CHAPTER 28 – EMPLOYEE BENEFITS

EMPLOYEE BENEFITS
• All forms of considerations given by an entity in exchange for services rendered by employees or
for the termination of employment
• Employees include directors and other management personnel. The employee benefits include:
o Short-term employee benefits
o Postemployment benefits
o Other long-term employee benefits
o Termination benefits

SHORT-TERM EMPLOYEE BENEFITS

• Employee benefits other than termination benefits which are expected to be settled wholly within
twelve months after the end of annual reporting period in which the employees render the related
service.
• Includes:
o Salaries, wages and other social security contributions
o Short-term compensated or paid absences
o Profit sharing and bonuses payable within twelve months
o Nonmonetary benefits, such as medical care, housing, car and free or subsidized goods
• Recognition and measurement
o There is no requirement to discount future benefits because such benefits are all, by
definition, payable no later than twelve months after the end of the current reporting
period.
o There is no possibility of actuarial gain/loss because it is measured on an undiscounted
basis.
• Accounting procedures
o Unpaid short-term employee benefits at the end of the accounting period shall e
recognized as accrued expense.
o Any short-term employee benefits paid in advance shall be recognized as prepayment.
• Short-term compensated or paid absences
o Vacation, sickness and short-term disability, maternity or paternity and military service
o Falls into two categories, accumulating and nonaccumulating absences.
o Accumulating absences
▪ Carried forward and can be used in future periods if the current period’s
entitlement is not used in full
▪ Vesting
• Employees are entitled to cash payment for unused entitlement on
leaving the entity.
• Are not conditional on future employment
▪ Nonvesting
• Employees are not entitled to a cash payment for unused entitlement on
leaving the entity.
o Nonaccumulating absences
▪ Not carried forward.
▪ Benefits lapse if the current period’s entitlement is not used
 ▪ Do not entitle the employees to a cash payment for unused entitlement on
leaving the entity.

POSTEMPLOYMENT BENEFITS
• Employee benefits other than termination benefits and short-term employee benefits, which are
payable after completion of employment.
• Include:
o Retirement benefits (pension, lumpsum retirement payment)
o Postemployment life insurance
o Postemployment medical care
• Formal arrangements between an employer and employee
• Established as part of the remuneration package for the employees
• Are classified as either defined contribution plan or defined benefit plan

• DEFINED CONTRIBUTION PLAN

o Postemployment benefit plan under which an entity pays fixed contributions into a
separate entity known as the fund.
o Entity 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.
o The contribution is definite but the benefit is indefinite.
o When an employee retires, the accumulated fund in the hands of the trustee determines
his retirement benefit.
o Employee bears the investment risk.

o Accounting for defined contribution plan

▪ Obligation of the entity is determined by the amount contributed for each period.
▪ There are no actuarial assumptions to measure the contribution
▪ There is no possibility of any actuarial gain or loss.
▪ Obligations are measured on an undiscounted basis, except when they are not
expected to be settled wholly within twelve months after the end of the period

o Accounting procedures for defined contribution plan

▪ The contribution shall be recognized as expense in the period it is payable.
▪ Any unpaid contribution at the end of the period shall be recognized as accrued
expense.
▪ 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.

o Insured benefits
▪ An entity may pay insurance premiums to fund a postemployment benefit plan.
▪ Insurance policy is in the name of a specified plan participant or a group of
participants and the entity does not have any legal or constructive obligation to
 cover any loss on the policy, the entity has no obligation to pay benefits and the
insurer has the sole responsibility for paying the benefits.
▪ Entity shall treat such insurance payments as contribution to a defined
contribution plan.

• DEFINED BENEFIT PLAN

o Postemployment plan other than a defined contribution plan (residual definition)
o An entity’s obligation is to provide the agreed benefits to employees
o Employee is guaranteed specific or definite amount of benefit which is usually related to
salary and years of service.
o Benefit is definite but the contribution is indefinite.
o Entity assumes the investment risk.
o If the plan is exceptionally good, the entity may take a “contribution holiday” meaning
stop paying the contribution for a while.
o If the plan is poor, the entity must make additional contributions for any expected
shortfall in order to satisfy the promised future benefits.

o Accounting for 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
▪ Obligation is measured on a discounted basis.
▪ May be unfunded, fully funded or partly funded by the contributions of the entity.
▪ The expense recognized is not necessarily the amount of contribution for the
period.

o Components of defined benefit cost

1. Service cost
a. Current service cost
b. Past service cost
c. Any gain or loss on plan settlement
2. Net interest
3. Remeasurements
a. Remeasurement of plan assets
b. Remeasurement of defined benefit obligation
c. Remeasurement of the effect of asset ceiling

▪ The service cost and net interest are included in profit or loss as component of
employee benefit expense.
▪ All of the remeasurements are fully recognized through other comprehensive
income and are reclassified subsequently to retained earnings.
▪ The defined benefit cost is the amount to be funded by contribution from the
employer.
▪ Contribution > Defined benefit cost = Prepaid Benefit Cost
▪ Contribution < Defined benefit cost = Accrued Benefit Cost
1. Current service cost
▪ Increase in the present value of the defined benefit obligation resulting from employee
service in the current period
▪ Is the cost to an entity under a defined benefit plan for service rendered by employees in
the current year
▪ Increases expense and defined benefit obligation

2. Past service cost

▪ Change in the present value of defined benefit obligation for employee service in prior
periods resulting from a plan amendment or curtailment
▪ Cost to an entity under a defined benefit plan for services rendered by employees in prior
periods resulting from the introduction of a defined benefit plan or amendment of an
existing plan or curtailment of an existing plan.
▪ Plan amendment includes introduction of defined benefit plan or changes to an existing
defined benefit plan.
▪ Plan curtailment is a significant reduction by the entity in the number of employees
covered by the defined benefit plan.
▪ Past service cost is recognized as an expense when the plan amendment or curtailment
occurs.
▪ All past service costs, whether vested or unvested, shall be expensed immediately

3. Net interest
▪ Defined benefit liability or asset
▪ Change in the defined benefit obligation, plan assets and asset ceiling as a result of the
passage of time
a. Interest expense on deferred benefit obligation
- Defined benefit obligation, beginning x discount rate
b. Interest income on plan assets
- Fair value of plan asset, beginning x discount rate
c. Interest expense on effect of asset ceiling
- Effect of asset ceiling, beginning x discount rate
▪ Net interest expense or income is the difference between the three interests above.

4. Plan assets
▪ Comprise assets held by a long-term benefit fund and qualifying insurance policy.

5. Qualifying insurance policy

▪ An insurance policy issued by an insurer that is not a related party of the reporting entity.
▪ Proceeds are for employee benefits only and are not available to own creditors even in
bankruptcy.

6. Actual return on plan assets

▪ Interest, dividend and other income derived from the plan assets
▪ Realized and unrealized gains and losses on the plan assets
 7. Remeasurement of plan assets
▪ Difference between actual return on plan assets and interest income on plan assets
▪ Actual return > Interest Income = Remeasurement Gain
▪ Actual return < Interest Income = Remeasurement Loss

8. Remeasurement of project benefit obligation (PBO)

▪ Is the recognition of actuarial gain and loss
▪ Changes in the value of the PBO resulting from experience adjustments and the effects of
changes in actuarial assumptions.
▪ Actual benefit obligation > Estimated amount = Actuarial loss (PBO has increased)
▪ Actual benefit obligation < Estimated amount = Actuarial gain (PBO has decreased)

9. Fair value of plan assets (FVPA)

▪ Source of fund set aside in meeting future benefit payments
▪ PBO is the present value of expected future payments required to settle the obligation
arising from employee service in the current and prior periods.
▪ FVPA > PBO
o Plan is overfunded
o Prepaid benefit cost, a noncurrent asset (debit balance)
▪ FVPA < PBO
o Plan is underfunded
o Accrued benefit cost, a noncurrent liability (credit balance)

Fair value of plan assets
Projected benefit obligation
Increases Decreases
Contribution to the plan Benefits paid
Actual return on plan assets Realized loss on plan assets
Current service cost Benefits paid
Past service cost Actuarial gain
Interest expense on PBO
Actuarial loss

OTHER LONG-TERM EMPLOYEE BENEFITS

• All employee benefits other than short-term employee benefits, postemployment benefits and
termination benefits. (residual definition)
• Employee benefits which are not expected to be settled wholly within twelve months after the
end of annual reporting period in which employees render the related service

TERMINATION BENEFITS
• Employee benefits provided in exchange for the termination of an employee’s employment as a
result of either:
o Entity’s decision to terminate employee before normal retirement date
o Employee’s decision to accept an offer of benefits in exchange for termination of
employment
OTHERS
BONUS COMPUTATION

Bonuses are given to employees for various reasons and are determined based on various bonus schemes.
Bonuses may arise from statutory requirements, contractual requirements, or simply from constructive
obligation.

For example, 13th month pay arise from statutory requirement, performance bonuses may arise from
employment contract, and bonuses for long-service awards may arise from constructive obligation. Other
bonuses that the employer commits to pay but are neither required by law nor contained in the
employment contract create constructive obligation.

More often than not, bonuses are given to encourage productivity and efficiency.

Examples of bonus schemes (employee profit sharing) include the following:

B = Bonus
P = Profit before deducting bonus and income tax expense
Br = Bonus rate/percentage
Tr = Tax rate

1. Bonus before bonus and before tax

▪ Bonus is computed as a percentage of the profit before deducting the bonus and the income
tax expense. The formula is
o B = P x Br

2. Bonus after bonus and before tax

▪ Bonus is computed as a percentage of profit after deducting the bonus but before deducting
income tax expense.
o B = P - (P / 1 + Br)

3. Bonus before bonus and after tax

▪ Bonus is computed as a percentage of the profit before deducting the bonus but after
deducting the income tax expense
o B = P x ( 1 - Tr / (1/Br-Tr) )

4. Bonus after bonus and after tax

▪ Bonus is computed as a percentage of profit after deducting the bonus and income tax
expense
o B = P x ( 1 - Tr / (1/Br – Tr + 1) )
Case #1

ABC Co. agrees to provide post-employment benefits to its employees by making monthly contribution
equal to 10% of employee’s monthly salary to a retirement fund. Upon retirement, the employee is
entitled to any accumulated contributions to the fund plus any investment income thereon Any
investment losses will be borne by the employee.

Analysis: This is a defined contribution plan because the benefits tb be received by the employee are
dependent on the contributions made by the employer to a retirement fund. The risk that benefits will
exceed or be deficient of the expected amount of benefit is borne by the employee.

Case #2

ABC Co.’s post-employment benefit plan states that employees will receive retirement benefits equal to
one-month salary, at the salary level on retirement, for each year of service with minimum service period
of 10 years.

Analysis: This is a defined benefit plan because the benefits to be received by the employee are not
dependent on the contributions made by the employer on a retirement fund. The risk that the
retirement fund set aside will exceed or be deficient of the agreed amount of benefit is borne by the
employer.