Defined Benefit Plan

Prepared by:
Prepared by:
Jeramie Ladica
Jeramie Ladica
Aireyca Glenn Lanaban
Aireyca Glenn Lanaban
 EMPLOYEE BENEFITS

Other long-term
Short-term employee benefits
benefits

Postemployment
Termination benefits
benefits

Defined contribution
plans

Defined benefit plans

 A defined-benefit plan is an employer-
based program that pays benefits based
on factors such as length of employment
and salary history.
 PFRS for Small Entities PFRS for SME Full PFRS
Accrual Approach Defined Benefit Defined Benefit
Projected Unit Credit Method

Simplified approach
Liability is based on • Ignore estimated future salary Projected Unit Credit Method
increase rates
Current Salary and Years • Ignore future service of current
of Service. employees
Does not consider future • Ignore possible in-service
mortality of current employees
changes in salary rates
and service periods Actuarial gain and loss -Other
Actuarial gain and loss – P/L or OCI Comprehensive Income
 Illustration- Accrual Approach
On December 31, 2018. ABC Company has 15 employees, which includes Employee B. The details of
employee B is as follows:
Monthly rate 15,000

Equivalent half month salary per RA 7641(22.5 day) 13,500

Estimated half month salary rate at estimated year of 23,000

retirement
(22.5 days)(includes future salary increase)
Present value as of December 31, 2018 of the estimated 18,000
half monthly salary rate at year of retirement

Years of service as of December 31, 2018 5 years

Remaining years of service up to retirement 15 years

Question: What is the amount of pension liability to be recognized for Employee B as of December 31, 2018?
Answer: 67,500 (13,500 x 5 years)
Illustration- Projected Unit Credit Method
An employer pays lump sum to employees when they retire. The lump sum is equal to 5% of their salary
in the final year of service, for every year of service. The following data pertain to a certain employee:
a. The employee is expected to work for 5 years (actuarial assumption)
b. The salary is expected to rise by 8% per annum (actuarial assumption)
c. The salary in 2020 is 200,000 per annum
d. The discount rate is 10% per annum

The first issue to be settled is the final salary of the employee in 2024. In this case, the “future value of 1
at 8% for 4 years subsequent to 2020 is 1.3605
Final salary= 272,100 (200,000 x 1.3605)

Therefore, the benefit each year is 5% of 272,100 is 13,605 or a total of 68,025 for 5 years

2020 2021 2022 2023 2024

Prior years 0 13,605 27,210 40,815 54,420
Current year 13,605 13,605 13,605 13,605 13,605
13,605 27,210 40,815 54,420 68,025
Thank you