3101AFE: WORKSHOP Accounting for Employee benefits

3101AFE: WORKSHOP 9 – Semester 1 2016Topic 13: Accounting for Employee benefitsQUESTION 1: Question 2 from Deegan Topic 13: According to AASB 119, how should anemployer’s obligation for employee benefits be measured?QUESTION 2: Question 7 from Deegan Topic 13: When would payments made to employeesbe considered to be an asset?QUESTION 3: Question 8 from Deegan Topic 13: When would it be considered that incomehas arisen in relation to employee benefits?QUESTION 4: Question 9 from Deegan Topic 13: Explain the difference between a definedbenefit plan and a defined contribution plan. Which plan poses more of a challengeto the accountant, and why?QUESTION 5: Question 10 from Deegan Topic 13: Some employers will pay out employees forany unused sick-leave entitlements if they leave the organisation, whereas in otherorganisations employees forfeit this entitlement when they leave. Explain how thesedifferent types of sick-leave entitlements are treated for accounting purposes.QUESTION 6: Question 12 from Deegan Topic 13: Why do some employers provide theiremployees with shares or options to buy shares in the organisation?QUESTION 7: Question 15 from Deegan Topic 13: Jerry Lopez works for Lightning Bolt Ltd. Hisannual salary is $200 000 and he is paid weekly. As part of his employmentagreement, he is entitled to four weeks’ annual leave each year. He receives a leaveloading of 17.5 per cent.Required(a) Provide the weekly journal entries to record the recognition of Jerry Lopez’s annualleave entitlements.(b) Provide the appropriate journal entries, assuming that Jerry Lopez takes two weeks’annual leave after being employed for one year and assuming that the tax deducted from thepayment for the two weeks is $2,400.QUESTION 8: Question 17 from Deegan Topic 13: Bear Island Ltd has a weekly payroll of $600000. The employees receive entitlements to two weeks’ sick leave per year. The sickleave entitlements are classified as non-vesting. Past experience, and experiencewithin the industry, suggest that 60 per cent of employees will use their full twoweeks’ entitlement each year; 20 per cent of employees will take one week’s sickleave each year; and 10 per cent of employees will take one day’s sick leave eachyear.Required(a) Calculate the expected annual sick-leave expense for Bear Island Ltd (on the basis ofaverage salaries).(b) Provide the journal entries necessary to recognise the sick-leave entitlementexpense as it accrues.QUESTION 9: Question 7.29 from Deegan Topic 7: Read the extract below from “Wikipedia”or read Accounting Headline 7.8. Babcock and Brown had negotiated an agreement withlenders that its market capitalisation would not fall below an agreed amount of $7.50 pershare. However, the share price dipped below this agreed amount, meaning that the lenderscould demand repayment of the funds if they choose to invoke their right to do so. From aPAT theory perspective, why would Babcock have agreed to this market capitalisationrequirement rather than other types of covenants, such as a restriction on the organisation’stotal liabilities to total tangible assets? Further, why would the banks have negotiated tohave this market capitalisation agreement included within the debt agreement?Babcock & Brown was a global investment and advisory firm based in Sydney, Australia that went intoliquidation in 2009. It was best known in financial markets for structured finance deals. The companyhad at its peak 28 offices and over 1,500 employees worldwide. Although headquartered in Sydney, ithad a significant presence in Europe and the United States. The creditors of Babcock & Brown voted toplace the company into liquidation on 24 August 2009. At the end of 2008 Babcock had a marketcapitalisation of just over $8.5 billion, and in 2007 its market capitalization peaked at above $9.1billion (A$33.90 per share). However, by October 2008 the share price had collapsed by 95% toA$1.30[1] and by December 2008 by 99.6% to A$0.14, representing a market capitalisation of less than$50 million. On 13 March 2009 the company was placed into voluntary administration.[2]Approximately 45% of its shares were owned by the executives of the firm. Nicknamed the “MiniMacquarie”,[3][4][5][6] it was a company frequently compared with larger competitor Macquarie Bank.History: The Company was founded in 1977 by James Babcock and George Brown in San Francisco,USA. Babcock opened a Sydney office in 1982 and largely operated as a corporate advisory firmfocused on leasing of aircraft and other equipment until the early 1990s. B&B entered the real estatemarket in Sydney, at that time enjoying considerable success. Jim Babcock resigned from the board ofdirectors on 1 November 2008 citing personal reasons. [7]The company’s focus from advisory work toinvestment management continued until a German bank Bayerische Hypo und Vereinsbank investedUS$120 million in return for a 20% stake. It used those funds and third-party funds they raised fromclients to invest directly in a wide variety of investments, as both co-investor and principal.Organizational structure: The investment firm latterly regarded its three business functions asfinancial advisory, principal investment on its own account, and funds management. It was a globalbusiness with 33% of its revenues coming from the United States, 31% from Australia, and 36% fromEurope. In 2005 its real estate group generated 36% of the company’s net revenue. This division madeinvestments on behalf of the company itself, and also of property-focused managed funds that it hadorganised. It had considerable success in property investments in Japan and Germany. Ininfrastructure and project finance, an area in which Macquarie Bank is probably best known inAustralia, emerged as a significant investor in a range of power, transport, water and public-privatepartnerships (PPPs). Starting out in England with PPP projects, this part of B&B’s business generated24% of the company’s net revenue. In 2004 it established Prime Infrastructure, an ASX listedinfrastructure fund containing coal distribution and related assets. It also had an operating leasingbusiness (Babcock & Brown Aircraft Management), listed in NY under the ticker symbol FLY [2], whichgenerated 24% of net revenue and managed around 300 leased commercial jets for airline clients, in aportfolio worth approximately US$8.1 billion on 1 June 2008, one of the largest portfolios ofcommercial jets in the world. As of March 2009 FLY did not appear to have been materially affected bythe problems at B&B [3]. Babcock and Brown Air changed its name to FLY Leasing in February 2010.The senior management of FLY Leasing’s manager (Babcock and Brown Aircraft Management)completed a MBO of Babcock and Brown’s aircraft leasing business in April 2010. The company wasrenamed BBAM LLC [4] and continues to manage a portfolio of over 450 commercial aircraft (includingthe 107 aircraft owned by FLY Leasing). B&B’s “bread and butter” business was its role as an adviser instructured finance, including leases, debt placement for large leases, hedging, securitisation forbusinesses looking to lease equipment essential to their business in the most tax-effective and lowcost way possible. In addition to its operating leasing business which actually finances suchequipment, B&B was one of the world’s leading advisers in that space as well, putting it in a strongmarket position. It was considered the market leader in the United States and the United Kingdom inthis area. The structured finance advisory business generated 23% of the company’s net revenue. Thecompany had a highly successful listing on the Australian Stock Exchange in 2004 where it raised over$550 million in new capital. Subsequently though the company became a high-profile victim of thecredit crunch, suffering the inevitable consequence of a balance sheet stuffed with long-term illiquidassets such as real estate, shareholdings in related businesses, private equity transactions all financedby short term debt. When, inevitably, this debt proved to be unrefinanceable the company entered anirreversible spi
ral of decline. Nevertheless some aspects of B&B’s business, particularly theinfrastructure related activities were well-founded and have re-emerged from the B&B collapse. Theseinclude B&B’s successful wind energy business, now called Infigen and listed on the ASX; PrimeInfrastructure, which was acquired by Brookfield; and B&B’s well regarded public-private partnershipbusiness, which has been acquired from B&B and trades as Amber Infrastructure Group,headquartered in London.Acquisitions: In August 2006 managed fund Babcock & Brown Capital announced that it hadcompleted a 65% acquisition of Irish telecommunications company Eircom, with its partner the EircomEmployee Share Ownership Trust Limited (ESOT) holding the remaining 35% of Eircom Group. InMarch 2007 Babcock & Brown led a consortium to attempt to buy the Australian energy companyAlinta Ltd. The takeover by a scheme of arrangement was supported by the Alinta Board. In the IrishIndependent newspaper [8] it was reported that Babcock and Brown were planning to break up Eircom.Retaining the core backbone Network Wholesale Division and selling the Eircom Retail and Mobile(Meteor) Divisions. It was reported that the retail arm of Eircom could be worth €1bn and Meteoraround €800m.Debt problems: Babcock shares fell 27% on 12 June 2008 due to fears about the debt levels of it andits various satellite funds. The plunge triggered a debt covenant when its market capitalisation fellbelow A$2.5 billion (roughly equivalent to a share price of $7.50), allowing its lenders to review thecompany’s financing arrangements.[9][10] Some of the satellite funds, which have suffered similar falls inshare price, have responded by cutting their dividends and selling assets in order to repay debt. [11] On19 August 2008, the company’s stock price was down 23.5% due to speculation about being forced tosell assets to cover bad debts, and caused the company to place itself into a trading halt and receive aprice query from the Australian Stock Exchange. The company then announced board andmanagement changes, including the stepping down of CEO Phil Green, and noting a sharp 30% drop inprofit and the announcement of no dividends.[12] On 21 August 2008, its share price collapsed afurther 36% to end at $2.22, a record low. In September the company commenced selling some of itsnon-core businesses and assets and reducing its workforce in order to streamline its operations. On 4December it was announced that Babcock and Brown had been granted a $150 million loan from its25 bankers and had the covenants on its outstanding debt removed, [13] conditional on production of asatisfactory revised business plan. Pending resolution, a trading halt was put in place on 8 January. [14] Astatement on 23 January 2009 announced “the Board believes that in the current market environmentand based on continuing discussions with the banking syndicate there will be no value for equityholders under the revised business plan and balance sheet restructure of Babcock & BrownInternational Pty Ltd and negligible or no value for holders of the Company’s subordinated notes.” [15]The banking syndicate is dominated by European institutions, with Australia’s four major banksholding aggregate exposure estimated at about $800 million. [16] The company went into voluntaryadministration in March 2009 after unsecured bondholders voted against a debt restructuring planthat would value their claims at 0.1 cents in the dollar. The rejection rendered the company insolventbecause it could not meet interest payments.[2]