Conceptual Framework: & Accounting Standards

CONCEPTUAL FRAMEWORK
&
ACCOUNTING STANDARDS
2019 Edition
Lecture Aid
By: Zeus Vernon B. Millan
1
PAS 19 Employee Benefits
Learning Competencies
• Differentiate between the four classifications of

employee benefits under PAS 19.
• State the timing of the recognition of employee
benefits.
• Differentiate between a defined contribution plan
and a defined benefit plan.
• State the accounting procedures for defined benefit
plans.
Conceptual Framework & Acctg.
2
Standards (by: Zeus Vernon B. Millan)
Employee benefits
• Employee benefits are “all forms of

consideration given by an entity in exchange for
service rendered by employees.” (PAS 19.8)

3
Four categories of employee benefits under
PAS 19
1. Short-term employee benefits

2. Post-employment benefits
3. Other long-term employee benefits
4. Termination benefits.

4
Short-term employee benefits
• Short-term employee benefits are employee benefits

(other than termination benefits) that are due to be
settled within 12 months after the end of the period in
which the employees render the related service.

5
Recognition and measurement
When an employee has rendered service to an entity during an accounting
period, the entity shall recognize the undiscounted amount of short-term
employee benefits expected to be paid in exchange for that service:
1. as a liability (accrued expense), after deducting any amount already
paid.
2. as an asset (prepaid expense) if the amount paid is in excess of the
undiscounted amount of the benefits incurred; provided, the
prepayment will lead to a reduction in future payments or a cash
refund; and
3. as an expense, unless the employee benefit forms part of the cost of an
asset, e.g., as part of the cost of inventories or property, plant and
equipment.
6
Short-term compensated absences
• Accumulating compensated absences are those that are carried
forward and can be used in future periods if the current period’s
entitlement is not used in full. Accumulating compensated absences may
either be
1. Vesting – wherein employees are entitled to a cash payment for
unused entitlement on leaving the entity ; or
2. Non-vesting - wherein employees are not entitled to a cash
payment for unused entitlement on leaving the entity
• Non-accumulating compensated absences are those that are not

carried forward. No liability or expense is recognized until the absences
occur, because employee service does not increase the amount of the
benefit.
7
8
Post-employment benefits
• Post-employment benefits are employee benefits (other

than termination benefits) that are payable after the
completion of employment. Post-employment benefit
plans are classified as either:
1. Defined contribution plans
2. Defined benefit plans

9
Defined contribution vs. Defined benefit

10
Other relevant terms

11
Accounting for defined contribution plan
• The accounting for defined contribution plans is straightforward

because the reporting entity’s obligation for each period is
determined by the amounts to be contributed for that period.
Consequently, no actuarial assumptions are required to
measure the obligation or the expense and there is no possibility of
any actuarial gain or loss.

12
Accounting Procedures
a. The contribution shall be recognized as expense in the period it is

payable.
b. Any unpaid contribution at the end of the period shall be
recognized as accrued expense.
c. Any excess contribution shall be recognized as prepaid
expense but only to the extent that the prepayment will lead to a
reduction in future payments or a cash refund.

13
Illustration 1
An employee is a member of the faculty of 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 requires the university to contribute the equivalent of 5% of the
employee’s salary of P30,000 for the current year to a trustee.
Employee benefit expense 30,000

Cash 30,000

14
Illustration 2
On January 31, 2020, an entity paid P100,000 contribution to a

defined contribution plan in exchange for services performed by the
employees in December 2019.
1. To record the accrual of benefit on December 31, 2019:

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

15
Illustration 3
On December 31, 2019, an entity paid P200,000 contribution to a

defined contribution plan. Of this amount, P150,000 is in part
exchange for services performed by the employees in December 2019,
and the balance of P50,000 is in respect of services to be performed in
2019.

Prepaid benefit expense 50,000
Cash 200,000

16
Accounting for Defined benefit plan
• The accounting for defined benefit plans is complex because
actuarial assumptions are required to measure the
obligation and the expensae and there is a possibility of
actuarial gains and losses.
• Obligations are measured on a discounted basis.
• May be unfunded, fully funded or partly funded by the

contributions of the entity
• The expense recognized is not necessarily the amount

of contribution for the period.

17
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.
18
Step #3: Determine the defined benefit cost

19
Defined benefit cost
Amount to be funded by contribution from the employer
• If the contribution is more than the defined benefit

cost, the difference is prepaid benefit cost during the
year
• If the contribution is less than the defined benefit cost,

the difference is accrued benefit cost during the year

20
Components of employee benefit expense
a. Current service cost

b. Past service cost
c. Net interest
d. Gain on plan settlement as a deduction
e. Loss on plan settlement as an addition

21
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.

22
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.

23
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
24
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.

25
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.

26
Illustration (PROBLEM)
At the beginning of current year, the memorandum records in relation
to a defined benefit plan showed the following:
Fair value of plan assets 5,000,000

Projected benefit obligation 7,000,000
Prepaid/accrued benefit cost – credit (2,000,000)
During the current year, the following transactions are gathered:
Current service cost 1,200,000
Past service cost 300,000
Actual return on plan assets 800,000
Contribution to the plan 1,000,000
Benefits paid 500,000
Actuarial loss due to increase in PBO 900,000
Discount rate 10%
1. What is the employee benefit expense?

2. What is the remeasurement gain or loss on plan assets?
3. What is the fair value of plan assets on December 31?
4. What is the projected benefit obligation on December 31? 27
At the beginning of current year, the memorandum records in relation
to a defined benefit plan showed the following:
Fair value of plan assets 5,000,000

Projected benefit obligation 7,000,000
Prepaid/accrued benefit cost – credit (2,000,000)
During the current year, the following transactions are gathered:
Contribution to the plan 1,000,000
Benefits paid 500,000
Actuarial loss due to increase in PBO 900,000
Discount rate 10%
1. What is the employee benefit expense? 1,700,000

2. What is the remeasurement gain or loss on plan assets? (600,000)
3. What is the fair value of plan assets on December 31? 6,300,000
4. What is the projected benefit obligation on December 31? 9,600,000 28
Rachel Company revealed the following information for the current
year:
Fair value of plan assets – Jan. 1 6,700,000

Projected benefit obligation – Jan. 1 7,600,000
Contributions to the plan 1,500,000
Benefits paid to retirees 800,000
Discount rate 10%
1. What is the employee benefit expense?

2. What is the remeasurement gain or loss on plan assets?
3. What is the fair value of plan assets on December 31?
4. What is the projected benefit obligation on December 31?
29
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.
30
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.

31
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.
32
END
Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 33
PAS 20 Accounting for Government Grants
and Disclosure of Government Assistance
Learning Competencies
• Explain the recognition and measurement of

government grants.
• Explain the presentation of government grants in
the financial statements.

34
Definition
• Government grants are assistance received from the
government in the form of transfers of resources in
exchange for compliance with certain conditions.
• Government grants exclude government assistance
whose value cannot be reasonably measured or
cannot be distinguished from the entity’s normal
trading transactions.

35
Examples of Government Grants
a. Receipt of cash, land, or other non-cash assets from the

government subject to compliance with certain conditions
b. Receipt of financial aid in case of loss from a calamity
c. Forgiveness of an existing loan from the government
d. Benefit of a government loan with below-market rate of interest

36
• The following are not government grants:
a. Tax benefits,
b. Free technical or marketing advice,
c. Provision of guarantees,
d. Government procurement policy that is responsible for a
portion of the entity’s sales, and
e. Public improvements that benefit the entire community.

37
Recognition
• Government grants are recognized if there is reasonable

assurance that:
a. the attached conditions will be complied with; and
b. the grants will be received

38
Classifications of government grants according to attached condition
a. Grants related to assets – grants whose primary

condition is that an entity qualifying for them should
purchase, construct or otherwise acquire long-term
assets.
b. Grants related to income – grants other than those
related to assets.

39
Initial measurement
• Monetary grants are measured at the
a. amount of cash received; or
b. the fair value of amount receivable; or
c. carrying amount of loan payable to government for which repayment is
forgiven; or
d. discount on loan payable to government at a below-market rate of interest.

• Non-monetary grants (e.g., land and other resources) are measured at the
a. fair value of non-monetary asset received.
b. alternatively, at nominal amount or zero, plus direct costs incurred in
preparing the asset for its intended use.

40
Accounting for Gov’t. Grants
• The main concept in accounting for gov’t. grants is the
MATCHING CONCEPT.
• This means that the gov’t. grant is recognized as income as the
entity recognizes as expense the related cost for which the grant is
intended to compensate.
In other words, the grant is taken to income over one or more

periods in which the related cost is incurred.

41
Illustration 1
An entity received a grant of P15,000,000 from the national
government for the purpose of defraying safety and environmental
expenses over the period of three years.
The safety and environment expenses will be incurred by the entity as

follows:
First year 2,000,000
Second year 3,000,000
Third year 5,000,000
10,000,000
Grant in recognition of specific expenses shall be recognized as

income over the period of related expense.

42
Illustration 1
First year (2/10 x 15,000,000)3,000,000
Second year(3/10 x 15,000,000)4,500,000
Third year (5/10 x 15,000,000) 7,500,000
15,000,000
Journal entries – first year
Cash 15,000,000
Deferred grant income 15,000,000

Grant income 3,000,000
Environmental expenses 2,000,000

Cash 2,000,000
43
Illustration 2
An entity received a grant of P50,000,000 from the Australian government
for the acquisition of a chemical facility with an estimated cost of
P80,000,000 and useful life of 5 years.
Grant related to depreciable asset shall be recognized as income

over the periods and in proportion to the depreciation of the
related asset.
Journal entries for the first year

1. Cash 50,000,000
2. Building 80,000,000
Cash 80,000,000
3. Depreciation (80,000,000/5) 16,000,000

Accumulated Depreciation 16,000,000
4. Deferred grant income (50,000,000/5) 10,000,000

Grant income 10,000,000 44
Illustration 3
An entity is granted a large tract of land in Mindanao by the national
government.
The fair value of the land is P60,000,000.
The grant requires that the entity shall construct a refinery on the site.
The cost of the refinery is estimated to be P100,000,000 and the useful

life is 20 years.
Grant related to nondepreciable asset requiring fulfillment of

certain conditions shall be recognized as income over the periods
which bear the cost of meeting the conditions.

45
Illustration 3
Journal entries in the first year
1. Land 60,000,000
2. Refinery 100,000,000
Cash 100,000,000
3. Depreciation (100M/20) 5,000,000

Accumulated Depreciation 5,000,000
4. Deferred grant income (60M/20) 3,000,000


46
Illustration 4
An entity received a grant of P50,000,000 from the USA government to
compensate for massive losses incurred because of a recent earthquake.
A government grant that becomes receivable as compensation for

expenses or losses already incurred or for the purpose of giving
immediate financial support to the entity with no further related costs
shall be recognized as income of the period in which it becomes
receivable.
Accordingly, the grant of P50,000,000 is recognized as income

immediately.
Cash 50,000,000

47
Presentation of Government grants related to assets
• Government grants related to assets are presented in the

statement of financial position either by:
a. Gross presentation –the grant is presented as deferred
income (liability); or
b. Net presentation – the grant is deducted when
computing for the carrying amount of the asset

48
Presentation of Government grants related to income
• Grants related to income are sometimes presented in the

income statement either by:
a. Gross presentation – the grant is presented separately
or under a general heading such as “Other income”, or
b. Net presentation – the grant is deducted in reporting
the related expense

49
Illustration
At the beginning of current year, an entity purchased an

equipment for P5,000,000 and received a government grant of
P500,000 with respect to this asset.
The equipment is to be depreciated on a straight line basis over 5

years. The estimated residual value of the equipment is
P200,000.

50
Deferred Income Approach
1. To record the acquisition of the equipment.
Equipment 5,000,000
Cash 5,000,000
2. To record the government grant as deferred income:

Cash 500,000
Deferred grant income 500,000
3. To record annual depreciation:

Depreciation Expense 960,000
Accumulated Depreciation 960,000
4. To recognize the income from government grant for the current year:
Deferred grant income (500,000/5) 100,000
Grant income 100,000
51
Deduction from asset approach
1. To record the acquisition of the equipment.
Equipment 5,000,000
Cash 5,000,000
2. To record the government grant as deduction from the cost of the asset:
Cash 500,000
Equipment 500,000
3. To record the annual depreciation:

Depreciation Expense 860,000
Accumulated Depreciation 860,000
Acquisition cost 5,000,000 Net cost 4,500,000

Government grant (500,000) Residual value (200,000)
Net cost 4,500,000 Depreciable amount 4,300,000/5 years = 860,000
52
Repayment of Gov’t. Grants
• A government grant that becomes repayable is accounted for

as a change in accounting estimate that is treated
prospectively under PAS 8.

53
Disclosures about government grant
a. The accounting policy adopted for government grant,
including the method of presentation adopted in the financial
statements.
b. The nature and extent of government grant recognized in the

financial statements and an indication of other forms of
government assistance from which the entity has directly
benefited.
c. Unfulfilled conditions and other contingencies attaching to

government assistance that has been recognized.
It is not required to disclose the name of the government

agency that gave the grant along with the date of sanction of the
grant by such government agency and the date when cash was
received in case of monetary grant. 54
Illustration
On January 1, 2019, Citimart Company was granted by a local
government authority 5,000 hectares of land located near the slums
outside the city limits. The condition attached to this grant was that the
entity shall clean up this land and lay roads by employing laborers from
the village where the land is located.
The entire operation will take 3 years and is estimated to cost

P10,000,000. This amount will be spent P2,000,000 for 2019,
P2,000,000 for 2020, and P6,000,000 for 2021. The fair value of this
land is P12,000,000.
What is the grant income that should be recognized for 2019?

a. 4,000,000
b. 2,400,000
c. 4,800,000
d. 0
55
Illustration
On January 1, 2019, Citimart Company was granted by a local
government authority 5,000 hectares of land located near the slums
outside the city limits. The condition attached to this grant was that the
entity shall clean up this land and lay roads by employing laborers from
the village where the land is located.
The entire operation will take 3 years and is estimated to cost

P10,000,000. This amount will be spent P2,000,000 for 2019,
P2,000,000 for 2020, and P6,000,000 for 2021. The fair value of this
land is P12,000,000.
What is the grant income that should be recognized for 2019?

a. 4,000,000
b. 2,400,000 (2/10 x 12,000,00)
c. 4,800,000
d. 0
56
Illustration
Paula Company purchased a varnishing machine for P6,000,000 on
January 1, 2019. The entity received a government grant of P540,000
in respect of this assets. The accounting policy is to depreciate the asset
over 4 years on a straight line basis and to treat the grant as deferred
income.
1. What is the carrying amount of the machine on December 31,

2020?
a. 3,000,000 c. 3,270,000
b. 4,500,00 d. 2,730,000
2. What amount should be reported as deferred grant income on

December 31, 2020?
a. 540,000 c. 405,000
b. 270,000 d. 135,000
57
Illustration
Paula Company purchased a varnishing machine for P6,000,000 on
January 1, 2019. The entity received a government grant of P540,000
in respect of this assets. The accounting policy is to depreciate the asset
over 4 years on a straight line basis and to treat the grant as deferred
income.
1. What is the carrying amount of the machine on December 31,

2020?
a. 3,000,000 c. 3,270,000
b. 4,500,00 d. 2,730,000
2. What amount should be reported as deferred grant income on

December 31, 2020?
a. 540,000 c. 405,000
b. 270,000 d. 135,000
58
Illustration
Betty Company purchased a jewel polishing machine for P3,600,000
on January 1, 2019 and received a government grant of P500,000
toward the capital cost.
The accounting policy is to treat the grant as a reduction in the cost of

the asset. The machine is to be depreciated on a straight line basis over
8 years and estimated to have a residual value of P100,000 at the end
of this period.
1. What is the depreciation of the machine for 2019?

a. 387,500 c. 437,500
b. 500,000 d. 375,000
2. What is the carrying amount of the asset on December 31, 2020?

a. 2,725,000 c. 3,000,000
b. 2,350,000 d. 2,250,000 59
Illustration
Betty Company purchased a jewel polishing machine for P3,600,000
on January 1, 2019 and received a government grant of P500,000
toward the capital cost.
The accounting policy is to treat the grant as a reduction in the cost of

the asset. The machine is to be depreciated on a straight line basis over
8 years and estimated to have a residual value of P100,000 at the end
of this period.
1. What is the depreciation of the machine for 2019?

a. 387,500 c. 437,500
b. 500,000 d. 375,000
2. What is the carrying amount of the asset on December 31, 2020?

a. 2,725,000 c. 3,000,000
b. 2,350,000 d. 2,250,000 60
END
Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 61

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CONCEPTUAL FRAMEWORK

• Differentiate between the four classifications of

• Employee benefits are “all forms of

Conceptual Framework & Acctg.

1. Short-term employee benefits

Conceptual Framework & Acctg.

• Short-term employee benefits are employee benefits

Conceptual Framework & Acctg.

• Non-accumulating compensated absences are those that are not

• Post-employment benefits are employee benefits (other

Conceptual Framework & Acctg.

Conceptual Framework & Acctg.

Conceptual Framework & Acctg.

• The accounting for defined contribution plans is straightforward

Conceptual Framework & Acctg.

a. The contribution shall be recognized as expense in the period it is

Conceptual Framework & Acctg.

An employee is a member of the faculty of accounting at a certain

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

Employee benefit expense 30,000

Conceptual Framework & Acctg.

On January 31, 2020, an entity paid P100,000 contribution to a

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

Employee benefit expense 100,000

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

Accrued benefit payable 100,000

Conceptual Framework & Acctg.

On December 31, 2019, an entity paid P200,000 contribution to a

Employee benefit expense 150,000

Conceptual Framework & Acctg.

• Obligations are measured on a discounted basis.

• May be unfunded, fully funded or partly funded by the

• The expense recognized is not necessarily the amount

Conceptual Framework & Acctg.

Step #1: Determine the deficit or surplus

(Deficit) Surplus = FVPA – PV of DBO

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

The asset ceiling is the present value of any economic benefits

Conceptual Framework & Acctg.

• If the contribution is more than the defined benefit

• If the contribution is less than the defined benefit cost,

Conceptual Framework & Acctg.

a. Current service cost

Conceptual Framework & Acctg.

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

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

Conceptual Framework & Acctg.

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

Conceptual Framework & Acctg.

2. Financial assumptions, dealing with items such as:

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

Conceptual Framework & Acctg.

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

Conceptual Framework & Acctg.

Fair value of plan assets 5,000,000

1. What is the employee benefit expense?

Fair value of plan assets 5,000,000

1. What is the employee benefit expense? 1,700,000

Fair value of plan assets – Jan. 1 6,700,000

1. What is the employee benefit expense?

• Other long-term employee benefits are employee

Termination benefits are employee benefits provided in

Conceptual Framework & Acctg.