IAS 19 Employee Benefits Explained

WEEK 1-3
EMPLOYEE BENEFITS
IAS 19
- Outlines the accounting for all types of employee benefits except share-based compensation.
- The latter is following IFRS 2 accounting rules.
-All forms of consideration given to an employee by an entity for services rendered by the employee is
called employee benefits.
- These benefits include:
*Post-employment benefits
*Short-term employee benefits
*Termination benefits
*Other long-term benefits
-The first to be discussed here concerns post-employment benefits.
POST EMPLOYMENT BENEFITS
- Are employee benefits other than termination benefits and short-term benefits which are payable
after the completion of employment.
- Usually established as part of remuneration package for its employees and may also be established by
law.
- These include:
*Retirement benefits (pension and lump sum payments on retirement)
*Post-employment life insurance
*Post-employment medical care
CLASSIFICATION OF EMPLOYEE BENEFITS
a. Defined contribution plans
b. Defined benefit plans

- These classifications can be contributory or non-contributory and funded or not funded.
- Contributory – both the employer and the employee shoulders the cost of the employment benefits by
making the contributions to the plan, although not of equal amounts.
- Non-contributory – it is only the employer making the contributions to the plan for the employee
benefits. Only the employer bears the burden of the cost of the benefits.
-Funded plan vs Non-funded plan -the difference is the transferring of assets from the entity to a
separate fund into a trustee, bank or insurance company.
- Funded plan – the employer just makes the payment and contributions to the fund in agency. It is the
responsibility and obligation of the funding agency to accumulate funds and pay the employee benefit
to the retired employee when due.
- Unfunded plan/Non-funded plan – there is no separate plan for that purpose. The company maintains
the fund and has obligation to pay for the employee at the time of the retirement when due.
DEFINED CONTRIBUTION PLAN
-In this type of retirement benefit, the employee bears the investment risk. The obligation of the
employer is to just make the contributions to a fund- where as the trustee, must accumulate and
increase the fund so that upon the retirement of the employee, retirement benefits received will be
higher amount.
- Simply stated, the contribution is fixed, but the benefit is not fixed. Therefore the amount of the
retirement benefits depends on the success of the management of the fund under the trustee.
DEFINED BENEFIT PLAN
- The amount of employee benefit is agreed or fixed, definite or specific that is usually computed in
consideration of salary and number of years in service.
- Moreover, in here, the employer must make additional contributions to meet up with the required
fixed amount of retirement benefit.
- Thus, the investment risk is born by the employer.
Post-Employment benefits under the law
1. Social Security System (SSS) – defined contribution plan
2. R.A 7641 – defined benefit plan

Accounting for defined contribution plan
- The obligation of the company is determined by the amount of contribution at each period and in
which the amount is an undiscounted basis. This is simple to apply. The amount contributed is
recognized as an expense in the period it is payable.
- Just like normal accounting consideration or treatment, any amount of unpaid contribution is regarded
as accrued expense at the end of the accounting period and any excess shall be recognized as prepaid
expense if it will reduce future payments or will lead to a cash refund.
- Required Disclosures:
a. The amount recognized as expense
b. The contribution to defined contribution plan for key management personnel as required by PAS 24
on related party disclosures.
ILLUSTRATION 1 (ADAPTED)
- An employee of a large manufacturing company in Davao City earned 480,000 during the current year.
- The employee is covered by the firm’s defined contribution plan which requires the entity to
contribute the equivalent of 5% of the employee’s salary of 24,000 for the current year to a trustee.
Case 1: If the entity paid the 24,000 on December 31, 2019, the entry will be:
Employee benefit expense 24,000
Cash 24,000
- Having made the contribution, the entity has n further obligation. Thus no further entries to be
prepared util the next accounting period.
ILLUSTRATION 1.1 (ADAPTED)
Case 2: If the entity paid the 24,000 concerning 2019, on January 31, 2020 (late payment); the entry will
be:
-December 31, 2019 Employee benefit expense 24,000
Accrued benefit payable/expense 24,000

-January 31, 2020
Accrued benefit payable/expense 24,000
Cash 24,000
ILLUSTRATION 1.2 (ADAPTED)
Case 3: If the company paid 35,000 pesos total in which 11,000 is in respect for services to be rendered
in 2020 (11,000 advance payment), the entry will be:
-December 31 2019
Prepaid benefit expense 11,000
Cash 35,000
ACCOUNTING FOR DEFINED BENEFIT PLAN
- Under IAS 19, the entity uses an actuarial technique, the projected unit credit method to estimate the
ultimate cost of benefits.
- This type of plan requires the expertise of an individual expert in dealing with actuarial assumptions
(Actuary) in order to measure the obligation and the expense.
- IAS 19 (2011). 80 provides that financial assumptions must be made at the end of the reporting period.
- Contrary to defined contribution plan, the obligation in a defined benefit plan is on a discounted basis.
- IAS 19 (2011). 83 provides that the discount rate used is determined by reference to market yields on
high quality corporate bonds at the end of the reporting period.
- Thus, accounting procedures involve is more complex than that of a defined contribution plan.
- Further, unlike the first plan, the amount of contribution to the plan in a defined benefit plan may not
be the same amount as the expense to recognized for the period.
- PAS 19 of PAR 120 provides that the defined benefit cost shall be composed of the following:
a. Service cost – (Profit or Loss) which includes current service cost, past service cost, and gain or loss on
settlement.
b. Net Interest - (Profit of Loss) which is composed of interest expense on defined benefit liability,
interest income on plan assets, interest expense on effect of asset ceiling.
c. Remeasurements – (Other comprehensive Income) comprises the following:
*actuarial gain and loss
*actual return on plan assets less interest income on plan assets
*change in effect of asset ceiling less interest on the effect of asset ceiling.
- Current service cost is the present value of the annual benefit obligation in a defined benefit plan for
the services rendered by the employee in the current year.
ACTUARIAL VALUATION METHOD
- The method used to compute the present value of the defined benefit obligation along with the
current service cost is the projected unit credit method.
- To illustrate the process by using this method, assume the following information as adapted:
-Lumpsum payment to employees upon retirement 5% of final salary for every year of service
- The following are actuarial assumptions needed:
1. The employee’s expected number of years to work for is 5 years.
2. The salary is expected to rise by 8% per annum.
3. The salary in 2019 is 400,000 per annum.
4. The discount rate is 10% per annum.
- To get the final salary, the future value of 1 at 8% for 4 years which is 1.3605 is multiplied to 400,000.
=400,000 (1.3605)
=544,200
- To compute for the benefit each year, multiply 5% with the final salary computed.
=544,200 (0.05)
=27,210
- After then, prepare the schedule per year:
2019 2020 2021 2022 2023
Prior Years - 27,210 54,420 81,630 108,840
Current Year 27,210 27,210 27,210 27,210 27,210

27,210 54,420 81,630 108,840 136,050
- The amount of 136,050 is the total present value of the obligation at the time that the employee is
expected to be paid.
- The annual benefit of 27,210 shall be discounted at 10% from the final year which is 2023 to get the
annual present value of the future benefits. The following PV factors can be computed or can be
obtained in a table of present value factors.
Period Present value of 1
1 .909
2 .826
3 .751
4 .683
2019 27,210 .683 = 18,584
2020 27,210 .751 = 20,435
2021 27,210 .826 = 22,475
2022 27,210 .909 = 24,734
2023 27,210 1.000 = 27,210
- Note that the factor used for 2019 is .683 because 2019 is 4 years away from 2023, .751 for 2020
because 3 years away from 2023 and so on.
- The amount discounted per year represents the current service cost. To determine the amount of
interest cost, the preparation of the table projected benefit obligation is necessary as illustrated below:
Date Current service cost Interest expense Present value
12/31/2019 18,584 - 18,584
12/31/2020 20,435 1,858 40,877
12/31/2021 22,475 4,088 67,440
12/31/2022 24,734 6,744 98,918
12/31/2023 27,210 9,922 (workback) 136,050

- Interest expense is computed by multiplying the 10% rate to the initial present value of. December
31,2020 present value is computed as 18,584 plus the interest cost of 1,858 plus the current service
cost of 2020 which is 20,435 total of 40,877.
- For the final year, 12/31/2023, the interest cost is just worked back 136,050 less 27,210 and less
98,918 to get the 9,922. The 136,050 was computed above as the total present value build-up of the
benefit obligation.
- Accordingly, as we discussed a while ago that the employee benefit or the defined benefit cost is
composed of the service cost plus interest cost plus remeasurements, in the problem above the
company shall report employee benefit expense per year as follows:
2019 2020 2021 2022 2023
Current service cost 18,584 20,435 22,475 24,734 27,210
Interest cost - 1,858 4,088 6,744 9,922
Total employee benefit 18,584 22,293 26,563 31,478 37,132
expense
- Note that when you add the employee benefit expense per year, it will result to 136,050.
Proof:
18,584
22,293
26,563
31,478
37,132
136,050
- Net interest as component of employee benefit expense mentioned awhile ago is composed of three
elements: Interest expense on the defined benefit liability, interest income and interest expense on
effect of asset ceiling.
- Interest expense computation has already been discussed earlier as the result of multiplying the
discount rate to the present value of the benefit obligation at the beginning of the period.
- Interest expense on effect of asset ceiling is computed by multiplying the effect of the asset ceiling at
the beginning of the reporting period multiplied at the same discount rate used for the defined benefit
obligation.
- At the beginning of the current year, the record showed the following:
*Fair value of plan assets 3,200,000
*Defined benefit obligation 4,000,000
*Discount rate 12%
*Expected return on plan assets 10%
- To compute the net interest, get first the interest expense which is 12% multiplies to 4,000,000
resulting to 480,000. Interest income is computed as discount rate same as used for the defined benefit
obligation of 12% multiplies to the fair value of plan assets at 3,200,000 resulting to 384,000
- Hence, 480,000 less 384,000, the net interest expense is 96,000
- In the memorandum record of the trustee, the 480,000 interest expense is included in the defined
benefit obligation while the 384,000 interest income as part of the computation of the fair value of plan
assets at year-end in the memorandum record.
- Interest expense > interest income = net interest expense
- interest expense < interest income = net interest income
PAST SERVICE COST
- The term used to describe the change in a defined benefit obligation for employee service in the prior
periods is past service cost.
- Past service cost is the change in the present value of defined benefit obligation for the employee
service in the previous years that resulted from amendment of plan and curtailment.
- An example of curtailment includes termination or suspension of a plan.
- PAS 19R in paragraph 103 states that the recognition of past service cost as an expense is necessary at
the earlier between
a. when the plan amendment or curtailment occurs.
b. when the entity recognizes related restructuring costs or termination benefits.
- Moreover, IAS 19 (2011), 110 provides that any gain or loss on settlement of a defined benefit plan are
to be recognized on the event of occurrence of settlement.
- An entity with a defined benefit plan provides for a 5% benefit based on final salary or each year of
service. The benefits become vested after five years of service.
- On January 1, 2019, the entity improves the benefit to 6% of final salary for each year of service
including prior years.
- At the amendment date, the present value of the additional benefits increased as follows:
*Employees with more than 5 years of service on Jan. 1,2019 150,000
*Employees with less than 5 years of service on Jan. 1, 2019
and average period until vesting is 3 years 75,000
- The total past service cost of 225,000 (150,000 + 75,000) shall be recognized as expense immediately
and also the amount is included as addition to the defined benefit obligation.
PLAN ASSETS
- Plan assets are composed of the assets held by a long-term benefit fund and qualifying insurance
policies.
- The measurement of plan assets is at fair value. It does not include unpaid contributions due from the
reporting entity to the fund. Moreover, it is reduced by the amount of liabilities of the fund not relating
to employee benefits.
- Qualifying Insurance Policy – 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.
- Except.
a. when the proceeds represents 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 is not a qualifying insurance policy, that insurance policy is not a plan asset.
RETURN ON PLAN ASSETS
- Its components are the following:
a. Interest, dividend and other income derived from the plan assets.
b. Realized and unrealized gains and losses on the plan assets.
- To get the net returns, the following deductions shall be made:
1. Any cost of managing the plan assets or costs of managing investments.

2. Any tax payable by the plan itself or tax on investment income.
- The said return on plan assets is accounted for through other comprehensive income as
“remeasurements” which is not to be recycled through profit or loss. Instead, it can be reclassified to
retained earnings. [IAS 19(2011) 120-130]
- The amount of the remeasurements is computed as:
Actual return on plan assets xx
Less: interest income on FV of plan assets at the beginning of the period (xx)
Remeasurement gain or loss xx
- The following data are provided related to a defined benefit plan:
*Fair value of plan assets – beginning 3,750,000
*Actual return on plan assets 675,000
*Contribution to the fund 750,000
*Benefits paid 150,000
Remeasurement computation:
Actual return 675,000
Interest income on plan assets (6% * 3,750,000) 225,000
Remeasurement gain 450,000
- If the reverse occur, the amount is a remeasurement loss.
- The actual return of 675,000 is separately reported as the interest income included in the computation
of employee benefit expense as deduction from interest expense to get the net interest.
- Whereas the 450,000 remeasurement gain is reported through other comprehensive income.
- The same problem above, the fair value of plan assets can be computed as follows:
*Fair value of plan assets – beginning 3,750,000
*add: contribution to the fund 750,000
Interest income 225,000

*Total 5,175,000
*less: Benefits paid 150,000
*Fair value of plan assets – ending 5,025,000
- Therefore, it can also be computed using the formula:
*FV of plan assets – beginning 3,750,000
*add: contribution to the fund 750,000
Actual return on plan assets 675,000
*Total 5,175,000
*less: benefits paid 150,000
*FV of plan assets – end 5,025,000
ACTUARIAL GAIN AND LOSSES
- PAS 19R of paragraph 20 provides the remeasurement such as actuarial gains and losses be reported
through other comprehensive income and not reclassified through profit or loss subsequently.
- Instead, it can be reclassified to retained earnings.
- Actuarial gains and losses represents changes in the present value of the defined benefit obligation
arising from changes are inevitable.
- Thus, the effect of these changes is recognized as actuarial gain or losses.
- As a guide, actuarial loss occurs when actual benefit obligation is higher than the estimated amount
because the obligation actually increased from that which is estimated.
- The reverse entail the recognition of actuarial gain.
- Illustration:
Projected benefit obligation- actual 4,000,000
Projected benefit obligation – estimated 3,000,000
Actuarial loss 1,000,000
- Actual > Estimated = Actuarial loss
- Actual < Estimated = Actuarial gain

-Disclosure requirements provided for/ set for according to IAS 19(2011). 135:
1. Characteristics of the defined benefit plan and associated risk.
2. Identification and explanation of the amounts in the financial statements of the defined benefit plan.
3. Description of how the plan may affect the amount, timing an uncertainty of the future cash flows of
the entity.
DEFINED BENEFIT PLAN (CHAPTER 19)
DEFINED BEENFIT PLAN ACCOUNTING PROCEDURES
- As earlier, the benefit plan is a sub entity separate and distinct from the primary entity which is the
employer. Hence, the sub entity maintains information that is not reflected in the general ledger of the
employer entity and that information will not appear in the financial statements of the employer entity
because such information is kept only by means of memorandum records. This memorandum records
contain the fair value of plan assets (FVPA) and the projected benefit obligation (PBO). These two items
are off statement of financial position account, which is an asset if debit balance and a liability if credit
balance. Since these two items are kept only in the memorandum records of the sub entity, what
appears in the employer entity’s financial statements is the account “prepaid/accrued benefit cost”. If
FVPA is more than the PBO, there is a prepaid benefit cost, which is classified as a non-current asset. In
the scenario, the plan is overfunded. On the other way around, if the FVPA is less than the PBO , the
fund is underfunding giving rise to an accrued benefit cost which is a non-current liability.
- FVPA > PBO = Prepaid benefit cost
- FVPA < PBO = Accrued benefit cost
- To illustrate an underfunded plan, assume that an entity made a contribution amounting to 900,000 to
the defined benefit plan for the current year and to simplify the illustration, the only component of the
benefit expense is the current service cost of 1,000,000. The journal entry would be as follows:
Employee benefit expense 1,000,000
Cash 900,000
Prepaid/accrued benefit cost 100,000
- Moreover, to illustrate an overfunded plan, assume that an entity made a contribution amounting to
1,200,000 to a defined benefit plan for the current year and to simplify the illustration , the only
component of the benefit expense is the current service cost of 1,000,000.
Cash 1,2000,000
- Note that the account “Prepaid/Accrued benefit cost” account is a balancing figure and may have a
debit or a credit balance at the end of reporting period and will be reported as prepaid benefit cost (if
debit balance) or accrued benefit cost (if credit balance) as earlier stated.
ILLUSTRATION 1
Assumes that at the beginning of the year, the memorandum records in relation to a defined benefit
plan showed the following information:
*Fair value of plan assets (FVPA) 2,500,000
*Projected benefit obligation (PBO) 3,500,000
*Prepaid/accrued benefit cost 1,000,000
- During the current year, the following transactions are gathered:
*Current service cost 600,000
*Past service cost 150,000
*Actual return on plan assets 400,000
*Contribution to the plan 500,000
*Benefits paid 250,000
*Actuarial loss due to increase in PBO 450,000
*Discount rate 10%
- Determine the following:
1. Employee benefit expense
2. Net remeasurement loss
3. Accrued benefit cost during the year
4. FVPA, end
5. PBO, end
6. Accrued benefit cost, end

Answers:
1. Employee benefit expense computation:
Current service cost 600,000
Past service cost 150,000
Interest exp. on PBO (3.5M*10%) 350,000
Interest income on FVPA (2.5M*10%) (250,000)

Total employee benefit expense 850,000
2. Net Remeasurement loss
Less: interest income on FVPA (250,000)
Remeasurement gain on plan assets 150,000
Less: actuarial loss due to increase in PBO (450,000)
Net remeasurement loss (300,000)
Net remeasurement loss 300,000
Total defined benefit cost 1,150,000
Contribution to the plan (500,000)
Accrued benefit cost during the year 650,000
4. FVPA, end
FVPA, beg. 2,500,000
Contribution to the plan 500,000

Benefits paid (250,000)
FVPA, end 3,150,000
- Or simply computed as:
FVPA, beg. 2,500,000
Contributions to the plan 500,000
FVPA, end 3,150,000
5. PBO, end
PBO, beg. 3,500,000
Currents service cost 600,000
Past service cost 150,000
Interest expense on PBO 350,000
Actuarial loss due to increase in PBO 450,000
PBO, end 4,800,000
FVPA, end 3,150,000
PBO, end 4,800,000
Accrued benefit cost, end 1,650,000
- The journal entry required to record the above information is as follows:

Net remeasurement loss-OCI 300,000
Cash 500,000
- With this entry the prepaid/accrued benefit cost as shown at the beginning which amounted to
1,000,000 is increased by the amount of accrued benefit cist during the year in the amount of 650,000
resulting to 1,650,000 accrued benefit cost at the end.
STATEMENT OF A PLAN
- This is a transaction which eliminated all further legal or constructive obligations in part or all of the
benefits provided under a defined benefit plan. Example of settlement is when an entity purchases
annuity contracts from insurance entities for less than the amount in the retirement fund and another is
when there is a one-off transfer of significant employer contributions under the plan to an insurance
entity through purchase of insurance policy. It is provided under PAS 19, paragraph 110 that when
settlement occurs, an entity shall recognize gain or loss on settlement price and the present value of the
defined benefit obligation on the date of settlement. Settlement gain arises when settlement price is
lower than present value of defined benefit obligation settled while settlement loss occurs when
settlement price is higher than the defined benefit obligation settled. This gain or loss on settlement
shall be fully recognized and included in service cost in the computation of employee benefit expense.
- Settlement price > defined benefit obligation = settlement loss
- Settlement price < defined benefit obligation = settlement gain

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- Assume the following data adapted from the book of Conrado T. Valix, et al which is entitled Financial
Accounting, Volume 2:
FVPA, beg. 2,000,000
PBO, beg. 2,750,000
- The following transactions gathered during the current year:
Settlement price of defined benefit obligation 225,000
Present value of defined benefit obligation settled 250,000
Discount rate 5%
- Determine the following:
1. settlement gain
2. remeasurement gain on plan assets
3.. employee benefit expense
4. accrued benefit cost during the year
5. FVPA, end
6. PBO, end
7. Accrued benefits cost, end
Answers:
1. Settlement gain
Settlement price 225,000
Present value of defined benefit obligation settled 250,000
Settlement gain 25,000
2. Remeasurement gain on plan assets
Less: interest income on FVPA (2M*5%) 100,000
Settlement gain (25,000)
Interest income on FVPA (100,000)
Interest expense on PBO ( 2.750M*5%) 137,500
Total employee benefit expense 412,500
Remeasurement gain (50,000)
Defined benefit cost 362,500
Contribution to the plan (300,000)
Accrued benefit cost during the year 62,500
5. FVPA, end
FVPA, beg. 2,000,000
Total 2,450,000
Less: settlement price 225,000
FVPA, end 2,225,000
- Or computed as :
FVPA, beg. 2,000,000
Total 2,450,000
Less: settlement price 225,000
FVPA, end 2,225,000
6. PBO, end
PBO, beg. 2,750,000
Currents service cost 400,000
Interest expense 137,000
Total 3,287,500
Less: present value of obligation settled 250,000
PBO, end 3,037,500
FVPA, end 2,225,000
PBO, end 3,037,500
Accrued benefit cost, end 812,500
- Or computed as :
Accrued benefit cost, beg 750,000
Add: accrued benefit cost during the year 62,500
Accrued benefit cost, end 812,500
- The journal entry to record the information above would be:
Cash 300,000
Remeasurement gain-OCI 50,000

- The above illustrations are an example of a situation wherein FVPA is lower than the PBO, thus
underfunded. The next to illustrate is a situation wherein the FVPA is more than the PBO giving rise to a
prepaid benefit cost which is called surplus, the amount of which shall not exceed the asset ceiling
which is determined by using the discount rate in the measurement of the defined benefit obligation.
The asset ceiling as defined represents the present value of any economic benefits available in the form
of refunds from the plan or reductions in future contributions to the plan.
ILLUSTRATION 3
A scenario where there is a prepaid benefit cost which does not exceed asset ceiling, assume the
following information revealed at year end for a defined benefit plan:
*Fair value of plan asset (FVPA) 3,000,000
*Projected benefit obligation (PBO) 2,500,000
*Prepaid/accrued benefit cost – surplus 500,000
- Assume further that the asset ceiling or the present value of available future refunds and reduction in
future contributions amounted to 600,000
- In this case, the surplus does not exceed the asset ceiling. Hence, there is no accounting problem. The
500,000 difference between the FVPA and PBO shall be recognized as prepaid benefit cost which is
reported as non-current asset in the financial statements at year end.
ILLUSTRATION 4
Scenario where there is a prepaid benefit cost but exceed asset ceiling, assume the following date
revealed for a defined benefit plan at the beginning of the current year:
*FVPA 9,000,000
*PBO 8,000,000
*prepaid/accrued benefit cost-surplus 1,000,000
*asset ceiling 600,000
*Effect of asset ceiling 400,000
- The following data are provided for the current year:
Current service cost 1,800,000
Actual return on plan assets 2,000,000

Contribution to the plan 1,400,000
Benefits paid 400,000
Actuarial gain due to decrease in PBO 600,000
Asset ceiling on Dec. 31 (end) 1,600,000
Discount rate 10%
- As provided in PAS 19, par 8, any change in the effect of the asset ceiling, excluding interest on the
effect of asset ceiling is considered as a remeasurement which will be recognized in other
comprehensive income. Further provided is that the interest on the effect of the asset ceiling is part of
the total change in the effect of the asset ceiling. The amount of which is determined by multiplying the
effect of the asset ceiling at the beginning of the period by the discount rate. The difference between
the total change in the effect of the asset ceiling and the interest on the effect of the asset ceiling is
considered as remeasurement. Any increase in the effect of asset ceiling gives rise to a remeasurement
loss minus interest expense on the effect of asset ceiling and any decrease in the effect of asset ceiling is
a remeasurement gain plus interest expense on the effect of asset ceiling.
- To apply what has been stated in the standard let us determine the items below using the data
provided above.
1. FVPA, end
2. PBO, end
3. Effect of asset ceiling
5. Remeasurement gain on plan assets
6. Remeasurement loss on asset ceiling
7. Net remeasurement gain-OCI
8. prepaid benefit cost during the year
Answers:
1. FVPA, end
FVPA, beg 9,000,000
Actual return on plan assets 2,000,000
FVPA, end 12,000,000

2. PBO, end
PBO, beg 8,000,000
Interest expense on PBO (8M*10%) 800,000
Actuarial gain due to decrease in PBO (600,000)
PBO, end 9,600,000
3. Effect of asset ceiling
FVPA, end 12,000,000
PBO, end 9,600,000
Prepaid/accrued benefit cost-surplus 2,400,000
Asset ceiling, end 1,600,000
Effect of asset ceiling 800,000
Interest exp. on PBO 800,000
Interest income on FVPA (9M*10%) (900,000)
Interest exp. on effect of asset ceiling
(400,000 *10%) 40,000
5. Remeasurement loss on asset ceiling
Effect of asset ceiling, end 800,000
Effect of asset ceiling, beg 400,000
Total change in the effect of asset ceiling 400,000
Interest exp. on effect of asset ceiling (40,000)
Remeasurement loss on asset ceiling 360,000
7. Net remeasurement gain-OCI
Remeasurement gain on plan assets 1,100,000
Actuarial gain dure to decrease in PBO 600,000

Remeasurement loss on the effect of asset ceiling (360,000)
Net remeasurement gain-OCI 1,340,000
8. Prepaid benefit cost during the year
Net remeasurement gain (1,340,000)
Defined benefit cost 400,000
Prepaid benefit cost during the year 1,000,000
Prepaid benefit cost, beg (asset ceiling) 600,000
Add: prepaid benefit cost during the year 1,000,000
Prepaid benefit cost, end (asset ceiling) 1,600,000
- Observe that the prepaid benefit cost at the end is 1,600,000 which is equal to the amount of asset
ceiling because as the standard provides that the surplus should not exceed the asset ceiling. The journal
entry to record the above information would be:
Prepaid/accrued benefit cost 1,000,000
Cash 1,400,000
Remeasurement gain-OCI 1,340,000
DISCLOSURE
- The following information shall be disclosed in the report of a retirement plan, defined contribution
and defined benefit plan:
1. Statement of changes in net assets available for benefits.
2. Summary of significant accounting policies.
3. Description of the plan and the effect of any changes in the plan during the period.
SHORT TERM EMPLOYEE BENEFITS
Short Term Employee Benefits

- Short term employee benefits are the benefits of employees other than those relating to termination
benefits.
- IAS 19 criteria for recognizing short term benefits provides that a liability is recognized when the
employee has rendered the services to be paid in the future as employee benefit.
- It includes the following:
1. Salaries, wages and social security contributions.
2. Short term compensated or paid absences such as paid annual leave and sick leave.
3. Profit sharing bonus
4. Non-monetary benefits (medical, housing subsidized goods, etc.)
- The recognition of short-term benefits is simple because there is no complex computations since it is
recognized on an undiscounted basis because these are payable not later than 12 months after the end
of the accounting period.
- Thus, any unpaid benefit is recognized as accrued expense while the amount paid in advance is
reported as prepaid expense.
- One of the example mentioned above was sick leave and annual leave.
- Employee’s entitlement to paid absences can be accumulating or non-accumulating.
- Accumulating can also be vesting or non-vesting. In a vesting type, it means that an employee receives
cash payment for unused entitlement on leaving t entity. Whereas non-vesting means that even if the
leave entitlement is not used, there is no cash payment to the employee.
- Accumulating type is that unused leave entitlement is carried forward while non-accumulating means
that when the leave entitlement is not used, it cannot be carried forward for the next accounting period.
- The entry to be recognized the leave entitlement used is to debit the expense and credit cash such as :
Vacation Pay expense xx
Cash xx
- When the leave is accumulating, the entry to recognize the leave entitlement that is not used is as
follows:
Vacation Pay expense xx
Accrued vacation pay xx
- If the leave entitlement is non-accumulating, there is no entry on the unused vacation leave.
- In profit sharing or bonus plan, the computation of which has been discussed very early in this course.
- Its recognition requirements provided for in IAS 19 that states when there is legal constructive
obligation to make such payments and there is reliable estimate of the amount to be recognized.
- Thus, to review, the entry to recognize and paying of the bonus are as follows:
1. Bonus expense xx
Bonus payable xx
2. Bonus payable xx
Cash xx
- In the case of other long-term benefits, its recognition and measurement work similarly for that of a
defined benefit obligation.
- IAS 19 (2011). 153-154 states the difference as to the treatment of components of the defined cost
because all items are included as part of the computation of the employee benefit expense recognized
through profit or loss.
- Thus all components, current service cost, past service cost, gain or loss on settlement, net interest
expense and remeasurements are all reported through profit or loss and nothing to be recognized
through other comprehensive income.
TERMINATION BENEFITS
- PAS 19 provides that if the termination benefits is to be wholly settled within 12 months after the end
of the reporting period, the accounting for short-term employee benefits shall be used.
- On the other hand, if it is to be settled beyond 12 months, the application guidance on the other long-
term benefits shall be used.
- The recognition of termination benefits shall be at the earlier of period between when the entity can
no longer withdraw the offer of those benefits o when the entity recognized costs for restructuring as
provided for under IAS 37 guidance.
ILLUSTRATION 1
TERMINATION BENEFITS
- An entity decided to close its plant site in 10 months and will terminate the employees thereto.
- The termination plan:
1. An employee leaving before closure shall receive 15,000.
2. Each employee that stays until closure received cash payment of 45,000.
3. 120 employees are at the plant site.

Computation:
20 (15,000) = 300,000
100(45,000) = 4,500,000
Total Cash Outflow 4,800,000
- The 4,800,000 is partly termination benefits and partly short-term benefits. The amount 15,000 is to be
paid regardless of staying in the company until closure or leaving before closure.
- Hence, this amount is regarded as termination benefits totaling 1,800,000 computed as 120 employees
multiplied by 15,000.
- Whereas the 30,000 multiplied to 100 employees which is equal to 3,000,000 is regarded as short-term
benefits and can be recorded as accrued monthly over 10 months for 300,000.

IAS 19 Employee Benefits Explained

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IAS 19 Employee Benefits Explained

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WEEK 1-3

- The latter is following IFRS 2 accounting rules.

- These benefits include:

*Short-term employee benefits

*Other long-term benefits

-The first to be discussed here concerns post-employment benefits.

POST EMPLOYMENT BENEFITS

*Retirement benefits (pension and lump sum payments on retirement)

*Post-employment life insurance

*Post-employment medical care

CLASSIFICATION OF EMPLOYEE BENEFITS

a. Defined contribution plans

b. Defined benefit plans

DEFINED CONTRIBUTION PLAN

DEFINED BENEFIT PLAN

- Thus, the investment risk is born by the employer.

Post-Employment benefits under the law

1. Social Security System (SSS) – defined contribution plan

2. R.A 7641 – defined benefit plan

a. The amount recognized as expense

Employee benefit expense 24,000

ILLUSTRATION 1.1 (ADAPTED)

-December 31, 2019 Employee benefit expense 24,000

Employee benefit expense 24,000

Accrued benefit payable/expense 24,000

Accrued benefit payable/expense 24,000

ILLUSTRATION 1.2 (ADAPTED)

Employee benefit expense 24,000

Prepaid benefit expense 11,000

ACCOUNTING FOR DEFINED BENEFIT PLAN

c. Remeasurements – (Other comprehensive Income) comprises the following:

*actuarial gain and loss

*actual return on plan assets less interest income on plan assets

ACTUARIAL VALUATION METHOD

- The following are actuarial assumptions needed:

1. The employee’s expected number of years to work for is 5 years.

2. The salary is expected to rise by 8% per annum.

3. The salary in 2019 is 400,000 per annum.

4. The discount rate is 10% per annum.

- After then, prepare the schedule per year:

2019 2020 2021 2022 2023

Prior Years - 27,210 54,420 81,630 108,840

Current Year 27,210 27,210 27,210 27,210 27,210

Period Present value of 1

2019 27,210 .683 = 18,584

2020 27,210 .751 = 20,435

2021 27,210 .826 = 22,475

2022 27,210 .909 = 24,734

2023 27,210 1.000 = 27,210

Date Current service cost Interest expense Present value

12/31/2019 18,584 - 18,584

12/31/2020 20,435 1,858 40,877

12/31/2021 22,475 4,088 67,440

12/31/2022 24,734 6,744 98,918

12/31/2023 27,210 9,922 (workback) 136,050

2019 2020 2021 2022 2023

Current service cost 18,584 20,435 22,475 24,734 27,210

Interest cost - 1,858 4,088 6,744 9,922

Total employee benefit 18,584 22,293 26,563 31,478 37,132

*Fair value of plan assets 3,200,000

*Defined benefit obligation 4,000,000

*Discount rate 12%

*Expected return on plan assets 10%