EMPLOYEE BENEFITS (IAS-19) - QUESTIONS (1)

PRACTICE QUESTIONS
Question 1
Employees of Alpha Limited (AL) are entitled to 10 paid leaves for each year. Unused leaves are entitled to cash
payment on leaving the entity. Average salary of employees for the year 2020 is Rs. 30,000 per month (2019:
Rs. 25,000 per month). As on June 30, 2019 there were 115 employees and their cumulative unused
compensated absences were 540 days.
During 2020, 15 employees resigned who cashed their unused leaves of 75 days. Of remaining employees 40%
employees availed 6 leaves each and 60% employees availed 9 leaves each.
Required:
Assuming 300 working days in a year, calculate the amount of compensated absence obligation at June 30,
2020 and related expense for the year 2020.

Question 2
Employees of Beta Limited (BL) are entitled to 5 paid leaves for each year. Unused leaves may be carried
forward for one calendar year (i.e. non-vesting). Leaves are allowed on LIFO basis therefore leave is taken first
out of the current year’s entitlement and then out any balance brought forward from the previous year.
Average salary of employees for the year 2020 is Rs. 1,000 per day (2019: Rs. 800 per day). As on June 30, 2019
there were 100 employees and their carried forward unused compensated absences were 240 days.
During 2020, on an average each employee availed 3 leaves. It is expected that during 2021, 70 employees will
avail 5 leaves or less, whereas 30 employees will avail 7 leaves.
Required:
Calculate the amount of compensated absence obligation at June 30, 2020 and related expense for the year
2020.

Question 3
Gamma Limited (GL) has offered its employees (including 5 directors) following profit share for their service
for the year:
o 10% of the profit in excess of target profit will be distributed to 5 directors, but each director can get a
maximum share equal to 20% of that profit share.
o 25% of the remaining excess profit (i.e. after deducting 10% share dedicated to directors) will be
distributed to all employees other than directors.

However, this profit share will be distributed to only those employees (including directors) who remain
employed till June 30th next year. Target profit for the year ending December 31, 2019 was set at Rs. 8,000,000.
However actual profit for the year 2019 was Rs. 10,500,000. Financial statements for the year ended December
31, 2019 are being finalized. It is estimated that one director will leave before June 30, 2020. Moreover, other
employees are also expected to leave as a result of which distribution of remaining excess profit to other
employees will reduce to 21%.
Required:
Journal entry to record profit share distribution for the year ending December 31, 2019.

Question 4
An annual pension equal to 2.5% of final salary multiplied by number of years of service will be paid from
retirement till death. Annual salary in year 1 is expected to be Rs. 40,000 and it is assumed to increase 6% per
year. Appropriate discount rate is 10%.
Required:
Assuming that employee will remain employed for 5 years and will live for 4 years after retirement, show yearly
calculations for service period of 5 years relating to defined benefit obligation and related costs.

NASIR ABBAS FCA

Question 5
A company is operating two post-employment benefits plans (funded), the details of which are as follows:
Plan A
The terms of the plan are as follows.
(i) Employees contribute 6% of their salaries to the plan.
(ii) Employer contributes, currently, the same amount to the plan for the benefit of the employees.
(iii) On retirement, employees are guaranteed a pension which is based upon the number of years service with
the company and their final salary.

The following details relate to the plan in the year to December 31, 2019:
Rs. million
Present value of obligation at January 1, 2019 200
Present value of obligation at December 31, 2019 240
Fair value of plan assets at January 1, 2019 190
Fair value of plan assets at December 31, 2019 225
Current service cost 20
Pension benefits paid 19
Total contributions paid to the scheme for year to December 31, 2019 17

The interest rate on high quality corporate bonds for the two plans are:
January 1, 2019 5%
December 31, 2019 6%

Plan B
Under the terms of the plan, the company does not guarantee any return on the contributions paid into the
fund. The company's legal and constructive obligation is limited to the amount that is contributed to the fund.
The following details relate to this scheme:
Rs. million
Fair value of plan assets at December 31, 2019 21
Contributions paid by company for year to December 31, 2019 10
Contributions paid by employees for year to December 31, 2019 10

Required:
(a) Discuss the nature of and differences between above two plans.
(b) Prepare extracts of SOFP, SOCI and notes for the year 2019 in respect of Plan A only.

Question 6
Savage, a public limited company, operates a funded defined benefit plan for its employees. The plan provides
a pension of 1% of the final salary for each year of service. The cost for the year is determined using the
projected unit credit method. This reflects service rendered to the dates of valuation of the plan and
incorporates actuarial assumptions primarily regarding discount rates, which are based on the market yields
of high quality corporate bonds.
The directors have provided the following information about the defined benefit plan for the current year (year
ended June 30, 2020).
(a) The actuarial cost of providing benefits in respect of employees' service for the year to June 30, 2020 was
Rs. 40 million. This is the present value of the pension benefits earned by the employees in the year.
(b) The pension benefits paid to former employees in the year were Rs. 42 million.
(c) Savage should have paid contributions to the fund of Rs. 28 million. Because of cash flow problems Rs. 8
million of this amount had not been paid at the financial year end of June 30, 2020.

NASIR ABBAS FCA

(d) The present value of the obligation to provide benefits to current and former employees was Rs. 3,000
million at June 30, 2019 and Rs. 3,375 million at June 30, 2020.
(e) The fair value of the plan assets was Rs. 2,900 million at June 30, 2019 and Rs. 3,170 million (including the
contributions owed by Savage) at June 30, 2020.

With effect from July 1, 2019, the company had amended the plan so that the employees were now provided
with an increased pension entitlement. The actuaries computed that the present value of the cost of these
benefits at July 1, 2019 was Rs. 125 million. The interest rate on high quality corporate bonds was as follows
from the following dates:
June 30,2019 6%
June 30, 2020 7%

Required:
Prepare extracts of SOFP, SOCI and notes for the year 2020.

NASIR ABBAS FCA