Chapter 17 & 18: Postemployment Benefits

General Knowledge
Employee benefits- are all forms of consideration given by an entity in exchange for:
a. Services rendered by employees
b. For the termination of employment
Types of employee benefits:
a. Postemployment benefits
b. Short-term employee benefits- 12 months after end of reporting period
c. Termination of benefits
d. Other long-term benefits- residual definition of the first three
-called other long-term because of the fact that postemployment
benefit is also a long-term benefit

Postemployment Benefits
Postemployment benefits- are employee benefits, other than termination benefits & short-
term employee benefits, which are payable after completion of
employment
-hindi ka na empleyado pero meron ka pa ring natatanggap
-normal ending of employment
*Most of these benefits are formal arrangements (may contract; at the commencement
of their employment, a plan about these benefits are already proposed to them; legal
obligation)
*Some of these benefits are informal arrangements (practice of entity; good customs;
constructive obligation)
Classifications:
a. Defined contribution plans
b. Defined benefits plans
*contributory, noncontributory, funded, unfunded - pg. 563*

Defined Contribution Plan

Defined contribution plan- a postemployment benefit plan under which an entity pays fixed
contributions (fund) into a separate entity

Entity Fund Employee

*Entity contributes a fixed fund to another entity. After this, he has no further legal or
constructive obligation to the employees as he has already done his part. In this case,
whether the fund eventually increase or decrease, he will not be compelled to add additional
amount to it.
*Contribution [fund] is definite; benefit is indefinite
*more details, pg. 564*
Accounting for Defined Contribution Plan
I. Rules
Straightforward
-bc. the obligation of the entity is determined by the amount contributed for each period)
Does not require actuarial assumptions to measure the contribution/fund
No possibility of any actuarial gain or loss
Undiscounted Discounted
measurement of fund when to be settled measurement of fund when to be settled
within 12 months after end of reporting period more than 12 months after end of reporting period

II. Journal Entries

*contribution is recognized as expense, allocated yearly
Normal Unpaid contribution Excess Contribution
Employee benefit exp. xx Employee benefit exp. xx Employee benefit exp. xx
Cash xx Accrued benefit payable xx Prepaid benefit exp. xx
Cash xx
Accrued benefit payable xx
Cash xx

Defined Benefit Plan

Defined benefit plan- a postemployment plan other than a defined contribution plan
- residual definition

Entity Fund Employee

*Entity contributes a fixed/agreed benefit to another entity. Given this, his
legal/constructive obligation is indefinite that is, even after contributing the fund.
*Since it is a fixed benefit, whenever the fund decreases, entity is obliged to add more to
it. Consequently, when the fund increases, the entity may stop contributing for a while.
*Contribution [fund] is indefinite; benefit is definite
Defined benefit plan Defined contribution plan
-entity assumes investment risk -employee assumes investment risk
-needs actuarial assumptions -needs not actuarial assumptions
-discounted basis -undiscounted basis (generally)
-treated as investment -treated as expense

Accounting for Defined Contribution Plan

I. Rules
Complex
-bc. you will do accounting from the commencement of the contract up to when the
employee is dead
Generally considers:
(1) Defined Benefit Cost [PBO]
(2) FVPA
(1) Defined Benefit Cost/PBO
*Defined benefit cost- is the benefit to be received at end; measured by an actuary

Components:
a. Service Cost
-included in profit or loss
a.1 Current service cost --------------------------------- add
Step 1: current salary x Future Value of 1 = final salary
Step 2: final salary x benefit rate (%) = benefit each year
or
final salary x benefit rate x yrs in service
(if benefit is payable in installment on retirement)
Step 3: benefit each year x PV of 1 = current service cost
*remember that time basis is from large to small (4 to 1)
or
*refer to table in pg. 583 if benefit is payable in installment on retirement*
a.2 Past service cost---------------------------------------deduct
a.3 Gain on settlement-----------------------------------deduct
a.4 Loss on settlement------------------------------------add
Present value of defined benefit obligation settled xx Service cost xx
Settlement payment (xx) Net interest xx/(xx)
Settlement gain/loss xx/(xx) Employee benefit expense xx
b. Net Interest
-included in profit or loss
-always based on discount rate
b.1 Interest expense: PBO-------------------------------------------add
PBO-beginning x discount rate
b.2 Interest income: FVPA--------------------------------------------deduct
FVPA-beginning x discount rate
b.3 Interest expense: effect of asset ceiling---------------------add
Service cost xx
Net interest xx/(xx)
Remeasurements xx/(xx)
Benefits paid (xx)
c. Remeasurements
PBO- end xx
-included in OCI
gain loss
c.1 Plan assets--------------------------------------------------------------add deduct
Actual return xx
Interest income: FVPA - beg. (xx)
Gain/Loss xx/(xx)
c.2 PBO-----------------------------------------------------------------------add deduct
c.3 Effect of asset ceiling------------------------------------------------add deduct
 *Plan assets- assets held by a long-term benefit fund and qualifying insurance policies
-measured at fair value

Components:
a. Contribution----------------------------------------------------------------add
b. Interest income: FVPA---------------------------------------------------add
c. Remeasurement gain/loss on plan assets-------------------------add/deduct
Actual return xx
Interest income: FVPA - beg. (xx)
Gain/Loss xx/(xx)
d. Benefits paid---------------------------------------------------------------deduct
e. Settlement price----------------------------------------------------------add/deduct

*return on plan assets, pg. 578*

FVPA- beg. xx
Contribution xx
Interest income- FVPA xx
Settlement payment of DBO (xx)
Remeasurement gain/loss - plan assets xx/(xx)
Benefits paid (xx)
FVPA- end xx

Interest income- FVPA beg. xx

Remeasurement gain/loss xx/(xx)
Actual return xx