Understanding Employee Benefits And Lease Accounting Implications

Reducing Risk for Managers

Discuss about the Advance Accounting Issues for Normal Duty.

Managers are entrusted with the responsibility for looking after the company and ensuring that all the activities are in the correct place. It is obvious that the risks will be undertaken by the manager and effectively managed. However, going by the role of the managers and the pressure exerted on them, it is imperative that some risks must be reduced or controlled that is imposed on them. This is due to the fact that the reduction in risk will lead to effective performance and the managers can be more pronounced in their activities (Melville, 2013). If additional risk or pressure exerts on them they will not be able to discharge their normal duty or function. Moreover, acting under immense risk leads to differences in their performance.

1. The compensation risk imposed on manager can be reduced by adding a bogey to the plan of bonus. A bogey leads to the exemption of the manager from paying the firm if it incurs a loss. This tends to lower the downside risk of the manager. Moreover, a stock option even lessens the downside risk of the manager as the lowest that can be observed is zero. In reality, the bankruptcy fear cannot be considered as the best means to motivate the manager to bring the best in them. It is due to the reason that manager will bring safe operating and investment strategies. Moreover, the interest of the shareholder might be served with the riskier ones. Hence, limitation of the downside risk is important in nature.
2.  

The AASB 119 describes the recognition, disclosure, and measurement of employee benefits in the financial statements of an entity. According to the AASB 119, there are two types of employee benefits:

1. Defined benefit plan- Under this plan, the amounts payable by an employee or member at his normal retirement age are calculated or determined by tracking his number of years of membership, his salary, etc (Ross et. 2014).
2. Defined contribution plan- Under this plan, the amounts payable by an employee or member at his normal retirement age are calculated or determined by the accumulated payments or contributions made by the members, his investment earnings, etc (Ross et. 2014).

The two superannuation plans as discussed under AASB 119 as mentioned above are :

Defined Benefit Plan

Defined Contribution Plan

The difference between these two are –

Under a defined benefit plan, the amount that is accumulated in the fund is out of the contribution of the employer which he promises to pay to the employee at the time of his retirement.

Whereas under a defined contribution plan, the amount accumulated in the fund is out of the contribution of the employee from his own money (Porter & Norton, 2014).

Another difference is that the benefit under the first plan is calculated on the basis of a number of years served, last taken salary, etc whereas in the second plan, the benefit is calculated on the basis of contribution done by the employee towards the fund. 

The implications of GFC on superannuation obligations of the employers are as under:

Firstly due to GFC there always exist chances that the employers might cut the jobs which will reduce the funds allocated for defined benefits plan. The employers shall be reluctant to hire new people in the company moreover in cases of serious GFC the employers shall try to relieve more employees from their company so that the fund allocation may be reduced (Kollmorgen , 2015). 

The employers will try to negotiate more and try to bargain on salaries to be paid to their employees hence there shall be a problem in benefits/ contribution which is to be paid by employers on behalf of their employees. There shall be a huge reduction in benefits plans due to GFC in the market (Petty et. al, 2012).

Types of Employee Benefits

The companies with a higher debt against assets are greatly impacted by the type of lease classification which they have opted for their company. In case the company has higher debts and lower assets they should opt for a finance lease where the lease rentals are such that they cover the entire life of the assets. The lessee in case of finance lease can become the owner of the asset at end of lease term. The lessee is at the convenience of not spending a huge amount at the start of the lease term yet having an option to claim both depreciation and interest as tax-deductible expenses (Vaitilingam, 2014). So more the debt-ridden company more is financed lease be beneficial to the lessee.

While operating lease does not allow the ownership being transfer to the lessee, the company with huge cash flows should opt for operating lease because it allows them to pay lease rentals out of their cash flows so the company should opt lease classification as per their financial condition. Hence the companies should make prudent decision to choose lease classification.

Implications of lease accounting are:

The books of the lessor in case of operating lease does not affect much because they remain the owner of the asset leased and continue to charge depreciation on assets in the books of accounts (Vaitilingam, 2014). The lease rentals received are treated as income of the company. In case of the lessee (operating lease), the lessee is only entitled to the charging of lease rentals in their books of accounts and no depreciation is available to them.

On the other hand, finance lease allows the lessee to become the owner of the asset at the end of lease term. They are more or less the owners of the asset as the lease term covers the entire term of the lease. The lessee is entitled to depreciation and interest costs to be charged in the books of accounts. While the lessor, in this case, gives away his ownership and passes on all the risks and rewards.

Answer- 4

1. a) In the given case, there is an obvious evidence of a future obligation to be served which is measurable in terms of money that is 1 free return ticket on booking of 6 return tickets. This means that the company shall give 1 return ticket to the person who has booked 6 return tickets from them. The free tickets provided by the company shall be an expense and shall extend over some time period which may be 3-6 months or more. So it is advised that this future expense is a liability which is not contingent in nature and hence should be duly recognized in the financial statements. So the company should make a provision for meeting our future liability (Parrino et. al, 2012). For example- expenses on purchase of tickets for distributing as free gifts, etc. 

1. b) The statement made by the advisor is wrong as the any grant received in form of money or in kind should be recorded as an income. In this case the company has been gifted a bus which is a tangible asset which possesses a value. The bus qualifies as an asset as it shall reap future benefits to the company and help them in doing business (Marsh, 2009). The company should record the asset equal to the fair market value on the date of gift t received which can be its historical or acquisition cost borne by the donor. So as per our advice, the school should record the bus as an asset in its balance sheet on its fair market value on the date of donation. The donation qualifies to be recorded in the books of accounts because it can be measured in terms of money. Also it, shall be helpful in case the company plans to sell off the bus in the future and it is duly recorded in books of accounts. 

1. c) The company has paid a deposit of $ 750000 to the computer manufacturer as a token for securing the order from the manufacturer. The order is to be done as per specifications and is a big valued order. The company will pay the remaining payment once the entire order is received and quality checks have been met. This does not constitute any liability of the company as the company has to pay only once the full order is received by them. The company has not received any bill or invoice from the manufacturer so it is not correct to record any future liability in the books of accounts right now hence the contention of the accountant is incorrect. The manufacture order completion will take the significant amount of time and can be delayed as well as it is to be built as per Australian specification so the liability to pay is not evident right now. Hence the company should just record Advance paid to the manufacturer in their books of accounts. 

References

Kollmorgen , A. (2015) Superannuation fund performance and fees [online].  Available at:  https://www.choice.com.au/money/financial-planning-and-investing/superannuation/articles/superannuation-funds-performance-and-fees-191115 [Accessed 15 May 2018]

Marsh, C. (2009) Mastering financial management. Harlow: Financial Times Prentice Hall.

Melville, A. (2013) International Financial Reporting – A Practical Guide. 4th edition. Pearson, Education Limited, UK

Parrino, R, Kidwell, D. & Bates, T. (2012) Fundamentals of corporate finance. Hoboken,

Petty, J. W, Titman, S., Keown, A. J., Martin, J. D., Burrow, M. and Nguyen, H. (2012) Financial Management: Principles and Applications, 6th ed. Australia: Pearson Education Australia.

Porter, G. and  Norton, C. (2014) Financial Accounting: The Impact on Decision Maker. Texas: Cengage Learning

Ross, S., Christensen, M., Drew, M., Bianchi, R., Westerfield, R. And Jordan, B.(2014) Fundamentals of Corporate Finance, 7th ed. North Ryde: McGraw-Hill Australia Pty Ltd.

Vaitilingam, R. (2014) The Financial Times Guide to Using the Financial Pages. London: FT Prentice Hall.