I'm Larry Walther, this is principlesofaccounting.com, Chapter 12.
And in this module, we will look at the other elements of employee compensation,
the amounts beyond just the paycheck.
These can include, periods of compensated absences or paid time off.
That can include sick leave, holidays, family emergency time,
jury duty time, vacations and so forth.
They often, these costs or benefits accumulate with the passage of time.
For example, when an employee earned two weeks of vacation a year.
But companies would expense, and provide a liability for these accumulating benefits.
When the accumulated benefits meet four criteria.
Specifically, the accumulated benefit relates to services already rendered.
It's a right that vests or accumulates.
It's probable that it will paid, and you can reasonably estimate the amount.
So, clearly things like your accrued vacation pay would typically meet
these conditions.
Some of the other items may not necessarily meet these conditions.
For example, sick leave, a company's sick leave policy may be less definite and
not meet all of the conditions for accrual.
Another category of employee benefit is a pension plan,
there are a variety of types of benefit plans.
Of popular one is the defined contribution plan.
With a defined contribution plan, an employer promises to make a periodic
contribution, into a separate pension fund account.
This might be, for example,
on equal to 5% of salary contributed to this pension account each period.
The funds might be invested in stocks, bonds, or other approved instruments.
And after a minimum vesting period, the funds essentially become the property of
the employee, and to their benefit once they enter retirement.
Under these define contribution plans,
one of their key advantages is certainty as well as simplicity of accounting.
The company simply expenses the required periodic contribution each period.
The assets and obligations or the pension are transferred to the pension trust,
that maintains accountability over the funds, and
then eventual disbursement to the employees.
Another type of pension plans would be a defined benefit plan.
With the defined benefit plan, an employer's promise becomes more uncertain.
The employee benefit in retirement will be based on factors,
such as how long they worked for the company?
What their annual salary was?
Maybe during the last years of service, what their age is when they retire and
other such factors.
So, we're really dealing with an unknowable amount up front.
Nevertheless, it needs to be accounted for,
the account will often involve the work of an actuary, who is someone trained to make
assessments about life expectancy and work force trends.
They prepare estimates that are necessary to calculate,
an estimated amount of annual pension expense.
In addition, to calculating the expense, the company would have an obligation to
make periodic fund payments, into a pension trust fund.
How those funds will be accumulated investment, for
eventual payment to the employees to satisfy the obligations.
But importantly, the company remains obligated for
any shortfalls in the pension trust.
The pension trust fund is underfunded relative to the outstanding promises that
have been made.
The pension liability would be reported on the company's books.
But as a general rule, the pension assets and pension obligations that are covered
by the fund, are not carried on the books of the company.
They're carried on the books of separate pension trust fund.
They've been essentially been removed from or isolated from the company records.
Finally, another huge category of government benefits,
are post-retirement benefits,
related to things such as health care, prescription benefits, and life insurance.
These are large cost items.
However, the cost of that service or
benefit to the employee needs to be expense during the period
of active employment, not while the employee is retired.
So, we need a good matching system, so that the cost of these benefits recorded.
And our rule, is that we'll record those costs over the period of
services provided, by the employee up to the point, in which those rights vest.
At that point the cost should be fully accounted for.
This will retire or essentially a debit to expense, and
a credit to liability over the period of time that the employee is working.
This liabilities are often reported on the balance sheet.
Very often, there is not a separate trust fund,
where monies are set aside to ensure the payment of these.
So, the company will continue to carry the obligation on their books.
A very substantial balance sheet liability, for many companies.