Insured benefits

An employer may pay insurance premiums to fund a postemployment benefit plan. Such plan is
classified as either defined contribution plan or defined benefit plan.

However such a plan shall be accounted for as 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.

Accounting for defined contribution plan

The accounting for defined contribution plans is straightforward.

Recognizes contribution as expense

and 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.

Illustration:

Under Entity A’s defined contribution plan, it agrees to make fixed

annual contributions of Php 200,000 to a retirement fund for the
benefit of its employees.

Scenario 1: Entity A’s retirement benefit plan is funded. Entity A

contributes Php 200,000 to the fund held by a trustee.

Dec.31, Retirement benefit expense 200,000

20x1 Cash 200,000

Scenario 2: Because of poor results of operations, Entity A was only

able to contribute Php 80,000 to the fund.

Dec.31, Retirement benefit expense 200,000

20x1 Cash 80,000
Accrued retirement contributions 120, 000

Scenario 3: Because of profitable operations , Entity A decided to

contribute Php 230,000 during the period.
Dec.31, Retirement benefit expense Prepaid 200,000
20x1 retirement contributions 30,000
Accrued retirement contributions 230,000

Scenario 4: An employee retired and was eligible to Php 30,000

retirement benefits based on the operating efficiency and investment
earnings to the fund.

Dec.31, No entry
20x1