MFRS 119

EMPLOYEE BENEFITS
◦ MFRS 119 Employee Benefits prescribes the accounting and
disclosure requirements by employers on employee benefits. This
standard covers both short- and long-term obligations of employers
to the employees in terms of benefits.

◦ MFRS119 prescribes the accounting treatment and disclosure

requirements for employee benefits in the financial statements of
employer-entities, where an entity shall recognize:
a) A liability when an employee has provided service in exchange for
employee benefits to be paid in future; and
b) An expense when the entity consumes the economic benefit
arising from service provided by an employee in exchange for
employee benefits
 Four categories of employee benefits

They are:
◦ Short-term employee benefits, both monetary and non-monetary;
◦ Post-employment benefits;
◦ Other long-term benefits; and
◦ Termination benefits.
 Short-term employee benefits
◦ Employee benefits which fall due wholly within 12 months after
the end of the period in which the employees render the related
services.
◦ Example:
Wages, salaries and SOCSO contributions made by the employer for
the employees, and medical benefits etc.
Paid leave, both annual and sick leave, where the absences are
expected to occur within twelve months after the end of the reporting
period.
Bonuses and profit sharing payable within twelve months after the end
of the period.
Non-monetary benefits such as medical benefits, housing, provision of
car, etc for current employees.
Post-employment Benefits
◦ EB (other than termination benefits and equity compensation
benefits) which are payable after the completion of
employment
◦ Often referred to as “PLANS”. The plans receive regular
contributions from the employer and the money is invested in
assets such as stocks, shares and other investments.
◦ The benefits are paid out of the income from the plan assets
(dividend, interest) or from money from the sale of some plan
assets
◦ Involve actuaries
Post-employment Benefits
There are two types of post-employment benefits.
They are:
A. Defined Contribution Plan
B. Defined Benefit Plan
A. Defined contribution plan
The employer’s legal or constructive obligation is limited to the
amount that the employer has agreed to contribute to the fund.
The employee will receive the contribution made to the fund and
returns on the contribution.

•Enterprises pays FIXED contribution to a separate entity (a fund)

•Example: contribution to EPF
•Amount of benefits retiring employee will receive is unknown at
the start.
•Gains/risks of losses are borne by employees
A. Defined contribution plan – Accounting
entries
• Contribution paid – recognized as an expense in the
year payment is made

• Contribution due - recognized as an expense and a

but unpaid liability.

• Contribution over - recognized as assets (prepayment)

paid
 B. Defined benefit plan
The employee is guaranteed a specific amount of benefit that
will be receivable by the employee. It could be a lump-sum
payment such as gratuity or periodic payments such as
pension. The obligation to provide the agreed benefits, the
actuarial risk (that benefits will cost more than expected) and
investment risk are all borne by the entity.

• Benefits are defined in advanced

• Employer contributes to the plan over the period of
employment to meet the defined benefits in future.
• Involves substantial use of estimates based on actuarial
assumptions.
• The employer is legally bound by the ultimate amount payable
to retiring employees.
B. Defined benefit plan
Recognition and measurement
Complexity of accounting for defined plans due to:
◦ Future benefits cannot be estimated exactly but whatever they
are, employers have to pay them and therefore, the liability
should be recognized now. To estimates these future
obligations, it is necessary to use actuarial assumptions
◦ Obligations payable in future years should be valued, by
discounting, on a present value basis
◦ If actuarial assumptions change, the amount of required
contributions will change, and there may be actuarial gains or
losses
Accounting for Defined Benefit Plans

◦ MFRS119 uses the term “obligation” instead of “liability”

and requires the use of professional actuaries
◦ Only one method allowed – Projected Unit Credit Method
◦ The plan assets and the employer’s obligations are “off-
balance sheet” or “off-statement of financial position”
◦ The figure reported in the SOFP is the result of:
◦ Recognition of the expense of retirement benefits in the SOPL; and
◦ The shortfall or surplus of plan assets over plan obligations
Defined benefit plan – Accounting entries

• employers pays contribution to the plan

Dr Plan Assets a/c
Cr Bank a/c
• income generates from investment
Dr Plan Assets a/c
Cr Income
• benefits paid to retired employees
Dr Present value of obligation a/c
Cr Plan Assets a/c
Defined benefit plan – Accounting entries…cont’d

• recognition of current service cost

Dr Expenses a/c
Cr Present value of obligation a/c
• imputed interest
Dr Expenses a/c
Cr Present value of obligation a/c
Defined benefit plan

There are a number of steps in accounting for a defined benefit plan.

◦ Actuarial computations are made to determine the amount to be
provided and contributions made to the plan asset.
◦ Determining the present value of obligations and current service
cost.
◦ The fair value of the plan asset is to be determined.
◦ Accounting treatment of the actuarial gains and losses.
◦ Past service cost.
◦ Curtailment/settlement
◦ Presentation in the statement of comprehensive income and
statement of financial position.
Determining Present Value Of Obligations And
Current Service Cost

The Projected Unit Credit Method is used to determine the present

value of the entity’s obligations and current service cost.

An estimate is made of the present value of the ultimate obligation.

This amount is spread over the vesting period or over the period of
service provided.

Current service cost – is the cost assigned to each accounting period for
the retirement benefit plan based on current services rendered by
employees (normally determined by professional actuaries)
 The Present Value of the
Obligation
The present value of obligations will be as follows:
◦ Opening amount is as per the present value of obligations at the end
of the previous year.
◦ Increases to the obligations comprise interest on the opening balance
and current service cost
◦ Benefits are paid from the plan assets which also reduces the
obligations. Therefore, the obligations are reduced by the benefits
paid.
◦ At year end, the present value of obligations is measured (or
estimated).
PV OF OBLIGATION

RM
Fair value of obligations at beginning xx

Interest cost xx

Current service cost xx

Past service cost xx
Benefits paid (xx)

xxx
Fair value of obligations at end of year xxx
Actuarial gain or loss xxx
The Fair Value Of The Plan Assets
As the obligations are built up, the entity has to set aside assets known as plan
assets to settle the obligations as they fall due. The actuary will inform the
entity the amount needed to be set aside. The amount of assets contributed to
the plan assets will take into consideration the returns on the plan assets and
changes in the fair value of the plan assets. The assets will also grow by the
annual contributions made by the entity to the fund.

Fair value of plan assets will be as follows:

• Opening amount is as per the fair value at the end of the previous
year.
• Increases to the plan assets comprise contribution made by the
entity and returns on the assets such as interest and dividends.
• Benefits are paid from the plan assets, therefore the plan assets are
reduced by the benefits paid.
• At year end, the fair value of plan assets is measured (or
estimated).
FV OF PLAN ASSETS

RM
Fair value of fund assets at beginning xx

Expected Returns xx

Contributions paid xx

Benefits paid (xx)

xxx
Fair value at end of year xxx
Actuarial gain or loss xxx
Actuarial Gain or Loss….cont’d

IF PV of obligation at end of the year is more(>) than

expected, give rise to ACTUARIAL LOSSES

IF FV of plan asset is more (>) than expected, give rise to

ACTUARIAL GAIN
Actuarial Gain or Loss
◦ The revised MFRS 119 removes the corridor mechanism for defined benefits
plans and no longer allows actuarial gains and losses to be recognized in
profit or loss.

◦ MFRS 119 allows companies to adopt a faster recognition of the actuarial

gains or losses depending on their accounting policies

◦ Companies may also opt not to apply the 10% corridor and instead recognize
all the actuarial gains or losses immediately
 Full recognition in other comprehensive
income

MFRS 119 also permits an entity to recognize the full actuarial gains or
losses immediately in the ‘other comprehensive income’ (and to the
retained earnings) and it never goes to the income statement.
An entity is permitted to adopt this method provided it does so for:
◦ All of defined benefit plans; and
◦ All of its actuarial gains and losses.

The actuarial gain or loss is presented in the ‘other comprehensive

income’ as specified in MFRS 101.
Determining amounts to be recognized in profit
or loss:
(i) current service cost.
(ii) any past service cost and gain or loss on settlement.
(iii) net interest on the net defined benefit liability (asset).
DB cost to profit or loss RM RM
Current service cost   xx
Past service cost   x
Net interest on defined benefit liability:    
Interest expense on PVO xx  
(PVO at the beginning x y%)
Less: Interest income from plan asset at discount (x)  
rate (FVPA x y%)
Interest on effect of asset ceiling - x/(x)
DB cost to profit or loss   xxx
Determining the remeasurements of the net defined benefit
liability (asset) to be recognised in other comprehensive
income, comprising:
◦ (i) actuarial gains and losses;
◦ (ii) return on plan assets, excluding amounts included in net
interest on the net defined benefit liability (asset); and
◦ (iii) any change in the effect of the asset ceiling, excluding
amounts included in net interest on the net defined benefit
liability (asset).
Remeasurement costs to OCI RM RM
Actuarial loss / (gain) on PVO   xx/ (xx)
Return on plan asset:    
Expected return x  
Actuarial (loss) / gain (xx)/xx
Actual return xx  
Return recognized in P/L (x) x
Effect of asset ceiling net of interest on NDBL    
-

Remeasurement costs /(gain) to OCI   xx

Past Service Cost
Past service costs may arise due to:
◦ Introduction of retirement benefit plan
◦ Improve existing plan
◦ Completion of minimum service requirements for eligibility

Have to be determined by actuaries

Variables considered in arriving at actuarial assumptions are not past

service costs.
◦ Past service costs that are vested are recognized immediately.
◦ Those that are not vested are spread over the vesting period on a straight
line basis.
Past Service Cost

EXAMPLE:
An entity introduces a defined benefit plan for all its employees
who have served five years or more. Ten employees have worked
for more than five years and the rest have on the average worked
for three years. The benefit for the 10 employees is recognized
immediately and for the others, the benefits are spread over the
average vesting period of two years on a straight-line basis.
 Curtailment and Settlement
Curtailment occurs:
◦ when the entity has committed to make material deductions in the number of
employees covered by the plan or the employees are eligible for reduced benefits.
Closure of an operation or restructuring of an operation may give rise to curtailment.
A settlement occurs:
◦ when the entity terminates all legal and constructive obligations such as when the
employees are paid a lump-sum cash payment or payments are made either to the
employees or on behalf of them to another post-employment benefit plan. For
example, an entity that has a defined benefit plan may transfer the plan assets to a
contribution scheme for the employees.
◦ The gains/losses on curtailment or settlement of a plan are recognized when the
curtailment occurs.
The gain or loss comprises:
A. Change in the present value of the defined benefit obligation;
B. Change in fair value of plan assets; and
C.Unrecognized past service costs and unrecognized related actuarial gains and losses.
 Accounting treatment for DEFINED BENEFIT PLAN

◦ THE ASSET CEILING;

◦ When the FV of plan assets + unrecog. Past service costs EXCEEDS the PV of
obligation + net cumm. Unrecog. Actuarial gain = A
◦ The amount (A) to be disclosed as an ASSET & subject to the requirements of
para. 58 of FRS 119.
◦ Para.58 of FRS 119 requires the resulting figure to be COMPARED to the total of
(B);
◦ Any cumm. Unrecog. Net actuarial losses & past service cost; AND
◦ The PV of any economic benefits available in the form of REFUNDS from the
plan/ reduction in future contributions to the plan.
◦ The LOWER of the two will be recognised as the RETIREMENT BENEFIT
ASSET in the SOFP
◦ The difference between A and B shall be charged as EXPENSE in SOCI as
“Effect of limit in paragraph 58(b)”
 Accounting treatment for DEFINED BENEFIT PLAN - THE ASSET CEILING

◦ Asset ceiling is the present value of any future economic benefits available
in the form of refunds from the plan or reductions in future contributions to
the plan.
◦ Accordance with MFRS 119 Employee benefits, when the asset ceiling is
lower than the surplus of the plan asset over the defined benefit obligation,
the asset ceiling will be recognized as the defined benefit asset in the SOFP
and thus the write down amount is the effect of the asset ceiling.
◦ A portion of the effect of the asset ceiling will be recognized in profit or loss
and the remaining amount will be recognized in other comprehensive
income.
 Example 6
◦ The books of syarikat GLO Bhd show the following figures
resulting in an asset for the year ended 31 December 20X3:
PVOB RM32,760
FVPA RM34,230
DBA RM1,470
The company has determine that the present value of future
economic benefits is RM1,200. The discount rate used to
measure the defined benefit obligation is 10%.
 Example 6 pg 72
DB cost to profit or loss RM RM
Current service cost   xx
Past service cost   x
Net interest on defined benefit liability:    
Interest expense on PVO xx  
(PVO at the beginning x y%)
Less: Interest income from plan asset at discount (x)  
rate (FVPA x y%)
Interest on effect of asset ceiling - 27
DB cost to profit or loss   xxx
Solution
◦ The defined benefit asset to be recognize in the SOFP will be
RM1,200 being the lower of the two figures (i.e RM1,200 is
lower than RM1,470)
◦ The reduction in the value of the asset from RM1,470 to
RM1,200 is the effect of the asset ceiling.
◦ The amounts that will be recognize in P/L and OCI are as
follows:
Effect of asset ceiling RM270
Interest effect of asset ceiling
(10% x 270) RM27
Remeasurement cost to OCI RM243
Remeasurement costs to OCI RM RM

Actuarial loss / (gain) on PVO   xx/ (xx)

Return on plan asset:    

Expected return x  
Actuarial (loss) / gain (xx)/xx

Actual return xx  

Return recognized in P/L (x) x

Effect of asset ceiling net of interest on NDBL    

243

Remeasurement costs /(gain) to OCI   xx

Expenses Recognised for the Period

MFRS 119 requires the net total of following items to be disclosed as

expense:
◦ Current service cost;
◦ Interest cost (apply the discount rate on the present value of the
obligation at the beginning of the period);
◦ Expected return on plan assets;
◦ Past service cost;
◦ Gain/loss on curtailment or settlement; and
◦ Effect of limit in para.58(b)
 Obligation or Asset to be Disclosed in the
Statement of Financial Position
MFRS 119 requires the net total of the following to be disclosed as
defined benefit liability:
◦ Present value of the defined benefit obligations at balance sheet
date;
◦ Minus fair value of plan assets as at the balance sheet date; and
◦ Minus any past service cost not yet recognized.
◦ An adjustment for asset ceiling, if any
 Other long-Term employee Benefits
Examples of other long-term employee benefits are long-term
compensated absences such as sabbatical leave and long-term disability
benefits.

MFRS 119 requires a simplified method of accounting:

◦ The actuarial gains and losses are recognised immediately, and
◦ All past service costs are recognised immediately.
Termination Benefits

The termination benefits are recognised as an expense and liability

when the entity is demonstrably committed to terminate the
employment of the employee before normal retirement date, or
provides termination benefits to encourage the employees to
voluntarily leave.
If the payment is to be made 12 months after the reporting
date, the obligation is discounted.