EMPLOYEE BENEFITS

PAS 19 Employee Benefits & PAS 26 Accounting and Reporting by Retirement Benefit Plans
ACCOUNTING FOR DEFINED BENEFIT PLANS
STEP 1: DETERMINE THE DEFICIT OR SURPLUS

The deficit or surplus is the difference between the following:

a. Present value of the define benefit obligation (PV of DBO)
- PV of DBO represents the entity’s obligation for the accumulated
retirement benefits earned by employees to date. This is determined
using an actuarial valuation method called the projected unit credit
method.
b. Fair value of plan assets (FVPA), if any
- FVPA represents the balance of any fund set aside for the payment of the
retirement benefits.
ACCOUNTING FOR DEFINED BENEFIT PLANS
STEP 2: DETERMINE THE NET DEFINED BENEFIT LIABILITY/ASSET

The net defined benefit liability or asset is the amount that is

presented in the statement of financial position.
-If there is a deficit, the deficit is a net defined benefit liability.
-If there is a surplus, the net defined benefit asset is the lower of
the:
a. surplus, and
b. Asset ceiling
The asset ceiling is the present value of any economic benefits
available in the form of refunds from the plan or reduction in
future contributions to the plan.
ACCOUNTING FOR DEFINED BENEFIT PLANS
STEP 3: DETERMINE THE DEFINED BENEFIT COST

Service cost: (recognized in P/L)

(a) Current service cost xx
(b) Past service cost xx
(c) Any (gain) or loss on settlement xx xx

Net interest on the net defined benefit liability (asset): (recognized in P/L)
(a) Interest cost on the defined benefit obligation xx
(b) Interest income on plan assets xx
(c) Interest on the effect of the asset ceiling xx xx

Remeasurements of the net defined benefit liability (asset): (recognized in OCI)

(a) Actuarial (gains) and losses xx
(b) Difference between interest income on plan assets and return on plan assets xx
(c)Difference between the interest on the effect of the asset ceiling and change in
the effect of the asset ceiling xx xx

Total defined benefit cost xx

SERVICE COST

Current service cost

- The increase in the PV of DBO resulting from employee service in the
current period.

Past service cost

- The change in the PV of DBO for employee service in prior periods
resulting from a plan amendment or curtailment.
- Past service cost (vested or unvested) is recognized immediately as
expense (a) when the plan amendment or curtailment occurs; or (b)
when the entity recognizes related restructuring costs or termination
benefits; whichever comes earlier.
- Unvested past service costs are not deferred and amortized.
SERVICE COST

Gain or loss on settlement

- It arises when the employer’s obligation to provide benefits is
eliminated other than from payment of benefits according to the terms
of the plan.
- The gain or loss on a settlement is the difference between:
a. The present value of the defined obligation being settled, as determined
on the date of settlement; and
b. The settlement price, including any plan assets transferred and any
payments made directly by the entity in connection with the settlement.
- The gain or loss is recognized when the settlement occurs.
NET INTEREST ON THE NET DEFINED
BENEFIT LIABILITY (ASSET):
 Net increase on the defined benefit liability (asset) is the
change in the net defined benefit liability (asset) during the
period that arise from the passage of time.
 The same discount rate is used for the three times. This
discount rate is based on high quality corporate bonds or in
the absence thereof, on government bonds, determined at
the start of the annual reporting period.
REMEASUREMENTS OF THE NET DEFINED
BENEFIT LIABILITY (ASSET)
Actuarial gains and losses
-These are changes in the PV of DBO resulting from changes
in actuarial assumptions.
-Actuarial assumptions are estimates of variables used in
determining the ultimate cost of providing post-employment
benefits.
-These include demographic assumptions and financial
assumptions.
REMEASUREMENTS OF THE NET DEFINED
BENEFIT LIABILITY (ASSET)
Return on plan assets
-Return on plan assets represents the investment income
earned by the plan assets during the year after deducting
the costs of managing the fund and taxes.
FAIR VALUE OF PLAN ASSETS

 Fair value is the price that would be received to sell

an asset or paid to transfer a liability in an orderly
transaction between market participants at the
measurement date.

 Plan assets comprise:

a. Assets held by a long-term employee benefit fund; and
b. Qualifying insurance policies
FAIR VALUE OF PLAN ASSETS

 Both assets held by a long-term employee benefit fund and

the proceeds from a qualifying insurance policy are intended
solely for paying employee benefits, are not available to the
employer’s creditors even in bankruptcy. It cannot be
returned to the employer except when the amount returned
represents surplus assets that are not needed in settling
employee benefit obligations or a reimbursement to the
employer for employee benefits already paid.
FAIR VALUE OF PLAN ASSETS

 Plan assets exclude unpaid contributions due from the

employer, as well as any non-transferable financial
instruments issued by the employer and held by the fund.
 Plan assets are reduced by any liabilities of the fund that do
not relate to employee benefits.
DETERMINING THE ULTIMATE COST OF A
DEFINED BENEFIT
 The ultimate cost of the plan is uncertain and this
uncertainty is likely to persist over a long period of time. In
order to measure the present value of the post-employment
benefit obligations and the related current service cost, it is
necessary:
a. To apply an actuarial valuation method;
b. To attribute benefit to periods of service; and
c. To make actuarial assumptions
ACTUARIAL VALUATION METHOD
PROJECTED UNIT CREDIT METHOD

 The projected unit credit method sees each period of service

as giving rise to an additional unit of benefit entitlement and
measures each unit separately to build up the final
obligation.
 Under the projected unit credit method, retirement benefit
obligations are measured based on future salary levels of
employees (projected salaries). Assumptions are made to
estimate the salary level of employees on their expected
retirement date.
ATTRIBUTING BENEFIT TO PERIODS OF SERVICE

 Benefits are attributed to the periods of service using the

plan formula.
 However, if plans are materially higher for services
rendered in later years than in earlier years, the benefits are
attributed on a straight-line basis from the date the
employee’s entitlement to benefits starts to accrue until the
date where the future service no longer lead to material
amount of benefits.
 Benefits are attributed to the current period in order to
determine the current service cost, and current and prior
periods in order to determine the PV of DBO.
REIMBURSEMENTS

 When it is virtually certain that another party will reimburse

some or all of the expenditure required to settle a defined
benefit obligation, an entity recognizes its right to
reimbursement as a separate asset, measured at fair value.
 Any gain or loss on the changes in the carrying amount of
the reimbursement asset is recognized as an addition to (or
deduction from) the define benefit cost.
OVERFUNDING/UNDERFUNDING

 The retirement plan is said to be overfunded if there is net

defined benefit asset and underfunded if there is net define
benefit liability.
 If the fair value of the plan assets is equal to or greater than
the present value of the defined benefit obligation, the
retirement plan is said to be fully funded.
OFFSETTING

 An asset relating to one plan is offset against a liability

relating to another plan only when the entity has both:
a. A legally enforceable right to use a surplus in one plan to
settle obligations under the other plan; and
b. An intention to either settle the obligations on a net basis, or
to realize the surplus in one plan and settle its obligation
under the other plan simultaneously.
 OTHER LONG-TERM EMPLOYEE BENEFITS

 Other long-term employee benefits are employee benefits that

are due to be settled beyond 12 months after the end of the period
in which the employees have rendered the related service.
Examples:
a. Long-term compensated absences
b. Jubilee or other long-service benefits
c. Profit-sharing, bonuses, and deferred compensation payable
beyond 12 months after the end of the period in which the benefits
were earned.
 There benefits are accounted for similar to defined benefit plans
except that all the components of the defined benefit costs is
recognized in profit or loss.
TERMINATION BENEFITS

 Termination benefits are those as a result of either

a. The entity’s decision to terminate the employee before
normal retirement date; or
b. The employee’s decision to accept the employer’s offer of
benefits in exchange for termination.
 Benefits arising from termination at the employee’s request
without the employer’s offer are not termination benefits but
rather post-employment benefits.
RECOGNITION

 Termination benefits are recognized as a liability and

expense at the earlier of the following dates:
a. When the entity can no longer withdraw the offer of those
benefits; and
b. When the entity recognizes restructuring costs under PAS 37
that involve payment of termination benefits.
MEASUREMENT

Termination benefits are accounted for according to their

nature. Termination benefits that are:
a. Payable within 12 months are accounted as short-term
benefits.
b. Payable beyond 12 months are accounted as other long-
term employee benefits.
c. Enhancement to post-employment benefits are accounted
for as post-employment benefits.
END