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M co runs a profit sharing plan under which it pays 3% of its net profit for the yaer to its employees if none have left during the year.M co estimates that this will be reduced by staff turnover to 205% in 20×9.
Here iz my question why M co used 2.5% to record as an expense and liability…?
Because it’s an expense of the year with payment / settlement deferred
OK?
When the scheme was first set up, the directors of M Company estimated that 3% would be payable but, during the year (presumably because employees were leaving), that estimate was revised downwards to just 2.5% by the end of the accounting period.
And it’s at that date that the company will first recognise the obligation and the expense. What is the best information available to the directors at the date the annual accounts are being prepared? 2.5%!
So that’s why they use that rate rather than their estimated rate from 12 months ago
Is that better?
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