Profit-sharing and Bonus Plans :
An enterprise should recognise the expected cost of profit-sharing and bonus payments under paragraph 10 when, and only when:
(a) the enterprise has a present obligation to make such payments as a result of past events; and
(b) a reliable estimate of the obligation can be made.
A present obligation exists when, and only when, the enterprise has no realistic alternative but to make the payments.
Under some profit-sharing plans, employees receive a share of the profit only if they remain with the enterprise for a specified period. Such plans create an obligation as employees render service that increases the amount to be paid if they remain in service until the end of the specified period. The measurement of such obligations reflects the possibility that some employees may leave without receiving profit-sharing payments.
An enterprise may have no legal obligation to pay a bonus. Nevertheless, in some cases, an enterprise has a practice of paying bonuses. In such cases also, the enterprise has an obligation because the enterprise has no realistic alternative but to pay the bonus. The measurement of the obligation reflects the possibility that some employees may leave without receiving a bonus.
An enterprise can make a reliable estimate of its obligation under a profit-sharing or bonus plan when, and only when:
(a) the formal terms of the plan contain a formula for determining the amount of the benefit; or
(b) the enterprise determines the amounts to be paid before the financial statements are approved; or
(c) past practice gives clear evidence of the amount of the enterprise’s obligation.
An obligation under profit-sharing and bonus plans results from employee service and not from a transaction with the enterprise’s owners. Therefore, an enterprise recognises the cost of profit-sharing and bonus plans not as a distribution of net profit but as an expense.
If profit-sharing and bonus payments are not due wholly within twelve months after the end of the period in which the employees render the related service, those payments are other long-term employee benefits (see paragraphs 127-132).