INTERMEDIATE ACCOUNTING II (AE 16)

LEARNING MATERIAL

UNIT NUMBER/ HEADING: POSTEMPLOYMENT BENEFIT –

DEFINED BENEFIT PLAN ACCOUNTING PROCEDURES
LEARNING OUTCOMES:
At the end of the unit, the students will be able to:
a. Differentiate fair value of plan assets and projected benefit
obligation;
b. Compute employee benefit expense;
c. Compute remeasurements of plan assets, projected benefit
obligation and effect of asset ceiling;
d. Recognize plan settlement; and
e. Apply accounting procedures for asset ceiling

Presentation of Content

BASIC ACCOUNTING PROCEDURES

 The benefit plan shall be viewed as a subentity separate and distinct
from the primary entity, which is the employer entity
 The subentity maintains information that does not appear in the
financial statements of the primary entity. These information is kept onl
by means of memorandum records. The information includes:
 Fair value of plan assets (FVPA)
o It is the source of fund set aside in meeting future benefit
payments
o Analogous to an off-statement of financial position asset
with a debit balance
 Projected Benefit Obligation (PBO)
o 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
o Analogous to an off-statement of financial position liability
with a credit balance
 Prepaid/accrued benefit cost is the item that appears on the financial
statement of the employer entity:
o FVPA > PBO = prepaid benefit cost, noncurrent asset
o FVPA < PBO = accrued benefit cost, noncurrent liability

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Comprehensive Illustration
At the beginning of current year, the memorandum records in relation to a
defined benefit plan showed the following:

Fair value of plan assets P5,000,000

Projected benefit obligation P7,000,000
Prepaid/Accrued benefit cost (P2,000,000)

During the current year, the following transactions are gathered:

Current service cost P1,200,000

Past service cost P 300,000
Actual return on plan assets P 800,000
Contribution to the plan P1,000,000
Benefits paid P 500,000
Actuarial loss due to increase in PBO P 900,000
Discount rate 10%

Computations
Current service cost P1,200,000
Past Service cost P 300,000
Interest expense on PBO (10% x P7,000,000) P 700,000
Interest income on FVPA (10% x P5,000,000) (P 500,000)
Employee benefit expense P1,700,000

Actual return on plan assets P 800,000

Interest income on FVPA (P 500,000)
Remeasurement gain on plan assets P 300,000
Actuarial loss due to increase in PBO (P 900,000)
Net remeasurement loss (P 600,000)

Employee benefit expense P1,700,000

Net remeasurement loss P 600,000
Total defined benefit cost P2,300,000
Contribution to the plan (P1,000,000)
Accrued benefit cost during the year P1,300,000

Journal Entry
Employee benefit expense P1,700,000
Net remeasurement loss –OCI P 600,000
Cash P1,000,000
Prepair/accrued benefit cost P1,300,000

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Prepaid/accrued benefit cost – January 1 (P2,000,000)
Credit adjustment – accrued benefit cost during year (P1,300,000)
Prepaid/accrued benefit cost – December 31 (P3,300,000)

Reconciliation

FVPA – January 1 P5,000,000

Contribution to the plan P1,000,000
Interest income on FVPA P 500,000
Remeasurement gain on plan assets P 300,000
Benefits paid (P 500,000)
FVPA – December 31 P6,300,000

PBO – January 1 P7,000,000

Current service cost P1,200,000
Past service cost P 300,000
Interest expense on PBO P 700,000
Benefits paid (P 500,000)
Actuarial loss due to increase in PBO P 900,000
PBO – December 31 P9,600,000

FVPA – December 31 P6,300,000

PBO – December 31 (P9,600,000)
Prepaid/accrued benefit cost (P3,300,000)

SETTLEMENT OF 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. Examples include:
 One-off transfer of significant employer contributions under the
plan to an insurance entity through the purchase of an insurance
policy
 Lump sum payment to plan participants in exchange for their
rights to received specified postemployment benefits
 Routine settlement is the lump sum payment to plan participants
made under the terms of the existing defined benefit plan. It is
considered an actuarial assumption that should be included in the
measurement of the defined benefit obligation
 PAS 19, par. 110 provides that an entity shall recognize gain or loss
on settlement of a defined benefit plan when the settlement occurs

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  Gain or loss on settlement is fully recognized and included in service
cost in the computation of employee benefit expense. It is the difference
between:
o Settlement price which includes any plan assets transferred and
any payments made directly by the entity in connection with the
settlement
o Present value of the defined benefit obligation on the date of
settlement
Illustration:
At the beginning of the current year, the memorandum records of a defined
benefit plan showed the following:

Fair value of plan assets P4,000,000

Projected benefit obligation (P5,500,000)
Prepaid/accrued benefit cost (P1,500,000)

During the current year, the following transactions are gathered:

Current service cost P 800,000

Actual return on plan assets P 300,000
Contribution to the plan P 600,000
Settlement price of defined benefit obligation P 450,000
Present value of defined benefit obligation settled P 500,000
Discount rate 5%

Computations

Present value of defined benefit obligation settled P 500,000

Settlement price P 450,000
Settlement gain P 50,000

Current service cost P 800,000

Settlement gain (P 50,000)
Interest expense on PBO (5% xP5,500,000) P 275,000
Interest income on FVPA (5% x P4,000,000) (P 200,000)
Employee benefit expense P 825,000

Actual return on plan assets P 300,000

Interest income on FVPA (P 200,000)
Remeasurement gain P 100,000

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Employee benefit expense P 825,000
Remeasurement gain – OCI (P 100,000)
Defined benefit cost P 725,000
Contribution to the plan (P 600,000)
Accrued benefit cost during the year P 125,000

Journal entry
Employee benefit expense P825,000
Remeasurement – OCI P100,000
Cash P600,000
Prepaid/accrued benefit cost P125,000

Prepaid/accrued benefit cost – January 1 (P1,500,000)

Credit adjustment – accrued benefit cost during year (P 125,000)
Prepaid/accrued benefit cost – December 31 (P1,625,000)

Reconciliation
FVPA – January 1 P4,000,000
Contribution to the plan P 600,000
Settlement price (P 450,000)
Interest income on FVPA P 200,000
Remeasurement gain P 100,000
FVPA – December 31 P4,450,000

PBO – January 1 P5,500,000

Current service cost P 800,000
Interest expense on PBO P 275,000
PV of defined benefit obligation settled (P 500,000)
PBO – December 31 P6,075,000

FVPA – December 31 P4,450,000

PBO – December 31 (P6,075,000)
Prepaid/accrued benefit cost (P1,625,000 )

FVPA more than PBO

 As stated, if FVPA > PBO, there is a prepaid benefit cost which PAS
19 calls as surplus
 A 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
 The 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

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Illustration;
At year-end, a defined benefit plan revealed the following data:

Fair value of plan assets P6,000,000

Projected benefit obligation (P5,000,000)
Prepaid/accrued benefit cost – surplus (P1,000,000)

Data also shows that the asset ceiling is P1,200,000.

The surplus does not exceed the asset ceiling. Thus, a prepaid benefit cost or
surplus asset of P1,000,000 shall be reported in the statement of financial
position at year-end.

Comprehensive Illustration
A defined benefit plan revealed the following information at the beginning of
current year:

Fair value of plan assets P4,500,000

Projected benefit obligation (P4,000,000)
Prepaid/accrued benefit cost – surplus P 500,000
Asset ceiling (P 200,000)
Effect of asset ceiling P 300,000

The following data are provided for the current year:

Current service cost P 900,000

Actual return on plan assets P1,000,000
Contribution to the plan P 700,000
Benefits paid P 200,000
Actuarial gain due to increase in PBO P 300,000
Asset ceiling on December 31 P 800,000
Discount rate 10%

Notes:
** PAS 19, paragraph 8 provides that any change in the effect of asset ceiling,
excluding interest on the effect of the asset ceiling is a remeasurement to be
recognized through other comprehensive income
** Paragraph 126 provides 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 is
determined by multiplying the effect of the asset ceiling at the beginning
of the period by the discount rate

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** 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
remeasurement:
 Effect of asset ceiling minus interest expense on the effect of
asset ceiling = remeasurement loss
 Effect of asset ceiling plus interest expense on the effect of asset
ceiling = remeasurement gain

Computations

FVPA – January 1 P4,500,000

Contribution to the plan P 700,000
Actual return on plan assets P1,000,000
Benefits paid (P 200,000)
FVPA – December 31 P6,000,000

PBO – January 1 P4,000,000

Current service cost P 900,000
Interest expense on PBO (10% x P4,000,000) P 400,000
Actuarial gain due to decrease in PBO (P 300,000)
Benefits paid (P 200,000)
PBO – December 31 P4,800,000

FVPA – December 31 P6,000,000

PBO – December 31 (P4,800,000)
Prepaid/accrued benefit cost – surplus P1,200,000
Asset ceiling – December 31 (P 800,000)
Effect of asset ceiling P 400,000

Current service cost P900,000

Interest expense on PBO (10% x P4,000,000) P400,000
Interest income on FVPA (10% x P4,500,000) (P450,000)
Interest expense on effect of asset ceiling (10% x P200,000) P 20,000
Employee benefit expense P870,000

Actual return on plan assets P1,000,000

Interest income on FVPA (P 450,000)
Remeasurement gain on plan assets P 650,000

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Effect of asset ceiling – December 31 P400,000
Effect of asset ceiling – January 1 (P200,000)
Total change in the effect of asset ceiling P200,000
Interest expense – January 1
(10% x P200,000) (P 20,000)
Remeasurement loss on asset ceiling P180,000

Transitional provision
 Revised PAS 19, paragraph 173, provides that an entity shall apply this
standard retrospectively, that means 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.
 An entity need not adjust the carrying amount of assets for changes
in employee benefit costs that were included in the initial carrying
amount of the assets. In other words, assets such as inventory and PPE
that include employee benefit costs in their carrying amount do not
have to be restated

Illustration:
On January 1, 2020, the memorandum records showed the following:

Fair value of plan assets P4,000,000

Unamortized past service cost P 400,000
Unrecognized actuarial loss P 500,000
Projected benefit obligation (P6,000,000)
Prepaid/accrued benefit cost (P1,100,000)

On January 1, 2020, the entity applied the revised PAS 19 in relation to the
recognition of past service cost and actuarial gains and losses.

Effective January 1, 2020, all past service costs during the year are fully
recognized in profit or loss. All actuarial gains and losses during the year
are fully recognized in other comprehensive income

The unamortized past service cost and the unrecognized actuarial loss
shall be eliminated and accounted for retrospectively as an adjustment of
retained earnings

Retained earnings P900,000

Prepaid/accrued benefit cost P900,000

If this adjustment is posted to the ledger, the effect would be:

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Prepaid/accrued benefit cost (P1,100,000)
Credit adjustment (P 900,000)
Adjusted credit balance (P2,000,000)

FVPA – January 1 P4,000,000

PBO – January 1 (P6,000,000)
Prepaid/accrued benefit cost (P2,000,000)

**Note that the unamortized past service cost and the unrecognized actuarial
loss are now eliminated and no longer reported

DISCLOSURES – DEFINED BENEFIT PLAN

a. Characteristics of the defined benefit plan and risks associated with the
plan
b. Reconciliation for the fair value of plan assets and the present value of
the defined benefit obligation
c. Separate showing of current service cost, past service cost, interest
expense or income and remeasurements
d. Disaggregation of the FVPA into classes that distinguish the nature and
risks of assets
e. A sensitivity analysis for each significant actuarial assumption showing
the effect on the defined benefit obligation for any change
f. Description of any funding arrangement and policy
g. Expected contribution to the plan for the next period
h. Maturity profile of the defined benefit obligation

REPORT OF DEFINED CONTRIBUTION PLAN

 Shall contain:
 Statement of net assets available for benefits, in which the plan
investments shall be carried at fair value. But in cases when plan
investments are held for which an estimate is not possible, the
reason why fair value is not used shall be disclosed
 A description of the funding policy

REPORT OF DEFINED BENEFIT PLAN

The 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.

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References:

 Valix, C. T., Peralta, J.F & Valix C. A. M. (2019). Intermediate Accounting

Vol.2. Manila, Philippines: GIC Enterprises & Co.. Inc.

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