Accounting for remuneration underpayments – AASB issues Staff FAQ
In addition to the issue of potential underpayment of casual staff entitlements referred to in our article on ‘double dipping’ on casual entitlements, many prominent entities have in recent years either admitted, or been exposed in the media, as having underpaid wages to staff, failing to pay certain employees in full compliance with industry awards (casual, permanent and permanent-part-time staff). This article showcases the Australian Accounting Standards Board’s (AASB) recent ‘hot topic’ FAQ on remuneration underpayments which outlines the appropriate accounting where entities are forced to provide for ‘back pay’ of wages.
The AASB Staff FAQ presents the following fact pattern (extracted from the AASB Staff FAQ):
Underlying fact pattern
Historically, an entity has not paid certain employees in full compliance with applicable industry awards. During the current financial year, the company undertook a review to determine the extent of payment shortfalls to current and former employees, including superannuation contributions.
The company has also made the decision in the current year to compensate all affected employees for the inconvenience of the underpayment that occurred by way of a one-off payment in the amount of $1,500 per employee. This payment is not intended to partially settle the obligation for underpayment (as the amount of the payment shortfall was calculated as a separate payment), but to remediate the employees for any inconvenience.
The AASB Staff FAQ deals with three questions:
- In what year should the payments be recorded?
- How do I determine whether any prior year payments are material and require a restatement of the financial statements?
- What disclosures are required?
These are summarised briefly below. Please refer to the full text of the AASB Staff FAQ for more details.
Question 1 – In what year should the payments be recorded?
The AASB Staff FAQ answers this question for the two types of payments to be made to staff, i.e. ‘back pay’ (underpayment restitution), and the $1,500 inconvenience payment.
These are recognised in the financial statements depending on whether the ‘back pay’ relates to services provided by the employees in the current year or in a prior year:
|Period services provided
||Underpayment restitution recognised during ...
As these are ‘one-off’ payments and paid voluntarily by the entity, they do not relate to past services received. They are recognised in the financial statements during the current year when the entity agreed to make the payments to affected employees.
Question 2 - How do I determine whether any prior year payments are material and require a restatement of the financial statements?
Prior period error
In a nutshell, the applicable industry awards outline what each employee is entitled to receive for services provided to the entity during a particular year. However, underpayments arise for various reasons, and therefore a ‘prior period error’ is not automatic. Individual facts and circumstances must be considered and the definition of ‘prior period errors’ in paragraph 5 of AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors should be considered.
Prior period errors
are omissions from, and misstatements in, the entity’s financial statements for one or more prior periods arising from a failure to use, or misuse of, reliable information that:
- was available when financial statements for those periods were authorised for issue; and
- could reasonably be expected to have been obtained and taken into account in the preparation and presentation of those financial statements.
Such errors include the effects of mathematical mistakes, mistakes in applying accounting policies, oversights or misinterpretations of facts, and fraud.
Definition of ‘prior period errors’ in AASB 108
Is error material?
AASB 108, paragraph 42 only requires retrospective restatement of prior period errors if they are material. The AASB Staff FAQ refers readers to the following sources to determine whether the error is material:
- AASB 101 Presentation of Financial Statements
- AASB Practice Statement 2 Making Materiality Judgements.
Qualitative and quantitative factors are taken into account when assessing materiality, and if the entity operates in a sector that is prone to large underpayments or has a large number of employees covered by awards, the AASB Staff FAQ notes that “…users will have a reasonable expectation that the entity may be at risk of having such underpayments. In these circumstances, any such underpayments might be considered qualitatively material, regardless of the amounts.”
Question 3 - What disclosures are required?
If any payments for restitution or inconvenience are considered material, retrospective restatement is required (even if quantitatively immaterial) and ‘error’ disclosures in AASB 108, paragraph 49 must be provided.
In applying paragraph 42, an entity shall disclose the following:
- the nature of the prior period error;
- for each prior period presented, to the extent practicable, the amount of the correction:
- for each financial statement line item affected; and
- if AASB 133 applies to the entity, for basic and diluted earnings per share;
- the amount of the correction at the beginning of the earliest prior period presented; and
- if retrospective restatement is impracticable for a particular prior period, the circumstances that led to the existence of that condition and a description of how and from when the error has been corrected.
Financial statements of subsequent periods need not repeat these disclosures.
AASB 108, paragraph 49
Please contact BDO’s People Advisory or Risk Advisory teams if you require assistance determining whether employees are being paid correctly, or BDO’s IFRS Advisory team if you require assistance with accounting for any underpayment of wages.