POST-EMPLOYMENT BENEFITS apter Overview and Obje After this chapter, readers are expected to comprehend: 1, The minimum amount of post-employment benefits. 2. The different types of post-employment benefit plans and their characteristics, 3. The accounting for defined contribution plan. 4, The accounting for defined benefit plan, including the amounts to be reported in the statement of financial position, income statement, and other comprehensive income. POST-EMPLOYMENT BENEFITS These benefits are given to employees after their employment with an entity has been completed (other than short-term benefits and termination benefits). In practice, this is normally given to retiring employees from ages 50 years old (early retirement age) to 65 years old (mandatory retirement age), depending on the entity's retirement plan. These benefits are given to retiring employees in a lump- sum basis or in a periodical basis. So, why continue giving benefits to the retired employees even if they are not working for the entity anymore? It is because they have devoted their time, effort, loyalty, life, and aspirations to the entity, and it is imperative for the entity to support them in their old age where they cannot work further and earn money for themselves. MINIMUM AMOUNT OF RETIREMENT BENEFITS Retirement plan provided by an employer entity varies from other employer entities, depending on what is the agreed level of benefits with the employees. However, minimum amount of retirement benefit is defined in Republic Act No. 7641, amending the Article 287 of the Labor Code of the Philippines. The minimum amount is one-half (1/2) month salary for every year of service, with a fraction of at least 6 months being considered as one whole year. One-half month salary includes the following amounts: a. 15 days salary based on salary rate at the time of retirement; b. Cash equivalent of not more than 5 days of service incentive leaves; and c. 1/12 of 13 month pay. This is equivalent to 2.5 days (30 days times 1/12). In other words, one-half month salary is equivalent to 22.5 days of compensation (15 days +5 days + 2.5 days). Retirement benefits to be given shall not go below one- half month salary x number of year of service to the last employer.This amount shall be given to a retiring employee meeting the fo requirements: a. Age of at le b. Atleast 5 ye: lowing 60 years old at the time of retirement; and s of service to the employer in which the employee retires from, Mlustration 1, A 62-year-old employee retired from his last employer when his daily salary is P5,000/day. He was employed for the last 42 years, of which 10 years were with his last employer. From this information, the minimum amount of retirement benefits that this employee should receive shall be determined as; Daily salary P5,000 Multiply by: No. of days 22.50 days One-half month salary P112,500 Multiply by: No. of years in service in the last employer ___10 years _ Minimum amount of total retirement benefits P1,125,000 DIFFERENT TYPES OF POST-EMPLOYMENT BENEFIT (RETIREMENT) PLANS Post-employment benefit plans are formal or informal arrangements under which an entity provides post-employment. benefits for.one or more employees. [PAS 19.8]. For accounting purposes, these plans are classified as follows: 1. Defined contribution plan 2. Defined benefit plan Their major differences are compared as follows: Defined Contribution Plan Fixed contributions into a separate entity (a fund) and no Defined Benefit Plan Provide the agreed (ie, pre- determined) _ benefits to Entity’s obligation legal or constructive obligation | current and former to pay further contributions if | employees, regardless of the the fund becomes insufficient _| performance of the fund. Amounts to be paid to retirees Actual contribution plus the returns from the investing of Pre-determined amounts of benefits, regardless of the contributions and returns earned from contributions to the fund Who assumes the actuarial risk and investment risk? Employer entity Prevalence in practice actual contributions —_(ie., dependent on the fund's performance) Employees Less common More common Actuarial risk is the risk that the amounts of retirement benefits are less tha" anticipated. Investment risk is the risk that the amount of contributions 4" returns are not sufficient to pay the expected benefits.pefined benefit plans are more ¢ ommon i oe n practice primarily o the minimum jmount of retirement be f het. 7641. nefits required by Republic Act No. 7641. examples of ee an entity's obligation is not limited to the amount that itagrees to contribute to the fund are when the entity has a legal or constructive obligation through: a. a plan benefit formula that is not linked solely to the amount of contributions and requires the entity to provide further contributions if assets are insufficient to meet the benefits in the plan benefit formula: b, a guarantee, either indirectly through a plan or directly, of a specified return on contributions; or c, those informal practices that give rise to a constructive obligation. [PAS 19.29]. By considering these examples, a retirement plan may be assessed to be as defined benefit plan for accounting purposes, even if it is legal form is a defined contribution plan (i.e., accounting substance over legal form). ACCOUNTING FOR DEFINED CONTRIBUTION PLANS Accounting for this kind of retirement plan is simple and relatively straightforward since the liability of an entity is limited to the amounts of its requir ed contributions. When an employee has rendered service to an entity during a period, the entity shall recognize the contribution payable to a defined contribution plan in exchange for that service: a. adebit to expense, unless another accounting standard requires or permits the inclusion of the benefits in the cost of an asset. For example, employee benefits given to employees involved in the manufacturing of inventories or construction of an item of PPE will be capitalized as part of cost of the inventories and PPE, respectively. b. asa liability (accrued expense) or as an asset (prepaid expense or advances to employees), depending on the amounts of incurred benefit and benefits paid: Scenario ae | “Accounting Consequence Amount paid > undiscounted amount of benefits Prepaid asset Amount paid < undiscounted amount of benefits Accrued liability Unless the amount is to be paid after 12 months, the entity shall measure the required contributions on an undiscounted basis. Illustration 2. MORALES Company maintains a defined contribution plan for its office workers that requires the Company to pay 5% of its net income before tax, due on December 31 of each year. For the year 2023, the Company reported 24,000,000 net income before tax.Required: Under each of the following scenarios, determine the single journal entry to record the payment of the required contribution: 1. The Company paid P1,000,000 2, The Company paid P1,350,000 Scenario 1 The journal entry to record the transaction is: Retirement expense (P24M x 5%) 1,200,000 Cash 1,000,000 Accrued liability - retirement 200,000 Scenario 2 The journal entry to record the transaction is: Retirement expense (P24M x 5%) 1,200,000 Prepaid expense - retirement 150,000 1,350,000 Cash Generalizations - Both Scenarios The amount recognized as the defined contribution expense (P1,200,000) is not affected by the amount of actual contributions. In addition, the amounts are not discounted since these are paid on or shortly after December 31 of each year. ACCOUNTING FOR DEFINED BENEFIT PLANS Accounting for this kind of retirement plan is somewhat complicated since the actuarial and investment risks are both assumed by the entity. In addition, in actual practice, almost all employer entities maintain a separate retirement fund (i.e., plan assets from which the benefits are paid from). If there is a corresponding retirement fund, then the defined benefit obligation is said to be “funded”. Accounting for defined benefit plans also means accounting for the following: 1. Defined benefit obligation (or projected benefit obligation) - this is the present value of the estimate of the entity's retirement obligation in the future. This is connected to actuarial risk. 2. Retirement fund or plan assets -fund to which contributions are made to earn returns that can be used to reduce the amount of retirement costs and from which the retirement benefits are paid. This is connected to investment risk. ACCOUNTING FOR DEFINED BENEFIT OBLIGATION The accounting for defined benefit obligation has the following characteristics: a. An entity shall make actuarial assumptions and estimates related to the amount of obligation it has regarding the retirement benefits (i.e., retirement obligation). b. The computations are primarily discounted in nature as the amounts are expected to be settled far into the future. c. Since the computations utilize actuarial assumptions, these assumptions might change in the future, which results to the recognition of actuarial gains and losses.ro be able to compute the present value off fi ants 7 be ibiése procedures as te “three-step apna bene obligation, an entity shall a. Apply actuarial valuation method : p, Attribute benefit to periods of service ¢, Make actarial assumptions Actuarial Valuation Method An entity shall use the projected unit credit method in determining the present value ofits defined benefit obligation and other amounts that will be discussed later on. This method is also known as “accrued method pro-rated on service” or “penefit/years of service method”. [PAS 19.68]. 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. [PAS 19.68]. Attribute the Benefit to Periods of Service In determining the present value of its defined benefit obligations and the related amounts to be discussed later on, an entity shall allocate the benefit to periods of service under the plan's formula. For example, an entity grants P50,000 retirement benefit for every year of service, from the time of employment up to expected retirement date of an employee. Based on this plan, an entity attributes P50,000 for every year of service of the employee. The present value of P50,000 will increase the amount of defined benefit obligation each year as the employee renders additional one year of service. Making Actuarial Assumptions These are the entity's best estimates of the variables that will determine the ultimate cost of providing post-employment benefits. These assumptions include the following [PAS 19.76]: Demographic assumptions Financial assumptions Include, but are not limited to, the | Include, but not limited to, the following: following: mortality, employee turnover, | discount rate, benefit levels, future isability, early retirement, and claim | salary, future benefit costs, and claim rates under medical plans (ie, | handling costs (i.e,, financial inputs) Wonfinancial inputs) Actuar: Cluarial assumptions shall be unbiased and mutually compatible. [PAS 19.75]. o a 5 5 a ie other hand, the discount rate used in discounting the retirement benefits a. Rip, . determined by the following hierarchy: en iy reference to the market yields of high-quality corporate bonds as at the , Othe reporting period. ise, reference to the market yields on government bond: of onds as at the reporting period. the endResulting Amounts After Applying the Three-Step Approach The following amounts are the results from the estimation of defined benefit obligation using the “three-step approach”: Amounts Description : a. Current service cost - the increase in the present value of the defined benefit obligation resulting from employee service in the current period. b. Past service cost - is 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. This excludes the changes in actuarial assumptions. Plan amendment is the introduction or withdrawal of, or changes to, a defined benefit plan. Plan curtailment is the significant reduction service | bY the entity in the number of employees covered by a plan. costs Both current service cost and past service cost are measured on a discounted basis. any gain or loss on settlement. [PAS 19.8]. Settlement can be considered as immediate and/or premature payment of retirement benefits. Loss is added to the amount of retirement cost, while gain is deducted from retirement cost. Gain or loss on settlement is determined using the following rules: Scenario Result Settlement price > present value of settled benefit Loss Settlement price < present value of settled benefit Gain Interest expense is the change during the period in the net defined benefit liability (asset) that arises from the passage of time. [PAS 19.8]. This is recognized since the current service and past service costs are measured ona discounted basis (i.e., unwinding of discount). 2 Interest expense | The interest rate used in computing the amount of interest expense is the discount rate at the beginning of the current annual reporting period. This is similar to the discount rate determined at the end of the previous annual reporting period. Actuarial gains and losses are changes in the present value of the defined benefit obligation resulting from: | a. experience adjustments (the effects of differences between the Actuarial previous actuarial assumptions and what has actually occurred) nae b. the effects of changes in actuarial assumptions. [PAS 19.8]. The existence of actuarial gain or loss is determined as follows: a. Loss a ifthe change/s resulted to an increase in liability. b._Gain - if the change/s resulted to a decrease in liability.amounts are used to det Th ermine i i obligation as follows: termine the ending balance of the defined benefit Beg ng defined benefit obligation (DBO) TTT Te ae : Interest expense (heginn) 4, c Add: Interest expense (beginning discount rate x beginning DBO) ie Current and past service costs a I losses XK Less one paid to retirees in accordance with retirement plan (xx) ettled benefits at present value (premature settlements) (xx) Actuarial gains (20) Ending defined benefit obligation Ect The amounts deducted on account of payment to retirees and settled benefits should be equal to the present value of the settled liability and not necessarily the actual amount of payment. In addition, for simplicity’s sake, the basis of interest expense is the beginning balance. However, in actual practice, the readers should not be surprised if the present value of paid or settled benefits are considered in the computations. On the other hand, the following amounts are recognized in the entity’s total comprehensive income: As net expense in profit or loss: Current and past service costs Pxx Interest expense xX Loss on settlement (if loss) xX Less: Gain on settlement (if gain) XX Pxx Net expense recognized in profit or loss As net deduction from other comprehensive income: Actuarial losses, if any Pxx Less: Actuarial gains, if any xx) Net retirement cost recognized in OCI Pxx The readers should take note that the amounts of payments to retirees and settlement amounts are excluded from the retirement cost as they have already been previously recognized as part of service costs, interest expense, or actuarial Sains or losses. The cumulative amounts of retirement cost recognized in OCI is maintained in a separate shareholders’ equity account in a similar fashion as unrealized gains and losses from investments in equity securities at FVTOCL. DEFINED BENEFIT OBLIGATION - INDI! VIDUAL EMPLOYEE BASIS Illustration 3. BELINDA, a 55-year-old newly hired employee on January 1, 2023, is currently earning P8,000 per month. Her employer provides a retirement benefitof one month salary for every year of employment, using the monthly salary at the time of retirement. It is expected that she will be retiring at the age of 60 years old on January 1, 2028 and that her monthly salary will be at P9,000 per month at that time. Relevant discount rate is 7%. Required: From this information, determine the amounts of current service cost, interest expense, and defined benefit obligation for each year from 2023 to 2027. Identification of Actuarial Assumptions a. Before directly answering the requirements of the problem, it is interesting to note the following actuarial assumptions contained in the problem: a. Demographic assumption - the estimated retirement at the age of 60 years old b. Financial assumptions - future salary of P9,000 and discount rate of 7%. The discount rate in this problem was assumed to be fixed, but in actual practice, this is subject to changes. Computations: 1. First, attribute the amount of benefi 2023 2024 2025 2026 2027 Attributed amount P9,000 P9,000 P9000 P9,000 9,000 its to the period from which they arise: Based on the previous table, BELINDA will be entitled to P9,000 retirement benefit for every year of service. If she will continue her service up to her expected retirement date after’5 years, she will be entitled to P45,000 (P9,000 x 5 years) retirement benefit. The P8,000 current salary is not relevant in this case. On the other hand, if BELINDA works for only four years, she will be entitled to retirement benefit of just P36,000 (P9,000 x 4 years of service). 2. Next, compute for the amount of present value of the attributed benefits for each year. The starting date for the number of periods computation to be used in present value calculation is every December 31 of each year until January 1, 2028. December 31 2023 2024 2025 2026 2027 Attributed amount P9,000 P9,000 P9,000 P9,000 P9,000 Periods until 1/1/28 4 3 2 1 - Present value/current service cost 6,866 7,347 7,861 8,411 9,000 There are four (4) periods used in 2023 since it is four years from December 31, 2023 to January 1, 2028. There are three (3) periods used in 2024 since it is three years from December 31, 2024 to January 1, 2028 and so on. The computations of present value of attributed benefit or the amount of current service cost for each year are the following:Year 2023 2024 2025 2026 PV Factor of Single payment for 4 Periods Single payment for 3 periods Single payment for 2 Periods Single payment for 1 Period at7% at7% at7% at7% Py Factor 0.762895 0.816298 0.873439 0.934579 Current Attributed Service Benefit Cost P9,000 P6,866 9,000 P7,347 9,000 P7,861 9,000 P8,411 No present value calculations are necessary for the year 2027. 3, Next, compute for the amounts of benefit obligation for each year. T] 2023 Beg. defined benefit obligation P- Add: Interest expense a Current service cost 6,866 End. defined benefit obligation interest expense and ending balance of defined hese amounts can be computed as follows: 2024 2025 2026 2027 P6866 P14,694 P23,584 P33,646 481 1,029 1,651 2,354 7,347 7,861 8411 9,000 P6866 P14,694 P23,584 P33,646 P45,000 The interest expense per year is com} puted as the beginning defined benefit obligation multiplied by the 7% discount rate (e,g., P481 = P6,866 x 7%). Current service costs are those determined in Step 2. The ending balance of defined benefit obligation last year is the beginning balance for the current year. It should be noted that the previous present value calculations are different from the usual way of computing present values because every year of BELINDA’s service, additional amounts of current service cost are added to the present value of the obligation. DEFINED BENEFIT OBLIGATION - ENTITY LEVEL BASIS Illustration 4. As of December 31, 2022, the actuarial valuation report of MERCADO Company reported a balance of P3,400,000 in its defined benefit obligation. This amount is computed using the discount rate of 8%. During the year 2023, current service cost and past service cost amounted to P600,000 and P110,000, respectively. Actuarial losses due to a decrease in employee turnover amounted to P450,000 while actuarial gains from the increase in discount rate to 9% as of December 31, 2023 amounted to P270,000, Also, during 2023, payments to retirees amounted to P850,000. Lastly, the Company settled a retirement obligation with present value of P320,000 by paying the concerned employee P350,000 cash. Required: From the given information, determine the following: 1. Defined benefit obligation as of December 31, 2023 2. Retirement cost to be recognized in 2023 profit or loss 3. Retirement cost to be recognized in 2023 other comprehensive incomeAnswer: 1, Defined benefit obligation as of December 31, 2023 is computed as follows: Defined benefit obligation, 1/1/23 3,400,000 Add: Interest expense (P3,400,000 x 8%) Aha Current service cost oreG00 Past service cost ey 600 Actuarial losses 320,000) Less: Paid benefits to retirees ¢ 20,000) Settled benefits (at present value) (770,000 Actuarial gains fi Defined benefit obligation, 12/31/23 P3,392,000 e that the rate used (ie., 8%) is as of the beginning The readers should take not of 2023 and not the 9% as o! computing the interest expense f December 31, 2023. The 9% rate will be used in for the year 2024. nefit obligation on account of ‘om defined be f P320,000, rather than the In addition, the amount deducted fr it value oO: settled benefits is equal to its presen P350,000 amount of settlement. tirement cost to be recognized in 2023 profit or loss is 2. The amount of ret computed as follows: Interest expense P272,000 Current service cost 600,000 110,000 Past service cost Loss on settlement (P350,000 — P320,000) 30,000 Total amount recognized in 2023 profit or loss P1,012,000 There is a loss on settlement since the amount paid (ie. P350,000) is higher than the present value of settled retirement obligation (i.e, P320,000). 3. The amount of retirement cost to be recognized in other comprehensive income (OCI) is computed as follows: Actuarial losses P450,000 Less: Actuarial gains 270,000 Net retirement cost to be recognized in OCI P180,000 Net amount of retirement cost to be recognized in total com; ive i rehensive income is P1,192,000 (P1,012,000 + P180,000). ee ACCOUNTING FOR PLAN ASSETS Plan assets are assets that: a, are held by an entity (a fund) that is legally separate from the reporting entity and exists solely to pay or fund employee benefits; and. are available to be us ised only to r fi the reporting entity's own cr © pay or fund employee benefits, are not available to to the reporting entity, aleene {even in bankruptcy), and cannot be returned i, the remaining asse : : employee Boneh na of the fund are sufficient to meet all the related ii, the assets are ema Pete Da ouemcormtecee ya F assets a 'ned to the reporti i ei i employee benefits already paid. [PAS 19 a rting entity to reimburse it for employs The plan assets are measured equal at their fair value and reduced by liabilities that are unrelated to employee benefits (ie., the net asset value of the fund). Examples of these liabilities include the trade payables, derivative liabilities, unpaid fund management fees, and income tax payable of the fund. [PAS 19.114]. The composition of plan assets does not include the following: a. Unpaid contributions due from the reporting entity. b. Any non-transferable financial instruments issued by the entity and held by the fund. [PAS 19.114]. Query: What are the reasons for establishing a separate fund from which retirement benefits will be paid? Answer: The primary reason is the reduction in the retirement costs because the returns earned by the fund can be used as payments to the retirees. In addition, certain amounts have already been segregated for the payment of retirement benefits, regardless of the financial performance of the reporting entity. TRANSACTIONS AND AMOUNTS AFFECTING PLAN ASSETS The following affect the balance of plan assets: 1. Contributions of the entity - the entity's additional funding to the plan assets. When the balance in the fund is used to acquire investments, the amount of plan assets is not affected (ie. similar to accounting for bond sinking funds). 2. Payments to retirees 3. Settlement price paid benefits (not the presen for the immediately or prematurely settled retirement t value of retirement obligation settled) 4. Actual return (loss) on plan assets - amounts earned by the fund from dividends, interest, net unrealized and realized gains, reduced by related plan assets’ expenses. Actual return has increasing effect while actual loss has decreasing effect on the balance of plan assets. 5. Withdrawals from the plan assets (very rare). The accounting for actual return on plan assets is a little bit complicated so a separate section will discuss the related concepts. These transactions and amounts have the following effects in determining the ending balance of plan assets:ginning plan assets Pox Add: Actual return (fund income > fund expenses) - Contributions to the plan assets Pe Less: Actual loss (fund income < fund expenses) (ex) Amount of benefits paid to retirees pe x) Withdrawals from the fund (very rare) . Settlement price of settled benefits (not the PV ofbenefits) __(xx)| Ending plan assets Pe ACCOUNTING FOR ACTUAL RETURNS 7 i Reporting-wise, the amount of actual returns (loss) is split into the folowing! a. Interest income, which is reported as deduction from interest expense in defined benefit obligation in profit or loss; and ; ' b. Remeasurement gain or loss, which is reported in other comprehensive income, together with actuarial gains and losses from defined benefit liability. The amount of remeasurement gain or loss depends on the difference between the amount of actual returns and the amount of computed interest income. COMPUTATION OF INTEREST INCOME AND REMEASUREMENT GAIN OR LOSS The amount of interest income is generally computed as follows: Interest Income = Beg. Bal. of Plan Assets x Discount Rate The discount rate is the same interest rate used to compute the interest expense from defined benefit obligation (i.e., determined at the beginning of the current annual period). From the given amount of actual return and computed amount of interest income, the gain or loss on remeasurement is determined by applying the following rules: Scenarios Remeasurement Gain or Loss? Actual return is positive (or income): Actual return > interest income Gain Actual return < interest income Loss Actual return is negative (or loss): Actual return > interest income Actual return < interest income Always loss equal to the amount of actual loss plus the amount of interest income Illustration 5. At the beginning of 2023, AGUILAR Company reported a beginning balance in its plan assets amounting to P5,600,000. The relevant discount rate used to compute the present value of defined benefit obligation as of January 1, 2023 is 6%. The relevant discount rate used to compute the present value of defined benefit obligation as of December 31, 2023 is 7%. Required: Under each of the following independent scenarios, determine the amounts of interest income and remeasurement gain or loss: 1. Actual return is P500,0002, Actual return is P200,000 3, Actual loss is P100,000 Answer - Interest Income (All Scenarios) The interest income is computed as P336,000 (P5,600,000 x 6%). The interest rate used is as of the beginning of 2023 (i.e., 6%) and notas of the end of 2023 (i.e., 7%)- Nevertheless, this 7% will be used in computing for the amount of interest income for 2024. Answer ~ Remeasurement Gain or Loss Applying the previously mentioned rules, remeasurement gain or loss is computed in each scenario as follows: Scenario1 Scenario2 —_‘ Scenario 3 Actual return (loss) P500,000 200,000 —_ (P100,000) Less: Interest income 336,000 336,000 336,000 Remeasurement gain (loss) P164,000 (P136,000) (P436,000) EFFECTS OF CONTRIBUTIONS AND PAYMENTS FROM THE PLAN ASSETS IN INTEREST INCOME COMPUTATION The previous computations of interest income assumes either or both of the following: a. there are no additional contributions or payment from the fund during the year. b. contributions or payment from the fund are made at the end of the year in the absence of information on when the transactions happened during the year. However, in actual practice, contributions and/or retirement payments from the fund can happen at any time during the year. Their effects shall be included in the computation of interest income. The following accounting procedures are relevant: a. Contributions have increasing effect while payments have decreasing effect. b. The effects shall be time-weighted and will depend on the length of time from the date these contributions and payments occur up to the reporting date. This is somewhat similar to the computation of the weighted average capital of a partner. c. The weighted average plan assets shall be multiplied with the discount rate at the beginning of the period to obtain the interest income during the current Period. The above procedures are also applicable in determining interest expense from defined benefit obligation.ACCOUNTING FOR TOTAL RETIREMENT COSTS This is now the right time to put into test the concepts that the readers have learned in accounting for both the defined benefit obligation and plan asset. In practice, al] of the relevant amounts can be found on the actuarial valuation report given by an actuary whom the entity has consulted. Computing for the ending balances of obligation and asset is the same as previously discussed, but the amounts recognized in profit or loss and other comprehensive income will now be merged in the following manner: As expense in profit or loss: Current and past service costs Pxx Interest expense on defined benefit obligation XX Loss on settlement (if loss) XX Less: Gain on settlement (if gain) (xx) Interest income on plan assets XX Net retirement cost recognized in profit or loss Pxx As reduction from other comprehensive income: Actuarial losses on defined benefit obligation Pxx Remeasurement loss on plan assets (if loss) oe Less: Actuarial gains on defined benefit obligation (xx) Remeasurement gains on plan assets (if gain) XX) Net retirement cost recognized in OCI Pxx Total retirement costs in comprehensive income (net expense recognized in profit or loss and OCI) - Pxx Illustration 9. At the end of 2022, DIZON Company’s actuarial valuation report (AVR) showed balances of P7,300,000 and P6,200,000 for its defined benefit obligation and plan assets, respectively. During the year 2023, the following transactions transpired: a. Current service cost and past service cost amounted to P700,000 and P240,000, respectively.b. Contributions to the fund to P750,000. G Actuarial losses due to changes in financial assumptions amounted to 900,000. e Penton Sy due to changes in demographic assumptions amounted to ,000 while actuarial losses erienct E ts amounted to 300,000, ses due to experience adjustments e. Payments to retirees amounted to P1,000,000 while retirement liability with present value of P420,000 was settled for P370,000. f. Discount rate based on the 2022 AVR is 7% while it is 9% as of December 31, 2023 AVR. In addition, the plan assets are expected to earn 12% return. amounted to P500,000 while actual return amounted From the given information, determine the following amounts: 1. Defined benefit obligation as of December 31, 2023 2. Plan assets as of December 31, 2023 3. Amount to be presented in balance sheet as of December 31, 2023 4. Net retirement expense in profit or loss for 2023 5. Net retirement cost to be reported in other comprehensive income for 2023 Answer: 1. Defined benefit obligation as of December 31, 2023 is computed as follows: Defined benefit obligation, 1/1/23 7,300,000 Add: Interest expense (P7,300,000 x 7%) 511,000 Current service cost 700,000 Past service cost 240,000 Actuarial losses - financial assumptions 900,000 Actuarial losses - experience adjustments 300,000 Less: Paid benefits to retirees (1,000,000) Settled benefits (present value) (420,000) Actuarial gains - demographic assumptions (200,000) Defined benefit obligation, 12/31/23 P8,431,000 The amount deducted on account of settled benefits is the present value of such benefits. In addition, the readers should not forget the computation of interest expense. This is based on the discount rate at the beginning of 2023 (or based on 2022 AVR), rather than at the end of 2023. 2. Balance of plan assets as pf December 31, 2023 is computed as follows: Plan assets, 1/1/23 P6,200,000 Add: Actual return 750,000 Contributions to the plan assets 500,000 Less: Settlement price of retirement liability (not at PV) (370,000) Amount of benefits paid to retirees 100,000) Plan assets, 12/31/23 P6,080,000It should be noted that unlike in defined benefit obligation, the amount deducteg from the plan assets on account of settled benefits is the settlement price, in addition, the amount deducted from defined benefit obligation and plan assets on account of payments to retirees are equal (both P1,000,000 in this illustration), asset as of December 31, 2023 by fit obligation and plan assets: Defined benefit obligation P8,431,000 Less: Plan assets 6,080,000 Net retirement liability, 12/31/23 P2,351,000 There is a net retirement liability since the amount of defined benefit obligation is higher than the amount of plan assets. Therefore, this is presented in the liabilities section of balance sheet as of December 31, 2023. 3. Next, determine the net retirement liability or netting the computed balances of defined bene 4. The net amount to be recognized in profit or loss in 2023 is as follows: Current service cost P700,000 Past service cost 240,000 Interest expense on defined benefit obligation 511,000 Less: Gain on settlement (P420,000 - P370,000) (50,000) Interest income on plan assets (P6,200,000 x 7%) 434,000 Net expense recognized in profit or loss, 2023 P967,000 The computation of interest income is based on the beginning balance of plan assets as there are no information on the exact dates on when the contribution, payment to retirees, and settlement. As a result, they are assumed to have happened at the end of 2023. In addition, if we group these amounts, we can compute for net service cost of P890,000 (P700,000 current service cost + P240,000 past service cost - P50,000 gain on settlement) and net interest expense of P77,000 (P511,000 interest expense ~ P434,000 interest income). 5. Net retirement costs to be reported in other comprehensive for 2023 is computed as follows: Actuarial losses on financial assumptions P900,000 Actuarial losses on experience adjustments 300,000 Less; Actuarial gains on demographic assumptions (100,000) era gain on plan assets (P750,000 actual return less P434,000 interest income) 316,000) Net retirement cost recognized in OCI md There is a remeasurement gain on plan assets since the amount of actual return is higher than the amount of interest income. 6, The compound journal entry to record the transaction is as follows:Retirement cost ~ oct ‘ 784,000 Retirement cost ‘Ost ~ profit or loss 967,000 Cash (equal to contributions) 500,000 Net retirement liability 1,251,000 The amounts in the journal a. The credit to cash is equal to the amount of contributions during the year. b, Payments to retirees have no effect in the net retirement liability since it was deducted from both the defined benefit obligation and plan asset. G Settlement of benefits also has the same effect as payments to retirees, except for the gain or loss on settlement that was already included in the retirement cost ~ profit or loss amounting to P967,000. entry are explained below: In addition, the P1,251,000 net credit to the retirement liability is also equal to the increase in net retirement liability which is determined as follows: Net retirement liability, ending (P8,431,000 - P6,080,000) 2,351,000 Less: Net retirement liability, beginning (P7.3M — P6.2M) 1,100,000, Net increase in net retirement liability, 2023 P1,251,000 ACCOUNTING FOR ASSET CEILING It has been previously discussed that any excess of plan assets over the defined benefit obligation (or surplus of plan assets) is reported as a net retirement asset. However, there might be a limit, legally or otherwise, on the amount of net retirement asset that an entity shall recognize. This is due to the fact that the entity might not be able to fully utilize the economic benefits from this asset as the excess belongs to the retirement beneficiaries. Because of these limitations, the concept of asset ceiling will now become relevant. 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. [PAS 19.8]. The net retirement asset that shall be reported is lower of the following: a. excess of plan assets over defined benefit obligation (hereinafter referred to as “surplus of plan assets”); and b. amount of asset ceiling. The readers should take note that the asset ceiling does not affect the separate balances of plan assets and defined benefit obligation; instead, only their net amount is affected. The resulting accounting procedures are summarized by the following rules: Scenario Accounting consequences Surplus of plan assets < Asset ceiling _No consequences Surplus of plan assets > Asset ceiling | Accounting for effect of asset ceilingThe “effect of asset ceiling” is the amount of excess of surplus of plan assets over the amount of asset ceiling. This is accounted for as follows: a. Changes in this amount, is recognized in other comprehensive income as remeasurement gain or loss. b, The amount to be recognized in other comprehensive income is reduced by the amount of interest. This interest is reported in profit or loss. c. The interest is computed as discount rate applied to beginning amount of effect of asset ceiling. This discount rate is the same as the one used in computing the amount of net interest expense (income) in defined benefit obligation and plan assets. These rules are summarized as follows: Gain or loss, net of | Interest Income or Scenario related interest Expense Increase in effect of asset ceiling | Remeasurement loss Interest expense Decrease in effect of asset ceiling Remeasurement gain Interest income It should be noted that the amount of interest income or expense is included in the computation of net interest expense (income) on net retirement liability (asset). Incorporating these new amounts, the revised computation to be recognized in profit or loss and other comprehensive income is as follows: ‘As expense in profit or loss: Current and past service costs Pxx Interest expense on defined benefit obligation xX Interest expense on asset ceiling (if any) XxX Loss on settlement (if loss) XX Less: Gain on settlement (if gain) (xx) Interest income on plan assets (xx) Interest income on asset ceiling (if any) Net retirement cost recognized in profit or loss Pxx As reduction from other comprehensive income: Actuarial losses on defined benefit obligation Pxx Remeasurement loss on plan assets XxX Remeasurement loss on asset ceiling (if any) XxX Less: Actuarial gains on defined benefit obligation (xx) Remeasurement gains on plan assets (x) Remeasurement gains on asset ceiling (if any) XX Net retirement cost recognized in OCI Pxx,‘True or False 1, According to Republic Act No. 7641, the equal to one-half month salary for : 7 i One-half month salary is equi Avery month of perviee- salary is equivalent to 15 days of i Ina defined contributi Be ee eee ion plan, the i i least equal the'am , the amounts to be paid to retirees shall be at leas : eect te: ee pre-determined level of benefits. . Sk and investment risk are r enti ina defined benefit plan, are both shouldered by the employer entity 5. Ceeraeneae plan is more common than defined contribution plan. 6. Ina defined contribution plan, if the amount paid is lower than the required contributions, the employer entity shall recognize a prepaid asset. 7. The total retirement cost in a defined benefit plan is equal to the amount of actual contributions to the plan asset. 8. Service costs have an increasing effect to the balance of the defined benefit obligation. 9. The defined benefit obligation shall be based on the future amounts of employees’ salaries. 10. Interest expense shall be determined based on the discount rate determined as of the end of the previous period. 11. Actuarial gains have increasing effect to the balance of the defined benefit obligation. 12, Actuarial assumptions shall be both unbiased and mutually incompatible. 13. The present value of settled retirement benefits shall be deducted from the balance of plan assets, while the settlement price shall be deducted from the balance of defined benefit obligation. 14. There is a remeasurement gain from plan assets if the amount of actual return is higher than the amount of interest income. 15. Contributions to the plan assets shall be recognized as part of total retirement cost. minimum amount of retirement benefits is Multiple Choice - Theories 1. The following are the components of the minimum retirement benefit under Republic Act No. 7641, except a. 15 days salary based on salary rate at the time the employee was hired. b. Cash equivalent of not more than 5 days of service incentive leaves c. 1/12 of 13 month pay d. None of the above 2. Defined contribution plans and defined benefit plans have the following correct differences, except : bon : a. Under the defined contribution plan, the entity is only required to contribute fixed amounts to the retirement fund, while under the defined benefit plan, the entity is required to provide the promised benefits, no matter what happens.b. Under the defined contribution plan, investment risk and actuarial risk are both shouldered by the employer entity, while in defined benefit plan, these risks are shouldered by employees. Defined contribution plan is less common than the defined benefit plan. d. Under the defined contribution plan, the amount of benefit that the employees will receive depends on the fund's performance, while ee ee 7 plan, the promised benefits shall be given, regardless of the fund's performance, 9 This is the risk that the amounts of retirement benefits are less than anticipated a. Investment risk b. Retirement benefit risk c. Credit risk d. Actuarial risk w 4, This is the risk that the amounts of contributions and returns are not sufficient to pay the expected benefits a. Investment risk b. Retirement benefit risk c. Expected benefit risk a. Actuarial risk The following are the correct accounting procedures for defined contribution plan, n except a. The amount of retirement cost is generally recognized as expense. b. If the amount of actual contributions is higher than the retirement cost, the employer entity shall recognize a prepaid asset. c. Theamount of retirement cost is equal to the amount of actual contributions. d. None of the above Accounting for defined benefit obligation have the following characteristics, except a. The defined benefit obligation is based on the present value of estimated future post-employment payments to employees. b. Actuarial assumptions and estimates shall be made to be able to measure the defined benefit obligation amid the uncertainties. c. Changes in assumptions and estimates will result to the recognition of actuarial gains and losses, i d. The amount of retirement cost is equal to the payment to retirees or the settlement price paid in immediately settling post-employment benefits. a 7. The actuarial valuation method to be used in estimating the defined benefit obligation is called the a, Expected unit credit method b. Projected unit credit method c, Incurred unit credit method d, Actual unit credit method 2 Demographic assumptions include the following, exceptose d. 9, Financial assumptions include the foll a b. c d. Early retirement Claim rates under medic; Employee turnover Discount rate al plans lowing, except Employee mortality : P Future salary amounts Future benefit costs Claim handling costs 10. Discount rate to be used in discounting the retirement benefits shall be equal to a. b. by reference to the market yields of high-quality corporate bonds as at the end of the reporting period. by reference to the market yields on government bonds as at the end of the reporting period. first, by reference to market yields on government bonds; otherwise, by reference to market yields of high-quality corporate bonds, both as at the end of the reporting period. first, by reference to market yields of high-quality corporate bonds; otherwise, by reference to market yields on government bonds, both as at the end of the reporting period. 11.Service costs are comprised of the following, except a b. c da. Gain or loss on settlement Actuarial losses Past service cost Current service cost 12. Interest expense from the defined benefit obligation shall be equal to a. b. 13.The a b Beginning defined benefit obligation multiplied by the discount rate determined as of the end of the current period. : Ending defined benefit obligation multiplied by the discount rate determined as of the end of the current period. : - ; Beginning defined benefit obligation multiplied by the discount rate determined as of the beginning of the current period. | : ‘ Ending defined benefit obligation multiplied by the discount rate determined as of the beginning of the current period. following statements are true regarding actuarial gains and losses, except These arise from changes in actuarial assumptions ' These arise from the effects of differences between the previous actu assumptions and what has actually occurred. / / There is an actuarial gain if it resulted to an increase in defined benefit obligation. cae 2 Both actuarial gain and loss are recognized in the employer entity’s other comprehensive income.