EMPLOYEE BENEFITS

PAS 19 Employee Benefits & PAS 26 Accounting and Reporting by Retirement Benefit Plans
EMPLOYEE BENEFITS

 Employee benefits are all forms of consideration given by an

entity in exchange for service rendered by employees or for
the termination of employment.
 Employee benefits can be in any form – cash, goods or
services, and may be provided to either the employees or
their dependents
RECOGNITION

 Employee benefits are recognized as expense when

employees have rendered service, except to the extent that
the employee benefits form part of the cost of another asset.
 Employee benefits already earned by employees but not yet
paid are recognized as liabilities.
 Employee benefits may arise from contractual agreements,
legislation, or informal practices that create constructive
obligations.
FOUR CATEGORIES OF EMPLOYEE
BENEFITS UNDER PAS 19
a. Short-term employee benefits
b. Post-employment benefits
c. Other long-term employee benefits
d. Termination benefits
SHORT-TERM EMPLOYEE BENEFITS

 Short-term employee benefits are those that are due to be

settled within 12 months after the end of the period in which
the employees have rendered the related services.
 Examples:
1. Salaries, wages, and SSS, Philhealth, and Pag-IBIG
contributions
2. Paid vacation leaves and sick leaves
3. Profit sharing and bonuses
4. Non-monetary benefits
SHORT-TERM EMPLOYEE BENEFITS

General accounting requirements

 The benefits are recognized as expense after the employee
has rendered services and becomes entitled to payment.
 An accrued liability is recognized if the benefits are unpaid.
A prepaid asset is recognized if there is excess payment.
 Short-term employee benefits are recognized periodically.
 ILLUSTRATION:

ABC Co. pays salaries twice a month and does not pay salaries in
advance. Employees work five days a week and compensation are
computed on these working days. In December 20x1, ABC Co. paid
the second semi-monthly salaries on December 26 which falls on a
Friday. The next non-working holiday is on New Year’s Day. ABC has
100 employees who earn P1,000 per day. ABC’s cost accountant
identified that 70% of salaries incurred pertain to the production of
goods.

How much is the accrued salaries as of December 31, 20x1?

SHORT-TERM PAID ABSENCES

 Short-term paid absences include vacation, holiday,

maternity, paternity and sick leaves. Entitlement to paid
absences may be either:
a. Accumulating – those that can be carried forward and
used in future periods if not used in the current period.
1) Vesting
2) Non-vesting
b. Non-accumulating – those that expire if not used in the
current period and are not paid in cash when the
employee leaves the entity.
SHORT-TERM PAID ABSENCES

 Compensated absences are recognized as follows:

a. Accumulating and vesting – all unused entitlements are
accrued and measured at their expected settlement
amount.
b. Accumulating and non-vesting – unused entitlements are
accrued but taking into account the possibility that the
employees may leave before they use those
entitlements.
c. Non-accumulating – unused entitlements are not
accrued but recognized only when the absences occur.
 ILLUSTRATION

ABC Co.’s employees are entitled to 12 days paid vacation leave per
year. Employees are required to take a vacation leave each year, but
not necessarily for the full entitlement. Unused vacation leaves can
be carried over indefinitely.

ABC has 500 employees with an average salary of P1,000 per day.
The average salary increase is 5% per year. During 20x1, employees
took total vacation leaves of 5,400 days. Based on past experience,
90% of unused vacation leaves in a year are taken in the immediately
following year.
 ILLUSTRATION (CONTINUATION)

Case 1: Unused vacation leaves vest. How much is the accrued

liability on December 31, 20x1?

Case 2: Unused vacation leaves do not vest. How much is the

accrued liability on December 31, 20x1?
 ILLUSTRATION

ABC Co.’s 100 employees are each entitled to 5 days paid sick leave per year.
Unused sick leave can be carried over for one calendar year. Sick leave is taken out
first from the current year’s entitlement and then from any balance in the previous
year.

At December 31, 20x1, the average unused entitlement is two days per employee. The
entity expects that:
a) 92 employees will take no more than five days of paid sick leave in 20x2.
b) The remaining 8 employees will take an average of six and a half days each.
c) The average salary per day, per employee is P1,000. This is not expected to
change in 20x2.

How much is the accrued liability on December 31, 20x1?

PROFIT-SHARING AND BONUS PLANS

 Profit-sharing and bonuses are additional incentives given

to employees for a variety of reasons.
 Profit sharing and bonuses are recognized when
a) The entity has a present obligation to pay for them; and
b) The cost can be measured reliably.
 Examples of bonus schemes:
a) Bonus before bonus and before tax
b) Bonus after bonus and before tax
c) Bonus before bonus and after tax
d) Bonus after bonus and after tax
PROFIT-SHARING AND BONUS PLANS

 Bonus before bonus and before tax

B = P x Br

Where: B = bonus
P = profit before bonus and tax
Br = bonus rate/percentage
PROFIT-SHARING AND BONUS PLANS

 Bonus after bonus and before tax

P
B = P -
1 + Br

Where: B = bonus
P = profit before bonus and tax
Br = bonus rate/percentage
PROFIT-SHARING AND BONUS PLANS

 Bonus before bonus and after tax

1 - Tr
B = P x
1/Br - Tr

Where: B = bonus
P = profit before bonus and tax
Br = bonus rate/percentage
Tr = tax rate
PROFIT-SHARING AND BONUS PLANS

 Bonus after bonus and after tax

1 - Tr
B = P x
1/Br – Tr + 1

Where: B = bonus
P = profit before bonus and tax
Br = bonus rate/percentage
Tr = tax rate
ILLUSTRATION

ABC Co. grants its managerial employees bonus in the form

of profit sharing. Information on operations in 20x1 is shown
below:

Profit before tax P1,000,000

Bonus rate/percentage 10%
Income tax rate 30%

Compute the bonus using the four bonus scheme.

POST-EMPLOYMENT BENEFITS

 Post-employment benefits are employee benefits – other

than termination benefits and short-term employee benefits
– that are payable after the completion of employment.
 Post-employment benefits are provided to employees
through post-employment benefits plans.
 A post-employment benefit plan can be formal or informal.
 A post-employment benefit plan can also be contributory or
non-contributory; and funded or unfunded.
 POST-EMPLOYMENT BENEFITS

Contributory Non-contributory
• Both the employer and • Only the employer contributes
employee contribute to the to the retirement fund of the
retirement fund of the employee.
employee.
 POST-EMPLOYMENT BENEFITS

Funded Unfunded
• The retirement fund is • The employer manages any
isolated from the established fund and pays
employer’s control and is directly the retiring
transferred to a trustee employees.
who undertakes to manage
the fund and pay directly
the retiring employees.
POST-EMPLOYMENT BENEFITS

 Post-employment benefit plans are either:

a. Defined contribution plans; or
b. Defined benefit plans
DEFINED CONTRIBUTION PLANS

 The employer commits to make fixed contributions to a fund

that will be used to pay for the retirement benefits of the
employees.
 The amount of post-employment benefits to be received by
employees depends on the amount of contributions to the
fund together with the investment income therefrom.
 If the fund balance is less than expected, the employer has
no obligation to make good the deficiency.
 The risk that retirement benefits may be insufficient rests
with the employee.
DEFINED BENEFIT PLANS

 The employer commits to pay a definite amount of

retirement benefits.
 The amount of promised benefits is independent of any fund
balance.
 If the fund is insufficient to pay for the promised benefits, the
employer is obligated to make good the deficiency.
 The risk of fund insufficiency rests with the employer.
HYBRID PLANS

 Hybrid plans are retirement benefits plans that have

characteristics of both a defined contribution plan and a
defined benefit plan.
 For accounting purposes, hybrid plans are considered as
defined benefit plans.
MULTI-EMPLOYER PLANS

 Various unrelated employers contribute to a common fund

that is managed by a trustee to provide post-employment
benefits to the employees of the participating employers.
 Contribution and benefit levels are determined without
regard to the identities of the employers.
 It is classified as either defined contribution plan or a
defined benefit plan.
STATE PLANS

 A state plan is one that is established by law and operated

by the government.
 It is mandatory for all entities within its scope and is not
subject to control or influence by the entity.
 A state plan is accounted for similar to a multiemployer
plan, classified as either a defined contribution plan or a
defined benefit plan.
INSURED BENEFITS

 An employer may pay insurance premiums to fund a post-

employment benefit plan.
 It can be classified as either defined contribution plan or
defined benefit plan.
 It is a defined benefit plan if the employer retains the
obligation to either pay directly the benefits to the employee
if make good any deficiency if the insurer fails to pay in full
the benefits.
ACCOUNTING FOR DEFINED
CONTRIBUTION PLAN
 The accounting for defined contribution plans is
straightforward.
 It recognizes the contribution as expense and a liability
when employees have rendered services during a period.
 If the amount contributed exceeds the fixed amount of
contribution, the excess is treated as a prepaid asset.
 The amount of contribution is measured at an undiscounted
amount if it is due within 12 months; if due beyond 12 months,
it is discounted.
 ILLUSTRATION 1

Under Entity A’s defined contribution plan, it agrees to make fixed

annual contributions of P200,000 to a retirement fund for the benefit
of its employees.

Scenario 1: Entity A’s retirement benefits plan is funded. Entity A

contributes P200,000 to the fund held by a trustee.

Scenario 2: Because of poor results of operations, Entity A was only

able to contribute P80,000 to the fund.
 ILLUSTRATION 1

Under Entity A’s defined contribution plan, it agrees to make fixed

annual contributions of P200,000 to a retirement fund for the benefit
of its employees.

Scenario 3: Because of profitable operations, Entity A decided to

contribute P230,000 during the period.

Scenario 4: An employee retired and was eligible to P30,000

retirement benefits based on the operating efficiency and investment
earnings of the fund.
 ILLUSTRATION 2

Under Entity A’s defined contribution plan, it agrees to make fixed

annual contributions of P200,000 to a retirement fund for the benefit
of its employees.

Variation 1: Retirement is unfunded but with separate fund

Entity A’s retirement plan is unfunded. However, Entity A has
established a separate fund for the retirement benefits of its
employees.
 ILLUSTRATION 2

Scenario 1: Entity A accrues the retirement benefits expense for the

year and segregates P80,000 to the retirement fund maintained
internally.

Scenario 2: An employee retired and was paid P30,000 retirement

benefits based on the operating efficiency and investment earnings of
the fund.
 ILLUSTRATION 3

Under Entity A’s defined contribution plan, it agrees to make fixed

annual contributions of P200,000 to a retirement fund for the benefit
of its employees.

Variation 2: Retirement plan is unfunded with no separate fund

Entity A’s retirement plan is unfunded and no separate fund is
established for the retirement benefits of the employees.
 ILLUSTRATION 3

Scenario 1: Entity A accrues the retirement benefits expense for the

year.

Scenario 2: An employee retired and was paid P30,000 retirement

benefits.
END