2

PRESCRIBED WORK
FINANCIAL ACCOUNTING 300
DEPARTMENT 1. IAS 19: Employee Benefits
IAS 19: Employee benefits
OF
Prescribed work, notes, class examples and Read and study IAS 19 as follows:
homework questions ACCOUNTING  Lecture 1 Par 1 – 7; par 8 (definitions dealt with to date); par 9 – 18
 Lecture 2
C Wright / T Loate UP Par 8 (definitions dealt with to date); par 19 – 30;
par 50 – 54; par 159 – 171

However, ignore the following:

CONTENTS  Par 8 Ignore the following definitions:
PRESCRIBED WORK ................................................................................................ 2  Multi-employer plans
1. IAS 19: Employee Benefits ................................................................................. 2  All the definitions under the heading “Definitions related
2. Notes and class examples .................................................................................. 2 to the net defined liability (asset)”
3. Homework questions........................................................................................... 2  All the definitions under the heading “Definitions related
SPECIFIC OUTCOME – IAS 19 ................................................................................. 3 to the defined benefit cost”
1. Assessment criteria ............................................................................................. 3  Par 31 – 49 Ignore completely
2. Sources ............................................................................................................... 3  Par 55 – 158 Ignore completely
NOTES AND CLASS EXAMPLES ............................................................................. 4  Par 168 Ignore completely
1. Background: What are employee benefits? ........................................................ 4  Par 172 – 179 Ignore completely
2. The scope of IAS 19 ........................................................................................... 4  Appendix A Ignore completely
3. Basic principle of IAS 19 ..................................................................................... 4
4. IAS 19 and the line items of the financial statements .......................................... 4 References to IAS 24
5. Structure of IAS 19 .............................................................................................. 7
6. Short-term employee benefits ............................................................................. 7 Ignore the references to IAS 24 that fall within the prescribed works until the topic
is dealt with later during the year.
Class example 1 – identification of short-term employee benefits ....................... 7
Class example 2 – basic short-term employee benefits....................................... 8 2. Notes and class examples
Class example 3 – accumulating and non-accumulating leave ......................... 10
Class example 4 – last-in-first-out basis ............................................................ 12 Work carefully through the notes provides as follows:
Class example 5 – vesting and non-vesting accumulated leave ........................ 13  Lecture 1 Pg. 1 – 17 (including class examples 1 – 7)
Class example 6 – vesting and non-vesting accumulated leave (opening  Lecture 2 Pg. 18 – 25 (including class examples 8 – 10)
balances) ........................................................................................................... 14
Class example 7 – differing leave cycle and financial year ................................ 17 3. Homework questions
Class example 8 – bonus obligation .................................................................. 18
7. Post-employment benefits (general) ................................................................. 20 Work carefully through the homework questions as follows:
8. Post-employment benefits (defined contribution plans) .................................... 21  Lecture 1 Question 1
Class example 9 – defined contribution plan ..................................................... 22  Lecture 2 Questions 2 – 6
9. Post-employment benefits (defined benefit plans) ............................................ 23
10. Termination benefits ....................................................................................... 24 There is no question without a solution for this topic.
Class example 10 – termination benefits ........................................................... 25
HOMEWORK QUESTIONS ..................................................................................... 28 NB: Refer to the specific outcomes on the next page and ensure that you have
achieved the assessment criteria for this topic.
 3 4

SPECIFIC OUTCOME – IAS 19 NOTES AND CLASS EXAMPLES

IAS 19: Employee Benefits 1. Background: What are employee benefits?

You should be able to account for and prepare disclosure for all the aspects set out Employee benefits are all forms of consideration given by an entity in exchange for
below, relating to employee benefits, on an integrated basis. service rendered by employees or for the termination of employment (IAS 19, par 8).
IAS 19, par 5, distinguishes between four types of employee benefits, namely:
The following issues are not covered in FRK 300:
- Multi-employer plans;  Short-term employee benefits
- Defined benefit plans that share risks between entities under common control;  Post-employment benefits
- State plans;  Other long-term employee benefits
- Insured plans;  Termination benefits
- Recognition, measurement and disclosure of defined benefit plans;
- Other long-term employee benefits; and Examples of each of these employee benefits are highlighted in IAS 19, par 5.
- Disclosure OTHER THAN specifically required to be known on FRK 300 per
Employee benefits are not limited to benefits provided directly to employees but also
the study material provided.
include, for example, payments made to dependants or beneficiaries of employees
(IAS 19, par 6). Employees in the context of the standard include full-time, part-time,
1. Assessment criteria
permanent, casual or temporary appointments and also include directors and
management personnel of the entity (IAS 19, par 7).
In order to reach the specific outcome, you should:
Note that a formal contract between the employer and employee is not a requirement for
1. know and be able to interpret in practical situations the technical terms relating employee benefits (IAS 19, par 4).
to employee benefits;
2. The scope of IAS 19
2. apply the accounting principles applicable to the recognition and measurement
of short-term employee benefits, termination benefits and post-employment IAS 19 applies to all employee benefits discussed in section 1 above except share-based
benefits provided under a defined contribution plan to practical examples, and payments that are accounted for in accordance with IFRS 2 (IAS 19, par 2). Basically,
be able to properly account for them; share-based payments occur in the context of employee benefits when an entity gives
its employees shares in itself (or its parent) or when contracts are based on such shares.
3. be able to apply the disclosure requirements with respect to information on
IAS 19 only deals with the reporting by employers and not the reporting by benefit plans
employee benefits as prescribed by IAS 19 to practical situations and
(such as pension and provident funds) (IAS 19, par 3).
communicate these requirements through presentation and disclosure in a set
of financial statements.
3. Basic principle of IAS 19
2. Sources The general principle of IAS 19 is that an entity has an obligation for employee benefits
as soon as the entity consumes the service provided by an employee (IAS 19, par 1).
1. IAS 19: Employee Benefits Therefore, the principle is that the entity must recognise an expense and a related liability
as the employee renders service and not when the cash payment takes place.
2. IAS 19 Notes and class examples
This principle agrees with the Conceptual Framework for Financial Reporting
3. IAS 19 Homework questions (Conceptual Framework) which requires that transactions and events are accounted for
when they occur, i.e. not on a cash flow basis.
4. IAS 19 Suggested solutions
4. IAS 19 and the line items of the financial statements

Note: The impact on the statement of cash flows will be addressed later in the
year, in the lecture material of IAS 7, Statement of Cash Flows.

The following provides a basic overview of the line items that are affected by IAS 19:
 5 6

Example Limited R Administrative expenses **

Statement of financial position as at ……….. Other expenses ***
Assets Finance costs
Non-current assets Finance income using the effective interest method
Property, plant and equipment Other finance income
Investment property Profit before tax
Goodwill Income tax expense
Other intangible assets Profit for the year
Financial assets Other comprehensive income
Current assets Items that will not be reclassified to profit or loss:
Inventories - Revaluation surplus on property, plant and equipment (N1)
Trade receivables Revaluation surplus on land
Other current assets Income tax expense
Cash and cash equivalents - Mark-to-market reserve on investments in equity instruments (N2)
Items that will be reclassified to profit or loss:
Total assets - Mark-to-market reserve on investments in debt instruments (N2)
- Foreign currency translation reserve (N2)
Equity and liabilities R
Total equity Total comprehensive income for the year
Share capital ** The classification of employee benefits in accordance with IAS 1 will depend on
Retained earnings / Accumulated loss the function of the employees
Non-current liabilities
Long-term borrowings *** Sometimes, other expenses could include some employee benefits, such as
Deferred tax termination benefits.
Long-term provisions
Current liabilities N1 In FRK 300, we only consider the presentation option whereby each item in other
Trade and other payables comprehensive income is presented with its own income tax effect on the face of the
Short-term borrowings statement of profit or loss and other comprehensive income.
Short-term portion of long-term borrowings
Current tax payable N2 The income tax consequences of these items fall outside the scope of FRK 300.
Short-term provisions
Bank overdraft Note: Only employee benefits that are recognised within profit or loss / capitalised
to the cost of an asset fall within the scope of FRK 300. Therefore, the only impact
Total equity and liabilities
of employee benefits on the statement of changes in equity is on the “Retained
Note: An asset (for example, inventories) will be affected by IAS 19 if employee earnings” column through the line item “Profit for the year”.
benefits qualify for capitalisation in accordance with the applicable standard (in the
case of inventories, the employee benefits of employees involved in the manufacturing
process may be capitalised under IAS 2).

Example Limited R
Statement of profit or loss and other comprehensive income for
the year ended ………..
Revenue
Cost of sales **
Gross profit
Other income
Distribution costs
 7 8

5. Structure of IAS 19 SUGGESTED SOLUTION

IAS 19 deals with the four types of employee benefits within the following structure: Short-term employee benefits are employee benefits (other than termination benefits)
that are expected to be settled wholly before twelve months after the end of the annual
Within FRK 300 scope? reporting period in which employees rendered the related service.
(refer to the prescribed
work handout for detail) (i) The once-off bonuses of R120 000 relates to services which were rendered during
the 20X2 reporting period. This reporting period ended on 30 June 20X2. Since the
Background and scope Par 1 – 7 Yes bonuses are payable wholly by 30 June 20X3, these bonuses will therefore be
settled in full before twelve months after the end of the annual reporting period. The
Definitions Par 8 Yes full R120 000 is therefore short-term employee benefits on 30 June 20X2.
Short-term employee benefits, including Par 9 – 25 Yes (ii) The bonuses of R250 000 relate to services rendered during the 20X2 reporting
- Leave Par 13 – 18 Yes period. This reporting period ended on 30 June 20X2. Since only half of the bonuses
- Profit-sharing and bonuses Par 19 – 24 Yes are payable by 30 June 20X3, the total bonus amount of R250 000 will not be settled
wholly before twelve months after the end of the annual reporting period. The whole
Post-employment benefits, including Par 26 – 152 Limited amount of R250 000 therefore fails to meet the criteria for classification as short-term
- Defined contribution plans Par 50 – 54 Yes employee benefits on 30 June 20X2.
- Defined benefit plans Par 55 – 152 Limited
These bonuses will be treated as other long-term employee benefits. Other long-
Other long-term employee benefits Par 153 – 158 No term employee benefits fall outside the syllabus.
Termination benefits Par 159 – 171 Yes
 Reclassification of short-term employee benefits
6. Short-term employee benefits Note that the definition of short-term employee benefits depends on the expected
settlement date (IAS 19, par 8). An expected settlement date can change.
 Identification of short-term employee benefits Reclassification of short-term employee benefits is only required if a change in the
expected settlement date is a permanent change (IAS 19, par 10).
Refer to the definition of short-term employee benefits in IAS 19, par 8, and to the
examples in IAS 19, par 5 and 9. Specifically, note the requirements around the  Recognition and measurement of short-term employee benefits
settlement period in these paragraphs (i.e. wholly before twelve months after the end
of the annual reporting period in which the employees rendered the service). The general rule for recognition and measurement of short-term employee benefits
is set out in IAS 19, par 11. Importantly, short-term employee benefits are not
Class example 1 – identification of short-term employee benefits discounted!

The following employee benefits of W Limited are outstanding on 30 June 20X2 Class example 2 – basic short-term employee benefits
(reporting date):
You are provided with the following information relating to the remuneration of Mr X
(i) A total of R120 000 for once-off bonuses for all employees that worked overtime for a month:
during December 20X1. These bonuses are payable on 30 June 20X3.
R
(ii) Bonuses of R250 000 for services rendered during the year ended 30 June 20X2. Gross salary 100 000
Half of this amount is payable on 30 June 20X3 whilst the other half is payable on Provident fund employee contributions (8% of gross salary) (8 000)
30 June 20X4. Medical aid employee contributions (2 000)
PAYE (50 000)
These bonuses will be paid out irrespective of whether the employees stay until payment
date or resign before this date (the bonuses are unconditionally payable). Net salary 40 000

REQUIRED
Discuss, using the definition in IAS 19, Employee Benefits, whether each of the bonus
amounts are short-term employee benefits.
 9 10

The company makes the following monthly contributions to the benefit of Mr X:

Short-term paid leave
- 4% of the gross salary to the provident fund (defined contribution plan)
- R2 000 to the medical aid
Accumulating Non-accumulating
REQUIRED (can be carried over to the next leave cycle) (cannot be carried over to the
next leave cycle)
Prepare the journal entries (cash transactions included) for the month in respect of
Mr X’s remuneration in accordance with International Financial Reporting Standards
Vesting Non-vesting
(IFRS).
(can take or be (can only take)
Note:  Journal narrations are not required.
paid out in cash)
 Income tax expense journals are not required.

SUGGESTED SOLUTION  Accumulating leave increases as the employee renders service and
therefore an expense is recognised as this service is rendered (IAS 19,
Dr Cr par 13). Accumulating leave is measured at the additional amount that the
R R entity expects to pay based on unused leave days on the reporting date
Employee benefits expense (P/L) 100 000 (IAS 19, par 16).
Creditor – provident fund (SFP) 8 000
Creditor – medical aid (SFP) 2 000  Non-accumulating leave does not increase with service and therefore an
SARS – PAYE (SFP) 50 000 expense is recognised when the leave is taken (IAS 19, par 13). Effectively,
Creditor – salaries (SFP) 40 000 this expense is the same salary payment that the employee would have
Employee benefits expense (P/L) 4 000 received in any event. No separate expense is therefore recognised for the
Creditor – provident fund (SFP) 4 000 non-accumulating leave.
Employee benefits expense (P/L) 2 000
Creditor – medical aid (SFP) 2 000 Class example 3 – accumulating and non-accumulating leave
Creditor – provident fund (SFP) 12 000
Creditor – medical aid fund (SFP) 4 000 Employee A earns a gross salary of R360 000 per year which is equal to the cost to
SARS – PAYE (SFP) 50 000 company. Employee A is entitled to 20 days of paid sick leave per year which cannot
Creditor – salaries (SFP) 40 000 be carried forward to the next year. Assume that there are 250 working days in a year.
Bank (SFP) 106 000 During the year ended 31 December 20X1, employee A took 10 days of paid sick
leave. The leave cycle is the same as the financial year and no increases were
 Recognition and measurement of short-term employee benefits approved for the next year.
In addition to the general recognition and measurement requirements, IAS 19 also REQUIRED
determines how these requirements must be applied to short-term leave and
bonuses / profit-sharing. (a) Journalise the transactions (cash transactions included) for the year ended
31 December 20X1 in accordance with IAS 19, Employee Benefits.
 Recognition and measurement of leave
(b) Assume that the unused sick leave can be carried forward for 12 months before
An entity can grant different types of leave, examples of which are provided in they expire. On 31 December 20X1, it is expected that Employee A will use
IAS 19, par 14. The different types of leave are explained in IAS 19, par 14, 15 60% of the accumulated sick leave days during the year ended 31 December
and 18, which are briefly summarised below: 20X2, as well as all the additional sick leave days that will accumulate during
the next year.
Journalise the transactions (cash transactions included) for the year ended
31 December 20X1 in accordance with IAS 19, Employee Benefits.
Note for (a) and (b):  Journal narrations are not required.
 Ignore all tax consequences.
 11 12

SUGGESTED SOLUTION is measured at the gross salary of the employee (i.e. ignore employer
contributions). Any days that the employee is expected to physically take
Part A in the future are measured using the cost to company of the employee.
Dr Cr
R R  The additional amount is based on an expectation of the future. Therefore, any
Employee benefits expense (P/L) 360 000 salary increases that an entity has a legal or constructive obligation for, are
Bank (SFP) 360 000 taken into account in the measurement of the leave obligation.

In this case, the paid sick leave is not accumulating. The cost of the paid sick leave is Class example 4 – last-in-first-out basis
reflected in the fact that the employee still received pay, even though he did not work.
Employee B is entitled to 20 days of paid vacation leave per year which can be carried
Part B forward to the next year. Any leave that is not used within 12 months from the end of
Dr Cr the leave cycle expires. During the year ended 31 December 20X1, employee B took
R R 10 days of paid vacation leave. The leave cycle is the same as the financial year.
Employee benefits expense (P/L) 360 000
Bank (SFP) 360 000 REQUIRED
Employee benefits expense (P/L) 8 640
Calculate the number of days that must be used in calculation of the leave pay accrual
Accrued leave obligation (SFP) 8 640
on 31 December 20X1 in accordance with IAS 19, Employee Benefits, if:
[(360 000 / 250) x (20 – 10) x 60%)]
(a) it is expected that employee B will take 25 days of paid vacation leave during
The fact that the paid sick leave can be carried forward for 12 months after which it
the year ended 31 December 20X2.
expires, makes this an accumulating, non-vesting leave benefit, but still a short-term
one. Note that the probability of the leave being taken in the following period is taken (b) it is expected that employee B will take 15 days of paid vacation leave during
into account in the measurement of the obligation. the year ended 31 December 20X2.

 Recognition and measurement of leave (continued) SUGGESTED SOLUTION

Accumulating leave is measured at the additional amount that an entity expects Part A
to pay based on unused accumulated leave days on the reporting date (IAS 19,
par 16). The leave pay accrual will be calculated using 5 days. Last-in-first-out means that
employee B will first take 20 leave days for 20X2 out of the entitlement for 20X2 before
 The additional amount represents only those expenses to be incurred due to the unused days of the previous year (20X1) will be used. The other 5 days (25 – 20)
the fact that the leave accumulates and must be calculated on a last-in-first-out will be taken out of the 10 unused leave days as at 31 December 20X1. This is the
basis (IAS 19, par 17 and BC26 – 27). balance of the accrual on 31 December 20X1.
 The additional amount differs between vesting and non-vesting accumulated Part B
leave:
The leave pay accrual will be calculated using zero days. Last-in-first-out means that
o In the case of non-vesting leave, the employee can only physically take employee B will first take 15 leave days for 20X2 out of the entitlement for 20X2 before
the leave, while still in the employ of the employer. When the employee the unused days of the previous year (20X1) will be used. Employee B is entitled to
physically takes leave, the employer continues to pay employer 20 days for 20X2 and it is expected that only 15 of these 20 days will be taken in 20X2.
contributions to medical, provident and other funds. Therefore, the rate Therefore, it will not be necessary for the employee to take any days from the unused
used to measure non-vesting leave is based on the cost to company days as at 31 December 20X1. This means that no leave pay accrual will be required
(gross salary of employee plus employer contributions). This rate is then on 31 December 20X1.
applied to the number of accumulated unused days on reporting date
that the employer expects the employee to physically take in the future.
o Vesting leave consists of two elements, namely, days that the employee
will physically take as leave in the future and days that the employee will
claim as a cash payment in the future. When a cash payment is made,
the employer will not pay employer contributions to the employee.
Therefore, the number of days that are expected to be paid out in cash
 13 14

Class example 5 – vesting and non-vesting accumulated leave Part B

Dr Cr
Employee B earns a gross salary of R480 000 per year. The company contributes R R
R24 000 per year to a medical aid on the employee’s behalf. Every employee is Employee benefits expense (P/L) 504 000
entitled to 20 days of paid vacation leave per year. Assume that there are 250 working Bank (SFP) 504 000
days in a year. On 31 December 20X2, employee B has 10 days accrued vacation (480 000 + 24 000)
leave (31 December 20X1: zero days). The leave cycle is the same as the financial Employee benefits expense (P/L) 16 128
year and no salary increases were approved. Accrued leave pay obligation (SFP) 16 128
[(480 000 + 24 000) / 250 x 10 x 80%]
On 31 December 20X2, it is expected that employee B will use 80% of her Employee benefits expense (P/L) 3 840
accumulated vacation leave days for 20X2 and 100% of her 20X3 vacation leave days Accrued leave pay obligation (SFP) 3 840
by 30 June 20X3. (480 000 / 250 x 10 x 20%)
REQUIRED The leave is accumulating and vesting, but remains short-term as cash payment will
take place within 12 months after year end. The accrued leave therefore creates an
(a) Assume that it is the company’s policy that all unused leave days at the end of
obligation that includes the employer’s contributions for the probable number of days
any financial year end expire by 30 June of the following financial year. Prepare
that the employee will physically take as leave and an additional obligation (which
the journal entries (cash transactions included) for the year ended
excludes the employer contributions) for the probable number of days that will be paid
31 December 20X2 in accordance with IAS 19, Employee Benefits.
out in cash.
(b) Assume that it is the company’s policy that all unused leave days at the end of
Part C
any financial year that are not taken by 30 June of the following financial year,
are paid out in cash on 30 June of that following year. Prepare the journal When the leave can be carried forward indefinitely, it no longer represents a short-
entries (cash transactions included) for the year ended 31 December 20X2 in term employee benefit since it is not wholly payable within 12 months after the
accordance with IAS 19, Employee Benefits. reporting date. Therefore, the accrued leave would need to be accounted for as other
long-term employee benefits.
(c) Discuss briefly, in accordance with IAS 19, Employee Benefits, how your
answer for (b) would be affected if all unused leave days can be carried forward Other long-term employee benefits fall outside the syllabus.
indefinitely and are only paid out in cash upon resignation. Calculations are not
required.  Recognition and measurement of leave (continued)

Note for (a) and (b):  Journal narrations are not required. Movement in the leave pay accrual
 Ignore all tax consequences.
If an entity has a leave pay accrual at the beginning and at the end of the financial
SUGGESTED SOLUTION year, the movement in the accrual is recognised in profit or loss.

Part A Class example 6 – vesting and non-vesting accumulated leave (opening balances)
Dr Cr
R R Use the same information provided in class example 5. Assume that the opening
Employee benefits expense (P/L) 504 000 balance of the leave pay obligation was R5 772 on 31 December 20X1.
Bank (SFP) 504 000
(480 000 + 24 000) REQUIRED
Employee benefits expense (P/L) 16 128
Accrued leave pay obligation (SFP) 16 128 (a) Assume that it is the company’s policy that all unused leave days at the end of
[(480 000 + 24 000) / 250 x 10 x 80%] any financial year end expire by 30 June of the following financial year. Prepare
the journal entries (cash transactions included) for the year ended
The leave is accumulating but not vesting, as there is no possibility of a cash payment 31 December 20X2 in accordance with IAS 19, Employee Benefits.
for any unused days of leave. The accrued leave therefore creates an obligation that
includes the employer’s contributions, based on the probable number of days that the
employee will physically take as leave.
 15 16

(b) Assume that it is the company’s policy that all unused leave days at the end of Calculation of accrued leave pay obligation
any financial year that are not taken by 30 June of the following financial year, R
are paid out in cash on 30 June of that following year. Assume further, that the Closing balance 19 968
company made a cash payment of R1 224 during the year ended 31 December - Days expected to be taken [(480 000 + 24 000) / 250 x 10 x 80%] 16 128
20X2 in accordance with this policy. Prepare the journal entries (cash - Days expected to be paid out (480 000 / 250 x 10 x 20%) 3 840
transactions included) for the year ended 31 December 20X2 in accordance Opening balance (5 772)
with IAS 19, Employee Benefits. Movement (increase) 14 196
Note for (a) and (b):  Journal narrations are not required.
Alternative journals for Part B:
 Ignore all tax consequences. Dr Cr
R R
SUGGESTED SOLUTION Employee benefits expense (P/L) 504 000
Bank (SFP) 504 000
Part A (480 000 + 24 000)
Dr Cr
Accrued leave pay obligation (SFP) 1 224
R R
Bank (SFP) 1 224
Employee benefits expense (P/L) 504 000
(given)
Bank (SFP) 504 000
Employee benefits expense (P/L) 15 420
(480 000 + 24 000)
Accrued leave pay obligation (SFP) 15 420
Employee benefits expense (P/L) 10 356
[19 968 (closing balance per calculation above) – (5 772
Accrued leave pay obligation (SFP) 10 356
– 1 224) (adjusted opening balance)]
(calculation below)
Calculation of accrued leave pay obligation  Recognition and measurement of leave (continued)

R What if the leave cycle is not the same as the financial year?
Closing balance [(480 000 + 24 000) / 250 x 10 x 80%] 16 128
Non-accumulating leave is defined with reference to the leave cycle. When the
Opening balance (5 772)
financial year and the leave cycle are the same (as in the previous examples), no
Movement (increase) 10 356
problem arises in identifying the unused leave days. The limitation on the carry-
forward of non-accumulating leave is applied at reporting date.
Part B
Dr Cr However, when the financial year and the leave cycle are different, the limitation
R R on the carry-forward of non-accumulating leave cannot be applied at the reporting
Employee benefits expense (P/L) 504 000 date. In such cases, the entity has an obligation to grant unused leave days until
Bank (SFP) 504 000 the end of the leave cycle:
(480 000 + 24 000)
Employee benefits expense (P/L) 1 224 Reporting date
Bank (SFP) 1 224 1 January 30 June 31 December
(given)
Employee benefits expense (P/L) 14 196 Leave cycle
Accrued leave pay obligation (SFP) 14 196
(calculation below) On 30 June, employees still have six months to take any unused leave days before
the leave cycle ends and they lose unused days. If leave days increase during the
** Total employee benefits expense = R15 420 (1 224 + 14 196) leave cycle as the employees render service (for example, from zero days to 20
days) and the entity expects that its employees will take some of this leave by
31 December, a leave pay accrual must be recognised. This principle is explained
in the following example.
 17 18

Class example 7 – differing leave cycle and financial year Part B

Dr Cr
Employee C earns a gross salary of R420 000 per year, which is also the cost to R R
company. Each employee is entitled to 20 days of paid vacation leave per year. Employee benefits expense (P/L) 420 000
Assume that there are 250 working days in a year. At the end of the 20X1 financial Bank 420 000
year, employee C had 12 days accrued vacation leave (20X0: zero days). The
Employee benefits expense (P/L) 15 120
maximum number of days that can be carried forward to the next leave cycle is 8 days.
Accrued leave pay obligation (SFP) 15 120
Any unused days not taken within 6 months of the end of the leave cycle are forfeited.
(420 000 / 250 x 12 x 75%)
On the date of approval of the financial statements, it was expected that employee C
will take 75% of his unused leave days that can be carried forward at the end of the In this case, the leave cycle ends on 31 December 20X1 and the limitation on the
20X1 financial year (as well as all new leave accrued after 30 June 20X1) by carry-forward of the days to the following cycle is only applicable on this date. On
30 June 20X2. No salary increases have been approved. 30 June 20X1, the company still has an obligation for the leave days as the employee
can still take the 12 days in the following six months before the limitation is applied. It
REQUIRED still remains short-term employee benefits as the expiry date of six months after the
end of the leave cycle (30 June 20X2) is still within 12 months of the reporting date
(a) Assume that the company’s reporting date is 30 June 20X1 and that the leave
(30 June 20X1). This type of situation often occurs in practice, as leave cycles
cycle is the same as the financial year. Prepare the journal entries (cash
generally follow the calendar year (and not the financial year).
transactions included) for the year ended 30 June 20X1 in accordance with
International Financial Reporting Standards (IFRS).
 Recognition and measurement of bonuses and profit-sharing

(b) Assume that the company’s financial year end is 30 June 20X1 and that the IAS 19, par 19, determines that the expected cost of bonuses and profit-sharing is
leave cycle is the calendar year (i.e. it runs from 1 January to 31 December of only recognised if the entity has a present obligation (legal or constructive – IAS 19,
each year). Prepare the journal entries (cash transactions included) for the year par 21) to pay the bonus or profit-share and the amount can be measured reliably
ended 30 June 20X1 in accordance with International Financial Reporting (IAS 19, par 20 - 22). The expected bonus cost is recognised in profit or loss (IAS 19,
Standards (IFRS). par 23) and must be short-term in nature if the short-term benefits rules in this section
are to be applied (IAS 19, par 24).
Note for (a) and (b):  Journal narrations are not required.
 Ignore all tax consequences. Class example 8 – bonus obligation

SUGGESTED SOLUTION A Limited has 20 employees, each earning an annual basic salary of R360 000. It is
anticipated that bonuses will be paid in full within 12 months of the reporting date. The
Part A profit before tax for the year ended 31 December 20X1 is R8,4 million.
Dr Cr
R R Scenario 1
Employee benefits expense (P/L) 420 000
Bank (SFP) 420 000 Each employee is entitled to a thirteenth cheque in terms of employment contracts. If
Employee benefits expense (P/L) 10 080 an employee is appointed during a year, the thirteenth cheque is reduced to the pro-
Accrued leave pay obligation (SFP) 10 080 rata number of months that the employee rendered service. Of the 20 employees, two
(420 000 / 250 x 8 x 75%) were appointed on 1 July 20X1. All the remaining employees were appointed prior to
1 January 20X1.
The leave cycle ends on 30 June 20X1 and only 8 days may be carried forward to the
next leave cycle – the accumulated leave days for this employee are therefore limited. Scenario 2
If the leave were vesting, an additional accrual would have been required for the Employees are contractually entitled to a performance bonus. An amount of R700 000
remaining two days (8 x 25%) using the gross salary of R420 000, but not for the four was approved by the directors before the annual financial statements were issued.
days (12 – 8) that the employee forfeited by not taking his leave.
 19 20

Scenario 3 R
Scenario 5 – formula based on contractual agreement
Based on the entity’s practice of the past ten years, employees are entitled to a
performance bonus. An amount of R800 000 was presented by management to the 8 400 000 profit before tax x 5% bonus pool x 90% taking expected
directors for approval, but this was not approved before the annual financial resignations into account 378 000
statements were authorised for issue. Past experience indicates that the directors
reduce the proposed bonus payment with 10% on average upon final approval.  Disclosure
Scenario 4 IAS 19 does not have specific disclosure requirements in respect of short-term
employee benefits. Other standards, such as IAS 1, require the disclosure of
Based on the entity’s practice in the past ten years, employees are entitled to a
employee benefits expense (IAS 19, par 25).
performance bonus. An amount of R800 000 was presented by management to the
directors for approval, but this was not approved before the annual financial  Income tax consequences
statements were authorised for issue. Past experience indicates that the directors
adjust bonuses presented to them by as much as 100% in both directions, but no In general, employee benefits are deductible for tax purposes in terms of section
predicting factors for this decision are known. 11(a) of the Income Tax Act at the earliest of cash payment or accrual. This means
that the accounting and tax treatments are the same and therefore no adjustments
Scenario 5 to accounting profit before tax are required when calculating taxable profit. Further,
no temporary differences arise for deferred tax purposes.
Employees are entitled to a bonus based on a formal contract with the trade union.
The formula determines that a bonus pool of 5% of the profit before tax must be shared However, bonus and leave pay obligations are usually only deductible for tax
between the employees. Bonuses are only paid to employees that are still in the purposes when they are paid in cash, as they are viewed as accounting provisions
employ of the company six months after the reporting date. It is expected that 10% of from a tax perspective. This means that the accounting expense will have to be
the employees will resign before 30 June 20X2. Individual bonuses are limited to what added back to the accounting profit before tax to calculate taxable profit and current
they would have been had there been no resignations. tax payable. A temporary difference arises which will result in deferred tax.
However, some contractual bonuses are deductible for tax purposes even if they
REQUIRED have not yet been paid in cash. For FRK 300, a question will indicate if bonuses
are deductible before cash payment has taken place. Otherwise, it will always be
Calculate the total bonuses that A Limited must accrue for as at 31 December 20X1
assumed that bonuses are only deductible when paid in cash.
in accordance with IAS 19, Employee Benefits for each of the above scenarios.

SUGGESTED SOLUTION 7. Post-employment benefits (general)

R  Identification of post-employment benefits

Scenario 1 – contractual bonus Refer to the definition of post-employment benefits in IAS 19, par 8, and the
18 employees for full year x (360 000 / 12 months) 540 000 examples in IAS 19, par 5 and 26.
2 employees x 6 / 12 months x (360 000 / 12 months) 30 000 An employer provides all post-employment benefits through post-employment
570 000 benefit plans (IAS 19, par 26). Refer to the definition of post-employment benefit
plans in IAS 19, par 8.
Scenario 2 – already approved
Amount approved by directors 700 000  Classification of post-employment benefit plans
IAS 19 distinguishes between two types of post-employment benefit plans that are
Scenario 3 – established practice and reliable basis for
defined in IAS 19, par 8:
estimate
 Defined contribution plans
800 000 x 90% 720 000
 Defined benefit plans
Scenario 4 – established practice but not reliably measurable
No reliable measurement, thus no accrual can be recognised Nil Note that a defined contribution plan must always be a separate entity while this
is not the case for a defined benefit plan.
 21 22

The distinction between these two types of plans is very important as the The contributions to a defined contribution plan represent an expense for the
recognition and measurement requirements differ radically! employer and any outstanding contributions are a liability (IAS 19, par 51). This
expense and obligation are normally measured at undiscounted amounts
 The difference between defined contribution plans and defined benefit plans (IAS 19, par 50). In limited circumstances, discounting could be required (IAS 19,
is discussed in more detail in IAS 19, par 27 – 30. par 52).
 Important characteristics of defined contribution plans and defined benefit  Disclosure
plans are summarised briefly below:
IAS 19 requires that the entity disclose the amount of the defined contribution plan
Defined contribution plans Defined benefit plans expense (IAS 19, par 53). The interpretation of “expense” for FRK 300 is that it
refers to the sum / total of the employer and employee contributions.
 Must be a separate entity  Often (but not always) a
separate entity  Tax consequences
 The employer must pay  The employer must provide Contributions to a defined contribution plan are deductible for tax purposes in terms
contributions benefits of section 11(l) of the Income Tax Act at the earliest of cash payment or accrual.
This means that the accounting and tax treatments are the same and therefore no
 The employee carries the risk  The employer carries the risk adjustments to accounting profit before tax are required when calculating taxable
that the assets could be too that the assets could be too little profit. Further, no temporary differences arise for deferred tax purposes.
little (actuarial and investment (actuarial and investment risk)
risk) Class example 9 – defined contribution plan

 The employee carries the risk  The employer “guarantees” a DCP Limited’s standard employment contracts determine that all employees must
that the post-employment specified level of post- belong to the company’s provident fund (a defined contribution plan). Employees
benefits could be insufficient employment benefits contribute 6% of their monthly gross salary to the provident fund and DCP Limited
contributes a further 8% of each employee’s gross monthly salary.
 Always has allocated assets  Can be funded or unfunded
The total gross salaries of employees for the year ended 30 June 20X6 were earned
 Employees have claims against  Employees have claims against
evenly through the year and amounted to R96 million (20X5: R90 million). The
their individual accounts the fund as a whole
contributions to the provident fund are paid over 5 days after the end of each month.

 In practice, provident funds (where the employee effectively “saves” for REQUIRED
retirement) would be defined contribution plans. In contrast, pension funds
(where the fund eventually pays a pension guaranteed by the employer to (a) Prepare the journal entries (cash transactions included) of DCP Limited for the
the employee after retirement) would be defined benefit plans. year ended 30 June 20X6 in accordance with International Financial Reporting
Standards (IFRS).
 Note that post-employment benefit plans are classified depending on the
economic substance of the plan, not based on its legal form (IAS 19, Note:  Journal narrations are not required.
par 27). Thus, even if a fund is a provident fund in legal terms, the employer  Ignore all tax consequences.
can still have a constructive obligation to provide post-employment benefits
(refer to IAS 19, par 29, for examples). In such cases, the post-employment (b) Disclose the above information in the “Profit before tax” note of DCP Limited for
benefit plan will be a defined benefit plan for accounting purposes. the year ended 30 June 20X6 in accordance with International Financial
Reporting Standards (IFRS).
8. Post-employment benefits (defined contribution plans)

 Recognition and measurement

The accounting requirements for a defined contribution plan are similar to those of
short-term employee benefits.
 23 24

SUGGESTED SOLUTION It is the benefits that are the entity’s expense under a defined benefit plan
and not the contributions made to the plan.
Part A
Dr Cr Due to the fact that the payment of the benefits will only take place in the future,
R R the recognition and measurement requirements for defined benefit plans are far
Provident fund creditor (SFP) 1 050 000 more complex than those of defined contribution plans.
Bank (SFP) 1 050 000 However, recognition and measurement of defined benefit plans fall outside the
[90 000 000 /12 x (6% + 8%)] syllabus.
Employee benefits expense (P/L) 96 000 000
Provident fund creditor (SFP) (96 000 000 x 6%) 5 760 000 10. Termination benefits
Bank (SFP) 90 240 000
Employee benefits expense (P/L) 7 680 000  Identification
Provident fund creditor (SFP) (96 000 000 x 8%) 7 680 000
Provident fund creditor (SFP) 12 320 000  Refer to the definition of termination benefits in IAS 19, par 8.
Bank (SFP) 12 320 000
[96 000 000 x 11 / 12 x (6% + 8%)]  Note that termination benefits exclude benefits paid to an employee where the
or [(5 760 000 + 7 680 000) x 11/12] employee takes the first step to terminate service (IAS 19, par 160).

The balance of the provident fund creditor will be presented as part of “Trade and other  Termination benefits are not necessarily once-off payments (IAS 19, par 161).
payables” on the face of the statement of financial position. On 30 June 20X6, this  Termination benefits are distinguished from other employee benefits as these
balance will be R1 120 000 {5 670 000 + 7 680 000 – 12 320 000) or ([5 760 000 + are benefits that are paid because of the termination of service rather than the
7 680 000] x 1 / 12)}. rendering of service (IAS 19, par 159). It can be difficult to make this
distinction. IAS 19, par 162 – 164, discusses situations where employee
Part B benefits relate to the rendering of service and are therefore not termination
DCP Limited benefits for the purposes of IAS 19.
Notes for the year ended 30 June 20X6  Recognition
26. Profit before tax Termination benefits are recognised at the earlier of (IAS 19, par 165):
Profit before tax is stated after the following items have been taken into account:  the date on which the entity can no longer withdraw the offer of those benefits;
20X6 20X5 and
Expenses R R IAS 19, par 166 – 167, explains when an entity can no longer withdraw an
Employee benefits expense 103 680 000 97 200 000 offer of termination benefits. Note that the date differs between situations
- Short-term employee benefits 90 240 000 84 600 000 when the final decision is that of the employee (IAS 19, par 166) and when
20X6: [96 000 000 x (100% - 6%)] the final decision is that of the employer (IAS 19, par 167).
20X5: [90 000 000 x (100% - 6%)]
- Contributions to defined contribution plan 13 440 000 12 600 000  the date on which the entity recognises a provision for restructuring in
20X6: (5 760 000 + 7 680 000) (part a) accordance with IAS 37, when termination benefits are payable as a result of
20X5: [90 000 000 x (6% + 8%)] the restructuring.

9. Post-employment benefits (defined benefit plans)  Measurement (IAS19, par 169 – 170)
Termination benefits are measured according to the nature thereof, namely as:
 Background discussion
 Post-employment benefits;
In terms of a defined benefit plan, an entity undertakes to provide certain post-
employment benefits to its employees. Normally, the employer (and sometimes  Short-term employee benefits (if it is expected that the benefits will be settled
also its employees) will contribute to a separate fund to “save” for the benefits that wholly before twelve months after the end of the annual reporting period in
will be paid. which the termination was recognised); or
 25 26

 Other long-term employee benefits (if it is not expected that the benefits will You may assume that X Limited could no longer withdraw the offer of the benefits on
be settled wholly before twelve months after the end of the annual reporting 31 January 20X7.
period in which the termination was recognised).
An appropriate pre-tax discount rate is 12% per annum and the time value of money
 Disclosure is significant.
IAS 19 does not have specific disclosure requirements in respect of termination
benefits. However, other standards, such as IAS 1, require disclosure of Ignore all tax consequences.
employee benefits expense (IAS 19, par 171).
REQUIRED
 Income tax consequences
(a) Calculate the termination benefits obligation that X Limited must recognise on
Termination benefits will normally be deductible at the earliest of cash payment 31 January 20X7 in accordance with IAS 19, Employee Benefits.
or accrual [section 11(a) of the Income Tax Act]. This is the case, as termination
benefits are normally payable in terms of contracts. This means that there would (b) Prepare the journal entries (cash transactions included) in the books of X Limited
be no difference between the accounting and income tax requirements and no to account for the termination packages for the year ended 31 January 20X7 in
temporary differences arise. accordance with International Financial Reporting Standards (IFRS).
However, termination benefits are sometimes not tax deductible mainly because
they are only an estimated amount (i.e. a “provision”) at reporting date. In such
Note:  Journals narrations are not required.
cases, the income tax deduction will only be allowed when the termination
benefits become payable in terms of a contract or are paid in cash. (c) Prepare the journal entries (cash transactions included) in the books of X Limited
to account for the employee benefits for the year ended 31 January 20X8 in
For FRK 300, a question will always indicate when the termination benefits are accordance with International Financial Reporting Standards (IFRS).
deductible for income tax purposes before cash payment has taken place.
Otherwise, it is always assumed that termination benefits are only tax deductible Note:  Journals must be dated.
when the cash payment takes place.  Journals narrations are not required.

Class example 10 – termination benefits SUGGESTED SOLUTION

On 31 December 20X6, X Limited decided to close its factory in Cape Town due to Part A
insufficient demand for the products manufactured in this factory. As part of this R
mandatory retrenchment, X Limited must make a once-off payment of three months’ Obligation for first 90 employees 5 250 000
basic salary to each of the 100 employees of the factory in accordance with legislation. [(2 000 000 – 25 000 x 10) x 3]
Obligation for 10 employees requested to stay on for longer 750 000
The retrenchment will take place on 30 April 20X7. However, to manage the final (25 000 x 10 x 3)
closing of the factory, X Limited asked ten employees to stay on until 30 June 20X7 in 6 000 000
exchange for an additional lump sum payment of six months’ basic salary. They will OR R2 million x 3 months = R6 000 000
also receive their normal salaries during May and June. If these employees do not The entity initiated this retrenchment and the employees are therefore compelled to
stay on until 30 June 20X7, they will only receive the general benefit of three months’ accept the termination benefits. Since the entity can no longer withdraw the offer on
basic salary. The employees that stay on will not receive any lump sum payments 31 January 20X7, an expense and liability are recognised on this date. These benefits
before 30 June 20X7. will be wholly settled within 12 months of the reporting date. Therefore they are short-
The total basic salaries for the 100 employees currently amount to R2 million per term employee benefits and no discounting is necessary.
month, while the 10 employees that were asked to stay on each earn a basic salary of
R25 000 per month. Note that the obligation to pay another six months’ salaries to ten employees is
contingent upon them rendering future service. Therefore, this is not a termination
On 31 January 20X7 (reporting date), X Limited expected that eight of the 10 benefit. No provision is recognised for these benefits on 31 January 20X7 as there is
employees that were asked to stay on will do so. The financial statements for the year no present obligation. The date that the employees decide to remain is not applicable
ended 31 January 20X7 were authorised for issue on 28 February 20X7. However, on in this case, as this is not a voluntary retrenchment (the employees are being
30 April 20X7, nine of the 10 employees that were asked to stay on, elected to do so retrenched through a decision of the employer). See part C for the accounting for these
and eventually received the termination benefits on 30 June 20X7. benefits in the next financial year.
 27 28

Part B HOMEWORK QUESTIONS

Dr Cr
31 January 20X7 R R QUESTION 1 (10 marks)
Employee benefit expense (P/L) 6 000 000
Termination benefit obligation (SFP) 6 000 000 JESSICA LIMITED is a large retail entity in South Africa. The company’s reporting date
is 31 December 20X5. The company’s single largest expense is employee benefits. The
Part C financial manager of Jessica Limited is experiencing problems with the calculation of the
Dr Cr leave pay accrual. There are two categories of employees, namely category A and
R R category B employees. The cost to company of employees within each category is
28 February 20X7 exactly the same.
Employee benefit expense (P/L) 2 000 000
Bank (SFP) 2 000 000 The following represents the cost to company per employee per year for the year ended
31 March 20X7 31 December 20X5 for the two different categories:
Employee benefit expense (P/L) 2 000 000
Bank (SFP) 2 000 000 R
30 April 20X7 Category A
Employee benefit expense (P/L) 2 000 000 Basic salary 155 000
Bank (SFP) 2 000 000 Employer’s contribution to medical aid fund (10% of basic salary) 15 500
Termination benefits obligation (SFP) 5 325 000 Employer’s contribution to a defined contribution fund (8% of basic salary) 12 400
Bank (SFP) 5 325 000 182 900
(5 250 000 (part a) + 25 000 x 1 x 3)
31 May 20X7 Category B
Employee benefit expense (P/L) 225 000 Basic salary 120 000
Bank (SFP) 225 000 Employer’s contribution to medical aid fund (8% of basic salary) 9 600
(25 000 x 9) Employer’s contribution to a defined contribution fund (5% of basic salary) 6 000
Employee benefits expense (P/L) 675 000 135 600
Short-term employee benefits obligation (SFP) 675 000
(25 000 x 9 x 6 months’ benefit / 2 months of service)
The directors of Jessica Limited have already approved a salary increase of 10% for
30 June 20X7
category A employees and an increase of 7% for category B employees. These
Employee benefit expense (P/L) 225 000
increases are effective from 1 January 20X6. The company contributions to the medical
Bank (SFP) 225 000
aid fund and the defined contribution plan also increased so that the percentage of the
(25 000 x 9)
basic salary that the employer contributes remained unchanged.
Employee benefits expense (P/L) 675 000
Short-term employee benefits obligation (SFP) 675 000
The following leave policy applies to the different categories:
(25 000 x 9 x 6 months’ benefit / 2 months of service)
Termination benefits obligation (SFP) 675 000 Category A employees: Each employee is entitled to 25 working days annual leave per
(25 000 x 9 x 3) year. Unused leave days can be used in the following leave cycle or can be paid out in
Short-term employee benefits obligation (SFP) 1 350 000 cash. Unused leave days that are not taken within the 12-month period after the end of
(25 000 x 9 x 6) the applicable leave cycle, will be paid out in cash on 31 December of the following year.
Bank (SFP) 2 025 000
Note: The portion of the benefit that is contingent upon future service (May and June Category B employees: Each employee is entitled to 20 working days annual leave per
20X7) is recognised on a month-to-month basis as the employees render the service year. Unused leave days can be used in the following leave cycle. However, these
that entitles them to the benefit. These benefits meet the definition of short-term employees are not entitled to any cash payment for unused leave days. Unused leave
employee benefits because they are not termination benefits (i.e. relate to a service days that are not taken within 12 months after the end of the leave cycle will be forfeited.
rendered) and they will be settled wholly within 12 months of the reporting date.
The leave cycle and the financial year end are the same.
 29 30

Each employee has on average the following unused leave days on 31 December 20X5: Total salaries and wages of employees that remained in service
throughout the year x 7½ %
Days
Category A 18
Category B 12 During the current year, staff turnover was such that 90% of the total salaries paid
in respect of 20X7 could be attributed to qualifying employees, while only 80% of
There are 100 Category A employees and 60 Category B employees. Assume that a wages paid in respect of 20X7 could be attributed to employees qualifying for the
financial year has 251 working days. bonus.

The entity has estimated that the employees in Category A will take 60% of their 2. The management of Maybe Limited is of the opinion that economic circumstances
accumulated leave before 31 December 20X6 while the employees in Category B will in 20X8 will be very unfavourable due to the instability of the currencies of
take 90% of their accumulated leave before 31 December 20X6. developing countries and expect that interest rates could increase sharply during
20X8. Consequently they are considering not paying any bonuses to employees
The financial manager has calculated the leave pay accrual on 31 December 20X5 and at the end of 20X7, but have yet to make a final decision. The human resources
has made the necessary adjustment in the general ledger: manager is of the opinion that this should not create problems as the bonuses
were not specified in the contracts of employment entered into with the
R employees.
Category A (155 000 / 251 days x 18 days x 100 employees) 1 111 554
Category B (120 000 / 251 days x 12 days x 60 employees) 344 223 3. The employees’ trade union heard rumours of the possibility of bonuses not being
1 455 777 paid and are preparing for a prolonged strike as the remuneration paid by Maybe
Limited is approximately 7½% below the salaries and wages paid to persons
employed in the industry in which the company operates.
REQUIRED

Prepare the correcting journal entries to correctly account for the leave pay accrual in 4. The current balance on the bonus obligation is R nil.
the financial statements of Jessica Limited for the year ended 31 December 20X5 in
accordance with International Financial Reporting Standards (IFRS). REQUIRED

Note:  Journal narrations are not required. (a) Critically discuss the intention of management not to recognise a liability for
bonuses on 31 December 20X7 in accordance with International Financial
 Ignore all tax consequences.
Reporting Standards (IFRS).
QUESTION 2 (13 marks)
Note:  A discussion of the definition of short-term employee benefits and
their general measurement criteria is not required. (9 marks)
MAYBE LIMITED employs a large number of people. During the year ended
31 December 20X7 the company paid the following amounts in cash in respect of staff (b) Regardless of your answer in (a) above, assume that a liability for bonuses must
benefits: be recognised. Journalise the amount of the bonus liability to be recognised in
accordance with International Financial Reporting Standards (IFRS).
1. R
- Salaries (gross) 10 000 000 Note:  Journal narrations are not required.
- Wages (gross) 14 000 000
 Ignore all tax consequences. (4 marks)
- Paid annual leave (gross) 2 000 000
- Paid sick leave (gross) 1 000 000
- Employer's contribution to defined contribution plan 2 025 000
29 025 000

Additional information

1. The company has, since its incorporation, paid bonuses to its employees provided
they are employed throughout a financial year. Experience has shown that these
bonuses are calculated using the following formula:
 31 32

QUESTION 3 (50 marks) 1.3. Category 3 employees

FRENCHISE LIMITED operates a number of French cuisine restaurants in South The 10 employees in this category are each entitled to a basic salary of R45 600
Africa. The accountant has calculated the profit before tax for the year ended per month. The employer contributes R3 500 per month to full medical cover for
30 June 20X6 as R8 451 500, after the following items have been taken into account: each of these employees.

1. Employees Based on past practice of the company, category 3 employees are entitled to a
10% bonus of the company’s profit before tax and before the bonuses of category 3
The employees of Frenchise Limited fall into one of the following categories based employees are taken into account. The bonus pool is allocated based on individual
on their work experience: performance. This allocation is expected to be completed on 30 September 20X6
so that the cash payments can be made.
1.1. Category 1 employees
Category 3 employees are each entitled to 30 days of leave per year. A maximum
The 100 employees in this category are each entitled to a basic salary of R6 500
of 15 days can be carried forward for five months of the following leave cycle after
per month. The employer contributes R250 per month to basic medical cover for
which it is forfeited. On 30 June 20X6, the average unused days per employee is
each of these employees. In addition to this, each of these employees are entitled
12 days. Past experience has shown that category 3 employees only take 75% of
to a thirteenth cheque in terms of their contracts of employment. The amount of
the leave days that have accumulated at the financial year end.
this cheque is however within the discretion of management and varies from year
to year. On 25 June 20X6, management decided that the thirteenth cheque for the
Other information
year ended 30 June 20X6 would amount to one month’s basic salary per
category 1 employee. The thirteenth cheque for the year ended 30 June 20X6 was (i) All employees rendered service to the company for the whole financial year
paid to the employees in cash on 31 July 20X6. and are expected to all be entitled to their annual bonus.

Category 1 employees are entitled to 15 days of leave per year. A maximum of (ii) Frenchise Limited’s leave cycle ends annually on 31 December and has 250
two days can be carried forward for three months of the next leave cycle after working days. Ignore any bonuses for the purposes of calculating the leave
which it is forfeited. On 30 June 20X6, category 1 employees had on average five pay accrual amount.
days of unused leave each. Past experience has shown that category 1
employees take all of the leave days to which they are entitled. (iii) On 30 June 20X5, the balances on the leave pay accrual and the bonus
accrual were R514 500 and R1 818 600 (R600 000 related to thirteenth
1.2. Category 2 employees cheque bonuses) respectively. Bonuses of R1 815 000 were paid on
30 September 20X5 and R600 000 of this amount related to the thirteenth
The 40 employees in this category are each entitled to a basic salary of R19 250 cheque bonus of 30 June 20X5.
per month. The employer contributes R250 per month to basic medical cover for
each of these employees. (iv) On 10 July 20X6, before the issue of the financial statements for the year
ended 30 June 20X6, the directors of the company approved a 7,5% increase
Category 2 employees are each entitled to a performance bonus based on past on basic salaries and employer’s contributions to the medical aid fund for all
practice of the company. For the past 15 years, the total performance bonuses employees.
paid amounted to 47% of one months’ basic salary paid to category 2 employees.
The performance bonus for the year ended 30 June 20X6 must still be finalised by 2. Asset information
management and is expected to be paid in cash on 30 September 20X6.
Frenchise Limited has the following assets on 30 June 20X6 that are accounted
Category 2 employees are entitled to 20 days of leave per year. A maximum of for in accordance with the cost model:
two days can be carried forward to the following leave cycle. If leave that is carried
forward to the following leave cycle is not used within three months after the end 2.1. Land
of the leave cycle, it is paid out in cash. On 30 June 20X6, category 2 employees
had on average four days of unused leave. Past experience has shown that All land owned by the company was purchased on 1 July 20X1 for
category 2 employees only take 50% of the leave days accumulated at the end of R12,1 million.
the reporting date.
 33 34

2.2. Office building

4.3. The correct balance on the deferred tax account on 30 June 20X5 was
The office building was acquired at a cost of R5,25 million on 1 July 20X1 R314 468 (debit).
and was immediately available for use as intended by management.
Depreciation is written off in accordance with the straight-line method over REQUIRED
an estimated useful life of 50 years. The residual value is insignificant.
Prepare the following notes of Frenchise Limited for the year ended 30 June 20X6 in
2.3. Restaurant buildings accordance with International Financial Reporting Standards (IFRS):

The restaurant buildings were completed on 1 July 20X2 at a cost of  Income tax expense; and (30½ marks)
R15,8 million and were available for use as intended by management on  Profit before tax. (19½ marks)
this date. Depreciation is written off on the straight-line method over an
estimated useful life of 40 years. The residual value is insignificant. Note:  Round all calculated amounts to the nearest Rand.
 Comparative amounts are not required.
2.4. Equipment  A detailed deferred tax calculation is required for all assets and liabilities
arising from the information provided.
Management replaced all of the equipment on 30 April 20X6 at a cost of  There were no temporary differences other than those that are evident
R6,2 million. The carrying amount of the new equipment on 30 June 20X6 from the information provided.
was R5,9 million.
QUESTION 4 (15 marks)
The old equipment with a carrying amount of R1,3 million was sold on
30 April 20X6 for R1,2 million. Depreciation on the old equipment was
SILLY SALLY LIMITED manufactures games and puzzles and is listed on the JSE
R125 000 for the year ended 30 June 20X6. The original cost of this
Limited. The following information in respect of the company’s employees is available
equipment was R5 million on 1 July 20X2.
for the year ended 31 July 20X5:
3. Profit and loss information
1. On 1 August 20X4, Silly Sally Limited had 500 Category A employees in
The following items are included in the profit before tax amount that was calculated service. On this date, the average monthly cost to the company for each of
by the accountant: these employees comprised the following:

R R
Dividend income 423 000 Basic salary 42 500
Penalty for late submission of the income tax return 24 800 Employer contributions:
- to the medical aid fund 1 570
4. Income tax information - to the provident fund 4 250
Total cost to the company 48 320
4.1. The tax rate on companies is currently 28% and 80% of capital gains are
included in taxable income. Ignore dividend withholding tax. 2. Each employee is required to make a monthly contribution of R100 to the labour
union and 5% of the basic salary to the provident fund.
4.2. The following tax rules are applicable:
3. The risk of shortfalls on the medical aid fund and the provident fund are borne
Bonuses Contractual bonuses are deductible when they accrue by the employees and Silly Sally Limited has no obligation to these funds other
but all other bonuses are only deductible when paid in than for the payment of its fixed monthly contributions.
cash.
Office building The office building does not qualify for any tax 4. Employees receive 20 days of annual leave per year and the leave cycle ends
deductions. annually on 31 July. Any unused leave days on 31 July can be carried forward
Restaurant The restaurant buildings qualify for a tax deduction of to the next leave cycle. If the leave days have not be taken by the end of the
buildings 5% per year that is not pro-rated. following leave cycle, they will be paid out in cash.
Equipment The equipment qualifies for a tax deduction of 20% per
annum that is not pro-rated.
 35 36

On 31 July 20X5, employees had an average of 6 accumulated leave days. QUESTION 5 (28 marks)
Historical experience indicates that employees will take on average 22 days of
annual leave in the following twelve months. CEASE & DESIST LIMITED distributes safety equipment and its reporting date ends
on 30 September. During the year ended 30 September 20X6, new legislation
5. Employees also receive 5 days of sick leave per year and the leave cycle ends prohibited the sale of “extra strength pepper spray”. Since the pepper spray division
annually on 31 July. Any unused sick leave days on 31 July can be carried will no longer be profitable, management decided to restructure its operations.
forward to the next leave cycle. If these days are not taken by 31 July of the
next year, they are forfeited. On 31 July 20X6, Cease & Desist Limited made a public announcement that the
pepper spray division will be closed. The 50 employees in this pepper spray division
On 31 July 20X5, employees had an average of 4 days accumulated sick leave. have until 31 October 20X6 to decide whether they want to be transferred to the chilli
Historical experience indicates that employees will take on average 6 days of spray division or take retrenchment packages of six months of their basic salary. Any
sick leave in the following twelve months. retrenchment packages will be paid in cash on 30 November 20X6.

6. In addition, employees are also entitled to six months of maternity leave for To ensure that the division is wound down in an orderly manner, Cease & Desist
each confinement. It is expected that 14 employees will take maternity leave Limited signed a contract with 5 employees on 31 July 20X6 that they will stay on until
during the 12 month period after the reporting date. 31 December 20X6 on which date they will receive an amount of R150 000 each in
addition to the basic retrenchment package. These employees will all leave the
7. The leave accrual had a balance of R6 567 800 on 31 July 20X4. company on 31 December 20X6.

8. On 31 July 20X5, the directors of Silly Sally Limited approved an increase of For the remaining employees, Cease and Desist Limited expects that 15 of the
8% is the basic salary for employees with effect from 1 August 20X5. The employees will take retrenchment packages and 30 employees will choose to be
employer’s contributions to the medical and provident funds will however, transferred to the chilli division.
remain unchanged.
On 31 July 20X6, Cease and Desist Limited met all of the criteria to recognise a
9. Assume that these are 20 working days per month (240 working days per year). restructuring provision.

10. Silly Sally Limited had no appointments or resignations during the year ended The following additional information relating to the pepper spray division is available:
31 July 20X5.
R Note
11. Ignore all tax consequences. Basic monthly salary per employee 41 000 1
Equipment on cost model: 2
REQUIRED - Cost 1 842 500
- Accumulated depreciation on 30 September 20X6 (168 955)
Prepare the “Profit before tax” note of Silly Sally Limited for the year ended
31 July 20X5 in accordance with International Financial Reporting Standards (IFRS). 1. Basic salaries include an amount of R500 per month in respect of the employee’s
contribution to the medical aid fund.
Note:  Round all calculated amounts to the nearest Rand.
 Comparative amounts are not required. 2. Depreciation on the equipment was R48 455 for the year ended
30 September 20X6. Due to the closing of the pepper spray division, the equipment
will be sold. The value in use of the equipment is thus R nil and the fair value less
costs of disposal is R1 550 811 on 30 September 20X6. The tax base of the
equipment was R nil on 30 September 20X6 (R184 250 on 30 September 20X5).

3. Due to the closing of the pepper spray division, Cease & Desist Limited will no
longer require use of maintenance services for the equipment. The monthly
maintenance fee is R5 000 (payable in cash on the last day of each month) and
the term of the maintenance contract expires on 31 July 20X9. Should the company
terminate the maintenance agreement early (i.e. on 31 July 20X6), a fine of
R175 000 will be payable.
 37 38

4. An applicable pre-tax discount rate is 12,5% per year (8,6% after tax). QUESTION 6 (18½ marks)

5. The company’s profit before tax, after taking into account the information above, MELODY LIMITED manufactures a variety of musical instruments. The following
was R1,1 million for the year ended 30 September 20X6. information relates to the year ended 30 November 20X11:

6. The medical aid contribution was paid over to the medical aid by Cease & Desist 1. Piano division
Limited on 30 September 20X6.
1.1. The employees in the piano division each earn an average basic salary of
7. The tax rate on companies has remained at 28% for the last few years. The R22 500 per month. In addition to the basic salary, the employer contributes
deferred tax balance on 30 September 20X5 was R430 570 (credit). 15% of the basic salary to a retirement annuity fund and a further 5% of the
basic salary to the employees’ medical fund.
8. Management has always been confident about future taxable profits.
1.2. The rules of both the retirement annuity fund and the medical fund determine
9. The South African Revenue Service (SARS) grants a tax deduction at the earlier that Melody Limited has no obligation for employees’ claims if there are
of accrual or cash payment for all employee benefits classified as short-term inadequate funds available in these funds.
employee benefits for accounting purposes. All other employee benefits are only
tax deductible in the year in which they are paid in cash. 1.3. The piano division had 200 employees in service on 30 November 20X11.
This number was constant during the 20X11 financial year with the exception
REQUIRED of December 20X10 when there were only 180 employees in service.

Prepare the journal entries (cash transactions included) of Cease & Desist Limited for 1.4. On 30 November 20X11, the average number of accumulated leave days
the year ended 30 September 20X6 in accordance with International Financial per employee of the piano division was 11 days (20X10: 10 days).
Reporting Standards (IFRS). Employees are entitled to 20 days of annual leave per year. Any days that
have not been taken at the end of the leave cycle, can be carried forward to
Note:  Round all calculated amounts to the nearest Rand. the next leave cycle. Any accumulated leave days that are not taken within
 Journal narrations are not required. the six months following the end of the leave cycle are forfeited.
 A detailed deferred tax calculation is required.
Historical data of the entity shows that 90% of the accumulated leave days
are taken during the December holiday period after the financial year end.
The remaining accumulated leave days at the reporting date are usually
forfeited as they are not used.

1.5. For the past 15 years, the company has given an annual increase on
1 December of 10% to the employees in the piano division. The contributions
to the retirement annuity fund and the medical aid fund increase by the same
percentage on this date.

2. Guitar division

2.1. The guitar division’s 30 employees each earn an average basic salary of
R17 000 per month. There were no appointments or resignations during the
year ended 30 November 20X11.

2.2. On 30 November 20X11, the average accumulated annual leave days per
employee of the guitar division was 4 days (20X10: 2 days). Employees are
entitled to 20 days of annual leave per year. Any days not taken by the end
of the leave cycle are forfeited.
 39

2.3. No increases in respect of the employees in the guitar division had been
approved by 30 November 20X11. Historical evidence indicates that an
increase of 0% to 15% is normally approved for these employees on 1 March
of each year. There are however no predictable factors that can be identified
to determine a more accurate estimation of the increases.

3. Further information

3.1. In addition to the above, employees in both divisions are contractually

entitled to a bonus pool equal to 12,5% of the profit before tax after the
bonuses have been taken into account. The bonuses are only paid in cash
in the January of the following year.

As a result of resignations, the actual bonuses paid in January 20X11

amounted to R1 750 000.

3.2. The audited profit before tax of Melody Limited for the year ended
30 November 20X11 (after the above information had been taken into
account) was R15 678 400 (20X10: R14 700 955).

3.3. Assume 260 working days in a year.

3.4. The company’s leave cycle ends on 30 November of each year.

3.5. Ignore all tax consequences.

REQUIRED

Prepare the general journal entries (cash transactions included) of Melody Limited for
the year ended 30 November 20X11 in accordance with International Financial
Reporting Standards (IFRS).

Note:  Round all calculated amounts to the nearest Rand.

 Indicate the section of the financial statements that will be affected by
the journal entry, i.e. P/L, OCI, SFP or Equity.
 Journal narrations are not required.
 Closing journal entries are not required.