DEFINED BENEFIT PLAN AND OTHER BENEFITS

1. Explain the accounting relationship between fair value of plan assets and projected
obligation.

 Fair value of the plan assets (FVPA) is the source of fund set aside in meeting future
benefit payments.
 Projected benefit obligation (PBO) or the defined benefit obligation is the present value
of expected future payments required to settle the obligation arising from employee
service in the current and prior periods.
Projected benefit obligation is compared with fair value of plan assets to find out a
pension fund's funded status. Comparing pension plan assets—the investment fund referred to
as the fair value of plan assets—to the PBO can help determine whether a company's pension
plan is underfunded. There is a pension shortfall if the fair value of the plan assets is less than
the benefit obligation[ CITATION Lib21 \l 1033 ] . The PBO is comparable to an off-statement of
financial position liability with a credit balance, while the FVPA is comparable to an off-
statement of financial position asset with a debit balance.

2. What is settlement of a defined benefit plan?

A settlement is a transaction that eliminates all further legal or constructive obligations
for part or all of the benefits provided under a defined benefit plan. For example, a one-off
transfer of significant employer contributions under the plan to an insurance entity through the
purchase of an insurance policy is a settlement. Entities may settle their postemployment
benefit plans by purchasing annuity contracts from insurance entities for less than the amount
in the retirement fund [ CITATION Val201 \l 1033 ].

3. Explain the recognition of gain or loss on settlement of a defined benefit plan.

 The gain or loss on settlement is the difference between the settlement price and the
present value of the defined benefits obligation on the date of settlement.
 The settlement price includes any plan assets transferred and any payments made
directly by, the entity in connection with the settlement.
 Any gain or loss on settlement is fully recognized and including in service cost in the
computation of employee benefit expense [ CITATION Val201 \l 1033 ].
4. What is a surplus in relation to a defined benefit plan?
 PAS 19 defined surplus as a prepaid benefit cost. If the fair value plan assets are more
than the projected benefit obligation, the plan is overfunded and therefore, there is a prepaid
benefit cost. Surplus in a defined benefit plan must not exceed the asset ceiling determined by
using the discount rate in the measurement of the defined benefit obligation.

5. Explain asset ceiling.

 Asset ceiling is the present value of any economic benefits available in the form of
refunds from the plan or reductions in future contributions to the plan.
 Any change in the effect of asset ceiling is a remeasurement to be recognized through
other comprehensive income.
 Interest on the effect of the asset ceiling is part of the total change in the effect of the
asset ceiling. It is determined by multiplying the effect of the asset ceiling at the
beginning of the period by the discount rate.
 Any increase in the effect of asset ceiling is a remeasurement loss minus interest
expense on the effect of asset ceiling.
 Any decrease in the effect of asset ceiling is a remeasurement gain plus interest expense
on the effect of asset ceiling.

6. Explain the transition to the revised PAS 19.
PAS 19 revisions under paragraph 173 provides that an entity shall apply this standard
retrospectively. Any transitional effect of the application of the amendment under PAS 19 shall
be accounted for as adjustment of the beginning balance of retained earnings. Assets such as
inventory and property, plant and equipment that include employee benefit costs in their
carrying amount do not have to be restated.

7. What is the treatment of unamortized past service cost and unrecognized actuarial gain or
loss upon adoption to the revised PAS 19?
Under the transitional provision of revised PAS 19, the unamortized past service cost
and unrecognized actuarial loss shall be eliminated and accounted for retrospectively as an
adjustment of retained earnings. Upon adoption to the revies PAS 19, all past service costs
during the period are fully recognized in profit or loss. All actuarial gains and losses during the
year are fully recognized in other comprehensive income [ CITATION Val201 \l 1033 ].

8. Explain the report of a defined contribution plan and a defined benefit plan.
 REPORT OF A DEFINED CONTRIBUTION PLAN
Shall contain a statement of net assets
available for benefits and a description of the
funding policy
In preparing the “statement of net assets
available for benefits”, the plan investments
shall be carried at fair value.
When plan investments are held for which an
estimate is not possible, the reason why fair
value is not used shall be disclosed.
References
Liberto, D. (2021). Projected Benefit Obligation (PBO). Retrieved from Investopedia:
https://www.investopedia.com/terms/p/pbo.asp
Valix, C. T., Peralta, J. F., & Valix, C. A. (2020). Intermediate Accounting Vol. 2. GIC Enterprises & Co., Inc.
REPORT OF A DEFINED BENEFIT PLAN
Shall contain either:
1. A statement that shows the net assets
available for benefits, the actuarial
present value of promised benefits,
distinguishing between vested and
nonvested benefits, and the resulting
excess or deficit.
2. A statement of net assets available
for benefits, including either a note
disclosing the actuarial present value
of promised vested and nonvested
benefits or a reference to this
information in an accompanying
actuarial report.
The actuarial present value of promised
benefits shall be based on the benefits
promised under terms of the plan using
either current salary or projected salary
levels, with disclosure of the basis used.
The report shall explain the relationship
between the actuarial value of the promised
benefits and the net assets available for
benefits, and the funding policy.