Employee benefits play a critical role in attracting and retaining staff. Properly accounting for these benefits is essential for accurate financial reporting and compliance with regulations.

In her session,Accounting for Employee Benefits, Lindsay Webber delves into the concept of employee benefits, provides examples, and explores the treatment of holiday pay accrual and other long-term benefits.

1. What is an Employee Benefit?

Employee benefits are various types of compensation provided to employees including their regular wages or salaries. These benefits can be either short-term or long-term, depending on their nature and the period over which they are provided. Proper accounting for employee benefits requires recognising them either as expenses or assets, and acknowledging any liabilities that remain unpaid at the end of the reporting period.

Short-term employee benefits are those expected to be settled within 12 months of the year-end and do not require discounting. Examples include wages, salaries, social security contributions, paid annual leave, non-monetary benefits like medical care or housing, and some profit-sharing and bonuses.

Long-term employee benefits extend beyond 12 months of the year-end. These include long-term paid absences such as sabbaticals, long service benefits, long-term disability benefits, and deferred remuneration. Long-term benefits typically require estimation at fair value and present value discounting.

2. Examples of Employee Benefits

Short-term employee benefits:

• Wages and Salaries: The most basic form of employee benefits, including hourly wages or annual salaries.
• Social Security Contributions: Employer contributions to social security on behalf of employees.
• Paid Annual Leave: Employees are entitled to take paid time off for vacations, public holidays, and other personal matters within the year.
• Non-monetary Benefits: Includes medical care, housing, company cars, and subsidised goods or services.

Long-term employee benefits:

• Long-term Paid Absences: This may include sabbaticals or long service leave. Companies need to accrue for these if they are offered.
• Long Service Benefits: Bonuses or other benefits granted after a significant period of service, such as ten or fifteen years.
• Long-term Disability Benefits: Benefits paid to employees who are unable to work due to long-term disability.
• Deferred Remuneration: Salaries or bonuses that are delayed for more than 12 months.

3. An Example - Holiday Pay Accrual

Holiday pay accrual is a common short-term employee benefit and often exemplifies how these benefits are accounted for.

Consider a company with 20 employees, each entitled to 20 days of annual leave. Employees can carry forward unused leave into the following year, and they are paid for any unused leave upon leaving the company. Both the financial year and holiday year end on December 31.

By December 31, 2025:

• Ten employees have taken 15 days of leave, leaving them with five days each.
• Two employees have taken 17 days of leave, leaving them with three days each.
• Eight employees have taken the full 20 days.

The average daily pay is £100, with an additional 10% National Insurance contribution. The calculation for holiday pay accrual is as follows:

• Ten employees with five days each: (10 \times 5 \times £100 = £5,000)
• Two employees with three days each: (2 \times 3 \times £100 = £600)
• Total pay: (£5,600)
• National Insurance (10%): (£560)

The total journal entry is:

• Debit Employee Costs: £6,160 (comprising £5,600 + £560)
• Credit Accrual for Holiday Payment: £6,160

Since the holiday pay is a short-term benefit expected to be settled within the next year, no discounting is required.

4. Other Long-term Benefits

Long-term benefits require more careful assessment and accounting, considering the time frame involved, which typically exceeds twelve months.

Consider long service leave or sabbatical leave offered by some companies. These benefits must be accrued from the moment an employee starts earning them. Accrual for these benefits is critical because they can become material liabilities over time.

Long Service Benefits: If a bonus or other benefit is offered after ten or more years of service, it must be accrued over the employee's service period. Estimating the obligation and discounting it to present value can be complex due to the long timeframe and variables affecting future payments.

Long-term Disability Benefits and Deferred Remuneration: Similar to long service leave, these benefits must be accurately estimated, discounted, and accounted for over the service period. For example, if there is a profit-sharing arrangement based on a three-year rolling period, careful estimation and continuous revision are essential.

Estimations involve understanding the terms of agreements, predicting future performance, and calculating potential obligations. It is crucial to examine each agreement meticulously, whether it is a one-time long-term arrangement or a rolling period calculation. Ensuring accurate and compliant accounting of these benefits requires close collaboration between management and the accounting team.

Accounting for employee benefits is a vital aspect of financial reporting that ensures fair and transparent compensation management. Short-term benefits are typically straightforward to account for, while long-term benefits necessitate thorough examination and fair value estimation. Proper handling of these benefits not only maintains regulatory compliance but also supports a transparent relationship between employers and employees.

For the full session, please click here. Lindsay Webber covers the following topics during this course:

• Accounting for short and long term employee benefits
• Accounting for defined contribution and defined benefit pension plans
• Disclosure requirements for full FRS 102, Section 1 A and FRS 105
• Disclosure requirements from Companies Act 2006
• Real world examples

The contents of this article are meant as a guide only and are not a substitute for professional advice. The author/s accept no responsibility for any action taken, or refrained from, as a result of the material contained in this document. Specific advice should be obtained before acting or refraining from acting, in connection with the matters dealt with in this article.