GRADED QUESTIONS IN INTERNATIONAL FINANCIAL REPORTING

22.5 Provision for leave pay and bonuses, and (Page 1 of 2 pages)
defined contribution plan
INTERMEDIATE (Time guide: 45 minutes)

As an IFRS expert in a large accounting firm, you are required to address the following employee benefit
transactions of various clients:

PROVISION FOR LEAVE PAY OF SPORTCO LIMITED (‘SPORTCO’)

Sportco operates in the sports equipment manufacturing industry, supplying its products and services in the
South African market as well as internationally. The company has a 31 December year-end.

The conditions of employment at Sportco stipulate that each ‘non-management’ category employee is
entitled to 15 paid working days as annual leave per annum. Sportco operates a six-day working week.
The employee statistics at 31 December 20.9 are as follows:

Number of Annual gross Expected Average unused annual leave days at 31

employees salary for the average annual staff December 20.9
at this year ended turnover from
annual 31 December 31 December 20.9
salary level 20.9 onwards
R Earned Earned during Earned during
during 20.7 20.8 20.9
750 80 000 11% 2 6 11

Annual leave is carried forward for two financial years. The employees’ entitlement to annual leave falls
away at the earlier of twenty-four months after the end of the financial year in which it was earned or when
the employee leaves the employ of Sportco.

There were no salary increases for the last five years but all salaries are expected to increase by 7% with
effect from 1 January 20.10 and 8% with effect from 1 January 20.11.

Sportco expects that 76% of the annual leave earned and unused in a particular financial year is taken
within twelve months after the year-end in which it was earned and the remaining 24% of the annual leave
carried forward is taken in the following twelve months (i.e. after 12 months after the year-end in which
leave was earned).

VACATION LEAVE PAY PROVISION OF USA LIMITED

The employees of USA Limited are entitled to 20 working days paid vacation leave per annum. Vacation
leave that is not used up by the employee in a particular year may be carried forward to the following year
after which it lapses. At 31 December 20.8, USA Limited had 400 employees. The weighted average
compensation per employee per working day for the 20.8 financial year amounts to R650. An average
increase in salaries of 8% per annum will take effect from 1 January 20.9.

The payroll records for the 20.8 financial year reveal that, on average, 180 employees have used up 15 days
of their current year’s entitlement, 120 employees have used up 10 days of their current year’s entitlement,
while the rest of the employees have utilized their entire year’s entitlement.

Based on past experience, it is estimated that only 280 employees will utilise an average of 4 days each
from their 20.8 unused leave entitlements during 20.9. At 1 January 20.8, the “Liability - Provision for
vacation leave pay” account reflected a credit balance of R550 240.

Chapter 22: Employee Benefits

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 GRADED QUESTIONS IN INTERNATIONAL FINANCIAL REPORTING

22.5 (Page 2 of 2 pages)

PROVISION FOR BONUSES OF TEKWENI LIMITED

The performance bonuses that Tekweni Limited pays to its employees was introduced on 1 January 20.8
for the first time. The total performance bonus for the year is calculated at 12% of the excess of reported
net profit for the year over a predetermined targeted net profit (established annually in advance).

The performance bonus is allocated on a pro-rata basis between all employees in proportion to their gross
salaries. Those employees that were employed for the entire 12 months of the year in which the bonus was
earned and who remain in the employ of Tekwini Ltd for the subsequent 12-month period, will, in terms of
their contracts, be paid their bonuses.

The predetermined target net profit for the year ended 31 December 20.8 was set at R200 million. Tekwini
Ltd reported net profit of R280 million for the year ended 31 December 20.8

Tekwini Ltd’s employee profile is as follows:

No. of employees in Annual gross salary for the Average annual staff
each salary category year ended 31 December turnover
as at 1 January 2015 2015
600 R100 000 25%
150 R250 000 12%
40 R600 000 5%
10 R900 000 2%
1 R1 400 000 0%

SPECIAL CONTRIBUTION TO PENSION FUND BY VIENNA LIMITED

During 20.8, Vienna Limited made an announcement whereby it pledged to make three (3) annual
payments of R200 000 each to its employees’ pension fund, a defined contribution plan.

The special contribution was part of the celebrations of the company’s centenary year since incorporation.
The first payment was made on 31 December 20.8 and the other two payments will be made on 31
December 20.9 and 31 December 20.10.

The market yield on high quality corporate bonds is 9%.

REQUIRED:

1. Calculate the leave pay provision to be raised by Sportco Limited at 31 December 20.9. 10
2. Prepare the entries, in journal entry form, in the accounting records of USA Limited for
the year ended 31 December 20.8 to reflect all matters relating to the vacation leave pay
provision. 6
3. Determine the provision for bonuses that should be raised by Tekwini Ltd for the year
ended 31 December 20.8 6
4. Write a report to the chief executive officer of Vienna Limited advising her of the
accounting implications (together with supporting calculations) for the 20.8 financial
year, of the announcement of the special contribution to the defined contribution
pension plan of Vienna Limited. 8

Chapter 22: Employee Benefits

© Stainbank, Razak and Jankeeparsad
 GRADED QUESTIONS IN INTERNATIONAL FINANCIAL REPORTING

SUGGESTED SOLUTION – 22.5 (Page 1 of 2 pages)

SPORTCO LIMITED

20.8 Leave expected to be used during 20.10

= 750 x [R80 000/365 x 7/6] x (100% - 11% - 11%) x 24% x 6
R215 408 x 1.07 salary increase R230 486

20.9 Leave expected to be used during 20.10

= 750 x [R80 000/365 x 7/6] x (100% - 11%) x 76% x 11
R1 426 926 x 1.07 salary increase R1 526 811

20.9 Leave expected to be used during 20.11

= 750 x [R80 000/365 x 7/6] x (100% - 11% - 11%) x 24% x 11
R394 915 x 1.07 x 1.08 salary increase R456 364
Leave pay provision at 31 December 20.9 2 213 661

USA LIMITED

31 December 20.8
Increase in leave pay provision (P/L) 236 000
Liability - Provision for vacation leave pay 236 000
Accounting for increase in leave pay provision
280 x 4 x R650 x 108% = 786 240
786 240 c/b – 550 240 o/b = 236 000

TEKWENI LIMITED

No. of employees Annual gross Annual average

in each salary salary for the staff turnover
category year ended 31
December 2015

600 R100 000 25% 600 x 100 000 60 000 000

150 R250 000 12% 150 x 250 000 37 500 000
40 R600 000 5% 40 x 600 000 24 000 000
10 R900 000 2% 10 x 900 000 9 000 000
1 R1 400 000 0% 1 x 1 4000 000 1 400 000
Total gross salary R131 900 000

Annual gross
salary
R100 000 (100% - 25% [new employees for current year] – 25%
[employees who will leave next year]) x (60m/131.9m {W1}) x
12% (280m – 200m) = 2 183 472
R250 000 (100%-12%-12%) x (37.5m/131.9m) x 12% x 80m = 2 074 299
R600 000 (100% 5% - 5%) x (24m/131.9m) x 12% x 80m = 1 572 100
R900 000 (100% -2% - 2%) x (9m/131.9m) x 12% x 80m = 628 840
R1 400 000 (100% 0% - 0%) x (1.4m/131.9m) x 12% 80m = 101 895
Provision for bonuses 6 560 606

Chapter 22: Employee Benefits

© Stainbank, Razak and Jankeeparsad
 GRADED QUESTIONS IN INTERNATIONAL FINANCIAL REPORTING

SUGGESTED SOLUTION – 22.5 (Page 2 of 2 pages)

VIENNA LIMITED

TO: THE CHIEF EXECUTIVE OFFICER – VIENNA LIMITED

I present below an assessment of the accounting implications of the special pension fund contribution
of Vienna Limited on the 31 December 20.8 financial statements.

Special contribution to pension fund

In terms of IAS 19, the liability for a defined contribution plan is raised when the employee has rendered
service to the company. At the same time, an expense will be recognised in profit or loss.

Although the contributions will be made over 3 years, the link to employee’s service will need to be
ascertained.

The extra contributions being made are because of the centenary year. Therefore, it does not appear to be
specifically linked to future service and therefore all employees will have an immediate vested right to
increased benefits that will result from the contribution.

This arises from a past event in terms of the definition of a liability in the conceptual framework.
Vienna Limited’s exposure is in effect, a ‘constructive obligation’ at 31 December 20.8.
Therefore, the company should raise the expense and the liability for the full amount immediately in the
financial statements. As the first contribution is paid, the liability should be reduced.
As the second and third contributions do not fall within 12 months of the vesting date, Vienna Ltd should
discount the contribution at the market yield on high quality corporate bonds of 9%.

In the financial statements for the year-ended 20.8, an expense of R551 822 (W1) and the liability in the
statement of financial position will be R351 822 (W2).

In terms of IAS 1, this item may be considered to be separately disclosable in profit or loss because of its
size, nature or incidence, and may be noted if so.

W1 - 200 000 + (200 000 / 1.09) + (200 000 / 1.09 / 1.09) = R551 822
W2 - (200 000 / 1.09) + (200 000 / 1.09 / 1.09) = R351 822 or (551 822 – 200 000)

Please do not hesitate to contact me should you require further information.

Regards
IFRS Advisor

Chapter 22: Employee Benefits

© Stainbank, Razak and Jankeeparsad