Chapter 6 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.
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.

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.
Step #3: Determine the defined benefit cost
Definition of terms

1. Current service cost - is the increase in the

present value of a defined benefit obligation
(DBO) 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.
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.
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:

a. the discount rate

b. future salary and benefit levels
c. future medical costs, if any, including cost
of administering claims and payments
d. the expected rate of return on plan assets
 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.
Present value of defined benefit
obligation
Fair value of plan assets
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.
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.
 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.
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.
Thank you
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