EMPLOYEE

BENEFITS
PAS 19
Corpuz, Mary Lorie Anne O.
Employee benefits are all forms
of consideration given by an
entity in exchange for services
rendered by employees or for
termination of employment.

Employees include directors and

other management personnel.

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 EMPLOYEE BENEFITS

OTHER
SHORT-TERM
POSTEMPLOYMENT LONG-TERM TERMINATION
EMPLOYEE
BENEFITS EMPLOYEE BENEFITS
BENEFITS
BENEFITS

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SHORT-TERM EMPLOYEE BENEFITS

These are employee benefits other termination 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.

Short-term employee benefits include the following:

1. Salaries, wages and social security contributions
2. Short-term compensated or paid absences
3. Profit sharing and bonuses payable within twelve months
4. Nonmonetary benefits, such as medical care, housing, car and free
or subsidized goods.

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Recognition and measurement

Accounting for short-term employee benefits is fairly straightforward

because there are no actual assumptions.

There is no requirement to discount future benefits because such

benefits are all, by definition, payable no later than twelve months
after the end of the current reporting period. Short-term benefits are
measured on a undiscounted basis.

Accounting procedures
1. Unpaid short-term employee benefits at the end of the accounting
period shall be recognized as accrued expense.
2. Any short-term benefits paid in advance shall be recognized as a
prepayment.

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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.

Entitlement to paid absences falls into two categories, namely

accumulating and nonaccumulating absences.

Accumulating paid absences are carried forward and can be used in

future periods if the current period’s entitlement is not used in full.

It may be either:
1. Vesting- meaning, employees are entitled to a cash payment for
unused entitlement on leaving the entity.

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Vested benefits are employee benefits that are not conditional on
future employment.

2. Nonvesting- meaning, employees are not entitled to a cash payment

for unused entitlement on leaving the entity,

Nonaccumulating paid absences are not carried forward.

Such benefits lapse if the current period’s entitlement is not used and
do not entitle the employees to a cash payment for unused
entitlement on leaving the entity.

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POSTEMPLOYMENT BENEFITS

These are employee benefits, other than termination benefits and

short-term employee benefits, which are payable after completion of
employment.

It includes:
1.Retirement benefits, such as pensions and lump sum payments on
retirement
2.Postemployment life insurance
3. Postemployment medical care

Most postemployment benefit plans are formal arrangements

between an emplyer entity and the employees.

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These plans are usually established as part of the renumeration
package for the employees

Some postemployment benefit plans are informal as 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 as in the case of Social
Security System.

Postemployment benefit plans classified as either defined contribution

plan or defined benefit plan.

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Defined contribution plan

A defined contribution plan is a postemployment plan under which an

entity pays fixed contributions into a separate entity known as the
fund.

Simply stated., the entity makes a specific or definite amount of

contribution to a separate fund without specifying the retirement
benefits to be received by the employee.

The contribution is definite but the benefit is indefinite.

When an employee retires, the accumulated funds in the hands of the

trustee determines his retirement benefit.

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The employee’s retirement benefit therefore depends on how the plan
has been managed by the trustees.

If the plan provides exceptional investment performance, the

employee will share in the gain in the form of a larger retirement
benefit.

If the plan does poorly, the employee will share in the loss by receiving
smaller retirement benefits.

In effect, the employee bears the investment risk in a defined

contribution plan.

Once the defined contribution is paid, the employer has no more

obligation under the plan.

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Accounting for defined contribution plan

Accounting for a defined contribution plan is straightforward because

the obligation of the entity is determined by the account contributed
for each period.

The obligations are measured on an undiscounted basis, except when

they are not expected to be settled wholly within twelve months after
the end of the period.

Accounting procedures
1. The contribution shall be recognized as expense in the period it is
payable.
2. Any unpaid contribution at the end of the period shall be recognized
as accrued expense.
3. Any excess contribution shall be recorded as prepaid expense but
only to the extent that the prepayment lead. 12
Illustration 1
An employee is a member of the faculty accounting at a certain
university. During the current year, the employee earned P600,000.

The employee is covered by the university’s defined contribution plan

which required the university to contribute the equivalent 5% of the
employee’s salary or 30,000 for the current year to a trustee.

Employee benefit expense 30,000

Cash 30,000

Having made the defined contribution, the university’s obligation is

fulfilled and no further entries are necessary for the university.

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Illustration 2
On January 30, 2020, an entity paid 100,000 contribution to a defined
contribution plan is exchange for services performed by the employee
in December 2019.

1. To record the accrual of benefits on December 31, 2019:

Employee benefits expense 100,000
Accrued benefit payable 100,000

2. To record the payment of the contribution on January 31, 2020:

Accrued benefit payable 100,000
Cash 100,000

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Illustration 3
On December 31, 2019, an entity paid 200,000 contribution to a
defined contribution plan. Of this amount, 150,000 is part exchange
for service performed by the employees on December 2019, and the
balance of 50,000 is in respect of services to be performed in 2020.

The contribution to the defined contribution plan is recorded on

December 31, 2019 as follows:

Employee benefits expense 150,000

Prepaid benefit expense 50,000
Cash 200,000

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Insured benefits
An entity pay insurance premiums to fund a postemployment benefit
plan.

When an insurance policy is in the name of a specified plan

participant, or a group of participants and the entity does not have any
legal pr constructive obligation to cover any loss on the policy, the
entity has no obligation to pay benefits and the insurer has sole
responsibility for paying the benefits.

The entity shall treat such insurance payments as contribution to a

defined contribution plan.

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Defined benefit plan
A defined benefit plan is simply defined as a postemployment plan
other than a defined contribution plan.

Under a defined benefit plan, an entity’s obligation is to provide the

agreed benefits to employees.

In other words, an employee is guaranteed specific or definite amount

of benefits which is usually related to his salary and years of service.

In this case, the entity must make contributions such that the
contributions plus earnings would be sufficiently large to cover future
retirement benefits,

Thus, the entity assumes the investment risk in a defined benefit plan.

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Accounting for defined benefit plan
Accounting for defined benefit plan 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 obligation is measured on a discounted basis.

Defined benefit plans may be unfunded, fully funded or partly funded

by the contributions of the entity.

Consequently, under a defined benefit plan, the expense recognized is

not necessarily the amount of contribution for the period.

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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
a. Current service cost
b. Past service cost
c. Any gain or loss on plan settlement
2. Net interest
3. Remeasurements
a. Remeasurement of plan assets
b. Remeasurement of defined benefit obligation
c. Remeasurement of the effect of asset ceiling

The service cost and net interest cost are included in profit or loss as
component of employee benefit expense.

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All of the remeasurements are fully recognized through other
comprehensive income and are reclassified subsequently to retained
earnings.

Actually the defined benefit cost is the amount to be funded by

contribution from the employer.

Components of employee benefit expense

1. Current service cost
2. Past service cost
3. Net interest
4. Gain on plan settlement as a deduction
5. Loss on plan settlement as an addition

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Current service cost
It 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 to an entity under a defined

benefit plan for service rendered by employee 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 asset ceiling as a result of
passage of time.

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The net interest can be viewed into three elements:
1. Interest expense on deferred benefit obligation- This is computed by
multiplying the defined benefit obligation at the beginning of the
reporting period by the discount rate.

2. Interest income on plan assets- This is computed by multiplying the

fair value of plan assets at the beginning of the reporting period by the
same discount rate.

3. Interest expense on effect of asset ceiling- This is computed by

multiplying the effect of asset ceiling at the beginning by the same
discount rate.

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

difference between the interest expense on the defined benefit
obligation, interest expense on the effect of asset ceiling and interest
income on the plan assets. 22
Past service cost
It is the change in the present value of defined benefit obligation for
employee service in prior periods resulting from a plan amendment
and curtailment.

Plan amendment includes introduction of defined benefit plan or

changes to an existing defined benefit plan.

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 as isolated event such as:

1. Closing of a plant
2. Discontinuance of an operation
3. Termination or suspension of a plan

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Recognition of past service cost

PAS 19, paragraph 103, provides that an entity shall

recognize past service cost as an expense when the
plan amendment or curtailment occurs.

All past service costs, whether vested or unvested,

shall be recognized as an expense immediately.

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Plan assets
It comprise assets held by a long-term benefit fund and qualifying
insurance policy.
The conditions for assets held by a long-term benefit fund:
1. The assets are held by an entity, the fund itself, that is legally
separate from the reporting entity.
2. The assets are available to pay only employee benefits.
3. The assets are not available to the reporting entity’s own creditors
even in bankruptcy.
4. 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.

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Qualifying insurance policy

It 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 cannot be paid to the reporting entity except:

1. When the proceeds represent surplus assets not needed for the
policy to pay employee benefits.
2. When the proceeds are returned to the reporting entity to
reimburse it for employee benefits already paid.

When an insurance policy held by entity is not a qualifying insurance

policy, that insurance is not a plan asset. 26
Actual return of plan assets
Components:
1. Interest, dividend and other income derived from the plan assets.
2. Realized and unrealized gains and losses on the plan assets.

Remeasurement of plan assets

The remeasurement of plan assets is the difference between actual
return on plan assets and interest income on plan assets.
1. If the actual return is higher than interest income, the difference is a
remeasurement gain.
2. If the actual return is less than the interest income, the difference is
a remeasurement loss.

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Illustration
An entity provided the following data for the current year related to a
defined benefit plan:

Fair value of plan assets- beginning 5,000,000

Actual return on plan assets during the year 900,000
Contribution to the plan 1,000,000
Benefits paid 200,000
Discount rate 6%

Actual return on plan assets 900,000

Interest income on plan assets (6% x 5M) (300,000)
Remeasurement gain on plan assets 600,000

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Computation of fair value of plan assets

Fair value of plan assets- beginning 5,000,000

Contribution to the plan 1,000,000
Actual return 900,000

Total 6,900,000
Benefits paid (200,000)

Fair value of plan assets- ending 6,700,000

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Remeasurement of projected benefit obligation

The remeasurement of defined benefit obligation is the recognition of

actuarial gain and actuarial loss.

Actuarial gain and actuarial loss are changes in the present value of the
projected benefit obligation resulting from experience adjustments and the
effects of changes in actuarial assumptions.

Determination of actuarial gain and loss

1. If the actual benefit obligation is higher than the estimated amount,
there is an actuarial loss.
2. If the actual benefit is lower than the estimated amount, there is an
actuarial gain.

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Illustration

Projected benefit obligation- actual 6,000,000

Projected benefit obligation- estimated 5,000,000

Actuarial loss-increase in actual obligation 1,000,000

Projected benefit obligation- actual 8,000,000

Projected benefit obligation- estimated 9,500,000

Actuarial gain-decrease in actual obligation 1,500,000

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Basic accounting considerations

The information contained in the memorandum records at the benefit plan

contains the following:
1. Fair value of the plan assets (FVPA)
2. Projected benefit obligation (PBO)

The fair value of the plan assets is the source of fund set aside in meeting
future benefit payments.
The projected benefit obligation is the present value of expected future
payments required to settle the obligation arising from employee service in
the current and prior periods.

These two do not appear in financial statements. Only the difference

between the two

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If the FVPA is more than the PBO, the plan is overfunded and therefore
there is a prepaid benefit cost, a noncurrent asset.

If the FVPA is less than the PBO, the plan is underfunded and therefore,
there is an accrued benefit cost, a noncurrent liability.

The fair value of plan assets increased by

1. Contribution to the plan
2. Actual return on plan assets

The fair value of plan assets decreased by

1. Benefits paid to retirees
2. Realized loss on plan assets- this amount is normally netted against
actual return

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The PBO increased by
1. Current service cost
2. Past service cost
3. Interest expense on PBO
4. Actuarial loss

The PBO decreased by

1. Benefits paid to retiree
2. Actuarial gain

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Illustration 1- Underfunding
To simplify the example, the only component of the benefit expenses is
the current service cost of 500,000.

The entity made a contribution of 450,000 to the defined benefit plan for
the current year.

Entry to record the expense and the contribution:

Employee benefit expense 500,000

Cash 450,000
Prepaid/accrued benefit cost 50.000

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OTHER LONG-TERM EMPLOYEE BENEFITS

The term “other long-term employee benefits” is a residual definition.

Other long-term employee benefits are all employee benefits other than
short-term employee benefits, postemployment benefits and
termination benefits.

Examples:
1. Long-term paid absences such as long service or sabbatical leave
2, Jubilee or other long service benefit
3. Long-term disability benefits
4. Profit sharing and bonuses
5. Deferred compensations

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TERMINATION BENEFITS

These are employee benefits provided in exchange for the termination of

an employee’s employment as a result of either:

1. An entity’s decision to terminate an employee’s employment before

the normal retirement date.
2. An employee’s decision to accept an offer of benefits in exchange for
the termination of employment.

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THANK YOU 

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