PAS 19

EMPLOYEE
BENEFITS
Introduction

PAS 19 prescribes the accounting for

employee benefits by employers, except
employee benefits within the scope of PFRS 2
Share-based Payment and reporting by
employee benefit plans to which PAS 26
Accounting and Reporting by Retirement
Benefit Plans applies.
Employee benefits are “all forms of consideration
given by an entity in exchange for service rendered by
employees or for the termination of employment”.
(PAS 19.8)

Employee benefits can be in any form, i.e., cash, goods

or services, and may be provided to either the
employees or their dependents.

Employees include all employees whether regular,

part-time or casual, and regardless of position in the
entity, i.e., rank-and-file, director or other management
personnel
Recognition

Employee benefits are recognized as expense when employees have rendered service,
except to the extent that the employee benefits form part of the cost of another asset
(e.g., salaries of factory workers are included in the cost of inventories).

Employee benefits already earned by employees but not yet paid are recognized as
liabilities.

Employee benefits may arise from contractual agreements (e.g., employment

contracts), legislation (e.g., Social Security System ‘SSS’ contributions) or informal
practices that create constructive obligations.

The following are the four categories of employee benefits under PAS 19:

a. Short-term employee benefits

b. Post-employment benefits
c. Other long-term employee benefits
d. Termination benefits
Short-term employee benefits

Short-term employee benefits are those that are due

to be settled within 12 months after the end of the
period in which the employees have rendered the
related services. Examples include:
a. Salaries, wages, and SSS, PhilHealth and PAG-
IBIG contributions
b. Paid vacation leaves and sick leaves
c. Profit-sharing and bonuses

d. Non-monetary benefits (e.g., free goods or

services)
General accounting requirements

The accounting for short-term employee benefits is generally

simple, in the sense that actuarial valuations are not necessary to
measure the obligation or the cost. Moreover, short-term employee
benefits are not discounted.

Employee benefits are recognized as expense (or as part of the

cost of another asset) and as an accrued liability, to the extent that
they are unpaid, after the employee has rendered service and
becomes entitled to payment. If payments exceed the benefits
earned by employees, the excess is recognized as a prepaid asset.

Short-term employee benefits are recognized periodically. For

example, salaries are usually paid every 15th and 30th of the month.
Short-term paid absences

Short-term paid absences include vacation, holiday (e.g.,

regular and nonworking holidays), maternity, paternity and
sick leaves. Entitlement to paid absences may be either:
a. Accumulating – those that can be carried forward and used
in future periods if not used in the current period.
Accumulating paid absences may be either:
i. Vesting – unused entitlement are paid in cash when the employee
leaves the entity (i.e., monetized)
ii. Non-vesting – unused entitlement are not monetized.

b. Non-accumulating – those that expire if not used in the

current period and are not paid in cash when the employee
leaves the entity.
Profit-sharing and bonus plans

Profit-sharing and bonuses are additional incentives

given to eligible employees for a variety of reasons
– the most obvious is to motivate the employees to
be more productive.

Profit-sharing and bonuses are recognized when (a)

the entity has a present obligation to pay for them
(b) the cost can be measured reliably.
Post-employment benefits

Post-employment benefits are “employee benefits (other

than termination benefits and short-term employee
benefits) that are payable after the completion of
employment”. (PAS 19.8)

Examples of post-employment benefits:

a. Retirement benefits (e.g., lump sum payment and

pensions)
b. Other post-employment benefits (e.g., post-
employment life insurance or medical care).
Post-employment benefits are provided to employees through
post-employment benefits plan, which are referred to in various
names including “retirement plans” and “pension schemes”.

A post-employment benefit plan can be a formal arrangement

(e.g., explicitly stated in employment contracts and in the
entity’s employee manual or handbook) or it can also be
informal (i.e., not documented but employees are entitled to
post-employment benefits based on the employer’s past practice
or the minimum requirements of law). Post-employment benefit
plans can be:

a. Contributory or Non-contributory; and

b. Funded or Unfunded
 Contributory Non-contributory
Both the employee and employer Only the employer
contribute to the retirement benefits contributes to the retirement
fund of the employee. benefits fund of the
employee.

Funded Unfunded
The retirement fund is isolated The employer manages any
from the employer’s control and established fund and pays
is transferred to a trustee (e.g., directly the retiring employees.
investment company) who
undertakes to manage the fund
and pay directly the retiring
employees.

Post-employment benefit plans are either:

a. Defined contribution plans; or
b. Defined benefit plans
Defined contributions plans

Under a defined contribution plan, the employer commits

to make fixed contributions to a fund that will be used to
pay for the retirement benefits of the employees.

The amount of post-employment benefits to be received

by employees depends on the amount of contributions to
the fund together with the investment income therefrom.

If the fund balance is less than expected, the employer

has no obligation to make good the deficiency. Therefore,
the risk that retirement benefits may be insufficient rests
with the employee.
Accounting for defined contribution plan

The accounting for defined contribution plans is

straightforward. Since the employer’s obligation is limited
to the amount that it has agreed to contribute, it simply
recognizes the contribution as expense (unless it forms part
of the cost of another asset) and a liability (if unpaid) when
employees have rendered service during a period. If the
amount contributed exceeds the fixed amount of
contribution, the excess is treated as a prepaid asset.

The amount of contribution is measured at an undiscounted

amount if it is due within 12 months; if due beyond 12
months, it is discounted. Actuarial valuations are not
necessary; therefore, there are no actuarial gains or losses.
Illustration:
Under Entity A’s defined contribution plan, it agrees to make fixed annual contributions
of P200,000 to a retirement fund for the benefit of its employees.

Accounting:
At each year-end, Entity A recognizes a fixed retirement benefit cost of P200,000,
regardless of whether that amount has actually been contributed and regardless of
whether an employee has actually retired during the period.

If the contribution is not yet made, Entity A recognizes the retirement benefit cost as a
liability (e.g., accrued payable) measured at an undiscounted amount (i.e., P200,000) if it
is due within 12 months from year-end.

If the actual contribution during the period exceeds the fixed amount (for example, Entity
A contributed P230,000) the excess (of P30,000) is accounted for as a prepaid asset.

The fact that an employee has actually retired and was paid his/her retirement benefits
during the period does not affect the accounting above. For example, assume that an
employee has retired during the period and was paid P1M for her retirement benefits. The
amount of retirement benefit cost that Entity A recognizes for the period is still P200,000,
i.e., the agreed amount of contribution. If the plan is funded, the trustee is the one who
will pay the retiring employee and not Entity A.
Defined benefit plans

Under a defined benefit plan, the employer commits

to pay a definite amount or retirement benefits,
which can be determined using a plan formula. The
amount of promised benefits is independent of any
fund balance. Accordingly, if the fund proves to be
insufficient to pay for the promised benefits, the
employer is obligated to make good the deficiency.
Therefore, the risk of fund insufficiency rests with
the employer.
 Defined contribution
Defined benefit plan
plan
• The employer commits • The employer commits
to make fixed to pay a definite
contributions to a fund. amount of retirement
The amount of benefits benefits. Such amount is
that an employee will independent of any fund
receive is dependent on balance.
the fund balance.
• The risk that the fund
• The risk that the fund may be insufficient to
may be insufficient to pay for the promised
meet the expected benefits rests with the
benefits rests with the employer.
employee.
Illustration:

Case 1
Entity A agrees to provide post-employment benefits to its
employees by making monthly contribution equal to 10% of
employee’s monthly salary to a retirement fund. Upon
retirement, the employee is entitled to any accumulated
contributions to the fund plus any investment income
thereon. The employee bears any investment losses.

Analysis:
This is a defined contribution plan because the benefits to
be received by the employee are dependent on the
contributions to the retirement fund. The employee bears the
risk that benefits will be less than expected.
Case 2
Entity A agrees to provide post-employment benefits to its
employees in the form of a lump sum payment of P2M upon
retirement plus monthly pension, equal to half of the final
monthly salary level, for two years after the retirement date.
After the first two years, monthly benefits will decrease by
10% every year and will cease upon death of the retired
employee.

Analysis:
This is a defined benefit plan because the benefits to be
received by the employee are definite amounts and not
dependent on contributions to a retirement fund. The employer
bears the risk that the fund set aside will be deficient of the
promised benefits.
Case 3
Upon retirement, the employees of Entity A are
entitled to a lump sum payment equal to half of the
final monthly salary level multiplied by the number
of years of service. The minimum service period is
10 years.

Analysis:
This is a defined benefit plan – same reason as with
Case #2.
Accounting for defined benefit plans

The employer’s obligation under a defined benefit plan is to provide

the agreed benefits. Therefore, the employer bears the risk that the
promised benefits will cost more than expected if actuarial or
investment experience is worse than expected. In such case, the
related obligation may need to be increased.

Consequently, the accounting for defined benefit plans is complex

because actuarial assumptions are necessary to measure the
obligation on a discounted basis. This results to actuarial gains or
losses. Also, the retirement benefit cost is not necessarily equal to
contribution due for the period.

The accounting for defined benefit plans involves the steps in the
succeeding slides:
Step 1: Determine the deficit or surplus

The deficit or surplus is the difference between the following:

a. Present value of the defined benefit obligation (PV of DBO)
b. Fair value of plan assets (FVPA), if any

 PV of DBO represents the entity’s obligation for the

accumulated retirement benefits earned by employees to date.
This is determined using an actuarial valuation method called the
projected unit credit method.
 FVPA represents the balance of any fund set aside for the
payment of the retirement benefits.

 If FVPA is less than PV of DBO, the difference is a deficit.

 If FVPA is greater than PV of DBO, the difference is a surplus.
Step 2: Determine the Net defined benefit liability (asset)

The net defined benefit liability or asset is the amount that is

presented in the statement of financial position.
 If there is a deficit, the deficit is a net defined benefit
liability.
 If there is a surplus, the net defined benefit asset is the
lower of the:
a. Surplus; and
b. 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”. (PAS 19.8)
Step 3: Determine the Defined Benefit Cost
The defined benefit cost is determined using the formula below:

Service cost: (recognized in P/L)

a) Current service cost xx
b) Past service cost xx
c) Any (gain) or loss on settlement xx xx

Net interest on the net defined benefit liability (asset): (recognized in P/L):
d) Interest cost on the defined benefit obligation xx
e) Interest income on plan assets xx
f) Interest on the effect of the asset ceiling xx xx

Remeasurements of the net defined benefit liability (asset): (recognized in OCI)

g) Actuarial (gains) and losses xx
h) Difference between interest income on plan assets
and return on plan assets xx
c) Difference between the interest on the effect of the asset
ceiling and change in the effect of the asset ceiling xx xx

Total Defined Benefit Cost xx

Service cost:

a. Current service cost – is the increase in the PV of

DBO resulting from employee service in the
current period. (PAS 19.8)
b. Past service cost – is the change in the PV of
DBO for employee service prior periods resulting
from a plan amendment or curtailment.
c. Gain or loss on settlement – arises when the
employer’s obligation to provide benefits is
eliminated other than from payment of benefits
according to the terms of the plan.
Net interest on the net defined benefit liability
(asset) – is the change in the net defined
benefit liability (asset during the period that
arises from the passage of time. It comprises
the three items listed in the formula from the
previous slide.
Remeasurements of the net defined benefit liability (asset):

a. Actuarial gains and losses – are changes in the PV of DBO resulting

from changes in actuarial assumptions.

Actuarial assumptions are estimates of variables used in determining

the ultimate cost of providing post-employment benefits. These
include demographic assumptions (e.g., employee turnover rate,
mortality or lifespan and health condition) and financial assumptions
(i.e., discount rate and future salary levels).
The discount rate used in measuring defined benefit obligations and
costs is based on high quality corporate bonds.
PAS 19 encourages, but does not require, involving a qualified
actuary in measuring defined benefit obligations.

b. Return on plan assets – represents the investment income earned by

the plan assets during the year after deducting the costs of managing
the fund and taxes.
Illustration:
Information on Entity A’s defined benefit plan is as follows:
PV of DBO – Jan. 1, 20x1 1,500,000
FVPA – Jan. 1, 20x1 1,200,000
PV of DBO – Dec. 31, 20x1 1,800,000
FVPA, end – Dec. 31, 20x1 1,310,000
Current service cost 325,000
Actuarial gain 100,000
Return of plan assets 110,000
Discount rate 5%

Requirement: Compute for the amounts that will be presented in Entity A’s December 31, 20x1 statement of
financial position and statement of comprehensive income.

Solutions:
Step 1: Determine the deficit or surplus
FVPA, end – Dec. 31, 20x1 1,310,000
PV of DBO – Dec. 31, 20x1 (1,800,000)
Deficit (490,000)

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

The net defined benefit liability is P490,000 – the deficit determined in Step 1. This is presented in the
noncurrent liabilities section of Entity A’s Dec. 31, 20x1 statement of financial position.
Step 3: Determine the Defined Benefit Cost
Service cost:
a) Current service cost 325,000
b) Past service cost -
c) Any (gain) or loss on settlement - 325,000

Net interest on the net defined benefit liability (asset):

d) Interest cost on the DBO (1.5M, beg. X 5%) 75,000
e) Interest income on plan assets (1.2M, beg. X 5%) (60,000)
f) Interest on the effect of the asset ceiling - 15,000

Remeasurements of the net defined benefit liability (asset):

g) Actuarial (gains) and losses (100,000)
h) Difference between interest income on plan assets
and return on plan assets (60,000-110,000) (50,000)
c) Difference between the interest on the effect
of the asset ceiling and change in the effect
of the asset ceiling - (150,000)
Total Defined Benefit Cost 190,000
 The amount shown in the profit or loss section of the
statement of comprehensive income is P340,000
expense (325,000 service cost + 15,000 net interest
on the net defined benefit liability).

 The amount shown in the other comprehensive

income section of the statement of comprehensive
income is P150,000 income, i.e., the total
remeasurements of the net defined benefit liability.

 The net effect on total comprehensive income is

P190,000 (340,000 expense less 150,000 income).
State plans

A state plan is one that is established by law and

operated by the government. It is mandatory for all
entities within the scope and is not subject to control or
influence by the entity. Examples include: Government
Service Insurance System (GSIS), which covers
government employees; and Social Security System
(SSS), which covers those in the private sector.

A state plan is classified as either a defined

contribution plan or a defined benefit plan.
Illustration: Social Security System (SSS)

Entity A pays monthly SSS contributions as part of its

employee retirement benefits.

Requirement: Identify whether the retirement benefit plan is a

defined contribution plan or defined benefit plan.

Analysis:
 The retirement plan is a state plan – it is established by law
and operated by the government.
 It is a defined contribution plan – Entity A is liable to the
employees only for its share in the monthly SSS
contributions.
Illustration 2: R.A. 7641 Retirement Pay Law

Entity A does not have a post-employment benefit plan for its employees.
Accordingly, Entity A is subject to the minimum requirements of the law. Republic
Act No. 7641 provides the following:

“In the absence of a retirement plan (or its similar) that provides for the employee’s
retirement benefits in the establishment, an employee shall be entitled to an
employee retirement benefit upon reaching the compulsory retirement age. The age
of sixty (60) years or more, but not beyond sixty-five (65) years is the considered
compulsory retirement age. If the employee has served the least of five (5) years in
the said establishment, he/she may retire and enjoy the retirement benefits
equivalent of at least one-half (1/2) month salary for his/her every year of service. A
fraction of at least six (6) months considered as one whole year.

Unless acknowledged by both parties otherwise, one-half (1/2) a month salary’ shall
represent the fifteen (15) working days in addition to the one-twelfth (1/12) for the
mandated 13th month pay. This is also includes the cash equivalent of not more than
five (5) days of paid leaves”.
Requirement: Identify whether the retirement
benefit plan described above is a defined
contribution plan or defined benefit plan.

Analysis:
 The retirement plan is not a state plan – although
it is promulgated by law, it is not operated by the
government.
 It is a defined benefit plan – Entity A is liable to
pay retiring employees the minimum computed in
accordance with the provisions of the law.
Insured benefits

An employer may pay insurance premiums to fund a

post-employment benefit plan. Such plan is
classified as either defined contribution plan or
defined benefit plan.

It is a defined benefit plan if the employer retains the

obligation to either pay directly the benefits to the
employee or make good any deficiency if the insurer
fails to pay in full the benefits.
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 have rendered the related
service. Examples include:
a. Long-term compensated absences, e.g., sabbatical leave
b. Jubilee or other long-service benefits
c. Long-term disability benefits
d. Profit-sharing and bonuses payable beyond 12 months after the end of the
period in which the employees have rendered the related service
e. Deferred compensation payable beyond 12 months after the end of the period
in which it is earned.

Other long-term employee benefits are accounted for similar to defined benefit plans
(see ‘3-step accounting’ in the previous slide) except that all the components of the
defined benefit cost is recognized in profit or loss, including the remeasurements of
the net defined benefit liability (asset).
Termination benefits

Termination benefits are those provided as a result of either

a. The entity’s decision to terminate the employee before normal
retirement date; or
b. The employer’s decision to accept the employer’s offer of
benefits in exchange for termination.

Unlike the other types of employee benefits, the obligation to pay

termination benefits arises from the employer’s act of
terminating an employee rather than from employee service.

Accordingly, benefits resulting from termination at the

employee’s request without the employer’s offer are not
termination benefits but rather post-employment benefits.
Recognition

Termination benefits are recognized as a liability and

expense at the earlier of the following dates:

a. When the entity can no longer withdraw the offer

of those benefits; and
b. When the entity recognizes restructuring costs
under PAS 37 that involve payment of
termination benefits. (PAS 19.65)
Measurement

Termination benefits are accounted for in accordance

with the nature of the employee benefit. If the
termination benefits are:

a. Payable within 12 months, they are accounted for

similar to short-term employee benefits.
b. Payable beyond 12 months, they are accounted for
similar to other long-term benefits.
c. In substance, enhancement to post-employment
benefits, they are accounted for as post-employment
benefits.