Employee Benefits and Accounting Standards: An Analysis

This assignment analyzes two articles on employee benefits and accounting standards. It discusses the need for companies to follow accounting principles and standards when accounting for employee benefits. The articles highlight the importance of management discretion and the need for transparency in annual reports. The implications of the research show that employee rights should not be compromised for shareholder interests.

Audit Assignment

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By student name
Professor
University
Date: 7th Sep 2018.
Executive Summary
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In this assignment two articles have been selected that are based on the concept of employee
benefits. Employees are often paid in cash or kind and there are definite accounting standards
and principles that companies need to follow when they are accounting for such employee
benefits in their annual reports. The two articles are disclosing the overall needs of the company
to take employee benefit related transaction seriously.
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Contents
Introduction.................................................................................................................................................3
Analysis........................................................................................................................................................3
Conclusion...................................................................................................................................................6
References.................................................................................................................................................10
Introduction
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The remuneration the employees both in the form and cash and non-cash for the services
provided to the company is termed as employee’s benefits. Apart from the cash component of
that is being paid to the them, other perks that are provided include bonus, free or concessional
meal passes, pension plans, car allowances and fuel allowances etc. These perks and benefits are
governed by set of rules and regulations under the umbrella of accounting standards. The same
has been analysed and presented in the given report.
The two articles that have been selected are “The negative effect of an accounting standard on
employee welfare: the case of McDonnell Douglas Corporation and FASB 106” and “Attaining
legitimacy by employee information in annual reports”.
a) Reason for selection of the two articles
. The principles of those standards revolve around the timing of recognition of those
benefits and the methods to measure the incentives and its subsequent reporting in the
financial statements (Alexander, 2016).
 The two journals highlights the important points with respect to employee
benefits and the need of disclosure in the annual report.
 The two journals highlights the need of the management discretion in the
management of the employee related issues. This would ideally involve
extensive use of assumptions, estimates and judgement based on experience
on part of the management.
 Since, these matters are subjective in nature, it would require a greater
attention of the auditors as he would be requiring to analyse the basis of these
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nature of assumptions and estimates in line with the laid down accounting
principles and relevant guidelines including the accounting journals.
Purpose of the two studies
For this we need to go through a relevant article articulated and presented by Richard and
Stephan. The article is titled “The negative effect of an accounting standard on employee
welfare: the case of McDonnell Douglas Corporation and FASB 106”. This study explains in
detail the negative repercussions on the employees when employee well-being decisions are
taken by the respective employers purely considering the economic considerations. The
management invariably tends to focus solely on the paying off the employee benefits under the
statutes and the compliance framework which effects the overall quantum of benefits paid to the
employees. The rules prescribed in FASB 106 provide that employers are expected to
accumulate the benefits of employees in the form of medical, life insurance and retirement plans
and which are to be paid to the employee over and after the work life of the individual (Richard
& Stephan, 1995). There are one more relevant article titles as “Attaining legitimacy by
employee information in annual reports”. The article is documented and presented by two
people, Pamela and Tamara. One of the main areas of focus of this article is to lay focus on the
disclosure by the company of all information that relates to the benefits paid to the employees in
the audit report of the company. The image of the company takes a boost in the society if there
remains a transparency in the acknowledging the remuneration the company pays to towards its
human capital. The disclosure related to employee remuneration is not an isolated reporting. It is
a part of the overall corporate governance requirements of the entity that the companies are
expected to make to the society at large (Pamela & Tamara, 2013)
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Similarities and Differences between the two articles.
The above-mentioned corporation in this case terminated the prevalent employee benefits in their
organization immediately at the year-end in which the laws relating to FASB 106 was adopted.
The company went to justify the act by saying that the termination of the benefits and the
commencement of the FASB rules have no connection to each other. They furthered their case
stating that this would be cost beneficial for the company as the defence industry of which they
were a part of were facing severe budget constraint and pricing issues. The thing to be noted
here is that the corporation is touted as the one of the largest companies in aerospace production
equipment in the world. For the non-union employees, their health benefits provided earlier were
done away with. The reasoning provided was the rules laid down by the FASB 106 which has
specific mention about certain aspects of health benefits which are post retirement. The standard
puts down a whole new approach of computation which is basically the pay-per-as-you-go
approach by accruing the anticipated cost of the health benefits post retirement (Trieu, 2017).
The second article shows some research that has been done been on many listed companies that
make employee related disclosures to prove the correctness of their observation. They have
categorized the information related to employee’s relation as positive or negative or a
combination of both. This article also does some analysis on the disclosures pertaining to social
responsibilities linking the company and the social environment in which it operates. The study
also inculcates the inclusiveness of the human capital as well as the participation on the
community standards. The primary concern of the study is to highlight the fact as to whether
these disclosures create a positive impact on the society or not. There is no law stating
compulsory employee remuneration requirement to be made by the companies but it’s done
voluntarily to as an enhanced part of corporate responsibility.
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Major implications of their research
The FASB has clear cut policies relating to accounting treatment to be followed for retirement
benefit plans which are to rest on conformed terms between the employer and the employee.
FASB 106 defines post retirements benefits as not being gratuities. They are to be considered as
part of the employee remuneration for rendering their services to the company. As the payment
for this compensation is not made upfront or on recurring basis by the employer, these can be
considered as deferred compensation. Unlike an ad-hoc amount being paid as a flat amount at the
time of retirement, they are to be paid by the employer based on the computation of the quantum
of services rendered by them over the years for the company. This would eventually turn out to
be a computation based on their earning (Werner, 2017). Since it would be covered under the
terms of the agreement a d would be a part of the total compensation, an employer cannot back
track from its commitment to pay at a later stage by simply scrapping the plan. This ultimately
shows, that FASB was designed in a way to reduce these uncalled-for situations where
employers terminates plan after a certain point of time and as a result the employee suffers the
financial brunt. The company justification of termination of the prevalent benefits was in
account of the overall cost considerations of the company was not taken well among the
employee union for obvious reasons. The bone of contention of the article who among the
employee or the employer was justified. The principle argument for the management was that it
was responsible for the profitability of the company and its growth and it must improve the
quantum of returns that the stakeholders receive and hence their decision was in the best interest
of the company. Therefore, it justifies the approach as ethical purely from an organizational and
shareholder point of view. It is alright to look after the profitability but if it comes at a cost of
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disgruntled employees, then it needs to be thought again. From the point view of employees, they
are being denied of the rights which they were promised to be paid. This is unethical. The
employees of any company would play a pivotal role in the growth of the company and
undermine the human capital will not help the company in achieving its objectives in the long
run. A trust deficit in the employer-employee relationship will hamper the performance of the
employees (Arnott, et al., 2017).
The main conclusion that we observe is that the rights of employees are being considered
subordinate to the interest of the shareholders and they remain vulnerable to financial
exploitation. It is among the responsibilities of the company to take good care and safeguard the
interest of the employees and not make them a scapegoat in fulfilling objectives of other
stakeholders.
The disclosures are to be made only if the management decides to do it. A debate on the overall
significance of the corporate social responsibilities and its effect and impact on the society as
well as to the company has been raging on for quite some time. It is thus established giving the
credit the where its due is not only a principle for personal affairs but also has its application in
the corporate hemisphere. The rewards, incentives and compensation meted out to the employees
is a method to recognize their effort in building the stature of the company both financially and
in other terms. This information regarding this needs to be made public so that the society is
made aware that there is collective growth that has taken place or is taking place and it’s not only
about the company but also the people associated with it. It is true that one of the primary
concern of the people charged with the governance and managerial aspects of the entity are to
create value for the shareholders but it is also to be considered that it should not come at the cost
interest of employees being compromised (Belton, 2017).
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Conclusion
Just like any other tangible or intangible asset would have a level of significance in an
organization, human capital, i.e., the human resources are a very valuable part of the
organization in its pursuit towards growth and achieving the objectives. Impeding employee
confidence by not proving them with the benefits will have a very negative impact on the
organization (Jefferson, 2017). When appropriate disclosures regarding employee pay out is
disclosed in the annual report, it builds the confidence of the society on the organization and
creates an atmosphere of contentment and harmony.
References
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Alexander, F., 2016. The Changing Face of Accountability. The Journal of Higher Education, 71(4), pp.
411-431.
Arnott, D., Lizama, F. & Song, Y., 2017. Patterns of business intelligence systems use in organizations.
Decision Support Systems, 97, pp. 58-68.
Belton, P., 2017. Competitive Strategy: Creating and Sustaining Superior Performance. London: Macat
International ltd.
Jefferson, M., 2017. Energy, Complexity and Wealth Maximization, R. Ayres. Springer, Switzerland.
Technological Forecasting and Social Change, pp. 353-354.
Pamela, K. & Tamara, Z., 2013. Attaining legitimacy by employee information in annual reports.
Accounting, Auditing & Accountability Journal, 26(7), pp. 1072-1106.
Richard, B. & Stephan, H., 1995. The negative effect of an accounting standard on employee welfare: the
case of McDonnell Douglas Corporation and FASB 106. Accounting, Auditing & Accountability Journal,
8(3), p. 12.
Trieu, V., 2017. Getting value from Business Intelligence systems: A review and research agenda.
Decision Support Systems, 93, pp. 111-124.
Werner, M., 2017. Financial process mining - Accounting data structure dependent control flow
inference. International Journal of Accounting Information Systems, 25, pp. 57-80.
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