Employee benefits

1. defined contribution plans

2. defined benefit plans

• fixed contributions to seperate fund

• no legal or constructive obligation to pay further than contribution

• contribution to plan expensed in the same period as income

entity promises a fixed pension upon retirement -> obligation -> pension liability

pension liability = PV of pension payments, with discount rate

either:

• yield on high quality corporate bonds (min. AA)

• yield on government bonds

1. vested benefit obligations (benefits for vested employees at current salary)

2. accumulated benefit obliagtions (benefits for vested / non-vesteed employees at current salary)

3. defined benefit obligation (benefits for vested / non-vested employees at future salary)

start value (t)

+service costs (benefits earned)

+past service costs (amendments to conditions of pension scheme)

+interst expense (unwinding discounting)

+- acturial gains or losses (changes in assumptions)

-benefits paid (payments to pensioner)

= end value (t) = start value (t+1)

1. funded: company has set aside pension assets to fund db obligations

2. unfunded: db obligations exist, but no seperate assets from which obligation will be paid

-> only for funded db plans

start value (t)

+interest income

+return on plan assets in excess of interest income

+employer contributions (cash contribitions by employer)

+plan/scheme participants contributions (cash contributions by employee)

-benefits paid

= end value (t) = starting value (t+1)

provisions of equity instruments to employees instead of cash salary

-> aligning employees interest with those of shareholders

• fair value reporting at grant day

3 types of share-based transactions

1. equity-settled

2. cash-settled

3. hybrid

recognition obligation in equity:

BS:

• “share-based payment reserve” in equity, increasing by allocated amount

  -> if necessary, rebooking into retained earnings (within equity)

P&L:

• expense at fair value of the option (yearly allocation)

recognition liability (remeasured each reporting date):

BS:

• liability -> at fair value -> changes in fv in P&L and BS

P&L:

• only changes in fair value and allocation

  (settlement is not in P&L)