(Financial Accounting &

Reporting 2)
LECTURE AID

2017

ZEUS VERNON B. MILLAN

FAR PART 2: Zeus Vernon B. Millan

Chapter 28 Employee Benefits (Part 2)
Related standards: PAS 19 Employee Benefits
PAS 26 Accounting and Reporting by Retirement Benefit Plans

Learning Competencies

• State the accounting procedures for defined benefit

plans.
• Compute for the net defined benefit liability
(asset).
• State the components of the defined benefit cost.
• Describe the accounting for other long-term
employee benefits and termination benefits.
FAR PART 2: Zeus Vernon B. Millan
Accounting for Defined benefit plan

• 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.

• Obligations are measured on a discounted basis.

FAR PART 2: Zeus Vernon B. Millan

Accounting procedures for defined benefit plans

Step #1: Determine the deficit or surplus

(Deficit) Surplus = FVPA – PV of DBO

Step #2: Determine the Net defined benefit liability (asset)

 If there is a deficit, the deficit is the Net defined benefit liability.
 If there is a surplus, the Net defined benefit asset is the lower of the
surplus and the asset ceiling.

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.
FAR PART 2: Zeus Vernon B. Millan
Step #3: Determine the defined benefit cost

FAR PART 2: Zeus Vernon B. Millan

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

2. Past service cost - is the change in the present value of the

defined benefit obligation resulting from a plan amendment or
curtailment.

3. Gain or loss on settlement – the difference between the present

value of the defined benefit obligation and the settlement price.

FAR PART 2: Zeus Vernon B. Millan

Definition of terms (Continuation)
4. Interest cost on the defined benefit obligation – is the
increase during a period in the present value of a defined benefit
obligation which arises because the benefits are one period closer
to settlement.

5. Actuarial gains and losses – are changes in the present

value of the defined benefit obligation resulting from
experience adjustments and the effects of changes in
actuarial assumptions.

FAR PART 2: Zeus Vernon B. Millan

Actuarial assumptions
• Actuarial assumptions are an entity’s best estimates of the variables that will
determine the ultimate cost of providing post-employment benefits.
1. Demographic assumptions about the future characteristics of employees who
are eligible for benefits. Demographic assumptions deal with matters such as:
a. mortality, both during and after employment
b. rates of employee turnover, disability and early retirement
c. the proportion of plan members with dependents who will be eligible for benefits
d. claim rates under medical plans

2. Financial assumptions, dealing with items such as:

e. the discount rate
f. future salary and benefit levels
g. future medical costs, if any, including cost of administering claims and payments
h. the expected rate of return on plan assets
FAR PART 2: Zeus Vernon B. Millan
Actuarial assumption – Discount rate

• The rate used to discount post-employment benefit obligations shall

be determined by reference to market yields at the end of the
reporting period on high quality corporate bonds.
• In countries where there is no deep market in such bonds, the
market yields at the end of the reporting period on government
bonds shall be used.

FAR PART 2: Zeus Vernon B. Millan

Present value of defined benefit obligation

FAR PART 2: Zeus Vernon B. Millan

Fair value of plan assets

FAR PART 2: Zeus Vernon B. Millan

Plan assets
Plan assets comprise:
1. Assets held by a long-term employee benefit fund – are
assets (other than non-transferable financial instruments issued
by the reporting entity) that are legally separate from the
employer and exist solely to pay employee benefits and are not
available to the employer’s own creditors even in case of
bankruptcy.
2. Qualifying insurance policy – the proceeds of the policy
can only be used to pay employee benefits and are not available
to the employer’s own creditors even in case of bankruptcy.

FAR PART 2: Zeus Vernon B. Millan

Other long-term employee benefits

• Other long-term employee benefits are employee

benefits (other than post-employment benefits and
termination benefits) that are due to be settled beyond
12 months after the end of the period in which the
employees render the related service.
• Other long-term employee benefits are accounted for
using the procedures applicable for a defined benefit
plan. However, all of the components of the net benefit
cost are recognized in profit or loss.
FAR PART 2: Zeus Vernon B. Millan
Termination benefits

Termination benefits 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; or
2. an employee’s decision to accept an entity’s offer of
benefits in exchange for the termination of employment.

FAR PART 2: Zeus Vernon B. Millan

Measurement
Termination benefits are initially and subsequently recognized in
accordance with the nature of the employee benefit.
a. If the termination benefits are payable within 12 months, the entity
shall account for the termination benefits similarly with short-term
employee benefits.
b. If the termination benefits are payable beyond 12 months, the
entity shall account for the termination benefits similarly with
other long-term benefits.
c. If the termination benefits are, in substance, enhancement to post-
employment benefits, the entity shall account for the benefits as
post-employment benefits.
FAR PART 2: Zeus Vernon B. Millan
 CLASSROOM
DISCUSSIONS &
COMPUTATIONS
PROBLEM 28-2: THEORY & COMPUTATIONAL

FAR PART 2: Zeus Vernon B. Millan

OPEN FORUM
QUESTIONS????
REACTIONS!!!!!

FAR PART 2: Zeus Vernon B. Millan

 SEATWORK
(PROBLEM 28-4: CLASSROOM ACTIVITY)

FAR PART 2: Zeus Vernon B. Millan

 OPEN FORUM
QUESTIONS????
REACTIONS!!!!!

FAR PART 2: Zeus Vernon B. Millan

IFA PART 1A: Zeus Vernon B. Millan