Chapter 44

Employee Benefits

QUESTION 44-1

What are employee benefits?

ANSWER 44-1

Employee benefits are all forms of consideration given by an entity in exchange for
services rendered by employees. For the purpose of PAS 19, employees include
directors and other management personnel.

Under Pas 19, employee benefits include:

1. Short-term employee benefits

2. Postemployment benefits
3. Long-term employee benefits, other than postemployment benefits
4. Termination benefits

QUESTION 44-2

Explain briefly short-term employee benefits.

ANSWER 44-2

Short-term employee benefits include the following:

1. Salaries, wages, and social security contributions

2. Paid annual leave and sick leave
3. Profit sharing and bonuses payable within twelve months
4. Nonmonetary benefits, such as housing, car and free or subsidized goods.

QUESTION 44-3

Explain the accounting for short-term employee benefits.

ANSWER 44-3

Accounting for short-term employee benefits is fairly straightforward because there

are no actuarial assumptions to be made and there is no requirement to discount
future benefits because they are all, by definition, payable no later than twelve
months after the end of the current period.
The rules for short-term benefits are essentially an application of basic accounting
principles and practice as follows:

a. Unpaid short-term employee benefits at the end of the accounting period shall be
recognized as accrued expense.

b. Any short-term benefits paid in advance shall be recognized as a prepayment, to

the extent, that it will lead to a reduction in future payments or a cash refund.

c. The cost of short-term benefits shall be recognized as expense in the period when
the economic benefit is given, as employment costs, except employment costs
which may be included within the cost of an asset, for example, property, plant, and
equipment.

QUESTION 44-4

Explain “short-term compensated absences”.

ANSWER 44-4

An entity may compensate employees for absences for various reasons such as
vacation, sickness and short-term disability, maternity or paternity and military
service.

QUESTION 44-5

Explain “accumulating” and “nonaccumulating” compensated absences.

ANSWER 44-5

Accumulating compensating absences are those that are carried forward and
can be used in future periods if the current period’s entitlement is not used in full.
Accumulating compensated absences may be either:

a. Vesting – meaning, employees are entitled to a cash payment for unused

entitlement on leaving the entity.

b. Nonvesting – meaning, employees are not entitled to a cash payment for

unused entitlement on leaving the entity.
Nonaccumulating compensated absences are those that do not carry forward.
They lapse if the current period’s entitlement is not used and do not entitle the
employees to a cash payment for unused entitlement on leaving the entity.

This is commonly the case for sick pay, maternity or paternity leave, and
compensated absences for military service.

QUESTION 44-6

Explain profit-sharing and bonus plans.

ANSWER 44-6

Under some profit-sharing plans, employees shall receive a share of the profit only
if they remain with the entity for a specified period. Such plans create a
constructive 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 constructive obligation reflects the possibility that some
employees may leave without receiving profit-sharing payments.

An entity shall recognize the cost of profit-sharing and bonus plans when the entity
has a present or constructive obligation to make such payments as a result of
past events and a reliable estimate of the obligation can be made.

QUESTION 44-7

What are “postemployment benefits”?

ANSWER 44-7

Postemployment benefits are employee benefits, other than termination benefits,

which are payable after completion of employment.

Postemployment benefits include:

a. Retirement benefits, such as pensions

b. Postemployment life insurance
c. Postemployment medical care

Postemployment benefits are usually embodied in an arrangement known as

“postemployment benefit plan”.
Postemployment benefit plans are classified as either defined contribution plans or
defined benefit plans, depending on the economic substance of the plan as derived
from its principal terms and conditions.

Such plans may be contributory or noncontributory, and funded or unfunded.

QUESTION 44-8

Define or briefly explain each of the following:

1. Contributory plan
2. Noncontributory plan
3. Funded plan
4. Unfunded plan

ANSWER 44-8

1. Under a contributory plan, the employer and employee make contributions to the
retirement benefit plan but they do not necessarily contribute equal amounts. Both
the employer and the employee share in the retirement benefit cost.

2. Under a noncontributory plan, only the employer makes contributions to the

retirement benefit plan. The employer shoulders all the retirement benefit cost.

3. Under a funded plan, the entity sets aside funds for future retirement benefits by
making payments to a funding agency, such as a trustee, bank, or insurance
company. The funding agency is then responsible for the accumulation of funds and
for making payments to retired employees when the benefits become due.

4. Under an unfunded plan, the entity retains the obligation for the payment of
retirement benefits without the establishment of a separate fund.

QUESTION 44-9

Explain fully “defined contribution plan”.

ANSWER 44-9

A defined contribution plan is a postemployment benefit plan under which an entity

pays fixed contributions into a separate entity known as the fund, and will have no
legal or constructive obligation to pay further contributions if the fund does not hold
sufficient assets to pay all employee benefits relating to employee service in the
current and prior periods.
Simply stated, the entity makes a specific or definite amount of contribution to a
separate fund without specifying the retirement benefit to be received by the
employee. The contribution is definite but the benefit is indefinite.

The contribution may be a fixed amount, a percentage of employer’s income, a

percentage of employee’s earnings or a combination of these factors.

Actually, in this case, the entity makes the contribution to a trustee which
administers, manages and invests the funds.

Consequently, when an employee retires, the accumulated fund in the hands of the
trustee determines his retirement benefit.

The employee’s retirement benefit therefore depends on how the plan has been
managed by the trustee.

If the plan provides exceptional investment performance, the employee will share in
the gain in the form of larger retirement benefit. If the plan does poorly, the
employee will share in the loss by receiving smaller retirement benefit.

QUESTION 44-10

Explain fully “defined benefit plan”.

ANSWER 44-10

Under a defined benefit plan, an entity’s obligation is to provide the agreed

benefits to employees.

An employee is guaranteed specific or definite amount of benefit which is usually

related to the salary and years of service. The benefit is definite but the
contribution is indefinite.

Actually, in this case, the entity must make contributions such that the contributions
plus earnings would be sufficiently large to cover future retirement benefits. Thus,
the entity assumes the investment risk in a defined benefit plan.

If the plan is exceptionally good, the entity may take a “contribution holiday”,
meaning stop paying the contribution for a while.

However, if the plan is poor, the entity must make additional contribution for any
expected shortfall in order to satisfy the promised future benefits.

QUESTION 44-11
What are the postemployment benefits under the law?

ANSWER 44-11

1. Social Security System – This postemployment benefit plan is a defined

contribution plan because the entity’s obligation is limited to specified contributions
to the plan as a percentage of salary.
2. R.A. 7641 – This postemployment benefit plan is defined benefit plan because the
entity’s obligation is to provide specific level of benefit for every year of service.

QUESTION 44-12

Explain the accounting procedure for a defined contribution plan.

ANSWER 44-12

Accounting for a defined contribution plan is straightforward because the obligation

of the entity is determined by the amount contributed for each period.

There are no actuarial assumptions to measure the contribution and there is no

possibility of any actuarial gain or loss.

1. The contribution shall be recognized as expense in the period it is payable. The

entity shall disclose the amount recognized as expense for a defined contribution
plan.

2. Any unpaid contribution at the end of the period shall be recognized as accrued
expense.

3. Any excess contribution shall be recognized as prepaid expense but only to the
extent that the repayment will lead to a reduction in future payments or a cash
refund.

QUESTION 44-13

Describe the accounting for a defined benefit plan.

ANSWER 44-13
Accounting for a defined benefit plan is complex because actuarial assumptions are
required to measure the obligation and the expense and there is a possibility of
actuarial gains and losses.

Moreover, the obligations are measured on a discounted basis because they may be
settled many years after the employees render the related service.

Defined benefit plans may be unfunded, fully funded or partly funded by the
contributions of the entity.

If actuarial assumptions change, the amount of required contributions will change

and there may be actuarial gains and losses. Consequently, under a defined benefit
plan, the expense recognized is not necessarily the amount of contribution
for the period.

QUESTION 44-14

What are the components of benefit expense under a defined benefit plan?

ANSWER 44-14

The components of benefit expense that will be recognized for a period under a
defined benefit plan are:

1. Current service cost

2. Interest cost
3. Expected return on plan assets
4. Actuarial gains and losses, to the extent that they are recognized
5. Past service cost, to the extent that it is recognized
6. Effect of any curtailment or settlement

The measurement of the expense components in a defined benefit plan cannot be

done by a CPA who lacks the expertise and training in making actuarial calculations.
Such measurement is usually made by an actuary, the mathematical expert best
qualified to do the job.

PAS 19 encourages but does not require an entity to involve a qualified actuary
in the measurement of a defined benefit obligation.

QUESTION 44-15
Explain briefly the actuarial valuation method of determining the benefit
expense under a defined benefit plan.

ANSWER 44-15

PAS 19 requires that the projected unit credit method, also known as the accrued
benefit valuation method, shall be used in determining the present value of the
defined benefit obligation and the related current service cost and where
applicable, past service cost.

This method sees each period of service as giving rise to an additional unit of
benefit entitlement and measures each unit separately to build up the final
obligation.

QUESTION 44-16

What is a “current service cost”?

Answer 44-16

Current service cost is the increase in the present value of the defined benefit
obligation resulting from employee service in the current period.

Otherwise stated, current service cost is the cost to an entity under a defined
benefit plan for service rendered by employees in the current year.

This component of the benefit expense understandably increases expense and

projected benefit obligation. It may simply be referred to as the “service cost”.

QUESTION 44-17

What is “interest cost”?

ANSWER 44-17

Interest cost is the increase during a period in the present value of the defined
benefit obligation which arises because the benefits are one period closer to
settlement.

As in most obligations, interest accrues every year until the obligation is paid. The
rate used in computing the interest cost is known as “settlement discount rate”.
The interest cost is based on the beginning balance of the projected benefit
obligation.
Like the current service cost, interest cost also increases the benefit expense and
the projected benefit obligation.

QUESTION 44-18

What are “plan assets”?

ANSWER 44-18

Plan assets include assets held by a long-term benefit fund and qualifying
insurance policies. The conditions for assets held by a long-term benefit fund are:

a. The assets are held by an entity, the fund itself, that is legally separate from the
reporting entity.
b. The assets are available to pay only employee benefits.
c. The assets are not available to the reporting entity’s own creditors even in
bankruptcy.
d. The assets cannot be returned to the reporting entity or can be returned only to
the reporting entity if the remaining assets of the fund are sufficient to meet all
employee benefit obligations or the assets are returned to the reporting entity to
reimburse it for employee benefits already paid.

QUESTION 44-19

Explain a “qualifying insurance policy”.

ANSWER 44-19

A qualifying insurance policy is an insurance policy issued by an insurer that is

not a related party of the reporting entity and the proceeds of the policy can be
used only to pay employee benefits and are not available to the reporting entity’s
own creditors even in bankruptcy.

The proceeds of the policy cannot be paid to the reporting entity, except:

a. When the proceeds represent surplus assets not needed for the policy to pay
employee benefits.

b. When the proceeds are returned to the reporting entity to reimburse it for
employee benefits already paid.

Plan assets exclude unpaid contributions due from the reporting entity to the fund,
as well as any nontransferable financial instruments issued by the entity and held
by the fund.
QUESTION 44-20

Explain fully “return on plan assets”.

ANSWER 44-20

The return on plan assets is interest, dividend and other revenue derived from the
plan assets, together with realized and unrealized gain or loss on the plan assets,
less any plan administration costs to the extent not included in the actuarial
assumptions used to measure the defined benefit obligation, and less any tax
payable by the plan itself.

The return on plan assets may be classified as expected return or actual return. PAS
19 identifies the expected return as the component in the computation of the
benefit expense. The expected return is deducted in the computation of the total
benefit expense because it reduces the cash outflow of the entity under the defined
benefit plan.

However, it is the actual return that increases the fair value of plan assets. The
difference between actual return and expected return on plan assets is treated as
an actuarial gain or loss.

QUESTION 44-21

Distinguish “accumulated benefit obligation” and “projected benefit obligation”.

ANSWER 44-21

Accumulated benefit obligation is the actuarial present value of all benefits

attributed by the pension benefit formula to employee service rendered before a
specified date. The amount is based on current compensation level of
employees and therefore includes no assumptions about future salary increases.

Projected benefit obligation is the actuarial present value of all benefits

attributed by the pension benefit formula to employee service rendered before a
specified date based on future compensation level. In other words, the amount
of benefit obligation includes future salary increases that the entity projects it
will pay to employees during the remainder of their employment.

Accordingly, the main difference between the two is that accumulated benefit
obligation is based on current salary, while projected benefit obligation is based
on future salary.
QUESTION 44-22

What is the defined benefit obligation?

Is it the accumulated benefit obligation or projected benefit obligation?

ANSWER 44-22

Paragraph 64 of PAS 19 provides that an entity shall use the projected unit credit
method to determine the present value of its defined benefit obligation and the
related current service cost and where applicable, past service cost.

Under the projected unit credit method, the computation of the present value of the
defined benefit obligation includes future salary increase. This means that PAS
19 is adopting the concept of projected benefit obligation.

Moreover, one of the actuarial assumptions is that “postemployment benefit

obligations shall be measured on a basis that reflects estimated future salary
increases”.

In conclusion, the defined benefit obligation is the projected benefit obligation.

QUESTION 44-23

Explain the two basic considerations in accounting for a defined benefit plan.

ANSWER 44-23

The benefit plan shall be viewed as a subentity separate and distinct from the
primary entity, which is the employer entity.

The subentity maintains information that does not appear in the financial
statements of the primary entity. Such information is kept only by means of
memorandum records and therefore not reflected in the general ledger accounts of
the primary entity.

The information contained in the memorandum records of the subentity contains

the following, among others:

a. Fair value of the plan assets (FVPA)

b. Projected benefit obligation (PBO)
The fair value of the plan assets is the source of fund set aside in meeting future
benefit payments.

The projected benefit obligation is the present value of expected future payments
required to settle the obligation arising from employee service in the current and
prior periods.

QUESTION 44-24

Explain the relationship between the FVPA and PBO in accounting for a defined
benefit plan.

ANSWER 44-24

The relationship between FVBA and PBO can be expressed as follows:

Fair value of plan assets xx

Less: Projected benefit obligation xx
Prepaid/accrued benefit cost (P/ABC) xx

The FVPA is analogous to an off-statement of financial position asset with a debit

balance and the PBO is analogous to an off-statement of financial position liability
with a credit balance.

Again, these two items are kept only in the memorandum records of the subentity.

The “prepaid/accrued benefit cost” is the item that appears in the statement of
financial position of the employer entity.

QUESTION 44-25

Explain the scenario “if the FVPA is more than the PBO”.

ANSWER 44-25

If the FVPA is more than the PBO, the plan is overfunded and therefore there is a
prepaid benefit cost, a noncurrent asset.

The excess of FVPA over the PBO is also known as “surplus”. PAS 19, paragraph 58,
provides that this surplus shall not exceed the sum of the unrecognized net
actuarial loss, unrecognized last service cost and the present value of refunds from
the plan or reduction in future contribution to the plan.
Normally, any excess of the surplus over the sum of the unrecognized net actuarial
loss, unrecognized past service cost and the present value of refunds or reduction in
future contribution is included in profit or loss.

However, PAS 19, paragraph 93C, provides that if an entity follows the “full
recognition” of actuarial gain or loss, any “surplus” adjustment is recognized in
other comprehensive income.

QUESTION 44-26

Explain the scenario “if the FVPA is less than the PBO”.

ANSWER 44-26

If the FVPA is less than the PBO, the plan is underfunded, and therefore, there is
an accrued benefit cost, a noncurrent liability.

Actually, the accrued benefit cost or the amount recognized in the statement of
financial position as liability is equal to the net total of the following:

a. The present value of the projected benefit obligation at the end of reporting
period.
b. Plus any actuarial gains, less any actuarial losses, not yet recognized.
c. Minus past service cost not yet recognized.
d. Minus fair value of plan assets at the end of reporting period.

QUESTION 44-27

What is “past service cost”?

ANSWER 44-27

Past service cost is the cost to an entity under a defined benefit plan for services
rendered by employees in prior periods resulting from the introduction of a
retirement benefit plan or amendment of an existing plan.

It is actually the actuarially computed present value of the retirement benefits

payable in the future with respect to services rendered prior to the adoption or
amendment of a retirement plan.

QUESTION 44-28

Explain the accounting for past service cost.

ANSWER 44-28

1. Past service cost shall be expensed immediately when additional benefits vest
immediately.

Vested benefits are employee benefits that are not conditional or contingent on
future employment.

2. If the benefits are not vested, the past service cost is amortized on a straight line
basis over the period until the benefits become vested (vesting period).

Benefits are not vested if the employee loses all benefits if he is separated from the
entity before retirement.

QUESTION 44-29

Explain fully actuarial gains and losses.

ANSWER 44-29

Actuarial gains and losses arise from experience adjustments and the effects of
changes in actuarial assumptions.

Experience adjustments are adjustments from the differences between the previous
actuarial assumptions and what has actually occurred. Experience adjustments
arise because actual events inevitably differ from actuarial assumptions.

Actuarial gains and losses may result from increases or decreases in either the
present value of the defined benefit obligation or the fair value of plan assets.

Actuarial gain and loss may be determined as follows:

1. If the actual return is more than the expected return, the difference is an
actuarial gain.
2. If the actual return is less than the expected return, the difference is an
actuarial loss.
3. Any increase in the projected benefit obligation is an actuarial loss.
4. Any decrease in the projected benefit obligation is an actuarial gain.

QUESTION 44-30

Explain the recognition of actuarial gains and losses.

ANSWER 44-30

An entity can recognize actuarial gains and losses using following:

a. Corridor approach – This is the deferral approach required by PAS 19.

b. Full recognition approach – This is an option available when

fluctuations are so great the deferral is not deemed to be wise.

QUESTION 44-31

Explain the “corridor approach” of recognizing actuarial gains and losses.

ANSWER 44-31

In measuring the defined benefit liability, the entity shall recognize a portion of its
actuarial gains and losses as income or expense if the net cumulative
unrecognized actuarial gains and losses at the beginning of the current period
exceed 10% of the greater between the projected benefit obligation and fair value
of plan assets.

This 10% amount is known as the “corridor” and represents a materiality threshold
in determining whether actuarial gains and losses are included in the computation
of total benefit expense.

The excess of the cumulative actuarial gains and losses over the corridor amount
shall be amortized over the average remaining service period of the employees
participating in the plan.

Observe the following accounting considerations:

1. The amortization of actuarial gain is deducted in the computation of the total

benefit expense.
2. The amortization of actuarial loss is added in the computation of the total benefit
expense.
3. Any unamortized actuarial gain is shown as a credit in the memorandum records.
4. Any unamortized actuarial loss is shown as a debit in the memorandum records.

QUESTIO 44-32

Explain the “full recognition approach” of recognizing actuarial gains and losses.
ANSWER 44-32

PAS 19, paragraph 93, provides that “an entity may adopt any systematic method
that results in faster recognition of actuarial gains and losses provided the same
basis is applied to both gains and losses and the basis is applied consistently from
period to period.”

Accordingly, an entity has the option of recognizing actuarial gains and losses in
full in the period in which they occur.

This means that actuarial gains and losses occurring in the current year are
recognized immediately in the current year.

However, the actuarial gains and losses are recognized as component of “other
comprehensive income” rather than as part of total benefit expense.

The full recognition approach is in conformity with paragraph 93A of PAS 19 in

conjunction with paragraph 7 of PAS 1.

QUESTION 44-33

What are the “actuarial assumptions” in determining the defined benefit obligation?

ANSWER 44-33

1. Actuarial assumptions shall be unbiased and mutually compatible.

2. Actuarial assumptions comprise of demographic assumptions and financial

assumptions.

Demographic assumptions deal with mortality, rate of employee turnover, disability,

early retirement, proportion of plan members, eligible for benefits, and claim rates
under medical plans.

Financial assumptions deal with discount rate, future salary and benefit levels,
future medical costs and expected return on plan assets.

3. The discount rate shall be determined by reference to market yields at the end of
reporting period on high quality bonds. If there are no such bonds, the market yields
on government bonds shall be used as discount rate.

4. Postemployment benefit obligation shall be measured on a basis that reflects

estimated future salary increases.
QUESTION 44-34

Explain “curtailment” and “settlement” of a defined benefit plan.

ANSWER 44-34

An entity shall recognize gains or losses on the curtailment or settlement of a

defined benefit plan when the curtailment or settlement occurs.

The gain or loss on curtailment or settlement comprises any resulting change in the
PBO, any resulting change in the FVPA, and any related actuarial gain and loss, and
past service cost that had not been previously recognized.

A curtailment occurs when an entity:

a. Is demonstrably committed to make a material reduction in the number of

employees covered by the plan.

b. Amends the terms of the defined benefit plan such that a material element of
future service by current employees will no longer qualify for benefits, or will qualify
only for reduced benefits.

A curtailment may arise from an isolated event, such as the closing of a plant,
discontinuance of an operation or termination or suspension of a plan.

A settlement occurs when an entity enters into a transaction that eliminates all
further legal or constructive obligation for part or all of the benefits provided under
a defined benefit plan.

An example of a settlement is when a lump sum payment is made to or on behalf of

plan participants in exchange for their rights to receive specified postemployment
benefits.

A settlement occurs with a curtailment if a plan is terminated such that the

obligation is settled and the plan ceases to exist.

Termination is discontinuance of the plan so that employees do not earn anymore

additional benefits for future services.

QUESTION 44-35

What are “other long-term employee benefits”?

ANSWER 44-35

Long-term employee benefits, other than postemployment benefits, include:

1. Long-term compensated absences such as long service or sabbatical leave.

2. Jubilee or other long-term benefit.
3. Long-term disability benefits.
4. Profit sharing and bonuses payable in more than twelve months after the end of
the period in which the employees render the related service.
5. Deferred compensation payable in more than twelve months after the end of the
period in which it is earned.

QUESTION 44-36

What are “termination benefits”?

ANSWER 44-36

Termination benefits are employee benefits payable as a result of an entity’s

decision to terminate an employee’s employment before the normal retirement
date, or an employee’s decision to accept voluntary redundancy in exchange for
those benefits.

QUESTION 44-37

Explain the “transitional liability” under PAS 19.

ANSWER 44-37

On first adopting PAS 19, an entity shall determine its transitional liability for a
defined benefit plan at that date as follows:

1. The present value of the obligation at the date of adoption.

2. Minus the fair value of plan assets at the date of adoption.
3. Minus any unamortized past service cost.

If the transitional liability is more than the liability that would have been recognized
at the same date under the entity’s previous accounting policy, the entity shall
make an irrevocable choice to recognize this increase as transition loss as follows:

1. Recognize the transition loss as expense immediately to be included in the total

benefit expense for the current period.
2. Amortize the transition loss on a straight line basis over a maximum of 5 years.
If the transitional liability is lower than the liability that would have been recognized
at the same date under the entity’s previous accounting policy, the entity shall
recognize the decrease as transition gain immediately.

QUESTION 44-38

What are the necessary disclosures for a defined contribution plan and defined
benefit plan?

ANSWER 44-38

Disclosures – defined contribution plan

1. General description of the plan

2. The amount recognized as expense during the period

Disclosures – defined benefit plan

1. Accounting policy for recognizing actuarial gains and losses.

2. General description or type of plan.
3. Reconciliation of the assets and liabilities recognized in the balance sheet.
4. Amounts included in the fair value of plan assets.
5. Reconciliation showing the movements during the period in the net liability or
asset recognized in the balance sheet.
6. Total expense in the income statement for each of the following, and the line
item of the income statement in which they are included:
Current service cost
Interest cost
Expected return on plan assets
Actuarial gains and losses
Past service cost
Effect of any curtailment or settlement
7. Actual return on plan assets
8. Principal actuarial assumptions

QUESTION 44-39

Explain the report of a defined contribution plan under PAS 26.

ANSWER 44-39
PAS 26 shall be applied to the “general purpose financial reports” of a defined
contribution plan and defined benefit plan.

The report of a defined contribution plan shall contain a statement of net assets
available for benefits and a description of the funding policy.

In preparing the “statement of net assets available for benefits”, the plan
investments shall be carried at fair value. When plan investments are held for
which an estimate of fair value is not possible, the reason why fair value is not used
shall be disclosed.

In practice, in many cases, plan assets will have determinable fair value because in
the discharge of their fiduciary responsibility, plan trustees will mandate that
retirement plans hold only marketable investments.

QUESTION 44-40

Explain the report of a defined benefit plan under PAS 26.

ANSWER 44-40

The report of a defined benefit plan shall contain either:

1. A statement that shows the net assets available for benefits, the actuarial
present value of promised benefits, distinguishing between vested and nonvested
benefits, and the resulting excess or deficit.

2. A statement of net assets available for benefits, including either a note

disclosing the actuarial present value of promised vested and nonvested benefits or
a reference to this information in an accompanying actuarial report.

In rare cases, a retirement benefit plan may contain characteristics of both defined
contribution plan and defined benefit plan.

For purposes of PAS 26, such a hybrid plan is deemed to be a defined benefit
plan.

QUESTION 44-41

Explain the frequency of actuarial valuation under PAS 26.

ANSWER 44-41
In many countries, actuarial valuations are not obtained more frequently than every
three years. PAS 26 does not make it incumbent upon the plan to use annual
actuarial valuation.

If an actuarial valuation has not been prepared on the date of the report, the most
recent valuation is used and the date of actuarial valuation is disclosed.

The report of a retirement plan, defined contribution and defined benefit, shall
disclose the following information:

a. Statement of changes in net assets available for benefits.

b. Summary of significant accounting policies.
c. Description of the plan and the effect of any changes in the plan during the
period.

QUESTION 44-42 Multiple Choice (PAS 19)

1. These are all forms of consideration given by an entity in exchange for service
rendered by employees.

a. Employee benefits
b. Employee compensation
c. Fringe benefits
d. Salaries and wages

2. Under PAS 19, employee benefits include all of the following, except

a. Short-term employee benefits

b. Postemployment benefits, such as pensions, defined contribution plans,
defined benefit plans, postemployment insurance and postemployment medical
care.
c. Other long-term benefits, including long-term service leave, sabbatical
leave and long-term disability benefits
d. Share-based payments

3. Short-term employee benefits include all of the following, except

a. Wages, salaries and social security contributions.

b. Short-term compensated absences.
 c. Profit-sharing and bonuses payable in more than twelve months after
the end of the period in which the employees render the related service.
d. Nonmonetary benefits for current employees, such as medical care,
housing, car and free and subsidized goods.

4. Which is not a characteristic of short-term employee benefits?

a. No actuarial assumptions are required to measure the benefit obligation.

b. There is no possibility of any actuarial gain or loss.
c. Short-term employee benefits by definition are payable no later than
twelve months after the end of the current period.
d. Short-term employee benefit obligations are measured on a discounted
basis.

5. These are compensated absences that are carried forward and can be used in
future periods and the employees are entitled to a cash payment for unused
entitlement on leaving the entity.

a. Accumulating and vesting

b. Accumulating and Nonvesting
c. Nonaccumulating and vesting
d. Nonaccumulating and Nonvesting

6. Postemployment employee benefits include all of the following, except

a. Nonmonetary benefits such as housing, car, and free or subsidized goods

b. Retirement benefits, such as pensions
c. Postemployment life insurance
d. Postemployment medical care

7. Under a defined contribution plan

I. The entity’s legal or constructive obligation is limited to the amount it

agrees to contribute to the fund.
II. The entity’s obligation is to provide the agreed benefits to current and
former employees.

a. I only
b. II only
c. Both I and II
d. Neither I nor II
8. It is a benefit plan under which an entity pays a fixed contribution into a separate
fund and will have no legal or constructive obligation to pay further contribution if
the fund becomes insufficient to pay employee benefits.

a. Postemployment benefit plan

b. Defined contribution plan
c. Defined benefit plan
d. Multi-employer plan

9. Which is incorrect concerning the recognition and measurement of a defined

contribution plan?

a. The contribution shall be recognized as expense in the period it is payable.

b. Any unpaid contribution at the end of the period shall be recognized as
accrued liability.
c. Any excess contribution shall be recognized as prepaid expense but only to
the extent that the prepayment will lead to a reduction in future payments or a cash
refund.
d. An entity shall not disclose the amount recognized as expense for a
defined contribution plan.

10. Which is incorrect concerning the recognition and measurement of a defined

benefit plan?

a. Actuarial assumptions are required to measure the obligation and expense

and there is a possibility of actuarial gains and losses.
b. The obligation is measured on a discounted basis.
c. The defined benefit plan must be fully funded.
d. The expense recognized for a defined benefit plan is not necessarily the
amount of contribution due for the period.

ANSWER 44-42

1. a 6. a
2. d 7. a
3. c 8. b
4. d 9. d
5. a 10. c

QUESTION 44-43

1. What is the mandated method of determining the present value of the defined
benefit obligation?
 a. Projected unit credit method
b. Entry age normal method
c. Individual level premium method
d. Aggregate method

2. It is the increase in the present value of the defined benefit obligation resulting
from employee service in the current period.

a. Current service cost

b. Interest cost
c. Past service cost
d. Unrecognized actuarial loss

3. These are assets held by an entity, the fund itself, that is legally separate from
the reporting entity and exists solely to pay or fund employee benefits.

a. Plan assets
b. Trust fund
c. Retirement fund
d. Pension assets

4. Plan assets are assets held by a long-term benefit fund that satisfies all of the
following conditions, except

a. The fund is legally separate from the reporting entity.

b. The assets of the fund are to be used only to settle the employee benefit
obligations.
c. The assets in the fund can be returned to the entity even if the remaining
assets of the fund are not sufficient to meet the plan’s obligation.
d. The assets are not available to the reporting entity’s creditors even in
bankruptcy.

5. It is an insurance policy issued by an insurer that is not a related party of the

reporting entity and the proceeds of the policy can be used only to pay or fund
employee benefits under a defined benefit plan.

a. Qualifying insurance policy

b. Aggregate policy
c. Annuity
d. Unconditional insurance policy

6. Which is incorrect concerning return on plan assets?

 a. The actual return on plan assets is one component of the expense
recognized in the income statement.
b. The difference between the expected return and actual return on plan
assets is an actuarial gain or loss.
c. The expected return on plan asset is based on market expectations, at the
beginning of the period, for returns over the entire life of the related obligation.
d. In determining the expected and actual return on plan assets, an entity
shall deduct plan administration cost not included in actuarial assumptions used in
measuring defined benefit obligation, and tax payable by the plan itself.

7. Which of the following should be included in plan assets?

I. Assets held by a long-term employee benefit fund

II. Qualifying insurance policy

a. I only
b. II only
c. Both I and II
d. Neither I nor II

8. It is the increase in the present value of the defined benefit obligation for
employee service in prior periods, resulting in the current period from the
introduction or amendment of a defined benefit plan.
a. Current service cost
b. Interest cost
c. Past service cost
d. Employee benefit cost

9. Which is correct concerning past service cost?

I. The past service cost shall be expensed immediately when additional

benefits vest immediately.

II. If the benefits are not vested, the past service cost is amortized on a
straight line basis over the period until the benefits become vested.

a. I only
b. II only
c. Both I and II
d. Neither I nor II

10. The vested benefits

 a. Are employee benefits that are not conditional on future employment.
b. Are benefits to be paid to the retired employees in the current period.
c. Are benefits to be paid to the retired employees in the subsequent year.
d. Are benefits accumulated in the hands of a trustee.

ANSWER 44-43

1. a 6. a
2. a 7. c
3. a 8. c
4. c 9. c
5. a 10. a

QUESTION 44-44 Multiple Choice (PAS 19)

1. It is the excess of the fair value of the plan assets over the present value of the
defined benefit obligation.

a. Surplus
b. Projected benefit obligation
c. Accrued benefit cost
d. Accumulated benefit obligation

2. The “surplus” contemplated under PAS 19 shall not exceed the sum of the

a. Unrecognized past service cost and unrecognized actuarial loss.

b. Unrecognized past service cost and present value of refund from the plan.
b. Unrecognized actuarial loss and present value of refund from the plan.
b. Unrecognized past service cost, unrecognized actuarial loss and present
value of refund from the plan.

3. Which is incorrect concerning the basic accounting considerations for a defined

benefit plan?

a. The fair value of plan assets is the source of fund set aside in meeting
future benefit payments.
b. The projected benefit obligation is the present value of expected future
payments required to settle the obligation arising from employee service in the
current and prior periods.
c. If the fair value of plan assets is more than the projected benefit obligation,
the plan is overfunded and there is prepaid benefit cost.
d. The fair value of plan assets is classified as noncurrent asset and the
projected benefit obligation is classified as noncurrent liability in the statement of
financial position.
4. These are employee benefits that are payable as a result of an entity’s decision
to terminate an employee’s employment before the normal retirement date, or an
employee’s decision to accept voluntary redundancy in exchange for those benefits.

a. Termination benefits
b. Short-term benefits
c. Long-term benefits
d. Postemployment benefits

5. The gain or loss on curtailment or settlement shall be

a. Recognized when the curtailment or settlement occurs.

b. Recognized in other comprehensive income.
c. Deferred and amortized over the average remaining service period of the
covered employees.
d. Treated as a change in accounting policy.

ANSWER 44-44

1. a
2. d
3. d
4. a
5. a

QUESTION 44-45 Multiple Choice (PAS 19)

1. These are the entity’s best estimates of the variables that will determine the
ultimate cost of providing postemployment benefits.

a. Actuarial assumptions
b. Demographic assumptions
c. Financial assumptions
d. Actuarial computations

2. Demographic actuarial assumption deal with all of the following, except

a. Mortality, both during and after employment

 b. Rate of employee turnover
c. Disability and early retirement
d. Expected rate of return on plan assets

3. Financial actuarial assumptions deal with all of the following except

a. Discount rate
b. Future salary level
c. Future medical costs, including cost of administering claims and benefit
payments
d. Proportion of plan members with dependents who will be eligible for
benefits

4. Which statement is correct concerning actuarial gains and losses?

I. Actuarial gains and losses comprise of experience adjustments and the

effects of changes in actuarial assumptions.

II. Actuarial gains and losses may result from increases or decreases in either
the present value of defined benefit obligation or the fair value of plan assets.

a. I only
b. II only
c. Both I and II
d. Neither I nor II

5. What is the so called “corridor” in the recognition of actuarial gains and losses?

a. 10% of the present value of the defined benefit obligation or 10% of the
fair value of plan assets at the beginning of the year, whichever is higher.
b. 10% of the present value of the defined benefit obligation or 10% of the
fair value of plan assets at the beginning of the year, whichever is lower.
c. 10% of the present value of the defined benefit obligation or 10% of the
fair value of plan assets at the end of the year, whichever is higher.
d. 10% of the present value of the defined benefit obligation or 10% of the
fair value of plan assets at the end of the year, whichever is lower.

6. Under the “full recognition approach”, actuarial gains and losses occurring in the
current year are:

a. Recognized in the current year as component of profit or loss.

b. Recognized in the current year as component of other comprehensive
income.
c. Included in retained earnings.
 d. Deferred and amortized over the remaining service period of participating
employees.

7. Which statement is incorrect concerning actuarial assumptions for a defined

benefit plan?

a. Actuarial assumptions shall be biased and mutually compatible.

b. Actuarial assumption comprise of demographic and financial assumptions.
c. The discount rate is equal to the market yield at the end of reporting
period on high quality bonds, or if there are no such bonds, the market yield on
government bonds.
d. Postemployment benefit obligations shall be measured on a basis that
reflects estimated future salary increases.

8. The discount rate used in making actuarial assumptions shall be determined by

reference to

a. Market yield at the end of reporting period on high quality bonds.

b. Stated rate on high quality bonds.
c. Market yield at the end of reporting period on government bonds.
d. Stated rate on government bonds.

9. Any transition loss on first adopting PAS 19 shall be recognized

I. As expense immediately
II. As expense over a maximum of 5 years

a. I only
b. II only
c. Either I or II irrevocably
d. Either I or II revocably

10. Any transition gain on first adopting PAS 19 shall be

a. Recognized in income immediately

b. Deferred and amortized over a maximum of 5 years
c. Credited to retained earnings
d. Credited to equity

ANSWER 44-45

1. a 6. b
2. d 7. a
3. d 8. a
4. c 9. c
5. a 10. a

QUESTION 44-46 Multiple Choice (IFRS)

1. An entity contributes to an industrial pension plan that provides a pension

arrangement for its employees. A large number of other employers also contribute
to the pension plan and the entity makes contributions in respect of each employee.

These contributions are kept separate from corporate assets and are used
together with any investment income to purchase annuities for retired employees.
The only obligation of the entity is to pay the annual contribution. This pension
scheme is

a. Multiemployer plan and a defined contribution scheme

b. Multiemployer plan and a defined benefit scheme
c. Defined contribution plan only
d. Defined benefit plan only

2. A entity has decided to improve its defined benefit pension scheme. The benefit
payable shall be determined by reference to 60 years of service rather than 65
years of service. As a result, the defined benefit pension liability would increase.
The average remaining service period of the employees is 10 years: What is the
treatment of the increase in the pension liability in the financial statements?

a. The past service cost shall be charged against retained earnings.

b. The past service cost shall be charged against profit or loss for the year.
c. The past service cost shall be spread over the remaining service period of
the employees.
d. The past service cost shall be not be recognized.

3. An entity uses International Financial Reporting Standards to prepare its financial

statements but the defined benefit obligation has been calculated using
assumptions that are different from IFRS. The financial statements of the entity also
do not take into account unrecognized past service cost. How would the entity
measure its net pension liability.

a. The net present value of the defined benefit obligation less the fair value of
the plan assets.
b. The net present value of the defined benefit obligation less the fair value of
plan assets less the unrecognized past service cost.
 c. The net present value of the defined benefit obligation less the fair value of
plan assets less the unrecognized past service cost and in addition, a review of the
assumptions shall be undertaken to remeasure the obligation.
d. The value in the entity’s statement of financial position will simply be used
in the consolidated financial statements.

4. An entity operates a defined benefit pension plan and changes it at the beginning
of the current year to a defined contribution plan. The net pension liability after the
plan amendment is less than the net pension liability before the plan amendment.
How should the entity account for this change?

a. The entity shall recognize a gain.

b. The entity does not recognize a gain.
c. The entity shall recognize a gain over the remaining service period of the
employees.
d. The entity shall recognize the gain but applies the 10% corridor approach.

5. An entity operated a defined benefit plan that pays employees an annual benefit
based on the number of years of service. The annual payment does allow the
employer to vary the final benefit. Over the last five years, the entity has used this
flexibility to increase employees’ pension by the current growth in earnings per
share. How will employees’ benefit be calculated if they retire in the current period?

a. It will be based on the existing plan rules with no additional award.

b. It will be based on the existing plan rules plus the current rate of growth in
earnings per share.
c. It will be based on the plan rules plus the current rate of inflation.
d. It will be based on the plan rules plus the increase in earnings per share
anticipated over the remaining service period of the employees.

6. At the end of the current year, an entity changes its defined benefit plan to a
defined contribution plan. The entity agrees with the employees to pay them a
certain amount in total on the introduction of a defined contribution plan. The
employees forfeit any pension entitlement for the defined benefit plan. The pension
liability recognized in the statement of financial position at the end of the prior year
was higher than the amount paid. How should this curtailment be accounted for in
the current year?

a. A settlement gain should be recognized.

b. The cash payment should be shown as expense.
c. The cash payment should go to reserves.
d. A settlement loss should be recognized.
7. The amount recognized as liability in the statement of financial position shall be
the net total of the following amounts (choose the incorrect one)

a. The present value of projected benefit obligation at the end of the

reporting period.
b. Plus any actuarial gains, less any actuarial losses, not yet recognized
c. Plus any past service cost not yet recognized.
d. Minus the fair value of plan assets at the end of the reporting period.

8. Which of these events will not cause a change in a defined benefit obligation?

a. Changes in mortality rate or the proportion of employees taking early

retirement.
b. Changes in the estimated salaries or benefits that will occur in the future.
c. Changes in the estimated employee turnover.
d. Changes in the expected rate of return on plan assets.

9. Which of the following statements best describes “other long-term employee

benefits”?

a. Benefits that are not due to be settled within twelve months at the end of
the period in which the service is rendered.
b. Benefits that are due to be settled within twelve months at the end of the
period in which the service is rendered.
c. Benefits payable as a result of an entity’s decision to end an employee’s
employment before the normal retirement date.
d. Benefits which are payable after completion of employment.

10. Under which category should lump sum benefit expressed as a certain percent
of the final salary for each year of service and actuarial gains be accounted for?

a. Lump sum benefit should be accounted for under defined benefit plans.
Actuarial gains should be accounted for under defined benefit plans.
b. Lump sum benefit should be accounted for under short-term employee
benefits. Actuarial gains should be accounted for under defined benefit plans.
c. Lump sum benefit should be accounted for under defined benefit plans.
Actuarial gains should be accounted for under defined contribution plans.
d. Lump sum benefit should be accounted for under short-term employee
benefits. Actuarial gains should be accounted for under defined contribution plans.

ANSWER 44-46
1. a 6. a
2. b 7. c
3. c 8. d
4. a 9. a
5. b 10. a

QUESTION 44-47 (PAS 26)

1. The report of a defined contribution plan shall contain

I. A statement of net assets available for benefit

II. A description of the funding policy

a. I only
b. II only
c. Both I and II
d. Either I or II

2. The report of a defined benefit plan shall contain

I. A statement showing net assets available for benefits, the present value of
promised benefits and the resulting excess or deficit.

II. A statement of net assets available for benefits including a note disclosing
the present value of promised benefits.

a. I only
b. II only
c. Both I and II
d. Either I or II

3. Retirement benefit plan investments shall be carried at

a. Fair value
b. Historical cost less impairment
c. Net realizable value
d. Value in use

4. In rare circumstances, when a retirement benefit plan has attributed of both

defined contribution plan and defined benefit plan, it is deemed

a. Defined benefit plan

 b. Defined contribution plan
c. Neither defined benefit plan nor defined contribution plan
d. Both defined benefit plan and defined contribution plan

5. In the case of a defined benefit plan, PAS 26

a. Makes it incumbent upon the plan to obtain an annual actuarial valuation.

b. Does not make it incumbent upon the plan to obtain an annual actuarial
valuation.
c. Allows the plan to estimate the present value of future benefits based on
valuation done by other similar plans.
d. Allows the plan to add a percentage based on consumer price index to the
previous year’s valuation of actuarial valuation.

6. PAS 26 shall be applied to which of the following?

a. The costs to entities of employee retirement benefits.

b. Reports to individuals on their future retirement benefits
c. The financial statements relating to an actuarial business
d. The general purpose financial reports of pension schemes

7. Which of the following may be disclosed in the financial report of defined benefit
plan but would not be shown in the financial report of a defined contribution plan?

a. Government bonds held

b. Actuarial present value of promised retirement benefits
c. Employee contributions
d. Employer contributions

ANSWER 44-47

1. c 6. d
2. d 7. b
3. a
4. a
5. b

QUESTION 44-48 Multiple Choice (IAA)

1. An employer sponsoring a defined benefit pension plan must report a liability in

the statement of financial position equal to

a. The current year pension cost that was not funded.

 b. The difference between the fair value of plan assets and the accumulated
benefit obligation.
c. The difference between the accumulated benefit obligation and the
projected benefit obligation.
d. The difference between the fair value of plan assets and the projected
benefit obligation.

2. Which statement characterizes defined contribution plans?

a. They are more complex in construction than defined benefit plans.

b. The employer’s obligation is satisfied by making the appropriate amount of
periodic contribution.
c. The investment risk is borne by the employer.
d. Contributions are made in equal amounts by employer and employees.

3. Which of the following components should not be included in the calculation of

net pension cost recognized for a period by an employer sponsoring a defined
benefit plan?

a. Expected return on plan assets

b, Amortization of unrecognized past service cost
c. Interest cost
d. Contribution to the fund.

4. Unrecognized past service cost can be amortized based on which of the following
methods?

a. Straight line method using any systematic and rational approach

b. Straight line method based on the average remaining service period of the
qualified employees
c. Interest method using the actuary’s discount rate
d. Service method based on the average remaining service period of the
qualified employees

5. If the actual return on plan assets exceeds the expected return for the period, the
difference is

a. A deferred loss
b. A deferred gain
c. Recognized as a loss in the current period
d. recognized as a gain in the current period

6. The components of net periodic pension expense that involve delayed

recognition are
 a. Interest cost, past service cost, transition cost and expected return on plan
assets
b. Service cost, transition cost, and gains and losses
c. Gains and losses, transition cost and past service cost
d. Transition cost, past service cost and expected return on plan assets

7. The projected benefit obligation is the measure of obligation that

a. Can no longer be used under GAAP as an estimate for reporting the service
cost component of pension expense.
b. Is not an allowable estimate for reporting the service cost component of
pension expense for defined benefit plan.
c. Is one of several allowable estimates for reporting the service cost
component of pension expense.
d. Is the only allowable estimate for reporting the service cost component of
pension expense.

8. The conclusion relating to the computation of the service cost component of

pension expense is that

a. The projected benefit obligation computed using future salary levels

provides a reasonable measure of present pension obligation and expense.
b. The projected benefit obligation computed using present salary levels
provides a reasonable measure of present pension obligation and expense.
c. The projected benefit obligation computed using present salary levels
provides a reasonable measure of future pension obligation and expense.
d. The projected benefit obligation computed using future salary levels
provides a reasonable measure of future pension obligation and expense.

9. Which of the following criteria is not required for the recognition of a liability for
compensated absences?

a. The amount of the obligation must be estimable.

b. Payment of the obligation must be probable.
c. Payment of the obligation will require the use of current assets.
d. The compensation either vests with the employee or can be carried
forward to subsequent years.

10. An employer’s obligations for postretirement health benefits that are

expected to be provided to an employee must be fully accrued by the date the
 a. Employee is fully eligible for benefits
b. Employee retires
c. Benefits are utilized
d. Benefits are paid.

ANSWER 44-48

1. d 6. c
2. b 7. d
3. d 8. a
4. b 9. c
5. b 10. a