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CONCEPTUAL FRAMEWORK
&
ACCOUNTING STANDARDS

PAS 19 Employee Benefits

Learning Competencies
• Differentiate between the four classifications of
employee benefits under PAS 19.
• State the timing of the recognition of employee
benefits.
• Differentiate between a defined contribution plan
and a defined benefit plan.
• State the accounting procedures for defined benefit
plans.

Conceptual Framework & Acctg.

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Standards (by: Zeus Vernon B. Millan)

Employee benefits

• Employee benefits are “all forms of

consideration given by an entity in exchange for
service rendered by employees.” (PAS 19.8)

Conceptual Framework & Acctg.

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Standards (by: Zeus Vernon B. Millan)

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Four categories of employee benefits under PAS

19

1. Short-term employee benefits

2. Post-employment benefits
3. Other long-term employee benefits
4. Termination benefits.

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Standards (by: Zeus Vernon B. Millan)

Short-term employee benefits

• Short-term employee benefits are employee benefits

(other than termination benefits) that are due to be
settled within 12 months after the end of the period in
which the employees render the related service.

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Standards (by: Zeus Vernon B. Millan)

Recognition and measurement

When an employee has rendered service to an entity during an accounting
period, the entity shall recognize the undiscounted amount of short-term
employee benefits expected to be paid in exchange for that service:
1. as a liability (accrued expense), after deducting any amount already
paid.
2. as an asset (prepaid expense) if the amount paid is in excess of the
undiscounted amount of the benefits incurred; provided, the
prepayment will lead to a reduction in future payments or a cash
refund; and
3. as an expense, unless the employee benefit forms part of the cost of
an asset, e.g., as part of the cost of inventories or property, plant and
equipment.
Conceptual Framework & Acctg.
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Short-term compensated absences

• Accumulating compensated absences are those that are carried
forward and can be used in future periods if the current period’s
entitlement is not used in full. Accumulating compensated absences
may either be
1. Vesting – wherein employees are entitled to a cash payment for
unused entitlement on leaving the entity ; or
2. Non-vesting - wherein employees are not entitled to a cash
payment for unused entitlement on leaving the entity

• Non-accumulating compensated absences are those that are not

carried forward. No liability or expense is recognized until the absences
occur, because employee service does not increase the amount of the
benefit.
Conceptual Framework & Acctg.
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Standards (by: Zeus Vernon B. Millan)

Conceptual Framework & Acctg.

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Post-employment benefits

• Post-employment benefits are employee benefits (other

than termination benefits) that are payable after the
completion of employment. Post-employment benefit
plans are classified as either:
1. Defined contribution plans
2. Defined benefit plans

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Defined contribution vs. Defined benefit

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Other relevant terms

Conceptual Framework & Acctg.

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Accounting for defined contribution plan

• The accounting for defined contribution plans is straightforward

because the reporting entity’s obligation for each period is
determined by the amounts to be contributed for that period.
Consequently, no actuarial assumptions are required to
measure the obligation or the expense and there is no possibility of
any actuarial gain or loss.

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Standards (by: Zeus Vernon B. Millan)

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Accounting for Defined benefit plan

• The accounting for defined benefit plans is complex

because actuarial assumptions are required to
measure the obligation and the expense and there is a
possibility of actuarial gains and losses.

• Obligations are measured on a discounted basis.

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Accounting procedures for defined benefit plans

Step #1: Determine the deficit or surplus

(Deficit) Surplus = FVPA – PV of DBO

Step #2: Determine the Net defined benefit liability (asset)

 If there is a deficit, the deficit is the Net defined benefit liability.
 If there is a surplus, the Net defined benefit asset is the lower of the
surplus and the asset ceiling.

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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Step #3: Determine the defined benefit cost

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Definition of terms
1. Current service cost - is the increase in the present value of
a defined benefit obligation resulting from employee service in
the current period.

2. Past service cost - is the change in the present value of the

defined benefit obligation resulting from a plan amendment or
curtailment.

3. Gain or loss on settlement – the difference between the

present value of the defined benefit obligation and the settlement
price.

Conceptual Framework & Acctg.

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Standards (by: Zeus Vernon B. Millan)

Definition of terms (Continuation)

4. Interest cost on the defined benefit obligation – is the
increase during a period in the present value of a defined benefit
obligation which arises because the benefits are one period closer
to settlement.

5. Actuarial gains and losses – are changes in the present

value of the defined benefit obligation resulting from
experience adjustments and the effects of changes in
actuarial assumptions.

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Actuarial assumptions
• Actuarial assumptions are an entity’s best estimates of the variables that will
determine the ultimate cost of providing post-employment benefits.
1. Demographic assumptions about the future characteristics of employees who
are eligible for benefits. Demographic assumptions deal with matters such as:
a. mortality, both during and after employment
b. rates of employee turnover, disability and early retirement
c. the proportion of plan members with dependents who will be eligible for
benefits
d. claim rates under medical plans

2. Financial assumptions, dealing with items such as:

a. the discount rate
b. future salary and benefit levels
c. future medical costs, if any, including cost of administering claims and
payments
d. the expected rate of return on plan
Conceptual assets& Acctg.
Framework
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Actuarial assumption – Discount rate

• The rate used to discount post-employment benefit obligations shall

be determined by reference to market yields at the end of the
reporting period on high quality corporate bonds.
• In countries where there is no deep market in such bonds, the
market yields at the end of the reporting period on government
bonds shall be used.

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Other long-term employee benefits

• Other long-term employee benefits are employee

benefits (other than post-employment benefits and
termination benefits) that are due to be settled beyond
12 months after the end of the period in which the
employees render the related service.
• Other long-term employee benefits are accounted for
using the procedures applicable for a defined benefit
plan. However, all of the components of the net benefit
cost are recognized in profit or loss.
Conceptual Framework & Acctg.
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Standards (by: Zeus Vernon B. Millan)

Termination benefits

Termination benefits are employee benefits provided in

exchange for the termination of an employee’s employment
as a result of either:
1. an entity’s decision to terminate an employee’s
employment before the normal retirement date; or
2. an employee’s decision to accept an entity’s offer of
benefits in exchange for the termination of employment.

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Measurement
Termination benefits are initially and subsequently recognized in
accordance with the nature of the employee benefit.
a. If the termination benefits are payable within 12 months, the entity
shall account for the termination benefits similarly with short-term
employee benefits.
b. If the termination benefits are payable beyond 12 months, the
entity shall account for the termination benefits similarly with
other long-term benefits.
c. If the termination benefits are, in substance, enhancement to post-
employment benefits, the entity shall account for the benefits as
post-employment benefits.
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