employee compensation: payroll, pensions, and other compensation issues

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Employee Employee Compensation: Compensation:

Payroll, Payroll, Pensions, and Pensions, and

Other Other Compensation Compensation

IssuesIssues

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Account for payroll and payroll taxes, and understand the criteria for recognizing a liability associated with compensated absences.

Compute performance bonuses and recognize the issues associated with postemployment benefits.

Understand the nature and characteristics of employer pension plans, including a detailed discussion of defined benefit plans.

Learning Objectives

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Use the components of prepaid/accrued pension costs and changes in the components to compute the periodic expense associated with pensions.

Prepare required disclosures associated with pensions, and understand the accounting treatment for pension settlements and curtailments.

Learning Objectives

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Learning Objectives

Describe the few remaining differences between U.S. pension accounting standards and the provisions of IAS 19.

EXPANDED MATERIAL Explain the differences in accounting for pensions and

postretirement benefits other than pensions, and be able to account for postretirement benefits other than pensions.

5Employee CompensationEvent Line

PayrollPayroll

Compensated Compensated AbsencesAbsences

Stock OptionsStock Optionsand Bonusesand Bonuses

Postemployment Postemployment BenefitsBenefits

Pensions and Pensions and Postretirement Benefits Postretirement Benefits

Other Than PensionsOther Than Pensions

Time

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Payroll and Payroll Taxes

Federal old-age, survivors’, disability, and hospital insurance (tax to both the employee and employer).

Federal unemployment insurance (tax to employer only).

State unemployment insurance (tax to employer only).

Individual income tax (tax to employee only).

Social security and income tax legislation Social security and income tax legislation impose four taxes based on payrolls:impose four taxes based on payrolls:

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Salary Expenses and Liabilities

The employee’s gross earnings are an expense to the employer.

Withholdings are an expense to the employee, not to the employer.

Withholdings become a liability to the employer only because the employer keeps money earned by employees and pays obligations on their behalf.

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Accounting for a Payroll

Employers make this entry to record expense for salaries paid to employees:

Salaries Expense 2,000 FICA Taxes Payable 133 Employees Income Taxes Payable 540 Cash 1,327

To record payment of payroll and related employee withholdings.

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Payroll taxes are: An expense to the

employer. A liability to the

employer until they are paid.


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Employers make this entry to record their portion of FICA and other payroll taxes:

Payroll Tax Expense 204 FICA Taxes Payable 133 State Unemployment Taxes Payable 50 Federal Unemployment Taxes Payable 21 To record the payroll tax liability of the employer.


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Compensated Absences

Compensated absences include payments by

employers for vacation, holiday, illness, or other

personal activities.

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S&N Corporation has 20 employees who are paid an average of $350 per

week. During 2001, a total of 40 vacation weeks was earned by all employees, but only 30 weeks of

vacation were taken.

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The entry to record the accrued vacation on December 31, 2001, would be:

Wages Expense 3,500Vacation Wages Payable 3,500 To record accrued

vacation wages ($350 x10 weeks).

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In 2002, when the additional vacation weeks are taken, the average rate has increased to $400 per week.Wages Expense 500Vacation Wages Payable 3,500

Cash 4,000 To record payment at

current rates of previouslyearned vacation time ($400 x 10 weeks).

15Major Categories of Pension Plans

Government plans, primarily social security

Individual plans, such as individual retirement accounts (IRAs)

Employer plans

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Pension Fund Characteristics

• Noncontributory• Contributory• Defined Contribution• Defined Benefit• Vested Benefits

17Potential Measures ofPension Liability

VestedBenefit

Obligation

AccumulatedBenefit

Obligation

ProjectedBenefit

ObligationBenefits forvestedemployeesat currentsalaries

Benefits for vested and non-vested employees at current salaries

Benefits for vested and nonvested employees at future salaries

(GAAP)PV of ExpectedCash Flows

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Defined Benefit Pension Plans

EmployerEmployer Current Current EmployeesEmployees

Services

Wages and Salaries

Pension Pension FundFund

Con

tribu

tions

Retired Retired EmployeesEmployeesDefined Benefits

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It says that vesting occurs when an employee has met certain specified

requirements...

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…and is eligible to receive pension benefits at retirement even if the employee stops working

for the employer.

Calculating Pension Costs

A Spreadsheet Approach

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The Basic Spreadsheet

Formal Accounts Memorandum AccountsPrepaid/ Periodic

UnamortizedTransition Gain/Loss

Annual Accrued Pension Fair ValuePension Pension Cost of PlanExpense Cash Cost Items PBO Assets

Beginning Balances(a) Service Cost(b) Interest Cost(c) Actual Return on Assets(d) Benefits Paid(e) PSC Amortization(f) Transition Amortization(g) Deferred Gain(h) Amort. of Deferred Loss

Summary Journal Entries(1) Annual Pension Cost Acc.(2) Annual Pension Contri.(3) Min. Liab. Adjustment

Deferred Gain/Loss

UnrecognizedPrior Service

Cost

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Memorandum Accounts

ProjectedBenefit

Obligation

Fair Value of Plan Assets

DeferredGain/Loss


Cost

UnamortizedTransitionGain/Loss

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• Actuarial present value of pension benefits.• Uses the benefits per year of service approach.• Assumes future compensation levels.

PBOEoY

= PBOBoY

+ ServiceCost

InterestCost

+ ±Change inActuarial

Assumptions

RetirementBenefits

Paid-

ProjectedBenefit

Obligation

Memorandum Accounts


DeferredGain/Loss


Cost


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• Amount that could be received from the sale of plan assets in a current sale between a willing buyer and seller.

• Increased by employer/employee contributions.• Decreased by benefits paid.FVPAEoY

= FVPABoY + Contributions - Benefits

Paid ±ActualReturn

on Assets

ProjectedBenefit

Obligation

Memorandum Accounts


DeferredGain/Loss


Cost


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ProjectedBenefit

Obligation

Memorandum Accounts


DeferredGain/Loss


Cost


• The difference between the actual and expected return.

• The FASB decided to minimize the volatility of net periodic pension expense by allowing deferral of some gains and losses and amortization over future periods rather than requiring immediate recognition.

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ProjectedBenefit

Obligation

Memorandum Accounts


DeferredGain/Loss



Cost

• The difference between the PBO and the FVPA at the time FASB Statement No. 87 was adopted by a company.

• If the PBO was the larger of the two values at the transition date, the difference was a loss.

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• When a pension plan is initially adopted or amended to provide increased benefits, employees are granted additional benefits for services performed in years prior to the plan’s adoption or amendment.

ProjectedBenefit

Obligation

Memorandum Accounts


DeferredGain/Loss


Cost


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Corridor Amortization

– market-related value of plan assets at the beginning of the year.

• Amortization is required only on portion of unrecognized net gain or loss that exceeds 10% of the greater of:– PBO, or

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Corridor Amortization

• May use any amortization method that– equals or exceeds straight-line amortization

over remaining expected service years of covered employees, and

– is consistently applied.

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Periodic Memorandum Entries

Service cost Interest cost Actual return on plan assets Benefits paid Prior service cost amortization Transition amortization Deferred gain/loss Amortization of deferred gain/loss

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Periodic Memorandum EntriesProjectedBenefit

Obligation

PeriodicPension

CostService Cost XXX (XXX)

Present value of additional benefits earned by employees during the year

• Increases periodic pension cost (debit).• Increases PBO (credit).

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Periodic Memorandum EntriesProjectedBenefit

Obligation

PeriodicPension

Cost

Interest Cost XXX (XXX)

Calculated as settlement interest rate multiplied by beginning of year PBO--represents increase in PBO due to interest.

• Increases periodic pension cost (debit).• Increases PBO (credit).

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Periodic Memorandum EntriesPeriodicPension

Cost

(XXX) XXX

Fair Valueof Plan Assets

Actual Return onPlan AssetsMeasures actual earnings on pension assets.

• Decreases periodic pension cost (credit).• Increases fair value of plan assets (debit).

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Periodic Memorandum Entries

XXX (XXX)

Fair Valueof Plan Assets

Records payments to pension beneficiaries.

• Decreases PBO (debit).• Decreases fair value of plan assets (credit).

Benefits Paid

ProjectedBenefit

Obligation

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Cost


CostsPrior ServiceCost Amortization

XXX (XXX)

Records amortization of prior service costs.

• Increases periodic pension cost (debit).• Decreases unrecognized prior service

cost (credit).

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Cost

(XXX)XXX

Records amortization of unrecognized transition gain or loss.

• Impacts periodic pension cost and unamortized transition gain/loss.

• Nature of debits and credits varies by gain or loss status.

TransitionAmortization

XXX(XXX)

UnamortizedTransition

(Gain)/Loss

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Cost

UnrecognizedNet Pension(Gain)/Loss

Deferred Gain/Loss (XXX)

XXXXXX

(XXX)

Records deferral of net pension gain or loss.• Impacts periodic pension cost and unrecognized

net pension gain/loss.• Nature of debits and credits varies by gain or

loss status.

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Cost

UnrecognizedNet Pension(Gain)/Loss

(XXX)XXX

XXX(XXX)

Amortizationof Deferred(Gain)/LossRecords corridor amortization.

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Formal Accounts

• Records total pension costs accrued.• Debited for the sum of all periodic

pension cost items.

NetPensionExpense Cash

Prepaid/AccruedPension

Cost

PeriodicPension

Cost Items

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Formal Accounts

NetPensionExpense


Cost

• Records cash expended for contributions to plan assets.

• Debited for actual amount of cash contributed to pension fund.

Cash

PeriodicPension

Cost Items

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Formal Accounts

Cash

• Reflects changes in net pension asset or liability.

• Debited for cash contributions to pension plan assets.

• Credited for net pension cost.

NetPensionExpense


Cost

PeriodicPension

Cost Items

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PeriodicPension

Cost Items

Formal Accounts

• Records noncurrent asset arising from recognition of additional pension liability for unfunded pension plans.

• Account balance should not exceed the sum of unrecognized transition loss plus prior service costs.

NetPensionExpense Cash


Cost

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Summary Journal Entries

Annual Pension Cost Accrual

Annual Pension Contribution

Minimum Liability Adjustment

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PensionCost


CostAnnual PensionCost Accrual XXX (XXX)• Records sum of periodic pension cost

items.• Increases pension cost (debit).• Increases pension liability (credit to

Prepaid/Accrued Pension Cost).

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Cash


Cost

(XXX) XXX

• Records contributions to plan assets.• Decreases pension liability (debit to

Prepaid/Accrued Pension Cost).• Decreases Cash (credit).

Annual PensionContribution

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Cost(XXX)

• Records minimum pension liability.• Increases pension liability (credit to

Prepaid/Accrued Pension Cost).• Increases Pension Cost (credit).

Minimum LiabilityAdjustment

PensionCostXXX

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Minimum Pension Liability

• Net amount of pension liability that must be reported for underfunded plans.

• Measured as difference between ABO and Fair Value of Plan Assets.

Minimum Pension ABO - FV Plan Liability Assets=

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The End

employee compensation: payroll, pensions, and other compensation issues

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