Intermediate Accounting 2

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What to discuss

I. Employee Benefits
1. Categories of Employee Benefits
a. Post-employment benefits
a1. Defined Contribution Plan
a2. Defined Benefit Plan
b. Short-term employment benefits
c. Other long-term employment benefits
d. Termination benefits

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Employee Benefits

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Employee Benefits

 All forms of consideration given by an entity in exchange for

services rendered by employees1 or for the termination of
employment.

 Categories of Employee Benefits

a. Post-employment benefits
b. Short-term employment benefits
c. Other long-term employment benefits
d. Termination benefits

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a. Post-employment benefits

 According to PAS 19.8, these are employee benefits (other than

termination benefits and short-term employee benefits) that are payable

after the completion of employment

 Examples:
 Retirement benefits (lump sum payment or pensions)
 Other post-employment benefits (post-employment life insurance or
medical care)
 Post-employment benefit plan2 can be:
 Contributory vs. Non-contributory
 Funded vs. Unfunded

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a. Post-employment benefits
Contributory Non-contributory
• Both employee and • Only the employer
employer contribute to contributes to the
the retirement benefits retirement benefits fund
fund of the employee, of the employee, and
and they share in the thus shoulders all the
retirement benefit cost retirement benefit cost

• They do not necessarily

contribute equal
amounts

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 a. Post-employment benefits
Funded Unfunded
• The retirement fund is isolated from • The employer manages any
the employer’s control and is established fund and pays directly the
transferred to a funding agency3 (e.g., retiring employees
investment company, et.al) who
undertakes to manage the fund and • The entity retains the obligation for
pay directly the retiring employees the payment of retirement benefits
without the establishment of a
• Funding = the transfer of assets to an separate fund
entity, called the retirement fund, via
a funding agency (trustee, bank or
insurance company) which is
separate from the reporting entity

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 a. Post-employment benefits
Defined Contribution Plan (DCP)
• The employer commits to make fixed
contributions to a fund (a separate
entity: trustee). The amount of benefits
that an employee will receive is
dependent on the fund balance
• The 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 periods4
• The contribution is definite but the
benefit is indefinite
Defined Benefit Plan (DBP)
• The employer commits to pay a
specific, or agreed, or definite
amount of retirement benefits.
• The entity must make contributions
such that the contributions plus
earnings would be sufficiently large
to cover future retirement benefits4
• The benefit is definite but the
contribution is indefinite
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 a. Post-employment benefits
Defined Contribution Plan (DCP)
• Accounting for DCP is
straightforward – the employer
recognizes the agreed fixed
contribution as retirement benefit
cost after the end of each period that
the employees have rendered service
• Steps in accounting for DCP:
1 . The contribution shall be recognized
as expense in the period it is payable
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 prepayment
will lead to a reduction in future
payments or a cash refund
Prob17-1 to 4, pages 592-593
Defined Benefit Plan (DBP)
• Accounting for DBP is complex – it
requires actuarial valuations using
the projected unit credit method (or
accrued benefit method)
Steps in accounting for DBP:
1. Determine the deficit or surplus
 If FVPA < PV of DBO=deficit/
underfunded (accrued benefit cost-
NonCurrent Liability)
 If FVPA > PV of DBO=surplus or
overfunded (prepaid benefit cost-
NonCurrent Asset)
2. Determine the net defined benefit liability
or asset
 net defined benefit liability=deficit
 net defined benefit asset=lower of
surplus and ‘asset ceiling’
3. Determine the components of the defined
benefit cost to be recognized in P/L or OCI
Prob17-5 to 17-11, pages 593-597 9
 a. Post-employment benefits
Terms used in Step 1
1. PV of DBO = present value of defined benefit obligation; represents entity’s
obligation for the accumulated retirement benefits earned by employees to
date. This is determined by using an actuarial valuation method called the
projected unit credit method (or accrued benefit method)
The projected unit credit method shall be used in determining the PV of DBO, and the related current service cost
and where applicable, past service cost

 DBO=defined benefit obligation, also called the projected benefit obligation

(PBO), is the PV of expected future payments required to settle the obligation
arising from employee service in the current and prior periods
 DBO or PBO is analogous to an off-statement of financial position liability with
a credit balance

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a. Post-employment benefits
Steps in computing DBO or PBO:
1. Get the final or future salary of the employee: Current salary x future
value factor
2. Multiply by the percentage of benefit and number of years worked/serviced
by the employee
3. Get the PV of the result in #2 (based on number of years the employee will
receive the benefits)
4. Get the PV of the benefit obligation based on the result on #3 (based on
number of years pertaining to the remaining service period of the employee
before his/her retirement age

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a. Post-employment benefits
Terms used in Step 1
2. FVPA = fair value of plan assets; represents the balance of any fund (or
source of funds) set aside for the payment of the retirement benefits
 FVPA is analogous to an off-statement of financial position asset with a debit
balance

 PV of DBO and FVPA are kept only in the memorandum records of

the subentity. Subentity maintains information that does
not appear in the financial statements of the primary
entity.

Subentity= the benefit plan

Primary entity = employer entity

 The prepaid/accrued benefit cost is the item that appears on

the financial statement of the employer entity

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a. Post-employment benefits
• Illustrations on underfunding, overfunding, and prepaid/accrued benefit cost
– see page 606

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a. Post-employment benefits
Terms used in Step 2
1. Net defined benefit liability or asset = amount that is presented in the
statement of financial position
2. Asset ceiling = the present value of any economic benefits available in the
form of refunds from the plan or reductions in future contributions to the plan
Terms used in Step 3
1. Defined benefit cost = see formula on the next slide

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a. Post-employment benefits
Defined benefit cost is determined using the formula here:
Service cost: (recognized in P/L)
(a) Current service cost xx
(b) Past service cost xx
(c ) any gain or loss on settlement xx xx
Net interest on the net defined benefit liability or asset
(recognized in P/L)
(a) Interest cost or expense on the defined benefit obligation xx
(b) Interest income on plan assets xx
(c ) interest (expense) on the effect of the asset ceiling xx xx
Remeasurements of the net defined benefit liability or asset
(recognized in OCI)
(a) Actuarial (gains) and losses/ remeasurement of projected benefit xx
obligation
(b) Difference between interest income on plan assets and return on xx
plan assets/ remeasurement of plan assets
(c) Difference between the interest on the effect of the asset ceiling and xx xx
change in the effect of the asset ceiling/ remeasurement of the effect
of asset ceiling
Total Defined Benefit Cost xx
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a. Post-employment benefits

More on DBP:
See comprehensive illustration on page 607 to 610
Prob 18-1 Shakira company, page 626
Prob 18-2 Shiela company, page 627

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END

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