Employee

Benefits

Prepared by:
Michael Angelo M. Manayao, CPA, MBA
 Learning Objectives
 To understand postemployment benefits.
 To distinguish defined contribution plan and defined
benefit plan.
 To know the recognition of defined contribution plan.
 To identify the components of defined benefit cost.
 To apply the projected unit credit method in computing
projected benefit obligation.
 To know the recognition of current service cost, past
service cost and net interest.
 To define plan assets and return on plan assets.
 Employee Benefits
Employee benefits are all forms of consideration given by an
entity in exchange for services-rendered by employees or for
the termination of employment.

NOTE: In accordance with PAS 19, employees INCLUDE directors

and other management personnel.

Under PAS 19, employee benefits include (SPOT):

1. Short-term employee benefits
2. Postemployment benefits
3. Other long-term employee benefits (other than
postemployment benefits)
4. Termination benefits
 Postemployment Benefits
 Postemployment benefits are employee benefits,
other than termination benefits and short-term
employee benefits, which are payable after
completion of employment.
 Examples of post-employment benefits are:
a. Retirement benefits, such as pensions and
lump sum payments on retirement
b. Postemployment life insurance
c. Postemployment medical care
 Postemployment Benefits
NOTE: Post-employment plans can be formal or
informal. A plan is FORMAL if it was established as
part of the remuneration package for the
employees. A plan is INFORMAL if it is evidenced
only by the entity's practice to pay postemployment
benefits. The plans may also be established by law
whereby entities are required to contribute to
national benefit plans.
Postemployment Benefits
Postemployment Benefits
 Postemployment Benefit Plans under the Law

a. Social Security System - This postemployment

benefit plan is a defined contribution plan
because the entity's obligation is limited to
specified contributions to the plan as a
percentage of salary.
b. R. A. 7641 - This postemployment benefit plan is a
defined benefit plan because the entity's
obligation is to provide specific level of benefit for
every year of service.
 Accounting for Defined Contribution Plan

 Accounting for a defined contribution plan is

straightforward because the obligation of the
entity is determined by the amount contributed
for each period.
 REQUIRED CONTRIBUTION = EXPENSE
 No actuarial assumptions.
 Accounting Procedures

 The contribution shall be recognized as expense in the

period it is payable
 Any unpaid contribution at the end of the period shall
be recognized as accrued expense.
 Any excess contribution shall be recognized as
prepaid expense but only to the extent that the
repayment will lead to a reduction in future payments
or a cash refund.
 The amount of contribution is measured at an
UNDISCOUNTED amount unless it is due beyond 12
months.
 Disclosures – Defined Contribution Plan

 The amount recognized as expense for the defined

contribution plan.
 The contribution to defined contribution plan for key
management personnel as required by PAS 24 on
related party disclosures.
 Let’s Try This!!!
Problems 17-1 to 17-3
Problem 17-1
2022 Employee Benefit Expense 200,000
Cash 200,000
(4,000,000 x 5% = 200,000)

2023 Employee Benefit Expense 210,000

Cash 210,000
(4,200,000 x 5% = 210,000)
Problem 17-2
12/31/22 Employee Benefit Expense 300,000
Accrued Benefit Payable 300,000

02/15/23 Accrued Benefit Payable 300,000

Cash 300,000

Problem 17-3
12/31/22 Employee Benefit Expense 350,000
Prepaid Benefit Expense 50,000
Cash 400,000
 Accounting for Defined Benefit Plan
 Accounting for a defined contribution plan more
complex since there is discounting and actuarial
assumptions.
 Consequently, under a defined benefit plan, the
expense recognized is not necessarily the amount of
contribution for the period. REQUIRED CONTRIBUTION ≠
EXPENSE
 Components of Defined Benefit Cost
PAS 19, paragraph 120, provides that an entity shall recognize the following
components of defined benefit cost:
1. Service cost which comprises:
a. Current service cost
b. Past service cost
c. Any gain or loss on settlement

2. Net interest which comprises:

a. Interest expense on defined benefit obligation
b. Interest income on plan assets
c. Interest expense on effect of asset ceiling

3. Remeasurements which comprise:

a. Remeasurement of plan assets
b. Remeasurement of projected benefit obligation
c. Remeasurement of the effect of asset ceiling
Components of Defined Benefit Cost
 Actuarial Valuation Method
 The projected unit credit method, sometimes known as the
accrued benefit method, shall be used in determining the
present value of the defined benefit obligation and the
related current service cost and where applicable, past
service cost.

 This 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.
 Current Service Cost
 Current service cost is the increase in the present
value of the defined benefit obligation resulting from
employee service in the current period.
 Otherwise stated, current service cost is the cost to an
entity under a defined benefit plan for service
rendered by employees in the current year.
 This component of the benefit expense
understandably increases expense and defined
benefit obligation.
 Net Interest
 Net interest on defined benefit liability or asset is the change in the
defined benefit obligation, plan assets and effect of asset ceiling as
a result of the passage of time.
 The net interest can be viewed as comprising three elements,
namely:
a. Interest expense on defined benefit liability
This is computed by multiplying the defined benefit obligation at
the beginning of the reporting period by the discount rate.
b. Interest income
This is computed by multiplying the fair value of plan assets at
the beginning of the reporting period by the same discount rate.
 Net Interest
c. Interest expense on effect of asset ceiling
This is computed by multiplying the effect of the asset
ceiling at the beginning of the reporting period by the same
discount rate.

In other words, the net interest expense or net interest income

is the difference between the interest expense on the defined
benefit obligation, interest expense on effect of asset ceiling
and interest income on the plan assets.
 Past Service Cost
 Past service cost is the change in the present value of
defined benefit obligation for employee service in prior
periods resulting from a plan amendment or curtailment.
 In other words, past service cost is the cost to an entity
under a defined benefit plan for services rendered by
employees in prior periods resulting from the introduction of
a defined benefit plan or amendment of an existing plan or
curtailment of an existing plan.
 Plan amendment includes introduction of defined benefit
plan or changes to an existing defined benefit plan.
 Past Service Cost
 Plan curtailment is a significant reduction by the entity
in the number of employees covered by the defined
benefit plan. A curtailment may arise from an isolated
event, such as the following:
a. Closing of a plant
b. Discontinuance of an operation
c. Termination or suspension of a plan
 Recognition of Past Service Cost
 PAS 19, paragraph 103, provides that an entity shall recognize
past service cost as an expense at the earlier of the
following dates:
a. When the plan amendment or curtailment occurs.
b. When the entity recognizes related restructuring costs or
termination benefits.

 This means that all past service costs, whether vested or

unvested, shall be recognized as an expense immediately.
 Plan Assets
 Plan assets comprise assets held by a long-term benefit fund and
qualifying insurance policies.
 The conditions for assets held by a long-term benefit fund are:
a. The assets are held by an entity, the fund itself, that is legally
separate from the reporting entity.
b. The assets are available to pay only employee benefits.
c. The assets are not available to the reporting entity's own
creditors even in bankruptcy.
d. The assets cannot be returned to the reporting entity or can be
returned to the reporting entity if the remaining assets of the
fund are sufficient to meet all employee benefit obligations or
the assets are returned to the reporting entity to reimburse it
for employee benefits already paid.
 Qualifying Insurance Policy
 A qualifying insurance policy is an insurance policy issued by an
insurer that is not a related party of the reporting entity.
 The proceeds of the policy can be used only to pay employee
benefits and are not available to the reporting entity's own creditors
even in bankruptcy.
 The proceeds of the policy cannot be paid to the reporting entity,
except:
a. When the proceeds represent surplus assets not needed for the
policy to pay employee benefits.
b. When the proceeds are returned to the reporting entity to
reimburse it for employee benefits already paid.
Note: When an insurance policy held by entity is not a qualifying
insurance policy, that insurance policy is not a plan asset.
 Measurement of Plan Assets
 Plan assets are measured at fair value.

 Plan assets exclude unpaid contributions due from the

reporting entity to the fund and nontransferable financial
instruments issued by the entity and held by the fund.

 Plan assets are reduced by any liabilities of the fund that do

not relate to employee benefits i.e. trade and other payables
and liabilities resulting from derivative financial instruments.
 Return on Plan Assets
The components of return on plan assets include following:
a. Interest, dividend and other income derived from the plan
assets.
b. Realized and unrealized gains and losses on the plan
assets.

However, the following shall be deducted in computing the

return on plan assets:
a. Any costs of managing the plan assets or costs of
managing investments.
b. Any tax payable by the plan itself or any tax on investment
income.
 Remeasurement of Plan Assets
The return on plan assets is fully recognized as a remeasurement
and accounted for as component of other comprehensive income.

Remeasurement = Actual return on plan assets minus the interest

income on the fair value of the plan assets at the beginning of the
reporting period.
a. If the actual return on plan assets is higher than the interest
income on fair value of plan assets, the difference is a
remeasurement gain.
b. If the actual return or plan assets is lower than the interest
income on fair value of plan assets, the difference is a
remeasurement loss.
 Components of Fair Value of Plan Assets

a. Contribution to the fund

b. Interest income on plan assets
c. Remeasurement gain or loss on plan assets
d. Benefits paid upon retirement
e. Settlement price of plan settlement before
retirement
 Projected Benefit Obligation
Projected benefit obligation is the actuarial present
value of all benefits attributed by the pension benefit
formula to employee service rendered before a specified
date based on future compensation level or future
salary increases.
 Remeasurement of Projected Benefit Obligation

 If the actual benefit obligation is higher than the

estimated amount, there is an actuarial loss. This
means that the projected benefit obligation has
increased and the increase is recognized as an
actuarial loss.

 If the actual benefit obligation is lower than the

estimated amount, there is an actuarial gain. This
means that the projected benefit obligation has
decreased and the decrease is recognized as an
actuarial gain.
 Let’s Try This!!!
Problems 17-4 to 17-6
Problem 17-4
Requirement 1
500,000 x 2.094 = 1,047,000

Requirement 2
1,047,000 x 2% x 10 years = 209,400

Requirement 3
PV of Annual Pension Payment (209,400 x 8.559) 1,792,255
PV Factor 0.146
Projected Benefit Obligation 261,669
Problem 17-5
Requirement 1
600,000 x 1.480 = 888,000

Requirement 2
888,000 x 2% x 15 years = 266,400

Requirement 3
PV of Annual Pension Payment (266,400 x 5.335) 1,421,244
PV Factor 0.386
Projected Benefit Obligation 548,600
Problem 17-6
Annual Benefit = 1,500,000 x 5% = 75,000

Current
Year PV Factor Present Value
Service Cost
2022 75,000 0.361 27,075
2023 75,000 0.404 30,300
2024 75,000 0.452 33,900

Current Interest
Date Present Value
Service Cost Expense
12/31/2022 27,075 0 27,075
12/31/2023 30,300 3,249 60,624
12/31/2024 33,900 7,275 101,799
QUESTIONS?
Thank you for
listening!

Michael Angelo M. Manayao, CPA, MBA