Long-Service Leave Expense and Note Disclosure for 30 June 2019

Questions:

1) Prepare the journal entires to recognitse the long-service leave expense for 30 June 2019
b) Prepare the note disclosure regarding the long-service leave provisions for 30 June 2019.

Answers:

Requirement-A

Step 1: Estimating the number of employees who are expected to become eligible for LSL
Years of Service	Probability LSL will Vest	No of employees	Expected Number of Entitled employees
(1)	(2)	(3)	(4)= 2*3
3	30%	1	0.3
5	40%	1	0.4
7	80%	1	0.8
11	100%	1	Note-2
13	100%	1	Note-2

Step 2: Estimate the projected salaries
	Current salary*(1+inflation rate)^n

Years of Service	Expected Number of Entitled employees	Current Salary	Inflation rate	Period until LSL vests	Projected salary
3	0.3	54,000.00	2.50%	7	64189.03
5	0.4	80,000.00	2.50%	5	90512.66
7	0.8	105,000.00	2.50%	3	113073.5

Step 3: Determine the accumulated benefit
Years of employment/Years required for LSL x weeks of paid leave x projected salaries Years required for LSL 52

Years of Service	Projected salary	Unit credit (Years of employment/Years required for LSL)	LSL weeks /52	Accumulated benefit
3	64,189.03	0.30	0.29	5,554.82
5	90,512.66	0.50	0.29	13,054.71
7	113,073.52	0.70	0.29	22,832.15

Step 4: Measure the present value of the accumulated benefit
	accumulated benefit/(1 + i)n

Years of Service	Accumulated benefit	Discount factor	Present value
3	5,554.82	0.81	4,516.58
5	13,054.71	0.86	11,266.58
7	22,832.15	0.92	21,109.11
			36,892.27

Note-1: Rate of discount is taken based on yield on government bond. Yield on bond being taken based on years of service remaining to vesting period


Note-2: In case of Yu Lew, the vesting condition of 10 years has been satisfied, so, no expense on this as it is due for payment. In the case of Adrian Toomes, the vesting conditions have already been satisfied and he has completed the payment perido as well so no expense to be recognized it is already debt due on company

Journal entries
S. No.	Account title	Debit	Credit
30-Jun-19	Long service leave expense	36,892.27
	Provision for Long service leave expense		36,892.27
	(Provision for long service leave expense created on 30 June 2009)

30-Jun-19	Profit and loss account	36,892.27
	Long service leave expense		36,892.27
	(Long service leave expense for 2009 charged to profit and loss account)

Requirement-B

Note disclosure regarding the long-service leave

Opening in provision account	62,400.00
Add: Current year expense	36,892.27
Balance at the end	99,292.27

Discount rate	Bond yield based on number of years
Phineas Mason	3.000%
Herman Schultz	2.990%
Jackson Brice	2.650%
Notes:
Assumed that benefits of Adrian Toomes have been paid
Assumed that plan assets of amount equal to benefits paid to Adrian Toomes have been disposed off

Case-B

Requirement-A

Determination of expense to be recognized each year
	2019	2020	2021	2022
A. No of employees entitled	360	344	336	403
	(450-20-70)	(450-20-11-75)	(450-20-11-8-75)	(450-20-11-8-8)
B. Options per employee	230	230	230	230

C. Total options (A*B)	82800	79120	77280	92690

D. Fair value	3.9	3.9	3.9	3.9

E. Total expense cumulative (C*D)	322920	308568	301392	361491

F. Expense to be recognized	80730	150696	69966	60099

Journal entries
S. No.	Account title	Debit	Credit
30-Jun-19	ESOP expense	80730
	ESOP outstanding-liability		80730
	(employee stock option expense recognized)

	Profit and loss account	80730
	ESOP expense		80730
	(expense transferred to profit and loss account)

30-Jun-20	ESOP expense	150696
	ESOP outstanding-liability		150696
	(employee stock option expense recognized)

	Profit and loss account	150696
	ESOP expense		150696
	(expense transferred to profit and loss account)

30-Jun-21	ESOP expense	69966
	ESOP outstanding-liability		69966
	(employee stock option expense recognized)

	Profit and loss account	69966
	ESOP expense		69966
	(expense transferred to profit and loss account)

30-Jun-22	ESOP expense	60099
	ESOP outstanding-liability		60099
	(employee stock option expense recognized)

	Profit and loss account	60099
	ESOP expense		60099
	(expense transferred to profit and loss account)

30-Jun-23	Bank	483000
	ESOP outstanding-liability	269100
	Share capital		69000
	Share premium		683100
	(Equity shares issued to 300 employees exercising the option)

	ESOP outstanding-liability	92391
	General reserve		92391
	(Remaining balance in ESOP outstanding-liability account transferred to general reserve)

Requirement-B

If three more employees leave on 31 Dec 2022, it will not affect the answer in part-A in any way. The amount of expenditure would remain same as the employees are leaving after the vesting period. Also, if it is assumed that these three employees were among 103 employees who did not exercise the option, the change will not affect the amount transferred to general reserve account too.

Case-C

As per the ruling given in AASB 138, the expenditure incurred on the in house developed intangible assets should be recognized in the statement of profit and loss account in the year of incurrence itself until development phase of the intangible being developed is started. This means that the expenditure after starting the development phase activities of the intangible being developed can be capitalized. However, this is also subject to certain conditions.

Based on the above ruling, the accounting treatment of the expenditure incurred on development of a motion- sensing system by StarK Ltd is given below:

Expenses to be charged to profit and loss account (Research phase)

All expenses incurred during the research phase would be charged to the statement of profit and loss account. The project started on 01 August 2017. The research phase of this project continued till May 2018 until company developed a prototype of the motion-sensing system. The expenditure incurred till May 2018 would be charged to profit and loss of the current year i.e. 2017-18. Thus, salary paid in September 2017 of 319000, cost of basic model production of 215000 incurred in November 2017, a $103000 incurred in January 2018 and another $93000 incurred in January 2018 would be charged to the profit and loss account. Further, a sum of $230000 incurred in April 2018 for incorporating new design would also be charged to the profit and loss account. So, a total of $960,000 would be charged to profit and loss account in 2017-18.

Expenses to be capitalized (Development phase)

The expenses incurred in the development phase can be capitalized to meeting the asset recognition criteria as set out in the framework. The framework states that an item can be recognized as asset in books if future economic benefits are expected to flow from its use in future years. In May 2018, Stark Ltd had developed a prototype of the system which shows that the system would be successfully available to the company for future economic benefits. Thus, expenses of $112,000, $38,000, and $40,000 resulting in total of 190,000 to be capitalized as intangible assets and these expenses would be amortized on yearly basis.

References

AASB 119, 2018, Employee benefits, Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB119_09-11_COMPjun14_07-14.pdf accessed on 13 September 2018.

AASB 138, 2018, Intangible assets, Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB138_08-15_COMPoct15_01-18.pdf accessed on 13 September 2018.

AASB 2, 2018, Share based payments, Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB2_07-04_COMPjul09_01-10.pdf accessed on 13 September 2018.

Conceptual framework, 2018, Conceptual Framework for Financial Reporting, Available at: https://www.aasb.gov.au/admin/file/content105/c9/ACCED264_06-15.pdf accessed on 13 September 2018.

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