Postemployment Benefits
Postemployment Benefits
 Payable AFTER completion of employment.
 Formal arrangement between employer and
employees, or in some cases wherein it is an
informal arrangement (part of an entities practice
already).
 Includes:
o Retirement Benefits
 Pensions.
 Lump sum payment on
retirement.
o Postemployment Life Insurance
o Postemployment Medical Care
 Can either be Contributory or Noncontributory.
 Can either be Funded or Unfunded.
 Classified as Defined Contribution Plan or Defined
Benefit Plan.
Contributory and Noncontributory
 Contributory – the employer and employee make
contributions to the retirement benefit plan, but
they do not necessarily contribute equal amounts.
Both share in the retirement benefit cost (may
not be equal).
 Noncontributory – only the employer makes the
contribution on the retirement benefit plan.
Employer shoulders all the cost.
Funded or Unfunded
 Funded Plan
o Entity set aside funds for future
retirement benefits by making payments
to a funding agency.
o Funding Agency – responsible for the
accumulation of funds and for making
payments to retired employees when the
benefits come due.
o Funding – the transfer of assets to an
entity, called the retirement fund, which
is separate from the reporting entity for
the purpose of meeting obligations arising
from a retirement benefit plan.
 Unfunded Plan – the entity retains the obligation
for the payment of retirement benefits without
the establishment of a separate fund.
Defined Contribution Plan
 An entity pays fixed contributions into a separate
entity known as the fund.
 The entity has no obligation to pay further
contributions if the fund is not sufficient to pay all
employee benefits.
o Basically, the fund that is contributed to a
separate entity is the only cost that the
entity is responsible for.
 The fund contributed is managed by the funding
agency (trustee), which is why the fund has the
possibility to increase or decrease.
 Contribution is definite but the benefit is
indefinite.
 Employees bear the investment risk.
 No actuarial gains or losses.
Accounting Procedure for Defined Contribution Plan
 The required contribution shall be recognized as
Retirement Benefit Expense (or postemployment
benefit cost) in the period payable.
o This amount is recorded in full.
o Eg. 100k required contribution, edi 100k
ang recognized as exp even if 50k lang or
120k ang ibabayad ni employer.
 If: Actual Contribution > Required Contribution
o Recognize an asset: Prepaid Retirement
Benefit Cost
 If: Actual Contribution < Required Contribution
o Recognize a liability: Accrued Retirement
Benefit Cost
 Prepaid and Accrued cost are current assets and
current liabilities, respectively.
Defined Benefit Plan
 Postemployment plan other than a defined
contribution plan.
 The entity is obliged to pay the agreed benefits to
its employees.
  Benefits are definite, contribution is indefinite. o Cost of an entity under a DBP for service
 Entity must make sure to cover all future rendered by an employee in the current
retirement benefits. period.
 Employer bears the investment risk.  Past Service Cost
 There are actuarial assumptions, thus there can o Services rendered by employee in the
be actuarial gains and losses. prior years.
 G/L on Early Settlement
Plan Assets or FVPA (Defined Benefit Plan)
o Computed by comparing:
 Source of funds set aside for meeting future  Settlement Price (this is a
benefit payments. deduction to FVPA)
 Measurement:  PV of Obligation Settled (this is
o At Fair Value (FV) deducted in the computation of
PBO)
Projected Benefit Obligation or PBO (Defined Benefit o IF Settlement Price > PV of Obligation
Plan)  Loss on settlement (added to
 A projected amount employee benefit expense)
 The actuarial present to all benefits attributed to o IF Settlement Price < PV of Obligation
the pension to employee service rendered before  Gain on settlement (offset against
a specified date based on future compensation both current and past service
level. cost)
 Estimate of the amount of obligation of the Note: Both current and past service cost are added to
employer to the employees. the PBO
FVPA vs. PBO Net Interest
 If: FVPA > DBO (this is a surplus)  Difference between:
o Recognize an asset: Prepaid Benefit Cost o Interest Expense (PBO, beg x Discount
 If: FVPA < DBO (this is a deficit) rate)
o Recognize a liability: Accrued Benefit Cost  Added to PBO.
Employee Benefit Cost o Interest Income (FVPA, beg x Discount
rate)
 Total cost of giving postemployment benefits.  Added to FVPA.
 Under Defined contribution plan, employee
benefit cost is the sum of employment benefit Remeasurements
expense + remeasurements.  Actuarial Gains or Losses
Employment Benefit Expense o Changes in the projected benefit
+ Remeasurements obligation.
Employee Benefit Cost o Actuarial Gain
 Decrease in PBO.
o P/L: Employment Benefit Expense  Deducted to PBO.
o OCI: Remeasurements o Actuarial Loss
 Increase in PBO.
Employee Benefit Expense  Added to PBO.
 Service Cost + Net Interest  G/L on returns
o Compare interest income to actual
Service Cost return.
 Current Service Cost o If int inc. > actual return
 Loss
 Deducted to FVPA.
 o If int inc. < actual return
 Gain
 Added to FVPA.
 Change of effect in asset celling, net of
interest.

Summary: