EMPLOYEE BENEFITS

(PAS 19)

SUBMITTED BY; JASTIN M. CUARESMA &

MART LORENZ ELPUZ
YR&SECTION; BSA-3A
SUBMITTED TO; MRS. KATHLEEN EBUEN ENCINA
 EMPLOYEE BENEFITS
EMPLOYEE BENEFITS are all forms of consideration given by an entity exchange for services rendered by
employees or for the termination of employment.

The employee benefits include;

a. Postemployment Benefits

b. Short-term employee benefits

c. Other long-term employee benefits

d. Termination benefits

A. POSTEMPLOYMENT BENEFITS

Post-employment benefits – are defined as employee benefits (other than termination benefits) that
are payable after the completion of employment or upon retirement.

Post-employment benefit plans – are formal or informal arrangements under which an entity provides
post- employment benefits for one or more employees.

TYPES OF PENSION PLANS:

Pension plan may be a state or government plan or an employer plan. A state plan is one that is
administered by the state or government, such as the plan administered by the Social Security System.
An employer plan is one that is sponsored by the employer.

Pension plan may be contributory or noncontributory.

 A contributory pension plan is one both the employer and employee contribute.

 A noncontributory pension plan is one in which the cost of the plan is paid solely by the employer;
the employee does not contribute to the plan.

Pension plan may be unfunded, partly funded or fully funded.

 When funded, the contributions are paid to a separate entity (fund). This entity is tasked to manage
the plan’s assets, with the goal of maximizing their earnings potential.

Pension plan may be a defined contribution plan or a defined benefit plan.

 A defined contribution plan is a post-employment benefit plan under which an entity pays fixed
contributions into a separate entity and will have no legal or constructive obligation to pay further
 contributions if the fund does not hold sufficient assets to pay all employee benefits relating to
employee service in the current and prior periods.

- The amount to be contributed to the plan based on a formula that uses employee
compensation as its basis of calculation. The benefits to be received by the employees will
depend on the total amount contributed plus the earnings on it.

Defined Contribution Plan recognition and measurement:

An entity should recognize the contribution payable to defined contribution plan in exchange
for service rendered by an employee during a period:

a. as a liability (accrued expense) after deducting any contributions already paid. If the
contribution already paid exceeds the contribution due for service before the balance sheet
date, an entity shall recognize that excess as an asset (prepaid expense) to the extent that the
prepayment will lead to, for example a reduction in future payments or a cash refund.

b. As an expense, unless another standard requires or permits the inclusion of the contribution
in the cost of an asset (PAS 2 for inventories and PAS 16 for PPE)

 A defined benefit plan defines the benefits to be received by employees upon retirement. The
contributions to the plan depend on the defined benefits.

- 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.
Moreover, the obligations are measured on a discounted basis because they may be settled
many years after the employees render the related service.

COMPONENTS OF DEFINED BENEFIT COST

1. Service Cost comprises

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

b. Past service cost which is the change in the present value of defined benefit obligation for
employee service in prior periods, resulting from a plan amendment (the introduction or
withdrawal of , or changes to, a defined benefit plan) or a curtailment ( a significant reduction by
the entity in the number of employees covered by a plan); and

c. Any gain or loss on settlement which the amount of loss (gain) whenever the amount of
settlement is not equals to the carrying value of obligation distinguished

2. Net Interest Cost comprises

a. Interest income = Beginning FV of plan asset x discount rate

b. Interest expense = Beginning Defined benefit Obligation x discount rate
c. Interest expense on effect of asset ceiling
3. Remeasurements comprises

a. Actuarial gains and losses

b. The return on plan assets, excluding amounts included in the net interest on the net defined
liability (asset); and

c. Any change in the effect of the asset ceiling, excluding amounts included in net interest on the
net defined liability (asset)

The plan assets – are assets held by a long-term benefit fund and qualifying insurance. 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 and

d. The assets cannot be return 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 – is an insurance policy issued by the insurer that is not a related party of
the reporting entity and 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 proceed of the policy
cannot be paid to the reporting entity, except

a. When the proceeds represent surplus asset not needed for the policy to pay employee
benefits.

b. When the proceeds are returned to the reporting entity to reimburse it to employee benefits
already

Past service cost - is the change in the present value of defined benefit obligation for employee service
in prior periods resulting from plan amendment or curtailment. Curtailment may arise from an isolated
event, such as

a. closing of a plant

b. discontinuance of an operation, and

c. termination or suspension of a plan. Past service costs whether vested or unvested shall be
recognized outright as an expense
ACCOUNTING FOR DEFINED BENEFIT PLAN

The liability for defined benefit plans are determined through the projected unit credit method/accrued
benefit method. The standard recognized that it makes use of actuaries, but does not require entities to
do so.

Steps for defined benefits are as follows:

a. Using actuarial techniques to make a reliable estimate of the amount of benefit that employees
have earned in return for their service in the current and prior periods. This requires an entity to
determine how much benefit is attributable to the current and prior periods and to make estimates
(actuarial assumptions) about demographic variables and financial variables.

b. Discount the benefit using the Projected Unit Credit Method in order to determine the present
value of the defined benefit obligation and the current service cost. An entity discounts the whole of
a post-employment benefit obligation, even if part of the obligation falls due within twelve months
of the balance sheet date.

c. Determine the fair value of any plan assets

d. Where a plan has been introduced or changed, determine the resulting past service cost.

e. Where a plan has been curtailed or settled, determine the resulting gain or loss. Where an entity
has more than one defined benefit plan, the entity applies these procedures for each material plan
separately

Projected Unit Credit Method (sometimes known as the accrued benefit method pro-rated on service or
as the benefit/years of service 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.

Balance sheet account for a defined benefit plan: Pension liability is the net total amount of the
following;

1. the present value of the defined benefit obligation at the balance sheet date

2. minus the fair value at the balance sheet date of plan assets (if any) out of which the
obligations are to be settled directly.

Projected Benefit Obligation (PBO) – a liability that is recorded only in memorandum records, and thus
doesn’t appear in the financial records.

Fair value of plan assets (FVPA) –counterpart of PBO, which also does not appear in the records. A
debit balance.
 The difference of PBO and FVPA is called the prepaid/accrued benefit cost, an account that appears on
the financial statements.

- If FVPA is more than PBO (overfunded), there is a prepaid benefit cost, a non-current asset.

- If FVPA is less than PBO (underfunded), there is a accrued benefit cost, a non-current liability.

The year-end balance of the aforementioned accounts can be calculated as follows:

PBO, beginning xx
ADD: Current service cost xx
ADD: Past service cost xx
ADD: Interest expense on PBO, beginning xx
DEDUCT: Present value of PBO settled (xx)
ADD/DEDUCT: Actuarial gains (deduct) or losses (add) xx/(xx)
DEDUCT: Benefits paid (xx)
Projected benefit obligation (PBO), ending xx

FVPA, beginning xx
ADD: Contributions made during the year xx
ADD: Interest income/expected return on plan assets xx
ADD/DEDUCT: Remeasurement
(gains) or losses on plan assets xx
DEDUCT: Benefits paid xx
DEDUCT: Settlement price xx
Fair value of plan assets (FVPA), ending xx

GAIN OR LOSS ON SETTELEMENT

Settlement Plan- is a transaction that eliminates all further legal or constructive obligations for all of the
benefits provided under a defined benefit plan.

Gain or loss on plan settlement is 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.

• Any gain or loss is fully recognized and included in service cost in the computation of employee benefit
expense.
ASSET CEILING

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.

IAS 16 provides that the surplus in a defined benefit plan must not exceed the asset ceiling
determined by using the discount rate in the measurement of the defined benefit obligation,

Related computations on asset ceiling:

Prepaid benefit cost (surplus) xx

Asset ceiling xx
Effect of asset ceiling xx
Effect of asset ceiling (beginning of reporting period) xx
Multiplied by discount rate x%
Interest expense on effect of asset ceiling* xx
* Included in the computation of employee benefit expense

Effect of asset ceiling (end of reporting period) xx

Effect of asset ceiling (beginning of reporting period) xx
Total change in effect of asset ceiling xx
Interest expense on effect of asset ceiling xx
Remeasurement gain/loss on asset ceiling** xx
**Increase in the effect of asset celling is a remeasurement loss and a decrease in asset celling is a
remeasurement gain.
** Remeasurement gain/loss on asset celling is included in the computation of net remeasurement
gain/loss-OCI

B. SHORT-TERM EMPLOYEE BENEFITS

Short-term employee benefits are employee benefits which are expected to be settled wholly within
twelve months after the end of annual reporting period in which the employees render the
related service. Examples of short-term employee benefits:

a. Salaries, wages and social security contributions

b. Short-term compensated or paid absences such as paid annual leave and paid sick leave

c. Profit sharing and bonuses payable within twelve months

d. Nonmonetary benefits, such as medical care, housing, car and free or subsidized goods.
 ACCOUNTING FOR SHORT-TERM EMPLOYEE BENEFITS

Accounting for short-term employee benefits is fairly straight forward because there are no
actuarial assumptions to be made. The rules for short-term benefits are essentially an application of
basic accounting principles and practice.

a. Unpaid short-term employee benefits at the end of the reporting period shall be
recognized as accrued expense.

b. Any short-term benefits paid in advance shall be recognized as a prepayment.

c. The cost of short-term benefits shall be recognized as expense in the period when
incurred, except when such cost may be included within the cost of an asset, such as
property, plant and equipment.

Short-term compensated or paid absences

An entity may pay employees for absences for various reasons such as vacation, sickness and short-
term disability, maternity or paternity and military service. Short-term compensated absences are
categories as: Accumulating and Non-accumulating

Accumulating paid absences may be either:

• Vesting
• Nonvesting

Non-accumulating paid absences are those that are not carried forward I the future periods.

Profit-sharing and bonus plans

Under some profit-sharing plans, employees shall receive a share of the profit only if they remain
with the entity for a specified period. The measurement of such constructive obligation reflects the
possibility that some employees may leave without receiving profit-sharing payments.

To recognize expected cost of profit sharing and bonus, all of the following conditions are present:

a. The entity has a present legal or constructive obligation to make such payment as a
result of past event.

b. A reliable estimate of the obligation can be made. A present obligation exists when the entity
has no realistic alternative but to make the payment.

C. LONG-TERM EMPLOYEE BENEFITS

Long-term employee benefits is a residual definition. All employee benefits other than short-term
employee benefits, postemployment benefits and termination benefits.
ACCOUNTING FOR OTHER LONG TERM EMPLOYEE BENEFITS

- The recognition and measurement of liability for other long-term employee benefits are the same as
the recognition and measurement of defined benefit obligation. And included in the computation of
employee benefits expense:

a. Current service cost

b. Past service cost
c. Net interest expense or net interest income
d. Any gain or loss on settlement
e. Remeasurements, such as actuarial gains and losses, the difference between actual return on
plan assets and interest income, and the change in the effect of asset ceiling.

-The only difference is the recognition of the components of the defined benefit cost.

Note: For other long-term employee benefits, ALL REMEASUREMENTS ARE RECOGNIZED FULLY
THROUGH PROFIT OR LOSS.

D. TERMINATION BENEFITS

Termination benefits are employee benefits provided for the termination of an employee's
employment as of either

a. An entity's decision to terminate

b. An employee's decision to accept an offer

ACCOUNTING FOR TERMINATION BENEFITS

Recognition:

19R, par 165, provides that an entity shall recognize a liability and an expense for
termination benefits at the earlier of the following dates:

a. When the entity can no longer withdraw the offer of the termination benefits. e.g. when the
plan termination is already communicated to affected employees.

b. When the entity recognizes the cost of restructuring that involves the payment of termination
benefits.

Measurement

a. Termination benefits are expected to be settled wholly within twelve months after the end of
reporting period. (Undiscounted amount)

b. Termination benefits are expected NOT to be wholly settled twelve months after the end of
the reporting period (discounted amount)