10. Liabilities and employee benefits

1. Read the article and discuss

Employee benefits represent the compensation paid to employees in return of the services they provide to the company.

A few categories of employee benefits include: short-term employee benefits, post-employment benefit plan, termination benefits, etc.

Short-term employee benefits are 'current' employee benefits i.e. these are expected to be settled within 12 months of the end of the period in which the related services were received from employees. These include wages, salaries and social security contributions, paid annual leave, paid sick leave, profit-sharing arrangements, bonuses (if current). These also include certain non-monetary benefits such as housing, transportation, subsidized services, medical care, etc.

Post-employment benefits (also called post-retirement medical benefits) are employee benefits which are payable after retirement. However, they do not include termination benefits. They include pensions, retirement benefits and post-retirement medical facility.

Post-employment benefit plans (also called post-retirement employee benefit plans) are arrangements between a company and its employees under which it provides retirement benefits to its employees. There are normally two types of post-employment benefit plans: the defined contribution plan and the defined benefit plan.

Termination benefits are employee benefits paid to an employee when his employment is prematurity terminated or he opts for a voluntary redundancy scheme by himself.

1) Defined Contribution Plan

Defined contribution plan is an employee benefit plan in which the employer undertakes to contribute a specific amount each period to the fund. Since the employer is responsible only for his contributions and nothing else, he does not bear the risks related to the plan rather those risks are borne by employees. The contributions made by the employer are based on the current number of employees and their current salary levels.

Accounting for a defined contribution plan

Accounting for defined contribution plan is straight forward. The employer records pension expense equal to the contributions which it is required to make to the plan in accordance with the fund characteristics. The pension plan has no further accounting complications for the employer because the contributions are managed by a trust representing the employees and the employer shares no gain or loss on those funds.

Example

Company DCP has a defined contribution plan. According to employment contracts it has entered into with its 100 employee it is required to contribute an amount one average monthly salary per employee to the plan. Average salary for the financial year ended 31 December 2012 is $60,000.

The yearly contribution which DCP should record as pension expense amounts to $6,000,000 ($60,000 multiplied by 100). The contributions are collected by a trust which represents employees and manages the contributions received for DCP on their behalf. Any future increase in salary level, decrease in mortality rate, increase in expected inflation and expected return and prevailing market return, etc. has no impact on the company's expense and liability related to the plan.