CONCEPTUAL FRAMEWORK IN FINANCIAL REPORTING AND

ACCOUNTING STANDARDS (CFFRAS)

BY PROF. CESAR V. RAMIREZ, CPA. MBA, CESO IV, FRIACC, BSA

PROGRAM CHAIR
 INTRODUCTION
• PAS 19 prescribes the accounting for employee benefits by employer except
– Employee benefits within the scope of PFRS No. 2 “Share-Based Payment”, and
– PAS 26 Accounting and Reporting by Retirement Benefit Plans
• Employee benefits are all forms of consideration given by an entity in exchange for
the service rendered by employees or for the termination of employment.
• Employee benefits can be in any form, that is, cash, goods or services, and may be
provided to either the employees or their dependents.
• Employees include regular, part-time or casual, and regardless of position in the
entity, that is, rank-and-file, director or other management personnel.
 RECOGNITION
• Employee benefits are recognized as
– Expenses when employees have rendered service
– Cost of another asset (direct and indirect labor) as part of inventories
– Liabilities –expenses already earned by employees but not yet paid
• Employee benefits may arise from
– Contractual agreements, e.g., employment contracts
– Legislation- e.g. SSS contributions
– Informal practices that create constructive obligations
 FOUR CATEGORIES OF EMPLOYEE BENEFITS UNDER PAS 19
• SHORT-TERM EMPLOYEE BENEFITS
• POST-EMPLOYMENT BENEFITS
• OTHER LONG-TERM EMPLOYEE BENEFITS
• 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 accounting period in which the employees have rendered
related services.
• Examples:
– Salaries, wages and SSS, Philhealth and Pag-ibig contributions
– Paid vacation leaves and sick leaves
– Profit-sharing and bonuses
– Non-monetary benefits ( e.g. free goods or services)
 SHORT-TERM EMPLOYEE BENEFITS
• GENERAL ACCOUNTING REQUIREMENTS
– Actuarial valuation is not necessary to measure the cost or obligation
– Short-term benefits are not discounted.
– Recognized as expense or cost of another asset or as an accrued liability if unpaid
– If payments exceed the benefits earned, recognized as prepaid expense(asset)
– Recognized periodically. For example, salaries are usually paid every 15th and 30th of the
month.
• Short-term paid absences
– Vacation and sick leaves
– Regular and nonworking holidays
– Maternity and paternity
 SHORT-TERM EMPLOYEE BENEFITS
• Entitlement to paid absences may be either
– 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
• Vesting- unused entitlement are paid in cash when the employee leaves the entity (i.e. monetized)
• Non-vesting –unused entitlement are not monetized, i.e, forfeited.
– Non-accumulating- those that expire if not used in the current period and are not paid in cash
when the employee leaves the entity.
• Compensated absences are recognized as follows:
– Accumulating and vesting
– Accumulating and non-vesting
– Non-accumulating
 SHORT-TERM EMPLOYEE BENEFITS
• Profit-sharing and bonus plan
– 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
• The entity has present obligation to pay for them
• The cost of the obligation can be measured reliably
 POST-EMPLOYMENT BENEFITS
• Post-employment benefits other than short-term benefits and retirement benefits
that are payable after the completion of employment.
• Examples
– Retirement benefits (lump-sum payment and pensions)
– Other post-employment benefits ( e.g. post-employment life insurance or medical care)
• Post-employment benefit plan can be
– Formal (stated in employment contract or employee manual/handbook)
– Informal ( based on employer’s past practices and not documented)
• Post-employment benefit plan can be
– Contributory or Non-contributory
– Funded or Unfunded.
 POST-EMPLOYMENT BENEFITS
CONTRIBUTORY NON-CONTRIBUTORY

Both the employer and the employee contribute to the retirement benefits Only the employer contributes to the retirement benefits fund of the
fund of the employee. employee.

FUNDED UNFUNDED

The retirement fund is isolated from the employer’s control and is The employer manages any established fund and pays directly the retiring
transferred to a trustee ( e.g. investment company) who undertakes to employees.
manage the fund and pay directly the retiring employees.
 POST-EMPLOYMENT BENEFITS
• Post-employment benefit plans are either
1. Defined contribution plans; or
2. Defined benefit plans.
 DEFINED CONTRIBUTION PLANS
– 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 benefits to be received by employee depends on the annual 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.
– The risk that retirement benefits may be insufficient rests with the employee.
 DEFINED CONTRIBUTION PLAN
• Accounting for defined contribution plan
– Straightforward
– The employer’s obligation is what is committed to contribute
– It simply recognizes the contribution as expense, cost of another asset or liability
– If the amount contributed exceeds the fixed amount of contribution , the excess is treated as
prepaid expense (asset)
– The amount of contribution is measured at an undiscounted amount if it is due within 12
months; if beyond 12 months it is discounted.
– Actuarial valuations are not necessary; so, there are no actuarial gains or losses.
 DEFINED CONTRIBUTION PLAN
• ILLUSTRATION
– Under Entity’s A defined contribution plan, it agrees to make fixed annual contributions of P
200,000 to a retirement fund for the benefit of its employees.
– Accounting:
• At each year-end, Entity A recognizes a fixed retirement benefit cost of P 200,000, 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. if it is due within 12 months from year-end.
• If the actual contributions during the period exceeds the fixed amount ( e.g. Entity A contributed P
230,000), the excess of P 30,000 is recognized as prepaid expense (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.
 DEFINED CONTRIBUTION PLANS
• For example, assume that an employee has retired during the period and was paid P
1 million for her retirement benefits. The amount of the retirement benefits cost that
Entity A recognizes for the period is still P 200,000, i.e., the agreed amount of
contribution. If the plan is funded, the trustee is the one who will pay thee retiring
employee and not Entity A.
 DEFINED BENEFIT PLANS
• The employer commits to pay a definite amount of retirement benefits which can be
determined using a plan formula.
• The amount of promised benefits is independent of any fund balance.
• If the fund proves to be insufficient to pay for the promised benefits, the employer is
obligated to make good the deficiency.
• The risk of fund insufficiency rests with the employer.
 DEFINED CONTRIBUTION PLAN VS. DEFINED BENEFIT PLAN
DEFINED CONTRIBUTION PLAN
• THE EMPLOYER COMMITS TO MAKE FIXED CONTRIBUTION TO A FUND.
• THE AMOUNT OF BENEFIT THAN AN EMPLOYEE WILL RECEIVE IS
DEPENDENT ON THE FUND BALANCE.
• THE RISK THAT THE FUND MAY BE INSUFFICIENT TO MEET THE
EXPECTED BENEFITS RESTS WITH THE EMPLOYEE
DEFINED BENEFIT PLAN
• THE EMPLOYER COMMITS TO PAY A DEFINITE AMOUNT OF RETIREMENT
BENEFITS.
• SUCH AMOUNT IS INDEPENDENT OF ANY FUND BALANCE.
• THE RISK THAT THE FUND MAY BE INSUFFICIENT TO PAY FOR THE
PROMISED BENEFITS RESTS WITH THE EMPLOYER.
 DEFINED BENEFIT PLAN-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.
 DEFINED BENEFIT PLAN-ILLUSTRATION
CASE 2: Entity A agrees to provide post-employment benefits to its employees in the
form of a lump-sum payment of P 2 million 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 not dependent on contributions to retirement funds.
The employer bears the risk that the fund set aside will be deficient of the promised
benefits.
 DEFINED BENEFIT PLAN-ILLUSTRATION
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 with same reason as in Case 2.
 ACCOUNTING FOR DEFINED BENEFIT PLAN
• The employer’s obligation is to provide the agreed benefits.
• The employer bears the risk that the promised benefits will cost more than expected
if actuarial or investment experience is worse than expected. Thus, the related
obligation may need to be increased.
• The accounting for defined benefit plan is complex because actuarial assumptions
are necessary to measure the obligation on a discounted basis.
• This results to actuarial gains or losses.
• The retirement benefit cost is not necessarily equal to contribution due for the
period.
 ACCOUNTING FOR DEFINED BENEFIT PLAN
• The accounting for defined benefit plan involves the following steps:
Step 1: Determine the deficit or surplus which 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 the FVPA is less than the PC of DBO, there is a deficit.
➢ If the FVPA is more than the PC of DBO, there is a surplus.
 ACCOUNTING FOR DEFINED BENEFIT PLAN
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 reduction in future contributions to the plan.
 ACCOUNTING FOR DEFINED BENEFIT PLAN
Step 3: Determine the defined benefit cost with the use of the following formula:
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)a.
a. Interest cost on the defined benefit obligation Xx
b. Interest income on plan asset Xx
c. Interest on the effect of the asset ceiling Xx Xx
Remeasurement of the net defined benefit liability (asset) recognized in
the OCI
a. Actuarial (gains) and losses Xx
b. 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
 ACCOUNTING FOR DEFINED BENEFIT PLAN
Service Cost:
1. Current service cost- is the increase in the PV of DBO resulting from employee
service in the current period.
2. Past service cost- is the change in the PV of DBO for employee service in prior
periods resulting from a plan amendment or curtailment.
3. Gain or loss on settlement- arises when the employer’s obligation to provide
benefits is eliminated other than from the payment of benefits according to the
terms of the plan.
 ACCOUNTING FOR DEFINED BENEFIT 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 above.
• Remeasurements of the net defined benefit liability (asset)
– Actuarial gains and losses- are changes in the PV of the 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.
– 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.
 ACCOUNTING FOR DEFINED BENEFIT PLAN
• 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 DVO-DEC. 31, 20X1 1,800,000
– FVPA, DEC. 31, 20X1 1,310,000
– CURRENT SERVICE COST 325,000
– ACTUARIAL GAIN 100,000
– RETURN ON PLAN ASSET 110,000
– DISCOUNT RATE 5%
 ACCOUNTING FOR DEFINED BENEFIT PLAN
• REQUIRED: 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 1,300,000
– 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 P 490,000 as derived in Step 1. This is presented in the non-current
liabilities section of the Entity A’s Dec. 31, 20x1 Statement of Financial Position.
– The net defined benefit liability in the preceding year is P 300,000 ( 1.2 M FVPA, beg.- 1.5 M PV of DBO,
beg.)
 ACCOUNTING FOR DEFINED BENEFIT PLAN
Step 3: Determine the Defined Benefit Cost
Service Cost:
a. Current service cost P 325,000
b. Past service cost 0
c. Any (gain) or loss on settlement 0
P 325,000
Net interest on the net defined liability (asset):
a. Interest cost on the DBO (P 1.5m beg. X 5%) 75,000
b. Interest income on plan asset (1.2 m, beg x 5%) (60,000)
c. 15,000
 ACCOUNTING FOR DEFINED BENEFIT PLAN
• Remeasurement of the net defined benefit liability (asset)
a. actuarial (gains) or losses (100,000)
b. Difference between interest income on plan asset
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
 ACCOUNTING FOR DEFINED BENEFIT PLAN
• Remeasurement of the net defined benefit liability (asset)
a. actuarial (gains) or losses (100,000)
b. Difference between interest income on plan asset
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
 ACCOUNTING FOR DEFINED BENEFIT PLAN
• The amount shown in the profit or loss section of the statement of comprehensive
income is P 340,000 expense( 325,000 + 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 P 150,000 income, i.e., the total remeasurement of the net
defined benefit liability.
• The net effect on total comprehensive income is P 190,000 ( 340,000 expense less
150,000 income)
 MULTI-EMPLOYER PLANS
• Under a multi-employer plan, various unrelated employers contribute to a common
fund that is managed by a trustee to provide post-employment benefits to the
employees of the participating employers. Contributions and benefit levels are
determined without regard to the identities of the employers.
• A multiemployer plan is classified as either a defined contribution plan or a defined
benefit plan.
 STATE PLANS
• A state plan is that which is established by law and operated by the government. It is
mandatory for all entities within its scope and is not subject to control or influence
by the entity. Examples include: GSIS and SSS.
• A state plan is accounted for in the same way as a multiemployer plan, that is,
classified as either a defined contribution plan or a defined benefit plan.
 ILLUSTRATION 1- SSS
• Entity A pays a monthly SSS contributions as part of its employee retirement
benefits. The retirement benefit plan under the SSS Law is described below:
• Qualification for retirement benefits
– The member is 60 years old, separated from employment or ceased to be self-employed, and
has paid at least 120 monthly contributions prior to retirement.
– The members is 65 years old whether employed or not and has paid at least 120 monthly
contributions prior to retirement.
• Types of retirement benefits
– Lifetime monthly pension-for a retiree who has paid at least 120 monthly contributions prior
to retirement, and
– Lump-sum amount- for a retiree who has not paid the required 120 monthly contributions.
 ILLUSTRATION 1- SSS
• Monthly pension
• The monthly pension is based on the contribution paid, credited years of service and the number of
dependent minor children not to exceed five. The amount of monthly pension is the highest of the
following:
– The sum of P 300 plus 20% of the average monthly salary credit plus 2% of the average monthly salary credit for each
credited year of service in excess of ten years; or
– 40% of the average monthly salary credit; or
– P 1,200 , provided that the credited years of service (CYS) is at least 10 or more but less than 20 or P 2,000, if the CYS is 20
or more. The monthly pension is paid for not less than 60 months.
• A retiree has the option to receive in advance ,upon date of eligibility, the first 18 monthly pension in lump
sum discounted at a preferential rate of interest to be determined by the SSS. The member will receive the
monthly pension on the 19th month and every month thereafter.
• If the member retires after age of 60, the monthly pension shall be the higher of the following:
– The monthly pension computed at the earliest time the member could have retired, had been separated from self-
employment or ceased to be self-employed plus all adjustments thereto, or
– The monthly pension computed at the time when the member actually retires.
 ILLUSTRATION 1- SSS
• Lump-sum benefit is equal to the total contributions paid by the member and the employer
including interest.
• Death of retiree- the primary beneficiaries are entitled to 100% of the monthly pension, and
the dependents to the dependents’ pension
• If the retiree dies within 60 months from the commencement of the monthly pension and
has no primary beneficiaries, the secondary beneficiaries are entitled to a lump-sum benefit
equivalent to the total monthly pensions corresponding to the 5-year guaranteed period
excluding the dependents’ pension.
• Required: Identify whether the retirement benefit plan described above 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- RA 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. RA 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 60 years or more, but not beyond 65 years is considered
compulsory retirement age.
• If the employee has served the least of 5 years in the said retirement, he/she may
retire and enjoy the retirement benefits equivalent of at least one-half month salary
for his/her every year of service. A fraction of at least 6 months is considered as one
whole year.
 ILLUSTRATION 2- RA 7641 RETIREMENT PAY LAW
• Unless acknowledged by both parties otherwise, one half a month salary shall
represent the fifteen working days in addition to the one-twelfth for the mandated
13th month pay. This also includes the cash equivalent of not more than five days of
paid leaves.”
• Required: 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 government. It is a defined benefit plan-Entity A is liable to pay
retiring employees the minimum amount computed in accordance with the provision
of the law.
 INSURED BENEFITS
• An employee 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 of 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 those 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 services. Examples are:
– Long-term compensated absences like sabbatical leave
– Jubilee or other long-term benefits
– Profit sharing and bonuses payable beyond 12 months after the end of the period in which the
employees have rendered the related service.
– Long-term disability benefits
– Deferred compensation payable beyond 12 months after the end of the period in which it is earned.
• Other long-term benefits are accounted for like defined benefit plan ( with three steps
above) except that all the components of the defined benefit cost is recognized in profit or
loss, including the remeasurement of the net defined benefit liability (asset).
 TERMINATION BENEFITS
• Termination benefits are those provided as a result of either
– The entity’s decision to terminate the employee before normal retirement date, or
– The employee’s decision to accept the employer’s offer 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 & MEASUREMENT
• Termination benefits are recognized as a liability and expense at the earlier of the
following dates:
– When the entity can no longer withdraw the offer of those benefits; and
– When the entity recognizes restructuring costs under PAS 37 that involve payment of
termination benefits.
• Termination benefits are measured in accordance with the nature of the employee
benefit. If the termination benefits are:
– Payable within 12 month, they are accounted for similar to short-term employee benefits
– Payable beyond 12 months, they are accounted for similar to other long-term benefits
– In substance, enhancement to post-employment benefits, they are accounted for as post-
employment benefits.
END OF THE PRESENTATION
• THANK YOU