Financial Reporting 2nd Edition Loftus Solutions Manual

Financial Reporting 2nd Edition Loftus
Solutions Manual
Visit to Download in Full: https://testbankdeal.com/download/financial-reporting-2nd-e
dition-loftus-solutions-manual/
Solutions manual
to accompany
Financial reporting
2nd edition
by
Loftus, Leo, Daniliuc, Boys, Luke, Ang and

Byrnes
Prepared by
Belinda Luke
© John Wiley & Sons Australia, Ltd 2018

Chapter 9: Employee benefits

Comprehension questions
1. What is a paid absence? Provide an example.
Refer to section 9.2. Paid absence refers to an employee entitlement to be paid during certain
absences. Examples include sick leave and annual leave.
2. What is the difference between accumulating and non-accumulating sick leave? How
does the recognition of accumulating sick leave differ from the recognition of non-
accumulating sick leave?
Refer to section 9.2.4. Accumulating sick leave may be carried forward to a future period if the
employee has not taken the leave in the current period. Non-accumulating sick leave may not be
carried forward to a future period. A liability must be recognised for accumulating sick leave
when the employee renders services that increase the entitlement. The liability is measured as
the amount that the entity expects to pay. If the leave is non-vesting, the amount recognised is
affected by the probability that the leave will be taken.
3. What is the difference between vesting and non-vesting sick leave? How does the
recognition of vesting sick leave differ from the recognition of non-vesting sick leave?
Refer to section 9.2.4. If sick leave is vesting, the employee is entitled to cash settlement for
unused leave. If sick leave is non-vesting, the employee has no entitlement to cash settlement of
unused leave. The employer recognises a liability for accumulating sick leave, measured as the
undiscounted amount expected to be paid. The entity will have good reason to expect that all
vested accumulating sick leave will be paid. However, if sick leave is not vesting, a liability is
recognised for proportion of accumulated sick leave that the entity expects to be taken by its
employees.
© John Wiley and Sons Australia Ltd, 2018 9.2

Solutions manual to accompany Financial reporting 2e by Loftus et al.
4. Explain how a defined contribution superannuation plan differs from a defined benefit
superannuation plan.
Refer to sections 9.4 and 9.5. Under a defined contribution superannuation plan the employer
pays fixed contributions into a fund. Employees’ benefits are a function of the level of
contributions paid and the return achieved by the fund on the investment of plan assets. The
employer has no obligation to make further payments if the fund is unable to pay all the benefits
accruing to members for past service.
In a defined-benefit superannuation plan, the benefits received by members on retirement are

determined by a formula reflecting their years of service and level of remuneration, rather than
the performance of the fund. The employer has an obligation to pay further contributions if the
fund is unable to pay members’ benefits.
5. During October 2008 there was a sudden global decline in the price of equity securities
and credit securities. Many superannuation funds made negative returns on
investments during this period. How would this event affect the wealth of employees
and employers? Consider both defined benefit and defined contribution
superannuation funds in your answer to this question.
Refer to sections 9.4 and 9.5. In a defined contribution fund the employees bear the risk of low
or negative returns on the investment of plan assets because the benefits paid on retirement are a
function of the level of contributions and the return achieved on plan assets. Thus, the employer
is not directly affected by the poor performance of the defined contribution fund because it has
no obligation for additional contributions if the fund is unable to pay benefits to members on
retirement.
Members of defined benefit plans would not be affected by the negative returns achieved by the
fund. Their benefits are defined in terms of their years of service and level of remuneration,
rather than by the performance of the fund. The employer has an obligation for the excess of the
defined benefit over the plan assets. Thus a decline in the value of investments held by the fund
may increase the employer’s obligation to the fund.
6. Explain how an entity should account for its contribution to a defined contribution
superannuation plan in accordance with AASB 119/IAS 19.
Refer to section 9.4. Contributions payable to defined contribution funds are recognised as
expenses in the period that the employee renders services, unless another standard permits the
cost of employment benefits to be allocated to the carrying amount of an asset, such as inventory.
If the amount paid to the defined contribution fund by the entity during the year is less than the
amount payable in relation to services rendered by employees, a liability for unpaid contributions
must be recognised. The liability is measured at the undiscounted amount payable unless it is
due more than 12 months after the end of the period, in which case it is discounted.

7. Compare the off-balance sheet approach to accounting for a defined benefit post-
employment plan with the net capitalisation approach adopted by AASB 119/IAS 19.
Can these approaches be explained by different underlying views as to whether a deficit
or surplus in the fund meets the definition of a liability or asset of the sponsoring
employer?
The off-balance sheet approach ignores any surplus or deficit in the defined benefit post-
employment plan. Under this approach, the accounting is similar to accounting for a defined
contribution fund, for which contributions are recognised as expenses in the period in which the
employee renders services. This approach can be justified conceptually if adopting the view that
a surplus in the fund is not an asset of the employer, who cannot direct a surplus to be used as a
resource to pursue its own objectives; and a deficit is not a liability of the employer in the
absence of a legal obligation to pay for any shortfall in the fund. However, this argument is
premised on a narrow view assets and liabilities. Adopting a broader view, the expected cost
savings, in the form of lower contributions, constitute future economic benefits that are expected
to be derived from the surplus. Similarly, the deficit gives rise to a constructive obligation
because the employer may find it difficult to attract and retain staff, or face opposition from
unions, if it did not make additional contributions to enable the fund to pay benefits to members.
This broader view is reflected in the net capitalisation approach because the surplus (deficit) of
the plan assets is recognised as an asset (liability) by the employer.
8. In relation to defined benefit post-employment plans, paragraph 56 of AASB 119/IAS

19 states, “… the entity is, in substance, underwriting the actuarial and investment
risks associated with the plan”. Evaluate whether the requirements for the recognition
and measurement of the net defined benefit liability reflect the underlying assumptions
about the entity’s risks.
The Standard reflects the view that a deficit in the post-employment fund represents a
constructive obligation because the entity (the employer) effectively underwrites the actuarial
and investment risks associated with the plan. Similarly, a surplus represents an asset in the form
of future savings in contributions. The recognition of a liability to the extent that the present
value of the accrued benefits exceed the fair value of plan assets is consistent with this view; it
provides a present value measure of the risk to the entity of having to pay additional
contributions in future to enable the fund to pay accrued benefits to members for services that
have already been rendered.
While the question focuses on the requirements for a defined benefit liability, some further
comments are offered in relation to the accounting requirements for a net defined benefit asset.
Conversely, a surplus in the fund represents potential savings in the form of reduced
contributions resulting from past actuarial and investment gains. However, assets are resources
controlled by the entity form which future economic benefits are expected to flow to the entity.
Accordingly, AASB 119/IAS 19 limits the carrying amount of the net superannuation asset to the
greater of the surplus and ‘the present value of any economic benefits available in the form of
refunds from the plan or reductions in future contributions of the plan’.

9. Identify and discuss the assumptions involved in the measurement of a provision for
long service leave. Assess the consistency of these requirements with the fundamental
qualitative characteristics of financial information prescribed by the conceptual
framework.
Refer to section 9.6. Accounting for long service leave requires estimation of when the leave
will be taken, projected salary levels and the proportion of employees who will continue in the
entity’s employment long enough to become entitled to long service leave. It is necessary to
make assumptions about when employees will take long service leave, which may be any time
after they become entitled. The estimation of the timing of when leave will be taken affects
estimates of projected salaries and wages and the discounting of the defined benefit. The
estimation of projected salary levels may be affected by assumptions about the rate of inflation
as well as promotion. The likelihood of promotion may differ among different categories of
employees, such as engineers, graduate trainees and unskilled workers. The proportion of
employees who will become entitled to long service leave may vary from one location to
another, and is usually considered to be increasing with the period of past employment.
Employees who are approaching entitlement are assumed to be less likely to leave before their
long service leave vests, because the loss of long service leave entitlement would be viewed as a
cost of changing employment.
The fundamental qualitative characteristics of financial information prescribed by the Conceptual

Framework are relevance and faithful representation. The liability for long service leave is
required to be measured as the present value of the amount expected to be paid to settle the
obligation. The focus on future cash flows required to settle the obligation reflects the
fundamental characteristic of relevance because users of financial statements need information
with which to assess the entity’s prospects for future not cash inflows (Conceptual Framework,
para. OB4). However, the estimation of future cash flows introduces measurement uncertainty
that can detract from faithful representation. The use of historical patterns of employee retention
and actuarial estimates can enhance the faithful representation of liabilities for long service
leave.
10. Explain the projected unit credit method of measuring and recognising an obligation for
long-term employee benefits? Illustrate your answer with an example.
Refer section 9.6. Under the projected unit credit method the obligation for long-term employee
benefits is measured by calculating the present value of the expected future payments that will
result from employee services provided to date. For example, if employees will be entitled to 13
weeks of long service leave after 10 years of employment, 30% of the amount expected to be
paid in the future is recognised for employees who have provided three years of service.

Case studies
Case study 9.1
Termination benefits
The board of directors of Swinburne Ltd met in June 2019 and decided to close down a
branch of the company’s operations when the lease expired in the following February. The
chief financial officer advised that termination benefits of $2 million are likely to be paid.
Required
Advise the company’s accountant whether the company should recognise a liability for
termination benefits in its financial statements for the year ended June 2019. Explain your
advice with reference to the requirements of AASB 119/IAS 19.
Given the timeframe for the expected payments is within 12 months after the end of the reporting
period, the amount should be recorded as a current liability (para. 8, AASB 119/IAS 9).
Case study 9.2
Vesting entitlements
Deakin Ltd is a newly formed company and is formulating its policies in terms of employee
benefits. The company would like to offer employees payment for any accumulated unused
sick leave if they resign from the company.
Required
Explain to the CEO the effect on the financial statements if sick leave entitlements are
vesting versus non-vesting.
Where payment is made for any accumulated unused sick leave, such leave is referred to as
vesting. In this case, records of accumulated unused leave must be kept and the associated
liability recorded in the company’s financial statements.
If there is no entitlement to payment for unused sick leave on resignation/termination, such leave
is referred to as non-vesting and only amounts due and payable within the next 12 months would
be recorded as a current liability in the company’s financial statements.

Case study 9.3
Long service leave
The accountant of Bond Ltd believes that long service leave should not be considered as a
liability in the accounts until employees have commenced their tenth year of service, given
this leave entitlement only applies to Bond Ltd employees after 10 years of continuous
service.
Required
Advise the accountant on whether this approach is acceptable, and what requirements exist
under AASB 119/IAS 19.
Under AASB119/IAS 9, long service leave accrues to employees as they provide services to the
entity, even though there may be no legal entitlement to the leave until after 10 years. Hence, net
present value calculations of the expected future obligation are required. This is normally done
using the projected unit credit method, which involves estimating when the leave will be taken,
projected salary levels at that time, and the proportion of employees who will remain in
employment to qualify for the leave.
Case study 9.4
Bonuses
Griffith Ltd pays bonuses to its staff 3 months after year-end, provided profit targets are
met and staff remain employed with the company at the time the bonuses are paid. At 30
June 2019 the company determines it has exceeded its profit target for the year, but prefers
not to record a liability for bonuses payable until it confirms how many staff continue to be
employed with the company in September, given there has been significant variation in
turnover rates in recent years.
Required
Advise whether the proposed approach is acceptable.
The proposed approach is not acceptable under AASB 119/IAS 19 if the company has a present
legal or constructive obligation to make such payments as a result of past events (meeting their
profit target), and a reliable estimate of the obligation can be made.
While Griffith has experienced significant variation in staff turnover rates in recent years, it
should be possible to make a reasonable estimate of the liability for bonus payments.

Application and analysis exercises
Exercise 9.1
Accounting for the payroll
Adelaide Ltd pays its employees on a monthly basis. The payroll is processed on the 6th
day of the month and payable on the 7th day of the month. Gross salaries for July were
$500 000, from which $125 000 was deducted in tax. All of Adelaide Ltd’s salaries are
accounted for as expenses. Deductions for health insurance were $10 000. Payments for
health insurance and employee income taxes withheld are due on the 15th day of the
following month.
Required
1. Prepare all journal entries to record the July payroll, the payment of July salaries and
the remittance of deductions.
2. Calculate the balance of the Accrued Payroll account at the end of July.
(LO2)
1.
6 July Wages and Salaries Expense Dr 500 000

Accrued Payroll Cr 500 000
(Payroll for July)
7 July Accrued Payroll Dr 365 000

Bank Cr 365 000
(Payment of net salaries for July)
15 August Accrued Payroll Dr 10 000

Bank Cr 10 000
(Payment of health insurance
payroll deductions)

Bank Cr 125 000
(Payment of payroll deductions for
withheld income tax)
2. $135 000 credit ($500 000 - $365 000), as all June payroll deductions would have been
remitted during July.

Exercise 9.2
Accrual of wages and salaries
Canberra Ltd has a weekly payroll of $125 000. The last payroll processed before the end
of the annual reporting period was for the week ended Friday 24 June. Employees do not
work during weekends.
Required
Prepare a journal entry to accrue the weekly payroll as at 30 June. (LO2)
Wages and salaries must be accrued for four business days after Friday 24 June. that is, Monday
27 June – Thursday 30 June.
4/5 x $125 000 = $100 000
30 June Wages and Salaries Expense Dr 100 000

Accrued Wages and Salaries Cr 100 000
(Accrual of payroll for business
days 27-30 June)

Exercise 9.3
Accounting for the payroll
Albury Ltd pays management on a monthly basis and staff on a fortnightly basis. Payroll is
processed and paid on the 1st of each month for management, and the 1st and 15th of each
month for staff. Gross management salaries per month are $400 000 (less $190 000 tax).
Gross staff wages per month are $600 000 (less $300 000 tax), and paid in equal instalments
on the 1st and 15th of each month. Tax is remitted on the 15th of the following month.
Required
Prepare journal entries for January payroll. (LO2)
1 Jan Wages expense Dr 300 000

Salaries expense Dr 400 000
Accrued payroll Cr 340 000
Bank Cr 360 000
(Payroll for first half of Jan, net
salary and wages $210 + $150)
15 Jan Wages expense Dr 300 000

Accrued payroll Cr 150 000
Bank Cr 150 000
(Payroll for 2nd half of Jan)
15 Feb Accrued Payroll Dr 490 000

Bank Cr 490 000
(Payment of payroll deductions for
income tax withheld)

Exercise 9.4
Accounting for sick leave
Melbourne Ltd has 100 employees who each earn a gross wage of $150 per day. In an
attempt to reduce absenteeism, Melbourne Ltd introduced a new workplace agreement
providing all employees with entitlement to 5 days of non-vesting, accumulating sick leave
per annum, effective from 1 July 2018. Under the previous workplace agreement, all sick
leave was non-cumulative. During the year ended 30 June 2019, 300 days of paid sick leave
were taken by employees. It is estimated that 60% of unused sick leave will be taken during
the year ended 30 June 2020 and that 40% will not be taken at all.
Required
Prepare a journal entry to recognised Melbourne Ltd’s liability, if any, for sick leave at 30
June 2019. (LO2)
60% x (100 x 5 – 300) x $150 = $18 000

Provision for Sick Leave Cr 18 000
(Accrual of sick leave)
Exercise 9.5
Auckland Ltd has 200 employees who each earn a gross wage of $140 per day. Auckland
Ltd provides 5 days of paid non-accumulating sick leave for each employee per annum.
During the year, 150 days of paid sick leave and 20 days of unpaid sick leave were taken.
Staff turnover is negligible.
Required
Calculate the employee benefits expense for sick leave during the year and the amount that
should be recognised as a liability, if any, for sick leave at the end of the year. (LO2)
Employee benefits for sick leave during the year: 150 days x $140 per day = $21 000
Auckland Ltd should not recognise a liability for sick leave because it is non-cumulative.

Exercise 9.6
Accounting for annual leave
Newcastle Ltd provides employees with 4 weeks (20 days) of annual leave for each year of
service. The annual leave is accumulating and vesting up to a maximum of 6 weeks. Thus,
all employees take their annual leave within 6 months after the end of each reporting
period so that it does not lapse. Newcastle Ltd pays a loading of 17.5% on annual leave;
that is, employees are paid an additional 17.5% of their regular wage while taking annual
leave. Refer to the following extract from Newcastle Ltd’s payroll records for the year
ended 30 June 2019.
Required
Calculate the amount of annual leave that should be accrued for each employee. (LO2)
Employee Wage, Change in AL AL 30/6/19 AL accrual (col. 2

per day entitlement in days x col. 4 x 117.5%)
$
Chand $160 6+20-15 11 2 068.00
Kim $125 3+20-16 7 1 028.13
Smith $150 2+20-13 9 1 586.25
Zhou $100 4+20-17 7 822.50

Exercise 9.7
Accounting for profit-sharing arrangements
Wellington Ltd has a profit-sharing arrangement in which 1% of profit for the period is
payable to employees, paid 3 months after the end of the reporting period. Employees’
entitlements under the profit-sharing arrangement are subject to their continued
employment at the time the payment is made. Based on past staff turnover levels, it is
expected that 95% of the share of profit will be paid. Wellington Ltd’s profit for the period
was $70 million.
Required
Prepare a journal entry to record Wellington Ltd’s liability for employee benefits arising
from the profit-sharing arrangement at the end of the reporting period. (LO2)
95% x 1% x $70 000 000 = $665 000

Provision for Employee Benefits Cr 665 000
(Accrual of employee benefits for
profit-sharing arrangements)

Exercise 9.8
Accounting for long service leave
Victoria Ltd provides long service leave entitlement of 13 weeks of paid leave after 10 years
of continuous employment. The provision for long service leave had a credit balance of
$140 000 at 30 June 2019. During the year ended 30 June 2020, long service leave of
$25 000 was paid. At the end of the year, the present value of the defined benefit obligation
for long service leave was $150 000.
Required
Prepare all journal entries in relation to long service leave for the year ended 30 June 2020.
(LO6)
$ $
Defined obligation 30/6/17 150 000
Obligation B/fwd 140 000
Less LSL paid (25 000) 115 000
Required increase/LSL 35 000
expense
Date Account $ $
During Provision for Long Service Leave Dr 25 000
2020 Bank Cr 25 000
(Long service leave paid)
30/06/20 Long Service Leave Expense Dr 35 000

Provision for Long Service Leave Cr 35 000
(Increase in Liability for LSL)

Exercise 9.9
Accounting for defined contribution superannuation plans
Wollongong Ltd provides a defined contribution superannuation fund for its employees.
The company pays contributions equivalent to 10% of annual wages and salaries.
Contributions of $50 000 per month were paid for the year ended 30 June 2019. Actual
wages and salaries were $7 million. Three months after the reporting period, there is a
settlement of the difference between the amount paid and the annual amount payable
determined with reference to Wollongong Ltd’s audited payroll information. The
settlement at 30 September involves either an additional contribution payment by
Wollongong Ltd or a refund of excess contributions paid.
Required
Prepare all journal entries required during June 2019 for Wollongong Ltd’s payment of,
and liability for, superannuation contributions. (LO4)
Superannuation payable $700 000

Contributions paid $600 000 ($50 000 x 12)
Superannuation liability $100 000
30/06/19 Superannuation Expenses Dr 50 000

Bank Cr 50 000
(Superannuation contribution for
June)
30/06/19 Superannuation Expenses Dr 100 000

Superannuation Liability Cr 100 000
(Liability for unpaid
superannuation contribution for the
year)

Exercise 9.10
Accounting for the payroll and accrual of wages and salaries
Lavender Ltd pays its employees on a fortnightly basis. All employee benefits are
recognised as expenses. The following information is provided for its July and August
payrolls:
The two fortnightly payrolls in August were for the fortnight ended Friday, 7 August and
Friday, 21 August. The payrolls were processed and paid on the following Monday and
Tuesday respectively. Payroll deductions are remitted as follows.
Required
1. Prepare all journal entries to account for the August payroll and all payments relating
to employee benefits during August.
2. Prepare a journal entry to accrue wages for the remaining days in August not included
in the final August payroll. Use the same level of remuneration as per the final payroll
for August.
(LO2)

1.

Bank Cr 20 000
(Payment of July health insurance
payroll deductions)
Accrued Payroll Dr 6 500

Bank Cr 6 500
(Payment of July payroll
deductions for union fees)
10 August Wages and Salaries Expense Dr 700 000

(Payroll for fortnight ended 7/8)

Bank Cr 553 230
(Payment of net wages & salaries)

Bank Cr 250 000
(Payment of employee income tax
withheld in July)

Bank Cr 4 000
(Payment of July payroll
deductions for charity donations)

(Payroll for fortnight ended 21/8)

Bank Cr 471 270
(Payment of net wages & salaries)
2.

Accrued Wages and Salaries Cr 360 000
(Accrual of wages and salaries for
6 business days Mon 24-28/8, 31/8)
Daily wages $600 000/10 days = $60 000; 6 days x $60 000 per day = $360 000

Exercise 9.11
Tulip Ltd provides 4 weeks (20 days) of accumulating vested annual leave for each year of
service. The company policy is that annual leave must be taken within 6 months of the end
of the period in which it accrues. Annual leave is paid at the base salary rate (which
excludes commissions, bonuses and overtime). A 17.5% loading is applied to annual leave
payments.
The following summary data is derived from Tulip Ltd’s payroll records for the year ended
30 June 2019. Base pay rates have increased during the year. The amounts shown are
applicable at 30 June 2019.
Additional information
After leave taken during the year had been recorded, Tulip Ltd’s trial balance revealed
that the provision for annual leave had a debit balance of $262 460 at 30 June 2019.
Required
Prepare journal entries to account for the liability for annual leave at 30 June 2019. (LO2)

30/6/2019 Wages and Salaries Expense Dr 333 700

Provision for Annual Leave Cr 333 700
(Accrual of employee benefits
arising from profit-sharing
arrangements)
Workings:
Category Pay/day Op bal Increase AL taken Clos bal. Loading Liability

$ Days Days Days Days $
Managers 440 100 200 260 40 0.175 20 680
Sales staff 220 150 600 630 120 0.175 31 020
Office workers 110 120 400 387 133 0.175 17 190
Other 100 60 200 240 20 0.175 2 350
Liability 30/6 71 240 Cr
Bal of provision 262 460 Dr
Accrual 333 700
Closing balance of annual leave accumulation (in days):

= Opening balance + accumulation during the year – Annual leave taken
e.g. Managers: 100 + 200 – 260 = 40 days
Accrual = Days accumulated at the end of the period x basic pay rate x (1 + 0.175)
e.g. Managers: 40 days x $440 per day x (1 + 0.175) = $20 680

Exercise 9.12
Assume the same details as in exercise 9.11, except that Tulip Ltd’s trial balance showed
the provision for annual leave had a credit balance of $62 640.
Required
1. Prepare journal entries to account for the annual leave liability at 30 June 2019.
2. Prepare journal entries to account for the annual leave liability at 30 June 2019 if the
provision for annual leave had a credit balance of $62 640, but there was no loading
applied to annual leave payments.
(LO2)
1.

Provision for Annual Leave Cr 8 600
C/bal 71 240 – o/bal 62 640 = 8 600
2.
30/6/2019 Provision for Annual Leave Dr 2 010

Wages and Salaries Expense Cr 2 010
Workings:
Category Pay/day Op bal Increase AL taken Clos bal. Loading Liability

$ Days Days Days Days $
Managers 440 100 200 260 40 0 17 600
Sales staff 220 150 600 630 120 0 26 400
Office workers 110 120 400 387 133 0 14 630
Other 100 60 200 240 20 0 2 000
Liability 30/6 60 630 Cr
Bal of provision 62 640 Cr
Accrual 2 010 Dr
Closing balance of annual leave accumulation (in days):

= Opening balance + accumulation during the year – Annual leave taken
E.g. Managers: 100 + 200 – 260 = 40 days
Accrual = Days accumulated at the end of the period x basic pay rate x (1)
E.g. Managers: 40 days x $440 per day x (1) = $17 600

Exercise 9.13
Daffodil Ltd opened a call centre on 1 July 2018. The company provides 1 week (5 days) of
sick leave entitlement for the employees working at the call centre. The following
information has been obtained from Daffodil Ltd’s payroll records and actuarial
assessments for the year ended 30 June 2019. The column headed ‘Term. in 2019’ indicates
the leave entitlement pertaining to service of employees whose employment was terminated
during the year. The actuary has estimated the percentage of unused leave that would be
taken within 12 months if Daffodil Ltd allowed leave to accumulate. Due to high staff
turnover, the remaining leave would lapse (or be settled in cash, if vesting) within 1 year
after the end of the reporting period.
Required
Calculate the employee benefits expense for sick leave for the year and the amount that
should be recognised as a liability for sick leave at 30 June 2019, assuming that sick leave
entitlements are:
1. non-accumulating
2. accumulating and non-vesting
3. accumulating and vesting.
(LO2)

There is no opening balance of sick leave, even if accumulating, because all employees
commenced in the current year.
Provision for sick leave:
Wage Current Days Clos Accum. Exp. To Provision

Category /day Service taken Term. bal. 30/6/19 be Used
$ Days Days Days Days $ % $
Supervisors 100 30 20 3 7 700 90 630
Consultant 80 500 400 60 40 3200 70 2240
c) 3900 b) 2870
1. Non-accumulating sick leave is recognised when the leave is taken.
Employee Base pay Leave Employee Provision for

category /day taken in benefits Sick Leave
2019 Expense
$ Days $ $
Supervisors 100 20 2 000 Nil
Operators 80 400 32 000 Nil
$34 000 Nil
Explanation: there is no obligation for unused sick leave at the end of the period because it is
non-accumulating. Therefore, Daffodil Ltd would not recognise a provision for non-
accumulating sick leave.
Accumulating sick leave is recognised when the employee provides a service and the liability is
measured as the nominal amount (if short-term) that is expected to be paid for sick leave arising
from services already provided.
2. Employee benefits expense:

= leave taken during the period + increase in the provision for sick leave
= $34 000 +$2870 = $36 870
Amount of liability = $2870
3. If the accumulating sick leave is vesting, all unused entitlement is expected to be paid.
Employee benefits expense:

= leave taken during the period + increase in the provision for sick leave
= $34 000 +$3900 = $37 900
Amount of liability = $3900

Exercise 9.14
Accounting for defined benefit superannuation plans
Sydney Ltd provides a defined benefit superannuation plan for its managers. The assistant
accountant has completed some sections of the defined benefit worksheet based on
information provided in an actuary’s report on the Sydney DB Superannuation Fund for
the year ended 30 June 2020.
The asset ceiling was $600 000 at 30 June 2020.
Required
1. Determine the surplus or deficit of the fund at 30 June 2020.
2. Determine the net defined benefit asset or liability at 30 June 2020.
3. Calculate the net interest and distinguish between the interest expense component of the
defined benefit obligation and the interest income component of the change in the fair
value of plan assets for the year ended 30 June 2020.
4. Determine the amount to be recognised in profit or loss in relation to the defined benefit
superannuation plan for the year ended 30 June 2020.
5. Determine the amount to be recognised in other comprehensive income in relation to
the defined benefit superannuation plan for the year ended 30 June 2020.
(LO5)

1. $1 200 000 deficit.
Present value of the defined benefit obligation 30 June 2020 $7 200 000
Fair value of plan assets 30 June 2020 6 000 000
Deficit of the fund at 30 June 2020 $1 200 000
2. The net defined benefit liability at 30 June 2020 is $1,200,000, being the deficit of the fund.
3. Net interest = $100 000
Interest expense component of the defined benefit obligation = $6 000 000 x 10%
=$600 000
Interest income component of the change in fair value of plan assets = $5 000 000 x 10%
= $500 000
4. $500 000.
Net interest $100 000

Service cost 400 000
Superannuation expense $500 000
5. The actuarial loss of $300 000 is recognised in other comprehensive income.

Exercise 9.15
Which of the following items in relation to a defined benefit fund are recognised in (i) profit
or loss and (ii) other comprehensive income in accordance with AASB 119/IAS 19? (LO5)
1. Current service cost
2. Past service cost incurred during the period
3. Net interest
4. Return on plan assets excluding amounts recognised in net interest
5. Benefits paid to members
6. Current period actuarial gains in relation to the defined benefit obligation
7. Current period actuarial losses in relation to the defined benefit obligation
8. Current period actuarial gains in relation to the assets of the plan
9. Current period actuarial losses in relation to the assets of the plan
10. Contributions paid
i) Recognised in profit or loss:

1. Current service cost
2. Past service cost incurred during the period
3. Net interest
ii) Recognised in other comprehensive income:

4. Return on plan assets excluding amounts recognised in net interest
6. Current period actuarial gains in relation to the defined benefit obligation
7. Current period actuarial losses in relation to the defined benefit obligation

Exercise 9.16
For each of the following scenarios, determine (i) the surplus or deficit in the defined
benefit superannuation fund and (ii) the net defined benefit liability or asset that should be
recognised by the sponsoring employer in accordance with AASB 119/IAS 19. (LO5)
Present value Fair value of Asset (i) Deficit or (ii) Net defined
of DBO plan assets ceiling surplus benefit asset /
liability
(a) $1 300 000 $1 000 000 $Nil $300 000 Deficit $300 000 liability
(b) $1 550 000 $1 200 000 $Nil $350 000 Deficit $350 000 liability
(c) $2 000 000 $2 200 000 $100 000 $200 000 Surplus $100 000 asset
(d) $2 400 000 $2 500 000 $250 000 $100 000 Surplus $100 000 asset

Exercise 9.17
Rose Ltd provides 1 week (5 days) of accumulating non-vesting sick leave for each year of
service. Sick leave is paid at the base pay rate, which does not include commissions,
bonuses and overtime. The proportion of accumulated sick leave that will be taken is
estimated for each category of employee due to differences in staff turnover rates. The
following summary data is derived from Rose Ltd’s payroll records for the year ended 30
June 2019.
The yield on high-quality corporate bonds at 30 June 2019 is 7% for one-year bonds and
8% for two-year bonds. After leave taken during the year had been recorded Rose Ltd’s
trial balance at 30 June 2019 revealed the provision for sick leave had a credit balance of
$13 000.
Required
1. Prepare journal entries to account for the liability for sick leave at 30 June 2019.
2. State how much of the provision should be classified as a non-current liability.
(LO2 and LO6)

1.

Provision for Sick Leave Cr 49 655
(Accrual of employee benefits for
profit-sharing arrangements)
Workings and explanation:
Daily Open. bal Current Taken or Clos. bal Accumulated

Category wage $ Days service Lapsed days Benefit $
Managers 450 120 50 10 160 72 000
Consultants 300 110 100 90 120 36 000
Clerical staff 100 80 100 70 110 11 000
Closing balance of sick leave accumulation (in days):

= Opening balance + entitlement for service during the year – sick leave taken/lapsed
e.g. Managers: 120 + 50 – 10 = 160 days
Amount of Sick Leave Expected to be Taken

Accum. Within 1 Year 1 Year Later 2 Years Later
Benefit % $ % $ % $
Managers 72 000 20 14 400 10 7 200 5 3 600
Consultants 36 000 75 27 000 10 3 600 0 0
Clerks 11 000 65 7 150 9 990 0 0
48 550 11 790 3 600
Provision for sick leave:
Current - due within one year after balance date – undiscounted $48 550
Non-current
Due one year later, discounted at 7% = $11 790 = $11 019
(1 + .07)
Due 2 years later, discounted at 8% = $3600 = $3 086
(1 + 0.08)2
Total provision for sick leave at 30 June 2019 $62 655 Cr
Amount per trial balance 13 000 Cr
Accrual $49 655
The amount that is expected to be paid more than one year after the end of the reporting period is
not a short-term benefit (refer para. 5 of AASB 119/IAS 19). Accordingly, it is measured at
present value, consistent with other long-term employee benefits (refer para. 155and para. 57(a)
(ii) of AASB 119/IAS 19).
2. Non-current component of Provision for Sick Leave = $11 019 + $3 086 = $14 105

Exercise 9.18
Geranium Ltd provides long service leave for its retail staff. Long service leave entitlement
is determined as 13 weeks of paid leave for 10 years of continued service. The following
information is obtained from Geranium Ltd’s payroll records and actuarial reports for its
retail staff at 30 June 2019.
• The estimated annual increase in retail wages is 1% p.a. for the next 10 years, reflecting
expected inflation.
• The provision for long service leave for retail staff at 30 June 2018 was $22 000.
• No employees were eligible to take long service leave during the year ended 30 June
2019.
Required
Prepare the journal entry to account for Geranium Ltd’s provision for long service leave at
30 June 2019. (LO6)


(Increase in provision for long
service leave)
Workings:
Step 1: Estimate the number of employees who are expected to become eligible for long service
leave.
Years of % expected to Total No. of

service become entitled Employees Step 1
1 20% 60 12
2 30% 50 15
3 50% 30 15
4 60% 10 6
Step 2: Estimate the projected salaries.
= salary x (1 + inflation rate)n
Years of From Step Current Inflation Period until Projected

service 1 salary rate LSL vests salary
1 Employees $ Years $
2 12 27 000 0.01 9 354 354
3 15 27 000 0.01 8 438 557
4 15 27 000 0.01 7 434 215
6 27 000 0.01 6 171 966
Step 3: Determine the accumulated benefit.
= Years of employment x weeks of paid leave x projected salaries

Years required for LSL 52
Years of Projected Unit LSL Accumulated

service salary credit weeks /52 benefit
$ $
1 354 354 0.1 0.25 8 859
2 438 557 0.2 0.25 21 928
3 434 215 0.3 0.25 32 566
4 171 966 0.4 0.25 17 197

Step 4: Measure the present value of the accumulated benefit.
= accumulated benefit
(1 + i)n
Years of Accumulated Discount Present

service benefit factor value
$ $
1 8 859 0.424098 3 757
2 21 928 0.501866 11 005
3 32 566 0.547034 17 814
4 17 197 0.596267 10 254
42 830
The increase in the provision for long service leave can be calculated as $42 830 less the opening
balance, $22 000, because there have been no long service leave payments during the year. Thus
the long service leave expense for the year ended 30 June 2019 is $20 830.

Exercise 9.19
Bluebell Ltd provides credit services. Bluebell Ltd provides its employees with long service
leave entitlements of 13 weeks of paid leave for every 10 years of continuous service. As the
company has been operating for only 5 years, no employees have become entitled to long
service leave. However, the company recognises a provision for long service leave using the
projected unit credit approach required by AASB 119/IAS 19. The following information is
obtained from Bluebell Ltd’s payroll records and actuarial reports for the non-managerial
staff of its debt collection business at 30 June 2019.
• The estimated annual increase in retail wages is 5% p.a. for the next 10 years, reflecting
Bluebell Ltd’s policy of increasing salaries of its debt collection staff for each year of
additional experience.
• At 30 June 2018, the provision for long service leave for non-managerial debt collection
staff was $132 000.
Required
Prepare the journal entry to account for Bluebell Ltd’s provision for long service leave at
30 June 2019 in relation to the non-managerial employees of the company’s debt collection
business. (LO6)


(Increase in provision for long
service leave)
Workings:
Step 1: Estimate the number of employees who are expected to become eligible for long service
leave.
Years of % expected to Total No. of

service become entitled Employees Step 1
1 20% 100 20
2 26% 85 22.1
3 35% 40 14
4 50% 32 16
5 65% 25 16.25
Step 2: Estimate the projected salaries.

= salary x (1 + inflation rate)n
Years of From Current Inflation Period until Discount Projected

service Step 1 salary rate LSL vests factor salary
$ $
1 20 40 000 0.05 9 1.5513282 1 241 063
2 22.1 42 000 0.05 8 1.4774554 1 371 374
3 14 44 000 0.05 7 1.4071004 866 774
4 16 46 500 0.05 6 1.3400956 997 031
5 16.25 49 600 0.05 5 1.2762815 1 028 683

Step 3: Determine the accumulated benefit.
= Years of employment x weeks of paid leave x projected salaries

Years required for LSL 52
Years of Projected Unit LSL Accumulated

service salary credit weeks /52 benefit
$ $
1 1 241 063 0.1 0.25 31 027
2 1 371 374 0.2 0.25 68 569
3 866 774 0.3 0.25 65 008
4 997 031 0.4 0.25 99 703
5 1 028 683 0.5 0.25 128 585
Step 4: Measure the present value of the accumulated benefit.
= accumulated benefit
(1 + i)n
Years of Accumulated Discount Present

service benefit factor value
$ $
1 31 027 0.591898 18 364
2 68 569 0.627412 43 021
3 65 008 0.710681 46 200
4 99 703 0.746215 74 400
5 128 585 0.783526 100 750
282 735
The amount by which the provision for long service should be increased can be calculated as the
present value of the accumulated benefit at 30 June 2019 less the opening balance of the
provision for long service leave because there have been no long service leave payments during
the year:
$282 735 - $132 000 = $150 735

Exercise 9.20
Lily Ltd provides a defined benefit superannuation plan for its managers. The following
information is available in relation to the plan.
• No past service costs were incurred during the year ended 30 June 2019.
• The interest rate used to measure the present value of defined benefits at 30 June 2018
was 9%.
• The interest rate used to measure the present value of defined benefits at 30 June 2019
was 10%.
• There was an actuarial gain pertaining to the present value of the defined benefit
obligation as a result of an increase in the interest rate.
• The only remeasurement affecting the fair value of plan assets is the return on plan
assets.
• The asset ceiling was nil at 30 June 2018 and 30 June 2019.
• All contributions received by the funds were paid by Lily Ltd. Employees make no
contributions.
Required
1. Determine the surplus or deficit of Lily Ltd’s defined benefit plan at 30 June 2019.
2. Determine the net defined benefit asset or liability that should be recognised by Lily
Ltd at 30 June 2019.
3. Calculate the net interest for the year ended 30 June 2019.
4. Calculate the actuarial gain or loss for the defined benefit obligation for the year ended
30 June 2019.
5. Calculate the return on plan assets, excluding any amount recognised in net interest,
for the year ended 30 June 2019.
6. Present a reconciliation of the opening balance to the closing balance of the net defined
benefit liability (asset), showing separate reconciliations for plan assets and the present
value of the defined benefit obligation.
7. Prepare a summary journal entry to account for the defined benefit superannuation
plan in the books of Lily Ltd for the year ended 30 June 2019.
(LO5)

1. Deficit of the fund = $702 500
Present value of the defined benefit obligation 30 June 2019 $10 750 000
Fair value of plan assets 30 June 2019 10 047 500
Deficit of the fund at 30 June 2019 $ 702 500
2. The net defined benefit liability at 30 June 2019 is $702 500, being the deficit of the fund.
Workings:
Interest expense component of the defined benefit obligation = $10 000 000 x 9% =$900 000
Interest income component of the change in fair value of plan assets = $9 500 000 x 9% = $855
000
4. Actuarial gain on remeasurement of the defined benefit obligation = $100 000
Workings:
Closing present value of defined benefit obligation (DBO) =

Opening DBO + interest cost + current service costs- benefits paid +(-) actuarial loss (gain)
$10 750 000 = $10 000 000 + $900 000 + $1 150 000 - $1 200 000 +/- actuarial loss (gain)
Solving for actuarial gain arising on remeasurement of DBO:
$10 750 000 - $10 000 000 - $900 000 - $1 150 000 + 1 200 000 = - $100 000 actuarial gain
5. Return on plan assets (excluding amount recognised in net interest) = $107 500
Workings:
Fair value of plan assets at 1 July 2018 $ 9 500 000

+ Interest income 855 000
+ Contributions received by the fund 1 000 000
- Benefits paid to members (1 200 000)
10 155 000
Loss on plan assets excluding interest (107 500)
Fair value of plan assets at 30 June 2019 $10 047 500

6. Reconciliation:
Net defined Defined Plan assets

benefit benefit $
liability obligation
$ $
Balance 1/7/19 500 000 10 000 000 9 500 000
Interest @ 9% 900 000 855 000
Current service cost 1 150 000
Contributions received by fund 1 000 000
Benefits paid by fund (1 200 000) (1 200 000)
Loss on plan assets excluding interest (107 500)
recognised
Actuarial gain on remeasurement of DBO (100 000)
Balance 30 June 2019 702 500 10 750 000 10 047 500
7. Summary journal entry:
30/6/2019 Superannuation Expense (P/L) Dr 1 195 000

Superannuation Expense (OCI) Dr 7 500
Bank Cr 1 000 000
Net Superannuation liability Cr 202 500
(Superannuation expense and

contributions for the year)
Workings:
Profit or Loss Other Bank Net

comprehensive DBL(A)
income
Balance 1 July 2018 500 000 Cr
Net interest 45 000 Dr
Service cost 1 150 000 Dr
Contributions paid to the fund 1 000 000 Cr
Loss on plan assets (ex. 107 500 Dr
interest)
Actuarial gain on DBO 100 000 Cr
Journal entry 1 195 000 Dr 7 500 Dr 1 000 000 Cr 202 500 Cr
Balance 30 June 2019 702 500 Cr

Exercise 9.21
Some years ago, Wattle Ltd established a defined benefit superannuation plan for its
employees. The company has since introduced a defined contribution plan, which all new
staff join when commencing employment with Wattle Ltd. Although the defined benefit
plan is now closed to new recruits, the fund continues to provide for employees who have
been with the company for a long time. The following actuarial report has been received
for the defined benefit plan.
• All contributions received by the funds were paid by Wattle Ltd. Employees make no
contributions.
• The interest rate used to measure the present value of the defined benefit obligation was
10% at 31 December 2018 and 31 December 2019.
• The asset ceiling was nil at 31 December 2018 and 31 December 2019.
Required
1. Determine the surplus or deficit of Wattle Ltd’s defined benefit plan at 31 December
2019.
2. Determine the net defined benefit asset or liability that should be recognised by Wattle
Ltd at 31 December 2019.
3. Calculate the net interest and the return on plan assets for the year ended 31 December
2019.
4. Present a reconciliation of the opening balance to the closing balance of the net defined
benefit liability (asset), showing separate reconciliations for plan assets and the present
value of the defined benefit obligation.
5. Prepare a summary journal entry to account for the defined benefit superannuation
plan in the books of Wattle Ltd for the year ended 31 December 2019.
(LO5)

1. Deficit of the fund = $2 870 000
Present value of the defined benefit obligation 31 December 2019 $23 000 000
Fair value of plan assets 31 December 2019 20 130 000
Deficit of the fund at 31 December 2019 $ 2 870 000
2. The net defined benefit liability at 31 December 2019 is $2 870 000, being the deficit of the
fund.
Workings:
Interest expense component of the defined benefit obligation:

Defined benefit obligation brought forward $20 000 000
Past service cost 2 000 000 $22 000 000 x 10% =$2 200 000
Interest income component: $19 000 000 x 10% = $1 900 000
4. Reconciliation:
Net Defined Plan assets

defined benefit $
benefit obligation
liability $
$
Balance 1/1/19 1 000 000 20 000 000 19 000 000
Past service cost 2 000 000
Revised balance 22 000 000
Interest @ 10% 2 200 000 1 900 000
Current service cost 800 000
Contributions received by fund 1 000 000
Benefits paid by fund (2 100 000) (2 100 000)
Return on plan assets excluding interest recognised * 330 000
Actuarial loss on remeasurement of DBO 100 000
Balance 31 Dec 2019 2 870 000 23 000 000 20 130 000
* Workings for return on plan assets:
Fair value of plan assets 31 Dec. 2019 $20 130 000

Less:
Opening balance 19 000 000
Interest income 1 900 000
Contributions received 1 000 000
Benefits paid (2 100 000) 19 800 000
Return on plan assets ex. Interest income $ 330 000

5. Summary journal entry:
31/12/2019 Superannuation Expense (P/L) Dr 3 100 000

Superannuation Income (OCI) Cr 230 000
Bank Cr 1 000 000
Net Superannuation liability Cr 1 870 000
(Superannuation expense and

contributions for the year)
Workings:
Profit or Other Bank Net DBL(A)

Loss comprehensive
income
Balance 1 January 2019 1 000 000 Cr
Past service cost 2 000 000 Dr
Net interest 300 000 Dr
Service cost 800 000 Dr
Contributions paid to the fund 1 000 000 Cr
Gain on plan assets (ex. 330 000 Cr
interest)
Actuarial loss on DBO 100 000 Dr
Journal entry 3 100 000 Dr 230 000 Cr 1 000 000 Cr 1 870 000 Cr
Balance 31 December 2019 2 870 000 Cr

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Financial Reporting 2nd Edition Loftus

Loftus, Leo, Daniliuc, Boys, Luke, Ang and

© John Wiley & Sons Australia, Ltd 2018

Chapter 9: Employee benefits

1. What is a paid absence? Provide an example.

© John Wiley and Sons Australia Ltd, 2018 9.2

In a defined-benefit superannuation plan, the benefits received by members on retirement are

© John Wiley and Sons Australia Ltd, 2018 9.3

8. In relation to defined benefit post-employment plans, paragraph 56 of AASB 119/IAS

© John Wiley and Sons Australia Ltd, 2018 9.4

The fundamental qualitative characteristics of financial information prescribed by the Conceptual

© John Wiley and Sons Australia Ltd, 2018 9.5

Case study 9.1

Case study 9.2

© John Wiley and Sons Australia Ltd, 2018 9.6

Case study 9.3

Long service leave

Case study 9.4

© John Wiley and Sons Australia Ltd, 2018 9.7

Application and analysis exercises

Accounting for the payroll

6 July Wages and Salaries Expense Dr 500 000

7 July Accrued Payroll Dr 365 000

15 August Accrued Payroll Dr 10 000

15 August Accrued Payroll Dr 125 000

© John Wiley and Sons Australia Ltd, 2018 9.8

Accrual of wages and salaries

4/5 x $125 000 = $100 000

30 June Wages and Salaries Expense Dr 100 000

© John Wiley and Sons Australia Ltd, 2018 9.9

Accounting for the payroll

1 Jan Wages expense Dr 300 000

15 Jan Wages expense Dr 300 000

15 Feb Accrued Payroll Dr 490 000

© John Wiley and Sons Australia Ltd, 2018 9.10

Accounting for sick leave

60% x (100 x 5 – 300) x $150 = $18 000

30 June Wages and Salaries Expense Dr 18 000

Accounting for sick leave

© John Wiley and Sons Australia Ltd, 2018 9.11

Accounting for annual leave

Employee Wage, Change in AL AL 30/6/19 AL accrual (col. 2

© John Wiley and Sons Australia Ltd, 2018 9.12

Accounting for profit-sharing arrangements

95% x 1% x $70 000 000 = $665 000

30 June Wages and Salaries Expense Dr 665 000

© John Wiley and Sons Australia Ltd, 2018 9.13

Accounting for long service leave

30/06/20 Long Service Leave Expense Dr 35 000

© John Wiley and Sons Australia Ltd, 2018 9.14

Accounting for defined contribution superannuation plans

Superannuation payable $700 000

30/06/19 Superannuation Expenses Dr 50 000

30/06/19 Superannuation Expenses Dr 100 000

© John Wiley and Sons Australia Ltd, 2018 9.15

Accounting for the payroll and accrual of wages and salaries

© John Wiley and Sons Australia Ltd, 2018 9.16

3 August Accrued Payroll Dr 20 000