Accounting for Employee Benefits

Time Duration and Allotment: Week 14; 6 hours

Abstract:
This study focuses on the summary of the accounting standards enumerated above.

Lesson Objectives:
As a result of completing this learning module, students will be able to:
• explain the definition, terms, nature and types of postemployment benefit plans;
• account for employee benefits under defined contribution plan;
• account employee benefits under defined benefit plan.

Module Guide:

1. Study topic content presented below. (TOPIC CONTENT)

2. Answer the exercise presented after the topic content below.

TOPIC CONTENT
PAS 19 – EMPLOYEE BENEFITS
Objective
The main objective of PAS 19 is to prescribe the accounting and disclosure for employee
benefits. PAS 19 requires an entity to recognize:
• a liability when an employee has provided service in exchange for employee
benefits to be paid in the future; and
• an expense when the entity consumes the economic benefit arising from service
provided by an employee in exchange for employee benefits.
NOTE: That’s the clear demonstration of matching principle—to recognize an
expense in the period when matching revenue is recognized.
Employee benefits – all forms of consideration given by an entity in exchange for
services rendered by employees or for the termination of employment.
Classification of employee benefits
1. Short-term employee benefits – employee benefits (other than termination
benefits) that are expected to be settled wholly before twelve months after the
end of the annual reporting period in which the employees render the related
service.
2. Post-employment benefits – employee benefits (other than termination benefits
and short-term employee benefits) that are payable after the completion of
employment. There are two basic types of post-employment benefits:
• Defined contribution plan – entity pays fixed contributions into a
separate entity (a fund) and will have no legal or constructive
obligation to pay further contributions if the fund does not hold
 as paid annual e. Deferred benefits in
sufficient assets to pay all employee benefits relating to employee leave and paid compensation exchange
service in the current and prior periods. sick leave for the
• Defined benefits plan – the employer has the obligation to pay c. Profit sharing termination
specified amount of benefits according to the plan to the employee and and bonuses of
all investment and actuarial risk thus fall on the entity. payable within employment
3. Other long-term benefits – all employee benefits other than short-term twelve months
employee benefits, post-employment benefits and termination benefits. d. Nonmonetary
4. Termination benefits – employee benefits provided in exchange for the benefits, such
termination of an employee’s employment as a result of either: as medical
a. an entity’s decision to terminate an employee’s employment before the care, housing,
normal retirement date; or car and free or
b. an employee’s decision to accept an offer of benefits in exchange for subsidized
the termination of employment. goods.

Other Long-term How to account short-term employee benefits

Post-employment Short-term Termination
Employee The entity shall recognize short-term employee benefits as an expense to profit or loss
Benefits Benefits Benefits
Benefits (unless another PFRS requires or permits the inclusion of the benefits in the cost of an
Employee benefits Employee Benefits Employee benefits Employee asset). The expense shall be recognized in the undiscounted amount of short-term
other than termination other than other than short- benefits provided employee benefits expected to be paid in exchange for employee’s service rendered
benefits and short- termination term, post in exchange for during an accounting period.
term employee benefits which are employment and the termination of
benefits, which are expected to be termination an employee’s Short-term paid absences: Expected cost of short-term paid absences shall be
payable after settled wholly benefits. employment as a recognized when the employees render service that increases their entitlement to future
completion of within twelve a. Long-term result of either: paid absences (in the case of accumulating paid absences); or when the absences occur
employment. months after the paid absences a. An entity’s (in the case of non-accumulating paid absences).
a. Retirement end of annual such as long decision to
benefits, such as reporting period in service or terminate an Profit sharing and bonuses: An entity shall recognize the expected cost of profit-
pensions and which the sabbatical employee’s sharing and bonus payments when the entity has a present legal or constructive
lump sum employees render leave employment obligation to make such payments as a result of past events; and a reliable estimate of
payments on the related service. b. Jubilee or before the the obligation can be made. A present obligation exists when, and only when, the entity
retirement a. Salaries, other long normal has no realistic alternative but to make the payments.
b. Postemployment wages, and service retirement
life insurance SSS benefit date. How to account for defined contribution plans
c. Postemployment contributions c. Long-term b. An The employer shall recognize contributions payable to a defined contribution plan as an
medical care b. Short-term disability employee’s expense to profit or loss (unless another PFRS requires or permits the inclusion of the
compensated benefits decision to benefits in the cost of an asset).
or paid d. Profit sharing accept an
absences such and bonus offer of
When the contributions are not expected to be settled wholly before twelve months after
the end of the reporting period, they shall be discounted.
How to account for defined benefit plans (STEPS)
Step 1: Determine Deficit or Surplus.
Deficit or surplus is a difference between the present value of defined benefit obligation
and fair value of plan assets as at the end of the reporting period. In order to determine
it, the entity must:
• Estimate the ultimate cost of a benefit. The entity must use projected unit credit
method to estimate how much the employees have earned for their work in the
current and prior periods, to attribute the benefit to the periods of service and to
incorporate estimates about demographic and financial variables (“actuarial
assumptions”) into calculations.
• Discount the benefit in order to determine the present value of the defined
benefit obligation and the current service cost.
• Deduct the fair value of any plan assets from the present value of the defined
benefit obligation.
Step 2: Determine amount in the statement of financial position
Although there are quite enough numbers involved in accounting for defined benefit
plan, PAS 19 requires to present them as 1 single amount in the statement of financial
position – the net defined benefit liability (asset), which is basically deficit or surplus
calculated in the step 1, but adjusted for the effect of asset ceiling.
Asset ceiling is the present value of any economic benefits available in the form of
refunds from the plan or reductions in the future contributions to the plan.
NOTE: If there is a surplus, the net benefit asset is the lower of the:
1. Surplus; and
2. Asset ceiling.
Step 3: Determine amount in the profit or loss
The entity shall present the following amounts to profit or loss:
• Current service cost – the increase in the present value of the defined benefit
obligation resulting from employee service in the current period;
• Any past service cost – the change in the present value of the defined benefit
obligation for employee service in prior periods, resulting from a plan
amendment or a curtailment;
NOTE: All past service cost, whether vested or unvested, shall be recognized
as an expense immediately 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.
• Any gain or loss on settlement - The difference between the settlement price
and the present value of the defined benefit obligation on the date of settlement.
NOTE: The settlement price includes any plan assets transferred and any
payments made directly in connection with the settlement.
NOTE: Any gain or loss is fully recognized and included in service cost in the
computation of employee benefit expense.
• Net interest on the net defined benefit liability (asset) – the change in the net
defined benefit liability (asset) during the period due to passage of time
(“unwinding the discount”)
NOTE: Net interest is the difference between the interest expense on the defined
benefit obligation and the interest income on the plan assets.
Composition:
a. Interest Expense – 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 discount rate.
NOTE: Under PAS19R, only the discount rate is to be used.
Step 4: Determine remeasurements in other comprehensive income
The entity shall present the following remeasurements to other comprehensive income:
• Actuarial gains and losses – the changes in the present value of the defined
benefit obligation resulting from experience adjustments or the effects of
changes in actuarial assumptions
 Usual Causes of Actuarial Gains and Losses
a. Unexpected high or low rate of employee turnover, early retirement or
mortality and increases in salary.
b. Change in assumptions concerning benefit payment options.
c. Change in discount rate.
Determination of Actuarial Gains and Losses
Gain: Actual benefit obligation < Estimated Amount
Loss: Actual benefit obligation > Estimated Amount
NOTE: Actuarial gains and losses shall be recognized immediately in other
comprehensive income and not subsequently reclassified to profit and loss.
• Return on plan assets, excluding amounts included in net interest on the net
defined benefit liability (asset)
Components of return on plan assets:
a. Interest, dividend and other income derived from the plan assets.
b. Realized and unrealized gains and losses on the plan assets.
Deductions in computing 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.
NOTE: Plan assets are measured at fair value.
NOTE: The amount of remeasurement is equal to the actual return on plan
assets minus the interest income on the fair value of the plan assets at the
beginning of the reporting period.
NOTE: Remeasurement is included in other comprehensive income without any
subsequent reclassification to profit or loss.
• Any change in the effect of the asset ceiling.
Asset ceiling - the maximum amount for prepaid benefit cost. It 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.
If the fair value of plan assets is more than the projected benefit obligation, the
plan is overfunded and therefore, there is a prepaid benefit cost which PAS 19R
calls it surplus.
NOTE: PAS 19R provides that the surplus in a define benefit plan must not
exceed the asset ceiling determined by using the discount rate in the
measurement of the defined benefit obligation.
NOTE: Any change in the effect of the asset ceiling, excluding interest on the
effect of the asset ceiling is a remeasurement to be recognized through other
comprehensive income.
NOTE: The “interest on the effect of the asset ceiling” is part of the total
change in the effect of the asset ceiling and is determined by multiplying the
effect of the asset ceiling at the beginning of the period by the discount rate.
COMPONENTS OF DEFINED BENEFIT COST (A Summary):
Profit / Loss
1. Service Cost
a. Current service cost
b. Past service cost
c. Any gain or loss on settlement
2. Net interest
a. Interest expense on defined benefit liability
b. Interest income on plan assets
c. Interest expense on effect of asset ceiling
Other Comprehensive Income
3. Remeasurements
a. Actuarial gain and loss
b. Actual return on plan assets less interest income on plan assets
c. Any change in the asset ceiling
 NOTE: The projected unit credit method, sometimes known as accrued benefit However, the entity should perform the same steps as that of defined benefit plans. The
method, shall be used in determining the present value of the defined benefit only difference is that all items such as service cost, net interest on the net defined benefit
obligation and the related current service and where applicable, past service liability (asset) and remeasurements of the net defined benefit liability (asset) are
cost. presented in the profit or loss – so nothing goes to other comprehensive income.

FORMULAS: How to account for termination benefits?

The primary question here is WHEN to recognize the liability and expense for
1. Fair Value of Plan Assets – Ending termination benefits. It is at the earlier of:
Beginning FVPA xx • when the company can no longer withdraw the offer of those benefits (either the
ADD: termination plan exists or employee accepts the offer of benefits) and
Contribution to the fund xx • when the company recognizes cost for a restructuring (PAS 37) and involves the
Interest Income xx payment of termination benefits.
Remeasurement gain on plan assets xx
Total xx The next question is HOW to recognize termination benefits. This depends on the
LESS: specific terms of the benefits:
Benefits paid (xx) • if the termination benefits are expected to be settled wholly before 12 months
Remeasurement loss on plan assets (xx) after the end of the reporting period, then we should apply the requirements
Ending FVPA xx for short-term employee benefits (so recognize it as an expense to profit or loss
on undiscounted basis)
2. Projected Benefit Obligation – Ending • if the termination benefits are not expected to be settled wholly before 12
Beginning PBO xx months after the end of the reporting period, then we should apply the
ADD: requirements for other long-term employee benefits (so recognize it as an
Current Service Cost xx expense to profit or loss on discounted basis)
Past Service Cost xx
Interest Expense xx
Actuarial loss due to increase in PBO xx WRAP UP EXERCISES:
Total xx
LESS:
Benefits paid (xx) Exercise 1. Multiple Choices.
Actuarial gain due to decrease in PBO (xx)
Ending PBO xx

How to account for other long-term employee benefits? Answers to Exercise:

As other long-term benefits are not subject to so much uncertainty as defined benefit
plans, the accounting treatment is a bit easier.
 Activities, Resources, and Assessment
Online (Hybrid Model Blended (Asynchronous Model) Offline (Flex Model)

Resources: Resources: Resources:

Schoology App/Messenger Schoology App/Messenger Textbook: Intermediate Accounting 2 by Conrado
Textbook: Intermediate Accounting 2 by Conrado Textbook: Intermediate Accounting 2 by Conrado Valix, et al.
Valix, et al. Valix, et al.
References and Sources:
References and Sources: References and Sources:
Activities:
Activities: Activities: Topic discussion will be during classroom meetups, and
Topic discussion will be through GoogleMeet App., Topic discussion will be through GoogleMeet App., during which the exercises will be supplied with
during which the exercises will be supplied with during which the exercises will be supplied with answers.
answers. answers. Such teleconferencing will be recorded, the
video of which will be made available to you via Assessment:
Assessment: Messenger Group Chat or Gmail address. Topic quiz will be issued to you and will be answered
Topic quiz will be published at Schoology App. at home, which will be immediately due for submission
Instructions as to the time allocated for answering and Assessment: the following day at the box placed at the SVCI guard
deadline for submission of quiz will be announced via Topic quiz will be published at Schoology App. house. Communication as to the receipt the said quiz
Messenger Group Chat. Instructions as to the time allocated for answering and will be through text messaging.
deadline for submission of quiz will be announced via
Messenger Group Chat.