Every company offers various financial/ non-financial benefits to its employees. These are divided into two main categories with respect to timing of benefit:
1: Regular benefits (also termed as short-term employee benefits)
These include the regular employee benefits which are given to employees on a periodic basis (weekly, monthly, annually)and include salary, fuel allowance, house rent allowance, utility allowance, performance bonus, leave fare assistance etc.) These benefits are recorded as expense in relevant period. Any amount unpaid at reporting date is booked as accrued liability.
2: Post-retirement benefits
These include the various benefits which are paid to employee at the time of his/her retirement. Example include pension, provident fund, gratuity, post-retirement medical facility etc.
Accounting for post-retirement employee benefits:
Post-employment-employee benefits are divided into following two categories with respect to employer’s liability:
1: Defined benefit plans
Defined benefit plans are the ones where employer commits a defined benefit for the employee at the end of his service based on his last salary and number of years served in the company. Since employer has committed a certain benefit to be provided, all risks and gains related to employee benefit fund are borne by the employer. Examples include:
- Gratuity plans
- Pension plans
In case of defined benefit plans, company makes monthly/yearly contributions to the fund on the basis of actuarial valuation which takes into account all factors such as expected interest and discount rates, average mortality rate and expected rate of increase in salaries etc. and determines the contribution to be made by the employer.
2: Defined contribution plan
Defined contribution plans are the ones where employer commits to pay a defined contribution to a fund maintained for employees’ benefit. The defined contribution is usually based on percentage of employee’s basic or gross salary. Contrary to defined benefit plans, employer has no further liability once it has contributed the agreed amount.
The best example of defined contribution plan is provident fund where both employer and employee contribute equal sums to the provident fund.