MODULE 5 EMPLOYEE BENEFITS

LEARNING OBJECTIVES:
1. Identify types of pension plans and their characteristics.
2. List the components of pension expense.
3. Describe the requirements for reporting pension plans in financial statements.
4. Explain special issues related to postretirement benefit plans.

OVERVIEW
PAS 19 Employee Benefits outlines the accounting requirements for employee benefits,
including short-term benefits (e.g. wages and salaries, annual leave), post-employment benefits
such as retirement benefits, other long-term benefits (e.g. long service leave) and termination
benefits. The standard establishes the principle that the cost of providing employee benefits
should be recognised in the period in which the benefit is earned by the employee, rather than
when it is paid or payable, and outlines how each category of employee benefits are measured,
providing detailed guidance in particular about post-employment benefits.

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Scope
PAS 19 applies to (among other kinds of employee benefits):
o wages and salaries
o compensated absences (paid vacation and sick leave)
o profit sharing and bonuses
o medical and life insurance benefits during employment
o non-monetary benefits such as houses, cars, and free or subsidised goods or
services
o retirement benefits, including pensions and lump sum payments
o post-employment medical and life insurance benefits
o long-service or sabbatical leave
o 'jubilee' benefits
o deferred compensation programmes
o termination benefits.

Short-term employee benefits are those expected to be settled wholly before twelve months
after the end of the annual reporting period during which employee services are rendered, but
do not include termination benefits. Examples include wages, salaries, profit-sharing and
bonuses and non-monetary benefits paid to current employees.

The undiscounted amount of the benefits expected to be paid in respect of service rendered by
employees in an accounting period is recognised in that period. The expected cost of short-term
compensated absences is recognised as the employees render service that increases their enti-
tlement or, in the case of non-accumulating absences, when the absences occur, and includes
any additional amounts an entity expects to pay as a result of unused entitlements at the end of
the period.
Profit-sharing and bonus payments
An entity recognises the expected cost of profit-sharing and bonus payments when, and only
when, it has a legal or constructive obligation to make such payments as a result of past events
and a reliable estimate of the expected obligation can be made.

Types of post-employment benefit plans

Post-employment benefit plans are informal or formal arrangements where an entity provides
post-employment benefits to one or more employees, e.g. retirement benefits (pensions or lump
sum payments), life insurance and medical care.

The accounting treatment for a post-employment benefit plan depends on the economic
substance of the plan and results in the plan being classified as either a defined contribution
plan or a defined benefit plan:

Defined contribution plans. Under a defined contribution plan, the entity pays fixed contribu-
tions into a fund but has no legal or constructive obligation to make further payments if the fund
does not have sufficient assets to pay all of the employees' entitlements to post-employment
benefits. The entity's obligation is therefore effectively limited to the amount it agrees to con-
tribute to the fund and effectively place actuarial and investment risk on the employee

Defined benefit plans. These are post-employment benefit plans other than a defined contribu-
tion plans. These plans create an obligation on the entity to provide agreed benefits to current
and past employees and effectively places actuarial and investment risk on the entity.

NATURE OF PENSION PLANS

Pension plans can be:
 Contributory: employees voluntarily make payments to increase their benefits.
 Noncontributory: employer bears the entire cost.
 Qualified pension plans: offer tax benefits.

Pension fund should be a separate legal and accounting entity.

Defined-Contribution Plan
 Employer contribution determined by plan (fixed)
 Risk borne by employees
 Benefits based on plan value

Defined-Benefit Plan
 Benefit determined by plan
 Employer contribution varies (determined by Actuaries)
 Risk borne by employer

Actuaries estimate the employer contribution by considering mortality rates, employee turnover,
interest and earning rates, early retirement frequency, future salaries, etc.

Components of Pension Expense

Service Costs
Actuarial present value of benefits attributed by the pension benefit formula to employee service
during the period.
Interest on the Liability
Interest for the period on the defined benefit obligation outstanding during the period.
Interest rate (discount rate) should be those based on high-quality bonds of currency and term
consistent with the liabilities.

Interest on the Effect of Asset Ceiling

Interest for the period on the effect of asset ceiling during the period.
Interest rate (discount rate) should be those based on high-quality bonds of currency and term
consistent with the liabilities.

Interest income on Plan Assets

Return on plan assets from interest, dividends, and realized and unrealized changes in the fair-
market value of the plan assets.

Past Service Costs

Plan amendments often increase benefits for service provided in prior years.
The cost (past service cost) of providing these retroactive benefits is allocated to pension
expense depending on whether the benefits vest immediately or not.

Gain or Loss on plan settlement

Loss if company pays more than the liability set aside for the retiring employees, whereas, gain
when payment is less than the obligation settled.

COMPUTATION OF PENSIONS

Current service cost xx

Past service cost xx
Interest expense on PBO xx
Interest expense on the EAC xx
Interest income on PA (xx)
Settlement loss xx
Settlement gain (xx)
Pension expense (P or L) xx

REMEASUMENT GAIN OR LOSS

Plan Asset: Actual return on PA xx

Interest Income on PA (xx)
Remeasurement gain(loss) on PA xx
Projected Benefit Obligation:
Actuarial gain xx
Actuarial loss (xx) xx
Effect on Asset Ceiling:
EAC, end xx
EAC, beg (xx)
Loss xx
Less interest on EAC (xx) (xx)
Total remeasurent gain(loss) – OCI xx
DEFINED BENEFIT COST

Pension Expense xx
Remeasurement (gain) loss xx
Defined benefit cost xx

PLAN ASSET

Plan asset, beg xx

Add: contribution to the plan xx
actual return on plan asset xx
Total xx
Less: benefits paid (xx)
Plan asset, end xx

PROJECTED BENEFIT OBLIGATION

Projected benefit obligation, beg xx
Add: Interest on PBO xx
Current Service cost xx
Past service cost xx
Actuarial loss xx
Total xx
Less: Actuarial gain xx
Benefits, settled xx (xx)
Projected benefit obligation, end xx

PREPAID/(ACCRUED) PENSION COST

Plan asset, end xx
Projected benefit obligation, end (xx)
Prepaid Pension cost xx

PBO, end xx
PA, end (xx)
Accrued Pension cost xx

Contribution to the plan xx

Defined benefit cost (xx)
Prepaid (accrued) Pension cost xx

PAST SERVICE COST

PBO, after amendment xx
PBO, before amendment (xx)
Past service cost xx

EFFECT ON ASSET CEILING

Plan Asset, end xx
Projected benefit obligation, end (xx)
Prepaid Pension Cost xx
Asset Ceiling (xx)
Effect on Asset Ceiling xx
Notes to the Financial Statements
1. Description of the plan and the accounting policy for recognizing actuarial gains and
losses.
2. Schedule showing all the major components of pension expense.
3. Reconciliation showing how the defined benefit obligation and the fair value of the plan
assets changed from the beginning to the end of the period.
4. Funded status of the plan and the amounts recognized and not recognized in the
financial statements.
5. Disclosure of the rate used in measuring the benefit amounts (discount rate).
6. Company’s best estimate of the contributions expected to be made to the plan in the
next year. A table indicating the allocation of pension plan assets by category and
showing the percentage of or the amount related to the fair value to total plan assets. In
addition, the actual return on the plan is disclosed, as well as information on how the
expected rate of return is determined.

Summary
 Employee benefits are all forms of consideration given to employees in exchange for the
services rendered. Benefits are classified under PAS 19 as: (a) short-term, (b) Post-
employment, (c) other long term, and (d) termination.
 Accumulating paid absences are those that can be Rose d over to the next period if not
used, while non-accumulating expires when not used.
 Vesting paid absences are those that are monetized if not used, non-vesting paid
absences are not monetized.

 Accumulating and vesting are accrued in full. Accumulating and non-vesting are
accrued but subject to estimate. Non-accumulating is not accrued, but recognized only
when the absences occur.

 Post-employment benefits are employee benefits (other than termination benefits) that
are payable after completion of employment. Post-employment benefit plans are either
(a) Defined contribution plan or (b) Defined benefit plan.

 Defined contribution plan – the employee’s retirement benefit is dependent on the

employer’s contributions to the plan and on the plan’s investment performance. The
employee retains the risk that the benefits to be received may be insufficient.

 Defined benefit plan – the employer assures the employee a definite amount of
retirement benefit. The employer retains the risk that the funds needed to pay the
agreed benefits may be insufficient.

 Under a contributory plan, both the employer and the employee contribute to a
retirement fund. Under non-contributory plan, only the employer contributes to a
retirement fund.

 Under a funded plan, plan assets are transferred to a trustee who assumes the
obligation of managing the fund and disbursing funds to retiring employees. Under
unfunded plan, plan assets, if any, are retained and managed by the employer.
 A post employment benefit plan that contains characteristics of both defined contribution
and defined benefit is considered define benefit.

 The accounting for defined contribution is straightforward – actuarial computation is not

required. Retirement benefits expense is equal to the agreed periodic contributions to
the fund.
MODULE # 5 Post-test
PRACTICAL ACCOUNTING 1 – REVIEW
EMPLOYEE BENEFITS
PROF. U.C. VALLADOLID

Multiple Choice
Identify the choice that best completes the statement or answers the question.

1. Angel Company reported the fair value plan assets at 7,000,000 and projected benefit obligation at 8,000,000. The
entity revealed the following for the current year:
 Current service cost 1,800,000
 Past service cost 500,000
 Discount rate 12%
 Benefits paid to retirees 900,000
 Contribution to the plan 1,300,000
 Actual return on plan assets 650,000
What is the employee benefit expense?
a. 4,100,000 b. 1,920,000 c. 3,260,000 d. 2,420,000

2. On the year 2021, the records about the defined benefit plan showed the following:
Fair value of plan assets 6,000,000
Projected benefit obligation 7,250,000
During the current year, the following transactions are gathered:
Current service cost 1,500,000
Past service cost 800,000
Contribution to the plan 600,000
Actual return 750,000
Discount rate 12%
How much is the employee benefit expense?
a. 1,500,000 b. 1,670,000 c. 2,450,000 d. 1,350,000

3. Ozz Ltd. reported the following values at the beginning of the year:
PBO, January 1, 2021 10,000,000
FVPA, January 1, 2021 7,500,000
During the year, Ozz Ltd. made a lump sum payment to a plan participant in exchange for their rights to
receive a certain post-employment benefit. The defined benefit obligation was Php 1,250,000 and the
lump sum payment was Php1,000,000. In addition, the following were also provided
Current Service Cost 1,125,000
Contribution to the fund 875,000
Actual Return on Plan Assets 1,000,000
Discount Rate 10%
What amount of employee benefit expense should be recorded?
a. 625,000 b. 875,000 c. 1,125,000 d. 1,375,000
4. At the beginning of the current year, Amara Company provided the following data in connection with a defined benefit
plan:

Fair value of plan assets 6,950,000

Projected benefit obligation 7,500,000

Following information for the current year:

Current Service cost 1,500,000
Past service cost 400,000
Discount rate 10%
Actual return on plan assets 650,000
Benefits paid to retirees 850,000
Contribution to the plan 1,750,000

1. Determine the employee benefit expense for the current year

a. 1,955,000 b. 1,205,000 c. 1,555,000 d. 2,650,000

2. Determine the remeasurement at year-end

a. 45,000 gain b. 45,000 loss c. 155,000 gain d. 155,000 loss

5. Rose Company provided the following information regarding to the defined benefit plan for the current year:
Past service cost 1,150,000
Current service cost 1,500,000
Actual return on plan assets 250,000
Interest expense on PBO 390,000
Interest income on plan assets 530,000

What is the total defined benefit cost?

a. 2,800,000 b. 2,970,000 c. 2,510,000 d. 2,790,000

6. The following data was given by Pido Co. about its Pension Plan during the year:

Current Service Cost 1,000,000

Actuarial Gain 400,000
Projected benefit obligation, January 1 6,000,000
Fair Value of Plan assets, Beg. 5,700,000
Past service cost 760,000
Actual return on Plan assets 200,000
Settlement rate 10%

What is the Defined Benefit Cost?

a. 2,950,000 b. 2,930,000 c. 2,900,000 d. 2,850,000 e. 1,760,000

What is the Interest Income?

a. 110,000 b. 600,000 c. 570,000 d. 550,000

What is the remeasurement gain/loss

 a. 50,000 Loss b. 30,000 Gain c. 30,000 Loss d. 50,000 Gain

7. At the beginning of 2018, Mark Company had the following balances in the memorandum records with respect to a
defined benefit plan:

FV of plan assets 5,000,000

Projected benefit obligation 6,000,000

During the year, the accountant determined current service cost of 1,500,000. Discount rate of 10%, actual return on
plan asset is 700,000, entity contributed 1,200,500 at the end of the year

1. Determine the employee benefit expense for the current year

a. 1,500,000 b. 1,600,000 c. 2,700,500 d. 2,600,000

2. Determine the prepaid/accrued liability at year- end

a. 1,199,500 b. 1, 900,000 c. 1,899,500 d. 1,299,500

8. Lisa Company showed the following reports on the beginning of the year:
Fair value of plan assets 3,000,000
Defined benefit obligation 7,000,000
Discount rate 10%
Expected return 8%

What amount should be reported as net interest expense?

a. 700,000 b. 300,000 c. 400,000 d. 240,000

9. Bernard Company provided the following information pertaining to its defined benefit plan on December 31, 2020:

Fair value of plan asset 4,350,000

Projected benefit obligation 2,350,000
Asset ceiling 1,000,000
Expected return on pension fund 500,000

What is the effect on asset ceiling?

a. 1,000,000 b. 4,350,000 c. 1,500,000 d. 500,000

10. Albert Company had a noncontributory defined benefit pension plan. The entity received the projected benefit
obligation report from the independent actuary at year-end.

Pension Fund 135,000

PBO December 31 2,160,000
Interest expense 120,000
Discount rate 8%

What is the projected benefit obligation on January 1?

a. 1,500,000 b. 2,160,000 c. 1,687,500 d. 1,987,200

What is the current service cost for the current year?

 a. 675,000 b. 810,000 c. 540,000 d. 225,000

11. On January 2, 2020, Albert Corp. presented the fair value of the plan assets at 6,300,000 and Projected benefit
obligation was amounted to 6,125,000. During 2020, the company reported current service cost of 220,000 and
actual return on Plan assets was 500,000. The settlement rate was discovered to be 9%.

On December 31, 2020, The Projected benefit obligation was 6,223,000.

1. What was the actuarial gain or loss on PBO during 2020?

a. 637,520 b. 673,520 c. 673,250 d. 637,250

2. Interest Income for the year was?

a. 675,000 b. 576,000 c. 567,000 d. 765,000

12. At the beginning of the year, Cherrie Company reported fair value of plan assets at 5,000,000 and projected benefit
obligation of 4,950,000.

During the year, it was determined that the current service cost was 1,050,000, past service cost of 750,000 and
discount rate is 11%. The actual return on plan asset was 750,000. Other information during the year related to the
benefit plan are as follows:
Contribution to the plan 1,100,000
Benefits paid to the retirees 90,000
Decrease in projected benefit obligation 150,000
1. What amount should be reported as employee benefit expense?
a. 1,794,500 b. 1,800,500 c. 1,944,500 d. 1,956,400

2. What amount should be reported as total remeasurement gain?

a. 300,500 b. 350,000 c. 350,500 d. 355,000

13. KELLY Company recorded the fair value of plan assets at 7,400,000 at the beginning of the year. It was determined
that the market value of the pension plan at that time was 6,900,000. Other related events were recorded by the
company:
Pension benefits paid 800,000
Contribution to the fund 650,000
Actual return on plan assets 700,000
Discount rate 8%

1. What is the fair value of plan assets at the end of the year?
a. 7,800,000 b. 7,850,000 c. 7,900,000 d. 7,950,000

2. What is the remeasurement on plan assets?

a. 98,000 gain b. 98,000 loss c. 108,000 gain d. 108,000 loss

14. Kim Co. has the following balances relating to defined benefit plan on December 31, 2020: Fair value of plan assets
64,500,000, Projected benefit obligation 55,450,000 and Asset ceiling 3,500,000. What will be the amount of the
effect on asset ceiling?
a. 0 b. 9,050,000 c. 3,500,000 d. 5,550,000
15. Catherine Company is fast leading Corporation which renders beauty services to customers. On January 1, 2019, it
showed a projected benefit obligation of 32,000,000 and a pension fund with a fair value of 10,200,000. In addition, a
decrease on PBO of 2,800,000 is recorded. The entity provided the additional data during the year:

Current service cost 13,000,000

Actual return on pension fund 1,000,000
Employer contribution 7,800,000
Benefits paid to retirees 8,500,000
Past service cost 3,000,000
Effect of asset ceiling 600,000
Discount rate 8%
Expected return on pension fund 10%

Q1. What is the pension expense for the current year?

a. 17,792,000 c. 16,816,000
b. 15,560,000 d. 16,048,000

Q2. What is the fair value of the pension fund on December 31?
a. 16,048,000 c. 10,500,000
b. 15,000,000 d. 18,500,000

Q3. What is the projected benefit obligation on December 31?

a. 39,260,000 c. 41,860,000
b. 34,000,000 d. 37,500,000

Q4. What is the remeasurement gain or loss on December 31?

a. 2,800,000 gain c. 2,948,000 loss
b. 2,984,000 gain d. 2,800,000 gain

Q5. What is the pension asset/liability on December 31?

a. 28,760,000 asset c. 28,760,000 liability
b. 39,260,000 asset d. 39,260,000 liability