Page 223 - Group Insurance and Retirement Benefit IC 83 E- Book

172 AS 15

profit only if they remain with the enterprise for aspecified period. Such
plans create an obligation as employees render service that increases the
amount to be paid if they remain in service until the end of the specified
period. The measurement of such obligations reflects the possibility that
some employees may leave without receiving profit-sharing payments.

Example Illustrating Paragraph18

A profit-sharing plan requires an enterprise to pay a specified
proportion of its net profit for the year to employees who serve
throughout the year. If no employees leave during the year, the
total profit-sharing payments for the year will be 3% of net profit.
The enterprise estimates that staff turnover will reduce the
payments to 2.5% of net profit.

The enterprise recognises a liability and an expense of 2.5% of
net profit.

19. An enterprise may have no legal obligation to pay a bonus.
Nevertheless, in some cases, an enterprise has a practice of paying
bonuses. In such cases also, the enterprise has an obligation because the
enterprise has no realistic alternative but to pay the bonus. The
measurement of the obligation reflects the possibility that some employees
may leave without receiving a bonus.

20. An enterprise can make a reliable estimate of its obligation under a
profit-sharing or bonus plan when, and only when:

(a) the formal terms of the plan contain a formula for determining the
amount of the benefit; or
(b) the enterprise determines the amounts to be paid before the
financial statements are approved; or

(c) past practice gives clear evidence of the amount of the
enterprise’s obligation.

21. An obligation under profit-sharing and bonus plans results from
employee service and not from a transaction with the enterprise’s owners.
Therefore, an enterprise recognises the cost of profit-sharing and bonus
plans not as a distribution of net profit but as an expense.