CHAPTER 17

POSTEMPLOYMENT BENEFITS

TECHNICAL KNOWLEDGE

To understand postemployment benefits.

To distinguish defined contribution plan and defined benefit plan.

To know the recognition of defined contribution plan.

To identify the components of defined benefit cost.

To apply the projected unit credit method in computing projected benefit obligation.

To know the recognition of current service cost, past service cost and net interest.

To define plan assets and return on plan assets.

To know the recognition of actuarial gains and losses.

EMPLOYEE BENEFITS

Employee benefits are all forms of consideration given by an entity in exchange for services
rendered by employees or for the termination of employment.

For the purpose of this standard, employees include directors and other management personnel.

The employee benefits include:

a. Postemployment benefits

b. Short-term employee benefits

c. Other long-term employee benefits

d. Termination benefits

Postemployment benefits

Postemployment benefits are employee benefits, other than termination benefits and short-term
employee benefits, which are payable after completion of employment.

Postemployment benefits include:

a. Retirement benefits, such as pensions and lump sum payments on retirement

b. Postemployment life insurance

c. Postemployment medical care

Most postemployment benefit plans are formal arrangements between an employer entity and the
employees.

These plans are usually established as part of the remuneration package for its employees.

Some postemployment benefit plans are informal as evidenced only by the entity's practice to
pay postemployment benefits.

The plans may also be established by law whereby entities are required to contribute to national
benefit plans.

Postemployment benefit plans are classified as either defined contribution plans or defined
benefit plans.

Such plans may be contributory or noncontributory, and funded or unfunded.

Contributory plan

Under a contributory plan, the employer and employee make contributions to the retirement
benefit plan but they do not necessarily contribute equal amounts.

Both the employer and the employee share in the retirement benefit cost.

Noncontributory plan

Under a noncontributory plan, only the employer makes contributions to the retirement benefit
plan.

The employer shoulders all the retirement benefit cost.

Funded plan

Funding is 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.

Under a funded plan, the entity sets aside funds for future retirement benefits by making
payments to a funding agency, such as a trustee, bank or insurance company.
The funding agency is then responsible for the accumulation of funds and for making payments
to retired employees when the benefits become due.

Unfunded plan

Under an unfunded plan, the entity retains the obligation for the payment of retirement benefits
without the establishment of a separate fund.

Defined contribution plan

A defined contribution plan is a postemployment benefit plan under which an entity pays fixed
contributions into a separate entity known as the fund.

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 periods.

Simply stated, the entity makes a specific or definite amount of contribution to a separate fund
without specifying the retirement benefit to be received by the employee.

The contribution is definite but the benefit is indefinite.

The contribution may be a fixed amount, a percentage of employer's income, a percentage of

employee's earnings or a combination of these factors.

Actually, in this case, the entity makes the contribution to a trustee which administers, manages
and invests the funds.

Consequently, when an employee retires, the accumulated fund in the hands of the trustee
determines his retirement benefit.

The employee's retirement benefit therefore depends on how the plan has been managed by the
trustee.

If the plan provides exceptional investment performance, the employee will share in the gain in
the form of larger retirement benefit.

If the plan does poorly, the employee will share in the loss by receiving smaller retirement
benefit.

In effect, the employee bears the investment risk in a defined contribution plan.

Once the defined contribution is paid, the employer has no more obligation under the plan.
Defined benefit plan

A defined benefit plan is simply defined as a postemployment plan other than a defined
contribution plan.

Under a defined benefit plan, an entity's obligation is to provide the agreed benefits to
employees.

In other words, an employee is guaranteed specific or definite amount of benefit which is usually
related to his salary and years of service.

The benefit is definite but the contribution is indefinite.

Actually, in this case, the entity must make contributions such that the contributions plus
earnings would be sufficiently large to cover future retirement benefits. Thus, the entity assumes
the investment risk in a defined benefit plan.

If the plan is exceptionally good, the entity may take a contribution holiday", meaning stop
paying the contribution for a while.

However, if the plan is poor, the entity must make additional contributions for any expected
shortfall in order to satisfy the promised future benefits.

Multiemployer, plan

This is a defined contribution plan or defined benefit plan that pools the assets contributed by
various entities that are not under common control and uses those assets to provide benefits to
employees of more than one entity.

Postemployment benefit plans under the law

a. Social Security System - This postemployment benefit plan is a defined contribution plan
because the entity's obligation is limited to specified contributions to the plan as a percentage of
salary.

b. R. A. 7641 - This postemployment benefit plan is a defined benefit plan because the entity's
obligation is to provide specific level of benefit for every year of service.

Insured benefits

An entity may pay insurance premiums to fund a postemployment benefit plan. Such
postemployment benefit plan shall be treated as defined contribution plan.
However, such a plan shall be accounted for as a defined benefit plan, if the entity has a legal or
constructive obligation:

a. To pay the employee benefits directly when they fall due.

b. To pay further amounts if the insurer does not pay all future employee benefits relating to
employee service in the current and future periods.

When an insurance policy is in the name of a specified plan participant or a group of participants
and the entity does not have any legal or constructive obligation to cover any loss on the policy,
the entity has no obligation to pay benefits and the insurer has sole responsibility for paying the
benefits.

The payment of fixed premiums under the insurance contract is in substance the settlement of the
employee benefit obligation, rather than an investment to meet the obligation.

Consequently, the entity no longer has an asset or a liability.

Therefore, the entity shall treat such insurance payments as contribution to a defined contribution
plan.

Accounting for defined contribution plan

Accounting for a defined contribution plan is straightforward because the obligation of the entity
is determined by the amount contributed for each period.

There are no actuarial assumptions to measure the contribution and there is no possibility of any
actuarial gain or loss.

Moreover, the obligations are measured on an undiscounted basis, except when they are not
expected to be settled wholly within twelve months after the end of the period.

Accounting procedures

a. The contribution shall be recognized as expense in the period it is payable

b. Any unpaid contribution at the end of the period shall be recognized as accrued expense.

c. 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.
Disclosures- defined contribution plan

a. The amount recognized as expense for the defined contribution plan.

b. The contribution to defined contribution plan for key management personnel as required
by PAS 24 on related party disclosures.

Illustration 1

An employee is a member of the faculty of accounting at a certain university. During the current
year, the employee earned P600,000.

The employee is covered by the university's defined contribution plan which requires the
university to contribute the equivalent of 5% of the employee's salary or P30,000 for the current
year to a trustee.

Assuming yearly contribution, the university shall recognize the contribution as expense as
follows:

Employee benefit expense 30,000

Cash 30,000

Having made the defined contribution, the university's obligation is fulfilled and no further
entries are necessary for the university

Upon retirement, the trustee shall pay large or small benefit to the employee depending on the
investment performance of the trust or pension fund.

Illustration 2

On January 31, 2021, an entity paid P100,000 contribution to a defined contribution plan in
exchange for services performed by the employees in December 2020.

1. To record the accrual of benefit on December 31, 2020:

Employee benefit expense 100,000

Accrued benefit payable 100,000

2. To record the payment of the contribution on January 31, 2021

Accrued benefit payable 100,000

Cash 100,000
Illustration 3

On December 31, 2020, an entity paid P200,000 contribution to a defined contribution plan. Of
this amount, P150,000 is in part exchange for services performed by the employees in December
2020, and the balance of P50,000 is in respect of services to be performed in 2021.

The contribution to the defined contribution plan is recorded on December 31, 2020.

Employee benefit expense 150,000

Prepaid benefit expense 50,000
Cash 200,000

Accounting for defined benefit plan

Accounting for a defined benefit plan is complex because actuarial assumptions are required to
measure the obligation and the expense and there is a possibility of actuarial gains and losses.

Moreover, the obligation is measured on a discounted basis.

Defined benefit plans may be unfunded, fully funded or partly funded by the contributions of the
entity.

Consequently, under a defined benefit plan, the expense recognized is not necessarily the amount
of contribution for the period

Components of defined benefit cost

PAS 19, paragraph 120, provides that an entity shall recognize the following components of
defined benefit cost:

1. Service cost which comprises:

a. Current service cost

b. Past service cost

c. Any gain or loss on settlement

2. Net interest which comprises:

a. Interest expense on defined benefit obligation

b. Interest income on plan assets

c. Interest expense on effect of asset ceiling

 3. Remeasurements which comprise:

a. Remeasurement of plan assets

b. Remeasurement of projected benefit obligation

c. Remeasurement of the effect of asset ceiling

The service cost and net interest are included in profit or loss as component of employee benefit
expense.

All of the remeasurements are fully recognized through other comprehensive income.

Paragraph 122 provides that remeasurements are subsequently transferred within equity or
reclassified to retained earnings.

Accordingly, the defined benefit cost is partly profit or loss representing service cost and net
interest, and partly other comprehensive income representing the remeasurements.

The measurement of defined benefit cost is usually made by an actuary, the mathematical expert
best qualified to do the job.

PAS 19R encourages but does not require an entity to involve a qualified actuary in the
measurement of a defined benefit obligation.

Actuarial valuation method

The projected unit credit method, sometimes known as the accrued benefit method, shall be used
in determining the present value of the defined benefit obligation and the related current service
cost and where applicable, past service cost.

This method sees each period of service as giving rise to an additional unit of benefit entitlement
and measures each unit separately to build up the final obligation.

Illustration - Projected unit credit method

An employer pays lump sum to employees when they retire. The lump sum is equal to 5% of
their salary in the final year of service, for every year of service. The following data pertain to a
certain employee:

a. The employee is expected to work for 5 years (actuarial assumption).

b. The salary is expected to rise by 8% per annum (actuarial assumption).

c. The salary in 2020 is P200,000 per annum.

d. The discount rate is 10% per annum.

The first issue to be settled is the final salary of the employee in 2024. In this case, the "future
value of 1" factor is necessary.

The future value of 1 at 8% for 4 years subsequent to 2020 is 1.3605. Thus, the final salary is
P200,000 multiplied by 1.3605 or P272,100.

Therefore, the benefit each year is 5% of P272,100 or P13,605 or a total of P68,025 for 5 years.
Observe the following schedule:

2020 2021 2022 2023 2024

Prior years 0 13,605 27,210 40,815 54,420

Current year 13,605 13,605 13,605 13,605 13,605

13,605 27,210 40,815 54,420 68,025

Note that the future benefit builds up to P68,025 over the 5 years, at the end of which the
employee is expected to leave and the benefit is paid.

But the next issue is how much current service cost shall be recognized each year?

The "current service cost" is equal to the present value of the future benefit using the 10%
discount rate. In this case, the "present value of 1" factor is necessary.

The mathematical table shows the present value of 1 at 10% as follows:

Period Present value of 1

1 .909

2 .826

3 .751

4 .683

The annual benefit is discounted from the end of 2024, which is the year of retirement.

Thus, the 2020 benefit is 4 years away from 2024 and discounted for 4 periods, the 2021 benefit
is 3 years away from 2024 and discounted for 3 periods, and so on.
Present value of the future benefits

(a) (b) (a x b)
Benefit PV factor Present value

2020 13,605 .683 9,292

2021 13,605 .751 10,217

2022 13,605 .826 11,238

2023 13,605 .909 12,367

2024 13,605 1.000 13,605

68,025 56,719

Projected benefit obligation

The projected benefit obligation at the end of each year is determined as follows:

Current Interest Present

Date service cost expense value

Dec. 31, 2020 9,292 - 9,292

Dec. 31, 2021 10,217 930 20,439

Dec. 31, 2022 11,238 2,044 33,721

Dec. 31, 2023 12,367 3,372 49,460

Dec. 31, 2024 13,605 4,960 68,605

Current service cost is the present value of the future benefit each year as determined previously.

Interest expense is 10% of the present value at the beginning of each year.

Thus, for 2021, 10% times P9,292 equals P930, and so on.

For 2024, 10% times P49,460 equals P4,946, but the interest expense is P4,960 to make the total
add up to P68,025, due to rounding.

Present value is the present value at the beginning of each year plus current service cost and
interest expense.
Thus, on December 31, 2021, P9,292 plus P10,217 plus P930 equals P20,439, and so on.

Accordingly, the total employee benefit expense to be reported each year is as follows:

Current service cost Interest expense Total

2020 9,292 - 9,292

2021 10,217 930 11,147

2022 11,238 2,044 13,282

2023 12,367 3,372 15,739

2024 13,605 4,960 18,565

56,719 11,306 68,025

Current service cost

Current service cost is the increase in the present value of the defined benefit obligation resulting
from employee service in the current period.

Otherwise stated, current service cost is the cost to an entity under a defined benefit plan for
service rendered by employees in the current year.

This component of the benefit expense understandably increases expense and defined benefit
obligation.

Net interest

Net interest on defined benefit liability or asset is the change in the defined benefit obligation,
plan assets and effect of asset ceiling as a result of the passage of time.

The net interest can be viewed as comprising three elements, namely:

a. Interest expense on defined benefit liability

This is computed by multiplying the defined benefit obligation at the beginning of the
reporting period by the discount rate.

b. Interest income

This is computed by multiplying the fair value of plan assets at the beginning of the reporting
period by the same discount rate.
 c. Interest expense on effect of asset ceiling

This is computed by multiplying the effect of the asset ceiling at the beginning of the
reporting period by the same discount rate.

In other words, the net interest expense or net interest income is the difference between the
interest expense on the defined benefit obligation, interest expense on effect of asset ceiling and
interest income on the plan assets.

Illustration

At the beginning of the current year, the records showed the following:

Fair value of plan assets 4,000,000

Defined benefit obligation 5,000,000
Discount rate 12%
Expected return on plan assets 10%

The net interest is determined as follows:

Interest expense on defined benefit obligation 600,000

(12% x 5,000,000)
Interest income on plan assets
(12% x 4,000,000) 480,000

Net interest expense 120,000

Note that the expected return of 10% on plan assets is ignored completely.

The discount rate of 12% is used in computing both interest expense and interest income.

The net interest expense of P120,000 is included in the computation of total employee benefit
expense.

The interest expense of P600,000 is included in the computation of the defined benefit obligation
at year-end in the memorandum record of the trustee.

The interest income of P480,000 is included in the computation of the fair value of plan assets at
year-end in the memorandum record of the trustee.

Past service cost

Past service cost is the change in the present value of defined benefit obligation for employee
service in prior periods resulting from a plan amendment or curtailment.
In other words, past service cost is the cost to an entity under a defined benefit plan for services
rendered by employees in prior periods resulting from the introduction of a defined benefit plan
or amendment of an existing plan or curtailment of an existing plan.

Plan amendment includes introduction of defined benefit plan or changes to an existing defined
benefit plan.

Plan curtailment is a significant reduction by the entity in the number of employees covered by
the defined benefit plan.

A curtailment may arise from an isolated event, such as the following:

a. Closing of a plant

b. Discontinuance of an operation

c. Termination or suspension of a plan

Recognition of past service cost

PAS 19, paragraph 103, provides that an entity shall recognize past service cost as an expense at
the earlier of the following dates:

a. When the plan amendment or curtailment occurs.

b. When the entity recognizes related restructuring costs or termination benefits.

This means that all past service costs, whether vested or unvested, shall be recognized as an
expense immediately.

An entity can no longer defer recognition of unvested past service costs over the remaining
future vesting period.

Vested benefits are employee benefits that are not conditional on future employment.

Illustration

An entity operates a defined benefit plan that provides for a benefit of 5% of final salary for each
year of service. The benefits become vested after 5 years of service,

On January 1, 2020, the entity improves the benefit to 6% of final salary for each year of service
including prior years.

At the date of the amendment on January 1, 2020, the present value of the additional benefits
increased as follows:
Employees with more than 5 years of service on
January 1, 2020 300,000
Employees with less than 5 years of service on
January 1, 2020 and average period until
vesting is 3 years 150,000

The total past service cost of P450,000 shall be recognized as expense immediately as
component of total benefit expense. The total amount is added to the defined benefit obligation

Plan assets

Plan assets comprise assets held by a long-term benefit fund and qualifying insurance policies.

The conditions for assets held by a long-term benefit fund are:

a. The assets are held by an entity, the fund itself, that is legally separate from the reporting
entity.

b. The assets are available to pay only employee benefits.

c. The assets are not available to the reporting entity's own creditors even in bankruptcy.

d. The assets cannot be returned to the reporting entity or can be returned to the reporting entity
if the remaining assets of the fund are sufficient to meet all employee benefit obligations or the
assets are returned to the reporting entity to reimburse it for employee benefits already paid.

Qualifying insurance policy

A qualifying insurance policy is an insurance policy issued by an insurer that is not a related
party of the reporting entity.

The proceeds of the policy can be used only to pay employee benefits and are not available to the
reporting entity's own creditors even in bankruptcy.

The proceeds of the policy cannot be paid to the reporting entity, except:

a. When the proceeds represent surplus assets not needed for the policy to pay employee
benefits.
b. When the proceeds are returned to the reporting entity to reimburse it for employee
benefits already paid.

When an insurance policy held by entity is not a qualifying insurance policy, that insurance
policy is not a plan asset.
Measurement of plan assets

Plan assets are measured at fair value.

Fair value of an asset is the price that would be received to sell an asset in an orderly transaction
between market participants.

Plan assets exclude unpaid contributions due from the reporting entity to the fund, as well as any
nontransferable 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, for
example, trade and other payables and liabilities resulting from derivative financial instruments.

Return on plan assets

The components of return on plan assets include following:

a. Interest, dividend and other income derived from the plan assets.

b. Realized and unrealized gains and losses on the plan assets.

However, the following shall be deducted in computing the return on plan assets:

a. Any costs of managing the plan assets or costs of managing investments.

b. Any tax payable by the plan itself or any tax on investment income.

Remeasurement of plan assets

The return on plan assets is fully recognized as a remeasurement and accounted for as
component of other comprehensive income.

The amount of remeasurement is equal to the actual return on plan assets minus the interest
income on the fair value of the plan assets at the beginning of the reporting period.

a. If the actual return on plan assets is higher than the interest income on fair value of plan assets,
the difference is a remeasurement gain.

b. If the actual return or plan assets is lower than the interest income on fair value of plan assets,
the difference is a remeasurement loss.

Such remeasurement is included in other comprehensive income without any subsequent

recycling or reclassification to profit or loss.

The remeasurement is reclassified subsequently through equity or retained earnings.

Illustration

An entity provided the following data for the current year related to a defined benefit plan:

Fair value of plan assets – beginning 5,000,000

Actual return on plan assets during the year 900,000
Contribution to the fund 1,000,000
Benefits paid 200,000
Discount rate 6%

Actual return on plan assets 900,000

Interest income on plan assets (6% x 5,000,000) (300,000)
Remeasurement gain on plan assets 600,000

The interest income of P300,000 will be included in the computation of employee benefit
expense as a deduction.

The remeasurement gain of P600,000 is fully recognized as component of other comprehensive

income.

Computation of fair value of plan assets

Fair value of plan assets – beginning 5,000,000

Add: Contribution to the fund 1,000,000
Interest income 300,000
Remeasurement gain on plan assets 600,000

Total 6,900,000
Less: Benefits paid 200,000

Fair value of plan assets – ending 6,700,000

Another approach

Fair value of plan assets – beginning 5,000,000

Contribution to the fund 1,000,000
Actual return 900,000
Benefits paid (200,000)

Fair value of plan assets – ending 6,700,000

Components of fair value of plan assets

a. Contribution to the fund

b. Interest income on plan assets

c. Remeasurement gain or loss on plan assets

d. Benefits paid upon retirement

e. Settlement price of plan settlement before retirement

Projected benefit obligation

Projected benefit obligation is the actuarial present value of all benefits attributed by the pension
benefit formula to employee service rendered before a specified date based on future
compensation level or future salary increases.

If the benefit obligation is based on current salary level, it is known as accumulated benefit
obligation.

The defined benefit obligation contemplated under PAS 19 is the projected benefit obligation.

Illustration - projected benefit obligation

An entity has established a defined benefit plan. The characteristics of the plan on January 1,
2020 are:

a. The defined annual benefit formula is 5% of the highest salary times the number of years of
service. The annual benefit is paid at the end of each year after retirement,

b. The age of retirement is 65.

c. The discount rate is 10%.

d. The life expectancy of the employee is 8 years beyond retirement.

This means that an employee shall receive annual benefit for 8 years after retirement or until
death.

Note that the benefit is not received lump sum but rather in the form of an annual pension from
retirement.

On January 1, 2020, an employee is 40 years of age and has worked for the entity for 5 years.
The current salary is P500,000 annually.

Since the retirement age is 65, it means that the employee has a remaining service period of 25
years.
Assume that the current salary of the employee of P500,000 will increase by 5% every year until
retirement.

Mathematical question

How much will be the salary by the year 2044, the last year. of employment, after 25 years from
January 1, 2020.

The salary for 2044 is simply computed by multiplying P500,000 by the future value of 1 at 5%
for 25 years or 3.3864 or an amount of P1,693,200.

Following the defined benefit formula, the annual benefit is determined as:

a. For one year of service (5% x P1,693,200 x 1) 84,660

b. For 5 years of service (5% x P1,693,200 x 5) 423,300

c. For 30 years of service (5% x P1,693,200 x 30) 2,539,800

Thus, if the employee retires at the age of 65 with 30 years of service period, the employee is
entitled to annual benefit of P2,539,800 for 8 years from retirement.

However, the employee has worked only for 5 years and has earned only the annual benefit of
P423,300.

Another mathematical question

How much benefit obligation shall be recognized at this point in time on January 1, 2020?

The answer is that the benefit obligation is equal to the present value of the annual benefit of
P423,300 already earned by employee in 5 years.

Computation of present value

The present value of the benefit obligation on January 1, 2020 is determined as:

Annual benefit (5 years of service) 423,300

Multiply by PV of ordinary annuity of 1 at 10% for 8 years 5.335

Present value - January 1, 2045 2,258,305

Multiply by PV of 1 at 10% for 25 years .0923
Present value of benefit obligation - January 1, 2020 208,442

The annual benefit of P423,300 is multiplied by the PV of annuity factor of 5.335 because the
annual payment is to be made only over 8 years from retirement.

The present value on January 1, 2045 of P2,258,305 is multiplied by the PV of 1 factor of .0923
because the annual benefit is to be paid only 25 years from now, January 1, 2020.

On January 1, 2020, the present value of the benefits earned by the employee for services
rendered during the past 5 years or P208,442 based on future salary is known as projected benefit
obligation.

Let us continue the "build up" of the projected benefit obligation for another 5 years.

Present value of 1 at 10%

Period PV of 1

20 0.1486

21 0.1351

22 0.1228

23 0.1117

24 0.1015

The current service cost or the present value of the future benefits for the next 5 years is
determined as follows:
(a x b x c)
(a) (b) (c) current
Year Benefit PV of annuity PV of 1 service cost

2020 84,660 5.335 0.1015 45,844

2021 84,660 5.335 0.1117 50,451

2022 84,660 5.335 0.1228 55,464

2023 84,660 5.335 0.1351 61,019

2024 84,660 5.335 0.1486 67,117

The benefit is multiplied by the PV of an ordinary annuity of1 at 10% for 8 periods or 5.335
because the annual benefit is to be paid only over 8 years from retirement.

The benefit is multiplied by the PV of 1 at 10% because the benefit is discounted from the end of
2044, which is the year of retirement.

Thus, the 2020 benefit is 24 years away from 2044 and discounted for 24 periods, the 2021
benefit is 23 years away from 2044 and discounted for 23 periods, and so on.

The "build up" of the projected benefit obligation for the succeeding 5 years may appear as:

Current service cost Interest expense PBO

1/ 1/2020 208,442

12/31/2020 45,844 20,844 275,130

12/31/2021 50,451 27,513 353,094

12/31/2022 55,464 35,309 443,867

12/31/2023 61,019 44,387 549,273

12/31/2024 67,117 54,927 671,317

The interest expense is 10% of the beginning balance. Thus, for 2020, 10% times P208,442
equals P20,844, and so on.

The PBO is equal to the beginning balance plus current service cost and interest expense.

Thus, on December 31, 2020, P208,442 plus P45,844 plus P20,844 equals P275,130, and so on.

Actuarial gains and losses

Actuarial gains and losses are changes in the present value of the projected benefit obligation
resulting from experience adjustments and the effects of changes in actuarial assumptions.

Experience adjustments are adjustments from the differences between the previous actuarial
assumptions and what has actually occurred.

Experience adjustments arise because actual events inevitably differ from actuarial assumptions.
Actuarial assumptions

Actuarial assumptions are an entity's best estimate of the variables that will determine the
ultimate cost of providing postemployment benefits.

Actuarial assumptions shall be unbiased and mutually compatible.

Actuarial assumptions are unbiased if they are neither imprudent nor excessively conservative.

Actuarial assumptions are mutually compatible if they reflect the economic relationships
between factors such as inflation, rates of salary increase, the return on plan assets and discount
rates.

Actuarial assumptions comprise of demographic assumptions and financial assumptions.

Demographic and financial assumptions

Demographic assumptions deal with mortality, rate of employee turnover, disability, early
retirement, proportion of plan members eligible for benefits, and claim rates under medical plans.

Financial assumptions deal with discount rate, future salary and benefit levels, future medical
costs and taxes payable by the plan.

The discount rate shall be determined by reference to market yields at the end of reporting period
on high quality bonds.

If there are no such bonds, the market yields on government bonds shall be used as discount rate.

Projected benefit obligations shall be measured on a basis that reflects estimated future salary
increases.

Causes of actuarial gains and losses

Actuarial gains and losses result from increases or decreases in the present value of the projected
benefit obligation because of changes in actuarial assumptions and experience adjustments.

The usual causes of actuarial gains and losses include the following:

a. Unexpected high or low rate of employee turnover, early retirement or mortality and increases
in salary

b. Change in assumptions concerning benefit payment options

c. Change in discount rate

Actuarial gains and losses do not include changes in the present value of the projected benefit
obligation arising from the introduction, amendment, curtailment or settlement of the benefit
plan.

Such changes result in past service cost or gain and loss on plan settlement.

Remeasurement of projected benefit obligation

a. If the actual benefit obligation is higher than the estimated amount, there is an actuarial loss.

This means that the projected benefit obligation has increased and the increase is recognized as
an actuarial loss.

b. If the actual benefit obligation is lower than the estimated amount, there is an actuarial gain.

This means that the projected benefit obligation has decreased and the decrease is recognized as
an actuarial gain.

Illustration

Projected benefit obligation -actual 6,000,000

Projected benefit obligation – estimated 5,000,000

Actuarial loss 1,000,000

If the actual obligation is higher that the estimated amount, the difference is an actuarial loss
because there is an increase in the projected benefit obligation.

Another illustration

Projected benefit obligation – actual 8,000,000

Projected benefit obligation – estimated 9,500,000

Actuarial gain 1,500,000

If the actual obligation is lower that the estimated amount the difference is an actuarial gain
because there is a decrease in the projected benefit obligation.

The actuarial gain and loss arising from remeasurement of projected benefit obligation are
recognized in other comprehensive income.

The actuarial gain and loss are not subsequently reclassified to profit or loss but transferred to
retained earnings.
QUESTIONS

1. Define employee benefits.

2. What are considered employee benefits?
3. Define postemployment benefits
4. Give examples of postemployment benefits
5. What are the two major classifications of postemployment benefit plans?
6. Explain contributory and noncontributory postemployment benefit plan
7. Explain funded and unfunded postemployment benefit plan
8. Explain fully a defined contribution plan
9. Explain fully a defined benefit plan
10. What is a multiemployer plan?
11. What are the postemployment benefit plans under Philippine law?
12. Explain fully insured benefits
13. Explain accounting for a defend contribution plan
14. What are the components of a defined benefit cost
15. Explain service cost
16. Explain current service cost.
17. . Explain net interest.
18. Explain "remeasurement".
19. What is the projected unit credit method?
20. Explain past service cost.
21. Distinguish plan amendment and plan curtailment.
22. Explain the accounting for past service cost.
23. Define plan assets.
24. Explain a long-term benefit fund.
25. Explain a qualifying insurance policy.
26. Explain the measurement of plan assets.
27. Explain return on plan assets.
28. Explain the recognition of return on plan assets.
29. What is the amount of "remeasurement" in relation to the return on plan assets.
30. Explain accumulated benefit obligation.
31. Explain projected benefit obligation.
32. Explain fully actuarial gains and losses.
33. Explain fully actuarial assumptions.
34. Explain the determination of actuarial gain and loss.
35. Explain the recognition of actuarial gain and loss.