Measuring interim bonus expense
An entity pays an annual performance bonus if earnings exceed 10 million, under which 5% of any earnings in excess over 10 million will be paid up to a maximum of 500,000. Earnings for the six months ended 30 June 2013 are 7 million, and the entity expects earnings for the full year ended 31 December 2013 to be 16 million.
The following table shows various accounting policies and the expense recognised thereunder in the interim financial statements for the six months ended 30 June 2013.
|
Expense () |
|
|
Method 1 – constructive obligation exists when earnings target is met |
Nil |
|
Method 2 – assume earnings for remainder of year will be same |
200,000 |
|
Method 3 – proportionate recognition based on full-year estimate |
131,250 |
|
Method 4 – one-half recognition based on full-year estimate |
150,000 |
Method 1 is generally not appropriate, as this method attributes the entire bonus to the latter portion of the year, whereas employees provided service during the first six months to towards earning the bonus.
Likewise, Method 2 is generally not appropriate, as the expense of 200,000 [(14 million – 10 million) × 5%] assumes that the employees will continue to provide service in the latter half of the year to achieve the bonus target, but does not attribute any service to that period.
In contrast to Methods 1 and 2, Method 3 illustrates an accounting policy whereby an estimate is made of the full-year expense and attributed to the period based on the proportion of that bonus for which employees have provided service at 30 June 2013. The amount recognised is calculated as (7 million ÷ 16 million) × [5% × (16 million – 10 million)].
Similar to Method 3, Method 4 also takes the approach of recognising an expense based on the full year estimate, but allocates that full-year estimate equally to each period (which is similar to the approach used for share-based payment transactions). The amount recognised is calculated as [50% × 5% × (16 million – 10 million)].
In addition to Methods 3 and 4, which might be appropriate, depending on the facts and circumstances, an entity might determine another basis on which to recognise bonus that considers both the constructive obligation that exists as of 30 June 2013, and the services performed to date, which is also appropriate.