Postemployment benefits need to be considered when employee transfers take place within large organizations. Several types of transfer agreements exist. In the article “Accounting impact of the movement of employees,” Milliman’s Danny Quant and Kumala Sanjaya relate details regarding several employee transfer agreements they have advised on in Indonesia.
Here is an excerpt:
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.