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

SOLUTIONS
Solution No. 1
Days Rate* Amount
(Rs.) (Rs.)
Balance as on 01-07-19 540 1,000 540,000
Leave encashment (75) 1,000 (75,000)
Expense for the year (balancing) 357,000
Balance as on 30-06-20 **685 1,200 822,000

* Monthly salary x 12/300

** Year end balance = 540 - 75 + 100 x 10 - 40 x 6 - 60 x 9 = 685 days

Solution No. 2
Since brought forward leaves balance could not be availed in 2020 and hence expired, therefore, opening
obligation must be reversed.

Dr. Obligation for compensated absence [240 x Rs. 800] 192,000

Cr. P&L 192,000

At 30-06-20 average unused leaves balance is 2 days for 100 employees but only 30 employees are expected
to utilize this balance in 2021 and unused leaves of 70 employees will lapse. Therefore, obligation will be
recorded for 60 days (30 x 2 days) as follows:

Dr. P&L [60 x Rs. 1,000] 60,000

Cr. Obligation for compensated absence 60,000

Solution No. 3
Rs.
Excess profit [10,500,000 - 8,000,000] 2,500,000

Profit distribution to directors [2,500,000 x 10% x 4/5] 200,000

Profit distribution to other employees [2,500,000 x 90% x 21%] 472,500
672,500

Journal entry Rs. Rs.

Dr. Employee cost 672,500
Cr. Bonus payable 672,500

Solution No. 4

Annual pension = Rs. 40,000 x 1.064 x 2.5% x 5 = Rs. 6,312

Lumpsum amount of pension (assuming 4 years remaining life) = Rs. 6,312 x annuity factor = Rs. 20,010
Benefit unit for each year service = Rs. 20,010 / 5 = Rs. 4,002

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 EMPLOYEE BENEFITS (IAS-19) - SOLUTIONS (2)

Yr-1 Yr-2 Yr-3 Yr-4 Yr-5

------------------------- Rs. --------------------------
Opening balance - 2,733 6,013 9,922 14,553
Interest cost [Opening x 10%] - 273 601 992 1,455
Current service cost 2,733 3,007 3,308 3,639 4,002
[PV of single unit i.e. Rs. 4,002]
Closing balance 2,733 6,013 9,922 14,553 20,010
[PV of cumulative units]

Solution No. 5
(a)
With defined contribution plans, the employer (and possibly, as here, current employees too) pay regular
contributions into the plan of a given or 'defined' amount each year. The contributions are invested, and the
size of the post-employment benefits paid to former employees depends on how well or how badly the plan's
investments perform. If the investments perform well, the plan will be able to afford higher benefits than if
the investments performed less well. The B scheme is a defined contribution plan. The employer's liability is
limited to the contributions paid.

With defined benefit plans, the size of the post-employment benefits is determined in advance, i.e. the
benefits are 'defined'. The employer (and possibly, as here, current employees too) pay contributions into the
plan, and the contributions are invested. The size of the contributions is set at an amount that is expected to
earn enough investment returns to meet the obligation to pay the post-employment benefits. If, however, it
becomes apparent that the assets in the fund are insufficient, the employer will be required to make additional
contributions into the plan to make up the expected shortfall. On the other hand, if the fund's assets appear
to be larger than they need to be, and in excess of what is required to pay the post-employment benefits, the
employer may be allowed to take a 'contribution holiday' (ie stop paying in contributions for a while).

The main difference between the two types of plans lies in who bears the risk: if the employer bears the risk,
even in a small way by guaranteeing or specifying the return, the plan is a defined benefit plan. A defined
contribution scheme must give a benefit formula based solely on the amount of the contributions.

A defined benefit scheme may be created even if there is no legal obligation, if an employer has a practice of
guaranteeing the benefits payable. The A scheme is a defined benefit scheme. The employer, guarantees a
pension based on the service lives of the employees in the scheme. The company's liability is not limited to the
amount of the contributions. This means that the employer bears the investment risk: if the return on the
investment is not sufficient to meet the liabilities, the company will need to make good the difference.

(b)
Plan A
Extracts - SOFP
Rs. million
Non-current liabilities
Net defined benefit liability 15

Extracts – SOCI
Rs. million
Employee cost (20.50)
Other comprehensive income:
Remeasurement loss (1.50)

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 EMPLOYEE BENEFITS (IAS-19) - SOLUTIONS (3)

Extracts – Notes
Amounts recognized in SOFP
Rs. million
PV of defined benefit obligation 240
Fair value of plan assets (225)
Net defined benefit liability 15

Amounts recognized in P&L

Rs. million
Current service cost (20)
Net interest [10 – 9.50] (0.5)
(20.5)

Amounts recognized in OCI

Rs. million
Actuarial loss (29.00)
Return on plan assets 27.50
(1.50)

Reconciliation of PV of defined benefit obligation

Rs. million
Opening balance 200.00
Interest cost [200 x 5%] 10.00
Current service cost 20.00
Benefits paid (19.00)
Actuarial loss (balancing figure) 29.00
Closing balance 240.00

Reconciliation of Fair value of plan assets

Rs. million
Opening balance 190.00
Interest income [190 x 5%] 9.50
Contributions 17.00
Benefits paid (19.00)
Return on plan assets (balancing figure) 27.50
Closing balance 225.00

Solution No. 6
Extracts - SOFP
Rs. million
Non-current liabilities
Net defined benefit liability 213

Extracts – SOCI
Rs. million
Employee cost (179)
Other comprehensive income:
Remeasurement gain 46

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 EMPLOYEE BENEFITS (IAS-19) - SOLUTIONS (4)

Extracts – Notes
Amounts recognized in SOFP
Rs. million
PV of defined benefit obligation 3,375
Fair value of plan assets [3,170 – 8] (3,162)
Net defined benefit liability 213

Amounts recognized in P&L

Rs. million
Current service cost (40)
Net interest [188 – 174] (14)
Past service cost (125)
(179)

Amounts recognized in OCI

Rs. million
Actuarial loss (64)
Return on plan assets 110
46

Reconciliation of PV of defined benefit obligation

Rs. million
Opening balance 3,000
Past service cost 125
Interest cost [3,125 x 6%] 188
Current service cost 40
Benefits paid (42)
Actuarial loss (balancing figure) 64
Closing balance 3,375

Reconciliation of Fair value of plan assets

Rs. million
Opening balance 2,900
Interest income [2,900 x 6%] 174
Contributions 20
Benefits paid (42)
Return on plan assets (balancing figure) 110
Closing balance 3,162

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