ResA The Review School of Accountancy BTel, No. 735-9807 & 734-3989 FINANCIAL ACCOUNTING & REPORTING C. UBERITA/C. ESPENILLAIG, MACARIOLA UCTURING tion in which “the exeditor for economic or legal reasons related to the to the debtor that it would not otherwise consider. That the nd the debtor or is imposed by law or a court” Types of Restructuring: Asset Swap ~ transter of non-cash asset, st ate, inventorie settle a payable. This type of restructuring usually recognizes ga Tiability and disposal of assets receivables or investments, 10 fully fr losses on the release of financial Equity Swap ~~ PAS 32 does not specifically de as 1o how such transactions should be aecounted for, One ar be the same as when convertible debt is converted into shares, the carrying value of the existing debt instrument is simply transferred to equity and no gain or lass on the conversion is recognized. — This accounting treatment is consistent with the ustal accounting for the issue oF shares that are recorded at the proceeds received rather than 1! ae of shares and does not result in gain or loss, Alternatively, one could aryue that the replacement oF exchange of am isuve's existing debt instrument with new equity instruments of the issuer is an extinguishment of existing financial obligation as the entity is legally released trom its ebtigation to pay cash, “Therefore in accordance with PAS 39 par. 40, the debt instrument should be ized and new equity i issued should be recognized at fair value. Furthermore, par. 41 of PAS 39, provides that the difference between the carrying amount of the existing debt instrument ished and the consideration paid (including non-cash assets or liabilities assumed) should be recognized in profit or loss with debt to equity conversions and so the question arises ument is that the accounting treatment should Modification of Terms This type of restructuring, may or mo¥ not derecognize the carrying value of the original liability. If the modification is considered substantial, the carrying value of the original financial liability is derecognized: the restructured debt is recognized; any gain or loss on debt restructuring, is recognized in the profit and loss. I the modification is not considered substantial, the carrying value of the ‘original financial liability is not derecognized; the gain or loss is not given accounting recognition and any transaction costs incurred is being deferred and amortized based on the restructured term of the contract using, the effective interest method. The modification may involve the c. oF both. Interest concession may involve a reduction of the interest rate, forgiveness of unpaid interest; oF a moratorium on interest payments for 3 period of time, Maturity value concessions may involve an extension of the maturity date or a reduction in the amount 10 be repaid at maturity ‘The accounting standard clarifies that a substantia! modification arises when the discounted present value of the new terms (including any fees paid net any fees reccived and discounted at the original effective interest erent from the discounted present vilue of the remaining cash ows of the original ‘accounted for as amr extinguishment, the difference between the fair value of the new financial liability obtained and the carrying amountvalue of the original financial liability cxtinguished, shall be recognized as gain or loss in the profit oF loss, Any costs or fees incurred are also lnment LIABILITIES-POS1 EMPLOVMENT BENIETTS 1. Posteemployment benefits ~ are defined as employee benefits (other than termination benefits) that sre payable after the completion of employment or upon retirement. 2, Fostemployment benefit plans ~ are formal or informal arrangements under which an entity provides post-employment benefits for one or more employees. 3. Types of pension plans: Persion plan maybe a state oF government plan or an employer plan. A state plan is one that is administered by the state or government, such asthe plan adeinistered by the Social Security System ‘An employer plan is one tha is sponsored by the employer. Pension plan may be contributory or noncortributory. A contributory pension plan is one both the ‘employer and employee contribute. A noncontri:¢ary pension plan is one in which the cost of the plan is paid solely by the employer; the employee does not contribute tothe plan,ReSA/ Financial Accounting and Reporting, g Page 2of4 Pension plan may’ be unfuneed. parity furded or fully funded. When funded, the contributions are paid to a separate entity (fund). This entity is tasked to manage the plan's assets, with the goal of maximizing their earnings potenti Pension plan may be a defined coris2bution plan oF a defined benefit plan. A defined contribution plan dines the amount to be contributed to te phim hased on a formula that uses employee compensation as its basis of calculation, ‘The Senefits to he reveived by the employees will depend on the total amount contributed plus tie earings on A defined berefit plan defines the benefits to be received by employees upon retirement, Fhe eunnibutions 0 the plan depend on the defined benefits| Defined Contribution plan = 1s 1 post ensployment benetit plan under which an entity pays fixed contributions inte a separate ently and will have no legal or constructive obligation to pay further contributions if the fund does not hod sufficient assets to pay all employee benefits relating to employee service in the current and prior pericds Defined Contribution Plan recognition and measurenen entity should recognize the coniributivss payable 1 defined contribution plan in rendered by an employee d period a) Asa liability «accrued expe paid execeds the contribution die for service before the balance sheet date, an entity shall recognize that {excess as an asset (prepaid expense) io he extent thatthe prepayment will Kad to, for example a reduction in furure payments or a cash refund. bb) Asan expense, unless another standard requires or permits the inclusion of the contribution in the cost of. ‘an asset (PAS 2 for inventories and PAS 16 for PI Defined Benefit Plans - Accounting for defined benefit plans is complex because actuarial assumptions are required to measure the obligation and shy expense and there is » possibilty of actuarial gains and losses. Morcover. the obligations are meacuecd on a discounted basis because they may be settled many years after the employees render the related service. change for service Recognition and measurement Defined benefit plans may be unfunded, oc they may be wholly or partly funded by contributions by an entity, and sometimes its employees, into an entity. or fu, satis legally separate from the reporting entity and from which the employee benefits are paid. The payment af benefits when they fall dae depends not only on the financial position and inv performance of the fund but also on an entity's ability (and willingness) to make good any shortfall in the fund's assets. Therefore, the entity is, in substance, underwriting the actuarial and investment risks associated with the plan. Consequently, the expense recognized fora defined benefit plan is wot necessarily the amount of the contribution due forthe period, Accounting stem fardfined : Using actuarial techniques to mcke 4 reliable estimate of the amount of benefit that employees have eared in return for their service ia une current ond prior periods. This requires an entity to determine hhow much benefit is attributable two the current aril prior periods and to make estimates (actuarial assumptions) about demographic variates nai financial variables, Demographic variables or assumptions deal with matters such as: 1a) mortality, both during and ater retirement 'b) rates of employee turnover. disability and early retirement ©) the proportion of plan members sith sep: ‘wha will be cligible for benefits, ancl 4d) claim rates under medical plans Financial variables or ussumprions deal wih tems suchas a) the discount rate ')- future salary and benefit levels ©) future medical costs, including where material, the cost of administering claims and benefit payments, and 4) the expected rate of return on plan assets 2 ing the Projected Unit Credit Method in order to determine the present value of the defined benefit obligation and the current service cost An emity discounts the whole ofa past-enplcyient benefit vbligation, even if part of the obligation falls due within else months of the balance sheet date. 3. Determine the Jair value of any plat: assets 4. Where a plan has been introduced or chiangec, determine the vesutting past service cost, 5. Where a plan has been curtailed or settied, determine the resulting gain or loss, Resa Tha Reviow School of Accountancy ‘Tel. No. 735-9807 & 734-3989ReSA/ Financial Accounting and Reporting Page 3 of 4 Where an enuty as more than one defined benefit plan, the entity applies these procedures for each ‘material plan separately Definitions relating to the net defined by ‘The met defined benefit lability (assed) is the deficit or surplus, adjusted for any effeet of limiting a net defined benefit asset to the asset ceiling. The deficit or surplus is ‘The present value of the defined benefit obligation les 1b. The fair value of plan assets (if ay) lable in the form of refunds from the The asset ceiling plan or reduction the present value oF any economic benefits avi future contributions to the plan “The present value of a defined penefir ebligation isthe present value, without deducting any plan assets, of expected payments required te settle the obligation resulting from employce service in the current and prior periods, The plan assers ~ are assets held by a fong-term benefit fund and qualifying insurance. ‘The conditions for assets held by a long-term benefit fund are: (a) The assets are held by an entity, dhe fund itself that is legally separate from the reporting entity {b) “The assets are available to pay only employee benefits| (©) The assets are not available tothe reporting entiy’s own creditors even in bankruptey and (a) The assets cannot be return 16 the reporting entity or can be retumed to the reporting entity if the remaining assets of the func are sulficient to meet all employce benefit obligations or the assets are returned to the reporting entity to reir burs it for employee benefits already paid, ‘Qualifving insurance policy ~ isan insurance policy issued by the insurer that isnot a related party of the reporting entity and the proceeds of the policy ean be used only to pay emplayee benefits and are ‘ot available to the reporting entity's own creditors even in bankruptcy. The proceed of the policy «annot be paid to the reporting entity, except (a), When the proceeds represent surplus asset not needed fo the policy to pay employee benefits {b) When the proceeds are returned to the reporting entity to reimburse it to employee benefits already paid. Plan assets are remeasored at fair nelue The fair value is the amount for which an asset could be exchanged or a liability setled between knowledgeable and willing partis in an arm’s length transaction. lan assets do not include unpaid contcibesions due from the reporting entity to the fund as well as any hontransferable Financial instruments issued by the entity and held by the fund. Plan assets are reduced by any liabilities of the fund that do not relate to employee benefits, Definitions relating to defined pension benefit costs Service cost comprises: ‘Current service cost which isthe increase in the present value of the defined benefit obligation result from employee service in the uurcent period b. Past service cost which is the change in the present value of defined benefit obligation for employee service in prior periods, resulting trom « plan amendinent (the introduction or withdrawal of , or changes to, a defined benefit phin) or a curtailment ( a significant reduction by the entity in the number of employees covered by a plan}, ard ‘e.Any gain or loss on settlement ig [Net interest on the net defined henefit liability (asset is the change during the period in the net defined Tiability (asset) that arises from the passage of time. -measurement of the net defined benefit liability (asset) comprises a. Actuarial gains and losses 'b. ‘The return on plan assets, excluding amounts included in the net interest on the net defined liability (asset); and cc. Any change in the effect of the asset essing, excluding amounts included in net interest on the net defined liability (asset) Actuarial gains and losses - are changes in the present value of the defined benefit obligation resulting from experience adjustments and the effect of changes in actuarial assumptions. Experience adjustments ‘are adjustments from the differences hetween the previous actuarial assumptions and what has actual occurred. Actuarial assumptions are the entily’s best estimate of the variables that will determine the ultimate cost of providing postemployient benefits. Actuarial assumptions comprises of demographic and financial assumptions. c ial gains and losses are the following, 3s of act Resa ‘The Review School of Accountancy ‘WTel. No. 735-9807 & 734-3989teSA / Financial Accounting and Reportine page tos 1. Unexpectedly high or iow rates of emplo:e tamovcr, carly retirement oF mortality or oF increases in salaries, benefits or medial costs ‘The effect of ehang increases in salaries, best St. ane ‘The effect of changes in diseunnt rates: and 4. Differences between the actual return on plan assets znd the expected return on plan assets. ployee turnover, early retirement or mortality oF of Actuarial gains and losses do not include changes in the present value of the defined benefit obligation because of the introduction, amendment, curtailment or seulement of the benefit plan. Such changes result in past service cust ur gains end losses on settlement. Return on plan assets the con:ponen's of return en pla assets include the following: a. interest, dividends and a:her revenue dovived Fromm the plan assets b, realized and unrealized vains oF basses ox the plan assets “The following 3 return on plan assets 3. Any costs of managing the plan asses or vosts oF managing investments Any tax payable by the plas itsclt or any tax on investment income The return on plan assets is fully recognized as a “remeasurement™ and accounted for as component of other comprehensive income. The amount of remeusurement 1s equal tote actual return on plan assels minus the interest incumte on te fir velue of #e pan aeset ut the beginning of the reporting period. Such remeasurement Included i ether eoripretensese income without subsequent reeyeling oF reclassification to profit or loss ‘Settlement — is tronsactice tha eliminates all fut the benefits provided under i defined benefit plan. ‘he gain or loss on settlement is the difference benween the settlement price and the present value of the defined benefit obligation on the date of settlement. The settlement price meludes any plan assets translerred and any payments made directly by the entity in connection with the setlement. Any gain or foss on settlement is fully recognized and included in service cost ia the computation of employee benefit expense. cr lexel oF constructive obligations for part or all of Balance sheet account (or a defined hone plans: Pension liability isthe net total ariunt oF th foitowing 1. The present value oF te etincd Benet obi. tov atthe bakance Beet date ~~ 2 Minus the fate value at the Eaiunce sheet date of plan assets(if any) our ef which the obligations are to be settled directly However, if the result of she abeve computation is negative (surplus), an entity shall measuee the resulting asset (Pension Asset) atthe lower of negative amount, and b) the present value of any economic benefits available in the form of refunds from the plan or reduetions in future contributions to the plan (Asset Ceiling) ervice cost which includes, current ser vice cos. pat service Cost and any gain of loss on settlement Net interest expense or income ~ interest un the beginning defined benefit obligation and interest on the beginning plan asset, The rat to be ued is the settlervent rate or discount rate, Remeasurement Gain o¢ fos» which comprise of the following: (a) actuarial gain and loss on the projected benetit obligatiot (b) actual return en pan asset less interest income on the plan asset. and (c) lany change in the asset ceiling, The accounting standard does not permit the remeasurement gains or losses to be reclassified to profit cr loss in a subsequent period._llowever, the entity may transfer those ‘amounts recognized in other compreh in the equity preferably to retained earnings. Past service cost - is the change in the preseat valuc of defined benefit obligation for employee service in prior periods resulting from gin airendment oF curtaitnent, Plan amendment inclides introduction of defined benefit plan or changes to an exi-lag defined benefit plan. Plan curtailment is @ significant reduetion by she entity in the wamber of employees covered by the defined benefit plan. Curtailment ‘may arise from an isolated eveut, suck as va closing of a plant (b) discontinuance of an operation, andl (e) termination or suspension ot plan, Pasi service costs whether vested oF unvested shall be recognized ‘outright as an expense. ReSA Fae Review School of Accountancy ‘Tel. No. 735-9807 & 734-3989,