Bonuses and profit-sharing

Learning objectives

• Assess, from the facts of a case, whether a constructive obligation to pay a bonus or profit-sharing exists.L2
• Calculate the amount of a bonus to be recognised using the plan formula given in a case.L3

Normative references

• IAS 19 §19The expected cost of profit-sharing and bonus payments is recognised when, and only when, the entity has a present legal or constructive obligation as a result of past events (no realistic alternative but to pay) and a reliable estimate of the obligation can be made; past practice can give rise to a constructive obligation (para. 21), and the situations in which a reliable estimate is possible are listed in para. 22 (plan formula, amounts determined before the financial statements are authorised for issue, clear past practice).

Original summaries of the paragraphs (reference register), never a quotation of the standard.

3 questions

• Garnel SA has paid for eight years an annual bonus equal to one month's salary, announced in December by an internal note, with no contractual clause or written commitment. In N, the board decided no withdrawal and management is not considering one; the formula (one month's salary) is known (case facts). Which conclusion is correct at the end of N?L2
• Ulvane SA closes its year on 31 December N. In November N, before the reporting date, management decided and communicated to employees a year-end bonus of {bonus}, payable in February N+1; the obligation is established and the amount is reliable. Post the closing entry for N.L2
• The bonus plan of Joran SA provides for a bonus equal to {bonus_percent} of profit after bonus. The profit for the year before bonus is {profit_before}. The constructive obligation is established and the amount can be estimated reliably (case facts). Calculate the profit after bonus, then the bonus to recognise at the reporting date.L3