Activity 1
Leave pay
Generous Limited has a 31 December year-end and operates on a five-day working week. The
conditions of employment at Generous Limited stipulate that each employee is entitled to 20 paid
working days vacation per annum. Generous Limited’s employee profile and recent leave statistics are
as follows:
Number of PER WEIGHTED AVERAGE EMPLOYEE, BY SALARY CATEGORY
employees Annual Average Average unused Average unused Average
at this gross salary annual vacation days at vacation days at forecasted days
annual for the year staff 31 December 31 December vacation to be
salary level ended 31 turnover1 2017 2018 taken during the
December year ending 31
2018 December 20192
Earned Earned Earned Earned Earned Earned
during during during during during during
2016 2017 2017 2018 2018 2019
500 R60 000 20% 2 5 2 5 3 15
50 R150 000 10% 4 8 4 7 4 13
5 R350 000 5% 5 10 5 10 6 15
1 R850 000 0% - 2 - 3 3 18
1
assume each employee spends a minimum period of two years with the company
2
these figures take account of expected attrition during the year ending 31 December 2019
Vacation leave is carried forward to the next financial year (i.e. accumulating). The employees
entitlement to vacation leave falls away at the earlier of the end of the financial year after that in which
it was ‘earned’ or when the employee leaves the employ of Generous Limited. (i.e. non-vesting).
There were no salary increases during 201 but all salaries were increased by 20% with effect
from the beginning of January 2019.
Ignore public holidays.
Bonuses:
Generous Limited pays performance bonuses to its employees. The total performance bonus for the
year is computed at 10% of the excess of reported net profit for the year over a predetermined targeted
net profit for the year (the target is established annually in advance). The performance bonus is shared
between employees in proportion to their gross salaries.
Generous Limited reported R250 000 000 profit for the year ended 31 December 2018. The
predetermined targeted profit for the same period was R150 000 000.
The company is contractually bound to pay the bonus to those employees that were employed for the
full twelve months of the year in which the bonus was earned AND who remain in the employ of the
company for the ensuing 12 month period. Generous Limited ‘saves’ a portion of the bonus due to this
vesting provision.
Additional information:
The corporate income tax rate is 30% throughout.
Assume that the South African Revenue Services will allow a deduction in respect of bonuses only
when Generous Limited pays the amounts to the employee.
Assume that the South African Revenue Services will allow a deduction in respect of leave pay only
when the employee takes the leave.
YOU ARE REQUIRED TO:
A. Determine the provision for employee benefits that should be raised by Generous Limited at
31 December 201.
B. Determine Generous Limited’s deferred taxation balance in respect of employee benefits at
31 December 201.
Activity 2
In order to right-size its employee profile Modcon Limited made an offer of voluntary termination of
employment to selected employees. In accordance with the terms of the offer affected employees
could elect to be retrenched at any of the ensuing four years ended 31 December 2018 to 2021. The
offer was made to the affected employees on 30 November 2018.
The yield on high quality corporate bonds is 10% per annum throughout and there is a deep market in
these corporate bonds.
Termination benefits are payable in early January of the year after accepting the voluntary
termination.
The termination of employment package is measured at three times the employee's annual gross
salary, and is reliably estimated to be as follows:
Annual gross salary for Expected Number of employees reliably expected to take the
the year ended average voluntary retrenchment package
31 December 2018 annual salary 31 31 31 31
increase December December December December
2018 2019 2020 2021
R60 000 15% 200 150 100 50
R150 000 12% 50 10 3 -
R350 000 10% 10 5 - -
R850 000 13% - - 1 -
The corporate income tax is 30% throughout.
South African Revenue Services will allow deductions in respect of employees that have
accepted the termination benefit and whom will be paid out early in January of the next year.
Required:
A. Determine the provision for termination benefits that should be raised by Modcon Limited at
31 December of each year: 2018, 2019, 2020, and 2021.
B. Determine Modcon Limited’s deferred taxation balance in respect of termination benefits at
31 December of each of the years 2018, 2019, 2020, and 2021.
Activity 3
The accountant of Gemini Limited, a large listed company, is concerned with the provision
in respect of post employment benefits for its employees.
The accountant of Gemini Limited has provided the following details in respect of the
company’s pension fund, which is a defined benefit plan for accounting purposes, as follows:
The fair value of plan assets at 1 January 2018
The fair value of plan assets at 31 December 2018
Current service cost
Benefits paid by the fund
Contributions paid to the fund
Actual return on plan assets (after management charges and
tax)
Present value of liability at 1 January 2018
Present value of liability at 31 December 2018
Discount rate at 1 January 2018
Activity 4
For the sake of simplicity, all transactions are assumed to occur at the year end.
The following data applies to the post employment defined benefit compensation
scheme of an entity
Expected return on plan asset: 12% (each year)
Discount rate: 10% (each year)
Present value of obligation at start of 2016: N$ 1 million
Market value of plan asset at start of 2016: N$ 1 million
The following figures are relevant
2016 2017
(N$000) (N$000)
Current service cost 140 150
Benefits paid out 120 140
Contribution paid by entity 110 120
Present value of obligation at year end 1 200 1 600
Market value of plan asset at year end 1 250 1 450
Required:
Show how the reporting entity should account for this defined benefit plan in each of
the years 2016 and 2017. Actuarial gains and losses are to be recognised in full in
the income statement (please show all workings and journals) (25)