Accounting impact of the movement of employees

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By Danny L. Quant, Kumala Sanjaya | 05 October 2015

Kumala Sanjaya considers the impact on financial statements when employees are transferred within a group of companies in Indonesia.

Employees play a crucial role in helping companies to achieve their objectives. In a large organisation, in particular a group that consists of many companies, the transfer of employees between companies within the group is often used to help achieve this aim.

An employee transfer is the transfer of a person from one job to other divisions or companies within the group without reducing compensation (salary), status, and responsibility. Transfers have some benefits, such as improving the effectiveness, productivity, and work efficiency. They can solve fluctuating labour needs, reduce boredom or monotony, favouritism, and egocentrism, and can maintain relationships among employees.

When employees transfer from one company to another, postemployment benefits need to be considered, in particular the benefits that are due from past service in the original company. When an employee reaches normal retirement age, which company will be responsible for the payment of benefits such as severance and gratuity (also known as service pay in Indonesia) in relation to the past service in the original company? In answer to this question, there are several kinds of transfers. This article sets out examples of cases where the Milliman Indonesia team has advised on the transfer.

In one case, where the agreement between the original company and the receiving company was for the transfer of benefits in relation to the entire working period (including the working period before transfer from the original company), the cost was borne by the receiving company. There was no cash transaction or recording of debt between the two companies. This type of transfer policy will directly impact on the profit and loss (P&L) of each company. With the release of the employees for the transfer, the original company will recognise income that is due to a release of reserves from the benefits it no longer needs to provide, while the receiving company will recognise an expense related to the recognition of the working periods prior to transfers in the original company.

In another case, the agreement between the two companies was that the liabilities of the employees before the transfer were still the responsibility of the original company. How are the obligations allocated between the two companies in this case? When in relation to postemployment benefits in accordance with Indonesian Labour Law No. 13/2003 (the amount of severance, gratuity, and compensation paid in Indonesia), the benefits granted rely heavily on years of service and the final salary when the benefits are due. This raised the question about the amount of salary that should be used for the calculation of the portion of liabilities to be borne by the original company. If the agreed policy is based on the original company only bearing the liability for postemployment remuneration related to years of service prior to transfer, and the liabilities are based on the calculation of the salary when the transfer occurs, there will be a cash transaction or recording of debt between the companies. The transactions that occur in the original company and the receiving company may be in the form of debt or receivables. The receiving company would record receivables, while the original company would record a debt in the financial statements in relation to the transfer.

Another possible agreement between the two companies is that the original company is responsible only for the years of service prior to the transfer but the reference salary used as the basis for calculating the liabilities is the final salary when the employee leaves the receiving company. When the employee reaches the normal retirement age, the receiving company will bill the original company using an agreed formula (dependent on the working period before transfer and the final salary at retirement). In this case, the receiving company's financial statements can record separate assets for postemployment benefits, whereas in the financial statements for the original company a liability will be recorded. The asset in the receiving company is treated as a reimbursement right that will be charged to the original company if the transferred employee leaves the receiving company.

Considering these different kinds of policies that may be agreed by the original company and receiving company, an additional question arises. What amount will be recorded in the accounts of the original company and the receiving company? The present value of liabilities (defined benefit obligation) is one measurement that can be used as the basis for financing. There are also some companies that use other formulas such as the amount that would be paid under termination benefits according to Indonesian Labour Law No. 13/2003.

Things get more complex when both the original company and the receiving company have different benefit schemes. For example, the original company gives benefits to all employees under Indonesian Labour Law No. 13/2003 without providing any benefits when employees voluntarily resign, while the receiving company provides benefits to all employees equal to 1.5 times the corresponding benefits of Indonesian Labour Law No. 13/2003 and provides a benefit of two times salary for employees who resign voluntarily. Furthermore, the original company provides other long-term benefits in the form of sabbaticals or gratuities, while the receiving company does not provide any other long-term benefits. In that case, which benefit scheme should be used as the basis for calculating the amount to be expensed in the statement of profit and loss or recorded as a payable or receivable for the original or receiving company?

Where the amount expensed in the statement of profit and loss or recorded as a payable or receivable is based on the present value of liabilities, actuarial assumptions also have an important role in the calculation. Actuarial assumptions should be tailored for each company, depending on its demographic profile and strategy. Complexity will also arise when the actuarial assumptions used by the original company and the receiving company differ.

In certain cases, when the agreed policy is that all of the benefits will be borne by the receiving company, the amount which will be charged refers to the applicable benefits and actuarial assumptions that are considered to be the best estimate of each company. This can result in differing amounts recorded for the original and receiving companies. However, employee transfers generally occur in two or more companies that are managed under one holding company, and the management typically takes a view that the transfer of these employees should have no cost impact in the group perspective.

Another case is when the working period before the transfer is to be borne by the original company and a cash transaction occurs between the two companies. In this case, the impact of transfers will directly affect the statement of financial position (or balance sheet) or be recorded as reimbursement rights. The amount recorded in the original company and the receiving company must have the same value. Therefore, the calculation of the impact of this transfer should refer to the same benefit schemes and actuarial assumptions. In this case, the management teams of the companies need to make a decision on the benefits and actuarial assumptions used as a reference for the calculation of the impact of the transfers.

There are a number of different ways that transfers of employees can affect a company's report and accounts. It is important for companies to carefully consider the impact on their reports and accounts when agreeing to the type of transfer to take place.