Employee Benefits Accounting

This assignment delves into the accounting treatment of employee benefits through a detailed illustrative example. It showcases journal entries for key elements such as past service cost, net interest expense, service cost, contributions, plan assets, and actuarial losses. The example highlights how these transactions are recorded under relevant accounting standards (AASB 119) to reflect the financial position of an entity regarding its employee benefit obligations.

ACC210(ATMC) - Financial Accounting
Task 2 – Major Assignment
Semester 2 - 2017
Student Name:
Student ID #:
Campus:

Table of Contents
Question 1. Ex 3.1..................................................................................................................................3
Accounting Justification:................................................................................................................3
Relevant Issues:.............................................................................................................................3
1. Determine subject of measurement..........................................................................................3
2. Determine valuation premise/method......................................................................................3
3. Determine market.....................................................................................................................3
4. Determine Valuation technique.................................................................................................3
Question 2. Ex 5.18................................................................................................................................4
Accounting Justification:................................................................................................................4
Relevant Issues:.............................................................................................................................4
1. Calculations & General Journal Entries 1/7/16 to 30/6/17:.......................................................4
2. Calculations & General Journal Entries 1/8/18:.........................................................................4
3. Calculations & General Journal Entries 30/6/18:.......................................................................4
Question 3. Ex 6.11................................................................................................................................5
Accounting Justification:................................................................................................................5
Relevant Issues:.............................................................................................................................5
1. Explain accounting issues...........................................................................................................5
2. Differences Internally Generated vs Acquired...........................................................................5
3. Reasons for Reluctance..............................................................................................................5
Question 4. Ex 9.19................................................................................................................................6
Accounting Justification:................................................................................................................6
Relevant Issues:.............................................................................................................................6
1. Deficit of Fund...........................................................................................................................6
2. Net Defined Benefit Liability......................................................................................................6
3. Net Interest................................................................................................................................6
4. Reconciliation............................................................................................................................6
5. Summary Journal.......................................................................................................................6
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Question 1. Ex 3.1
Accounting Justification:
The conceptual framework of measurement of the fair value is dealt with the Australian
accounting standard number 13 on the fair value measurement. As per paragraph number
nine of the accounting standard, fair value of the asset is defined as the price which will be
received when the asset is sole or as the price which will be paid to square off the liability at
the particular date (AASB, 2011).
Relevant Issues:
1. Determine subject of measurement
In the given case study, the subject of measurement is consists of two assets namely land
and factory. These are to be considered as jointly and also severally. It means these are to
be considered as the separate assets and also to be considered as the single asset as a group
of land and factory while measuring the fair value of the asset.
2. Determine valuation premise/method
Para number 31 of the accounting standard 13 describes the valuation premise of the non
financial asset. It defines that the highest and best use of the asset determines the valuation
premise of the asset. In case the highest and best use of the asset is achieved when it is
used in connection or together with other asset, the fair value will be the price which will be
received to sell the asset assuming that the aforesaid asset will be used by the other market
participant in different manner. The highest and best use of the asset may give the higher
value to the other market participants. Therefore, the valuation premise will measure the
fair value at the price equals to the recent sale price of the land less the amount incurred to
demolish the factory. Thus, the fair value will be $1000000 – $100000 = $900000 (Draft and
Standard, 2005).
3. Determine market
The market in the current scenario is the active market. It is because the active market
occurs at the situation where the transactions are being taken place on the frequent basis.
In the given case study, the prices of the residential house have been increased over the few
years and simultaneously the price of the land has been increased from $200000 to
$1000000. It exhibits that with the increased requirement of the residential buildings; the
cost of land will grow higher and thus has been regarded as the active market as also both
the market participants are dealing effectively and actively (Marton, 2009).
4. Determine Valuation technique
In the given case study, the cost approach is applicable. It is because as per the cost
approach, the fair value will be equal to the amount required to replace the existing
capacity of the asset. To develop the residential apartment, the cost is $900000.
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Question 2. Ex 5.18
Accounting Justification:
As per the Australian accounting standard 16 on property plant and equipment, asset is
valued using either cost model or the revaluation but initially the cost model is used and
subsequently the revaluation model is used (Aboody, Barth and Kasznik, 2009 ; Easton.,
Eddey and Harris, 2013).
Relevant Issues:
1. Calculations & General Journal Entries 1/7/16 to
30/6/17:
Date Account DR CR
1/7/2016 Machine A 100000
Machine B 60000
Cash 1600000
30/06/2017 Depreciation – Machine A (100000/5) 20000
Depreciation – Machine B (60000/3) 20000
Accumulated Depreciation – Machine A 20000
Accumulated Depreciation – Machine B 20000
30/06/2017 Machine A (84000-80000) 4000
Revaluation Surplus 4000
30/06/2017 Revaluation Surplus (40000-38000) 2000
Machine B 2000
2. Calculations & General Journal Entries 1/8/18:
Date Account DR CR
01/01/2018 Depreciation – Machine B 9500
Accumulated Depreciation – Machine B 9500
(Depreciation for Sic Months38000 / 2
*0.5)
01/01/2018 Cash 29000
Profit on Sale of Machine B 500
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Machine B (38000-9500) 28500
01/01/2018 Machine C 80000
Cash 80000
01/01/2018 General Reserve 8000
Revaluation Surplus 2000
Bonus Share Capital 10000
3. Calculations & General Journal Entries 30/6/18:
Date Account DR CR
30/06/2018 Depreciation – Machine A (84000/4) 21000
Depreciation – Machine C (80000/4*0.5) 10000
Accumulated Depreciation – Machine A 21000
Accumulated Depreciation – Machine C 10000
30/06/2018 Impairment Loss 3500
Machine A (63000-61000) 2000
Machine C (70000-68500) 1500
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Question 3. Ex 6.11
Accounting Justification:
The intangible assets have been dealt in the Australian accounting standard number 138 on
the intangible assets. As per the accounting standard, the intangible assets are those assets
which can be identified and expressed in the monetary terms but does not have any
physical substance.
Relevant Issues:
1. Explain accounting issues
The company has to classify the generation of the asset in order to meet the criteria of
recognition for internally generated intangible assets as laid down by the accounting
standard. The accounting standard requires that the generation of the intangible assets
which are being developed inside the organization will follow two stages research stage and
the development stage.
As per the provisions of the accounting standard, the intangible assets shall not be able to
be recognized as an asset in the research phase. It is due to the major fact that the company
which is doing research project for the intangibles can never confirm that the intangible in
actual exists and there will be the flow of the economic benefits in the future from such
research work. Due to this reason the expenses incurred during the research phase shall be
charged to the statement of the profit and loss for the year in which the said expense has
been incurred.
Secondly the amount incurred during the development stage shall be capitalised only if all of
the following requirements are met:
- There shall be feasibility in the technical terms that the project of intangible assets
will be completed.
- There shall be the clear intention and thought in the mind of the management of the
company for completing the project.
- The intangible so developed or made available for use shall be able to be available
for use or sale.
- There shall be the high probability that the intangible assets so developed will be
able to generate the high economic benefits in the future.
- The expenditure so incurred shall be able to measure in the reliable terms (AASB,
2015).
Thus, in this manner the accounting of the intangible is done.
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2. Differences Internally Generated vs Acquired
The major difference between the accounting for internally generated intangible assets and
the acquired assets is that in the case of the former the accounting of the amount incurred
has to be done stage wise and whereas in case of the acquired intangible assets the amount
so paid to purchase of the intangible asset will be capitalised as an asset.
Second major difference is that in the former case the expenditure incurred during research
stage is charged to the statement of the profit and loss account whereas in the latter case
nothing is charged to statement of profit and loss rather the whole amount paid for
acquiring the intangibles is mentioned in statement of financial position as intangible asset
(Padrtová, 2013).
3. Reasons for Reluctance
The companies are reluctant for bringing the changes in the accounting standard because of
the following reasons:
- The acquired intangible will always have the value associated with it and will be able
to establish the generation of the future cash flows.
- The value of capitalised internally generated intangibles will always be low because
of the fact that the major expense incurred in research stage will be expensed off.
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Question 4. Ex 9.19
Accounting Justification:
The employee benefits has been dealt by the accounting standard number 119 and it has
laid down the procedures for accounting and ten adequate justifications (AASB, 2011).
Relevant Issues:
1. Deficit of Fund
Deficit or Surplus of the Fund is calculated by deducting the fair value of the plant asset
from the present value of the defined benefit obligation.
Deficit = Present value of Defined benefit obligation as on 31-12-2016 minus the fair value
of plan asset
Deficit = $23000000 - $20130000 = $2870000.
2. Net Defined Benefit Liability
The net benefit liability is the deficit adjusted for any effect of limiting a net defined asset to
any asset ceiling. In the given case, Net defined benefit liability is $2870000.
3. Net Interest
Net Interest = Interest Expense – Interest Income
Net Interest = $2200000 - $1900000 = $300000
Workings:
Interest Expense = ($20000000 + $2000000)*10% = $2200000
Interest Income = $19000000*10% = $1900000
4. Reconciliation
S. No. Particulars Net Defined
Benefit Liability
Defined Benefit
Obligation
Plan Assets
1 Opening Balance –
01/01/2016
1000000 20000000 19000000
2 Add Past Service
Cost
0 2000000 0
3 New Balance 22000000
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4 Interest @10% 2200000 1900000
5 Current Service Cost 800000
6 Contribution
received
1000000
7 Benefits released (2100000) (2100000)
8 Return on Plan
Assets
330000
9 Actuarial Loss 100000
Closing Balance –
31/12/2016
2870000 23000000 201300000
Return on Plan Assets = $20130000 – ($19000000 + $1900000 + $1000000 – $2100000) =
$330000.
5. Summary Journal
Date Account DR CR
31/12/2016 Expense – Superannuation 3100000
Income – Superannuation 230000
Bank 1000000
Net Defined Liability - Superannuation 1870000
Workings :
S. No. Particulars Income
Statement
Other
Comprehensive
Income
Bank Net
defined
Benefit
Liability
1 Opening Balance 1000000
Cr
2 Past Service Cost 2000000 Dr
3 Net Interest 300000 Dr
4 Service Cost 800000 Dr
5 Contribution 1000000Cr
6 Plan Assets –
Profit
330000 Cr
7 Actuarial Loss 100000Dr
Closing Balance 3100000 Dr 230000 Cr 1000000Cr 1870000
Cr
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REFERENCES
Aboody, D., Barth, M.E. and Kasznik, R., (2009), “Revaluations of fixed assets and future firm
performance”, Evidence from the UK. Journal of Accounting and Economics, 26(1), pp.149-
178
AASB, (2011), “Fair Value Measurement” available at
www.aasb.gov.au/admin/file/content105/c9/AASB13_09-11.pdf accessed on 28/09/2017
AASB, (2011), “Employee Benefits” available at
www.aasb.gov.au/admin/file/content105/c9/AASB119_09-11.pdfaccessed on 28/09/2017
AASB, (2015), “Intangible Assets” available at
www.aasb.gov.au/admin/file/content105/.../AASB138_08-15_COMPoct15_01-18.pdf
accessed on 28/09/2017
Draft, E. and Standard, I.A.,( 2005). “Fair Value Measurement”. MEASUREMENT, 9, p.90
Easton, P.D., Eddey, P.H. and Harris, T.S., (2013), “An investigation of revaluations of
tangible long-lived assets” Journal of Accounting Research, pp.1-38.
Marton, J,(2009). “Fair Value Measurement” COMMENT LETTER ON THE EXPOSURE DRAFT
(ED/2009/5) University of Gothenburg.
.
Padrtová, M., (2013), “Accounting of Internally Generated Intangible Assets at Public
Universities in the Czech Republic”. Littera Scripta, p.104.
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