for uninterrupted service with the same employer. Annual leave is in addition to annual leave. It may be portable.

  • Long-Service Leave - Periods:

  • Pre-conditional Period: Early years of employment with no entitlement to long-service leave.

  • Conditional Period: Long-service leave accrues from the start but cannot be taken until the conditional period expires.

  • Unconditional Period: Employees can take accumulated long-service leave or receive cash equivalent on resignation/retirement.

  • Impact of AASB 119 on Long-Service Leave Liability: It is likely that complying with expected wage increases and discounting accumulated long-service leave will have a limited impact on the amount of the long-service leave liability.

  • Spring Ltd: Managers can buy company products at cost and have access to low-interest loans, for which general journal entries are described.

  • Jones' Annual Leave: General journal entries are specified when annual leave expense and annual leave payable increases due to an increase in pay.

  • Addison Ltd: Employees are entitled to 13 weeks' long-service leave after 15 years of continuous service; the liability is calculated using corporate bond rates.

  • Regg Ltd: 100 employees are entitled to 10 working days’ paid sick leave per annum. For 40 employees, the sick-leave entitlements are vesting; for 60, the sick-leave is non-vesting. Calculation for the provision for sick leave, based on past experience, is demonstrated.

  • Alexander Ltd: A defined contribution superannuation plan for its employees; journal entries are prepared to record contributions and reductions in benefits.

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Accounting for Employee Benefits Q&A Workshop 4 PDF

Description

This quiz covers the key concepts related to employee benefits, including remuneration packages, Fringe Benefits Tax (FBT), and various conditional and deferred benefits. Understand how these components affect both employers and employees, particularly in the context of Australian taxation. Test your knowledge on sick leave and superannuation as parts of employee compensation.

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