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Accounting Entries How to Book Profit Sharing Under IFRS 16

With a profit-sharing plan, employees can enjoy a company’s profit based on its quarterly or yearly revenues. The company gets to decide the amount of profit it will share with the employees. It is only the company that can contribute to a profit-sharing plan.

How Profit-Sharing Works

Often, will incorporate profit sharing into an employer-sponsored retirement plan to allow employees to save more for the future. But, only a handful of accounting and financial services fully comprehend profit-sharing under IFRS 16.

To execute a profit-sharing, the board of directors or the executive management decide the percentage or amount of pretax profit that can be channeled toward the profit-sharing pool. Funds may be disseminated monthly, quarterly, or yearly, based on what the management dim fit.

The amount in the profit-sharing pool is divided amongst the employees according to the method the management has chosen, such as percentages based on some years with the firm, base salary, or position level.

Reasons for Having a Profit-Sharing Plan

It creates a connection between performance and reward. If you expect more from your employees, you should give them something in return. Pay is not enough nowadays. A model that rewards workers with a share of their hard work creates a direct link between work and reward. It also fosters a culture of ownership.

Booking Profit Sharing Under IFRS 16

There are several ways accounting services in Dubai calculate profit sharing.

Comp-to-Comp Method

The simplest approach is the comp-to-comp method, where employees receive revenues based on their salary. To compute employer contribution,  compensation for all the employees is added and divided by total to arrive at the percentage of the compensation. Each employee then received an equivalent percentage of profit-sharing bonus.

Pro-Rata Method

Through the pro-rata method, the employer awards the same bonus to the employees in terms of a fixed dollar amount percentage. Therefore, if one employee receives a profit-sharing bonus equal to 15% of their salary, the rest do. Or if the bonus is AED 5000, then everyone receives the same amount.

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Uniform Points Allocation

A company sets a value for criteria such as service or age. Then computer the number of points that each employee possesses according to those criteria.  If employees receive one point for each year of service and age, then a 45-year-old worker with 15 years of service would receive 60 points. Employees would then receive their share based on these points.

Integration Method/ Permitted Disparity

If a company wants to share extra bonus funds with higher-income workers, it can base its distributions on the integration level, which is a percentage of the taxable compensation. Then each employee is awarded a base percentage and receives extra bonuses for the excess percentage of the integration level.

Age-Weighted Allocation

Sharing profits based on age allows accounting and financial services in Dubai to disseminate more to older employees. Created a fixed interest according to the mortality table that is included in the plan document. The actuarial factor is then calculated based on the number of years each employee has remaining until they retire. The actuarial factor is then multiplied by their wages to get their points.

New Comparability Method

Classifying workers based on factors such as geographic location, job function, or title allows accounting services in UAE to decide a rate for each group. Certain groups such as senior executives could receive a higher percentage. However,  audit specialists must not discriminate against certain groups.

Profit-Sharing Under IFRS 16: An Example

Assuming a company with two workers leverages the comp-to-comp method of profit sharing. Employee A earns AED 150,000 per year, and employee B earns AED 300,000 per year. If the company shares 15% of the annual profits and company earns AED 450,000 in a fiscal year, the business would allocate shares as follows:

Employee A = (AED 300,000 X 0.15) X (AED 150,000 / AED 450,000).

Employee B = ( AED 300,000 X 0.15) X (AED 300,000 / AED450,000).

To determine a company’s profit-sharing amount per employee, a chartered accountant can use the below formula:

Profit-sharing amount = (Employee Compensation) X (Profits X Profit-sharing Percentage / Total Employee Compensation)

Creating a Profit-Sharing Plan

To get started making a profit-sharing plan, accounting services in Dubai make use of the following steps:

Determining the amount that is to be remitted in terms of:

  • Dollar amount versus percentage.
  • Profit allocation formula

Write a Plan Document

This plan document includes but is not limited to the following:

  • Eligibility requirements.
  • Amount ( such as dollar amount or percentage)
  • Frequency ( monthly, quarterly, or yearly)

The accounting services provide information to qualified employees. File for taxation annually then details all the contribution plans and all the participants.  A chartered account also keeps records (such as participants and amounts).

Jose’s entire educational and professional career has circled around audit and assurance. While in India, he became a CPA and worked as an accountant and an auditor. Afterwards, he relocated to Dubai, where he joined Farahat & Co. as an auditor. He is currently assisting UAE mainland and free zone businesses with their compliance needs. With a reputation for proficiency, quality, and reliability, clients refer to Mr. Jose for independent assessments of organizations structures and operations.