Question

A supplier of electrical parts and motors company with annual sales of $14 million and employs a staff of 80. Company enters an agreement with 2 individuals ,fiscal year 2016, Bostic-age 55, and Wilson age 56, as a management security program to provide postretirement benefits to Bostic and Wilson of $60,000 per employee, per year for an eight-year period, and payable in semiannual installments of $30,000. The agreement provides that payments will be made if Bostic and Wilson remain in the employment of Electric Company, Inc. until their normal retirement date (on attaining the age of 65) or on their actual date of retirement, if later. If either employee dies after payments commence, the company is required to make the remaining payments to the employee’s beneficiary. If either employee dies while in the employment of the company but before retirement, the company is required to pay to the employee’s beneficiary a $60,000 lump sum. The agreement is neither funded nor guaranteed and does not preclude the company from terminating either employee. Although the plan is unfunded, the company has purchased two whole life insurance policies that would provide for the funding of the agreement if either or both of the employees become vested in the benefits.

Question 1 ) Should generally accepted accounting principles do not require the recognition of liabilities for these agreements as of September 30, 2016, OR as of September 30, liabilities of $960,000 for the agreement should be recognized ? What arguments in support of and against liability recognition ?

Question 2 ) What recommendation for agreement should be accounted for. Include in your discussion what year(s) the effects of the agreement (including specific dollar amounts) should be reported in the company’s balance sheet and income statement. Identify any accounts to be reported in the financial statements.

Answer 1

The above transaction can categorised under Defined Contribution Plan. IAS 19 'Employee Benefits' suggests to records such nature of expenses and create liabilities for such plans. For for above plan, the amount to be recognised should be the contribution payable by the Company for exchange of services rendered by Bostic and Wilson during the period. It is incorrect to record $960,000 being full value consideration on 30 September 2016. So $120,000 being the amount payable as contribution for current period needs to be recorded as expenses and liability.

It should be appropriate for the Company to record contribution payable during the period based upon acturial risk to the entity. The entire contribution of $960,000 needs to be amortised over the peirod of the Contract. $120,000 (approx cost) will be debited towards employees benefit expenses and credited to provision for employee benefits. This recognition may have some effect based upon acturial risk.

Reporting in the Financial Statement

Employee Benefit expenses should be recognised as expenses in the Income Statement. ($120,000 per year)

Provision for employee benefits needs to be created and to be shown in balance sheet. (Accumulated figure)

Further proper disclosure needs to given in the Company's financial statement as required by IAS 19.