DISCLAIMER: The information content provided in this course material is designed to provide helpful

information on the subjects discussed. Some information is compiled from different materials and
summarized from different books. Some information is based on contributors' perspective and
understanding. References are provided for informational purposes only and do not constitute
endorsement of websites or other sources. Readers should be aware that the websites/electronic
references listed in this course material may change. Hence, the contributors do not claim any
information presented in the materials and do not reflect their own work.

Subject Code: BAIACC3X

Subject Title:
Subject Description:
Intermediate Accounting 3
This course will introduce the concepts of shareholder’s equity, some
special topics and preparation of financial statements. It will specifically
discuss the application of accounting standards on shareholder’s equity,
special topics on employee benefits and the preparation of financial
statements.

No. of Units: 3
Class Schedule: ACT201: Tuesday 8:00 am – 12:00 pm

ACT202: Friday 8:00 am – 12:00 pm

Course Learning Outcomes:

At the end of this course, the student will be able to:
1. Recognize, measure, and present non-current liabilities and equity in accordance with applicable
PFRS
2. Describe the principles and standards underlying the recognition, measurement, presentation, and
disclosure requirements of the other liabilities and shareholders’ equity in statement of financial
position.
3. Prepare a complete set of financial statements in accordance with applicable PFRS.
4. Apply acquired knowledge and skills to pass professional licensure / certification examinations.

About the Instructor:

PROF. MICHAEL ANGELO M. MANAYAO, CPA, MBA
 Professional Lecturer, Baliwag Polytechnci College
 Master in Business Administration – Far Eastern University (2021)
 Graduated from Baliwag Polytechnic College (Cum Laude) – Batch 2018
 Member, PICPA Bulacan

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MODULE 2 – DEFINE BENEFIT PLAN

I. Learning Outcomes
 To understand the relationship between fair value of plan assets and projected benefit
obligation.
 To know the computation of employee benefit expense.
 To compute remeasurements of plan assets, projected benefit obligation and effect of asset
ceiling.
 To recognize plan settlement.
 To understand the treatment of asset ceiling.

II. Content

Basic Accounting Considerations

 The benefit plan shall be viewed as a sub entity separate and distinct from the primary entity,
which is the employee entity
 The sub entity maintains information that does not appear in the financial statements of the
primary entity
 Such information is kept only by means of memorandum records and therefore not reflected in
the general ledger accounts of the primary entity

Fair value of plan assets (FVPA) Projected benefit obligation (PBO)

 Source of fund set aside in meeting future
benefit payments
 The FVPA is analogous to an off-statement
of financial position asset with a debit
balance
 Defined benefit obligation is the present
value of expected future payments required
to settle the obligation arising from
employee service in the current and prior
periods.
 The PBO is analogous to an off-statement
of financial position liability with a credit
balance

 If the FVPA is more than the PBO the plan is overfunded and therefore there is a prepaid benefit
cost, a noncurrent asset
 If the FVPA is less than the PBO, the plan is underfunded, and therefore, there is an accrued
benefit cost, a noncurrent liability
 The prepaid/accrued benefit cost is the item that appears on the financial statement of the
employer entity

Illustration 1 - Underfunding
To simplify the example, the only component of the benefit expense is the current service cost of
₱500,000

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The entity made a contribution of ₱450,000 to the defined benefit plan for the current year.

The journal entry to record the expense and the contribution is:
Employee benefit expense 500,000
Cash 450,000
Prepaid/accrued benefit cost 50,000

Illustration 2- Overfunding
Again, the only component of the benefit expense is the current service cost of ₱500,000.

The entity made a contribution of ₱600,000 to the defined benefit plan for the current year.

The journal entry to record the expense and the contribution is:
Employee benefit expense 500,000
Prepaid/accrued benefit cost 100,000
Cash 600,000

Prepaid/Accrued Benefit Cost

 Observe that the "prepaid/accrued benefit cost" account is the balancing figure.
 As the years go by, this account will build up and it may have debit or credit balance at the end of
current reporting period.

Debit balance Noncurrent asset presented as prepaid benefit cost

Credit Noncurrent liability presented as accrued benefit
balance cost.

Accounting for Defined Benefit Plan

The following steps shall be followed in accounting for defined benefit plan
STEP 1: Determine the Defined Benefit Obligation (DBO)
STEP 2: Determine the Fair Value of Plan Assets
STEP 3: Determine the Deficit or Surplus
STEP 4: Determine the Net Defined Liability or Asset
STEP 5: Determine the Defined Benefit Cost
STEP 1: Determine the Defined Benefit Obligation (DBO).

Defined Benefit Obligation (PV)

Actuarial Gain xx Beginning Balance xx
Benefits Paid xx Current Service Cost xx
Past Service Cost xx
Interest Expense xx

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 Actuarial Loss xx
Ending Balance xx

NOTES:

 Interest expense is computed by multiplying the defined benefit obligation at the beginning of the
reporting period by the "discount rate". The discount rate is based on HIGH QUALITY
CORPORATE BONDS or ON GOVERNMENT BONDS in the absence thereof.

 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.

If the actual benefit obligation is higher than the estimated amount, there is an actuarial loss.

If the actual benefit obligation is lower than the estimated amount, there is an actuarial gain.

 Benefits paid results from the settlement of the plan.

STEP 2: Determine the Fair Value of Plan Assets

Fair Value of Plan Assets

Beginning Balance xx Benefits paid xx
Actual Return xx Settlement price of PBO settled in advance xx
Contributions made xx
Ending Balance xx

NOTES:
 Actual return comprises interest income and remeasurement gain. Interest income is computed
by multiplying the fair value of plan assets at the beginning of the reporting period by the same
discount rate used for interest expense.

STEP 3: Determine the Deficit or Surplus

If FVPA < DBO = Deficit
If FVPA > DBO = Surplus

STEP 4: Determine the Net Defined Liability or Asset

Net Defined Benefit Liability (Accrued Pension) = Deficit
Net Defined Benefit Asset (Prepaid Pension) = The lower of Surplus and Asset Ceiling

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STEP 5: Determine the Defined Benefit Cost

Comprehensive illustration
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 (2,000,000)

During the current year, the following transactions gathered:

Current service cost 1,200,000
Past service cost 300,000
Actual return on plan assets 800,000
Contribution to the plan 1,800,000
Benefits paid 500,000
Actuarial loss due to increase in PBO 900,000
Discount rate 10%

COMPUTATIONS
Current service cost 1,200,000
Past service cost 300,000
Interest expense on PBO (10% x 7,000,000) 700,000
Interest income on FVPA (10% x 5,000,000) (500,000)
Employee benefit expense 1,700,000

Actual return on plan assets 800,000

Interest income on FVPA (500,000)
Remeasurement gain on plan assets 300,000
Actuarial loss due to increase in PBO (900,000)
Net remeasurement loss (600,000)

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Employee benefit expense 1,700,000
Net remeasurement loss 600,000
Total defined benefit cost 2,300,000
Contribution to the plan 1,000,000
Accrued benefit cost during the year 1,300,000

Journal entry
Employee benefit expense 1,700,000
Net remeasurement loss-OCI 600,000
Cash 1,000,000
Prepaid / accrued benefit cost 1,300,000

Prepaid/accrued benefit cost - January 1 (2,000,000)

Credit adjustment-accrued benefit cost during year (1,300,000)
Prepaid accrued benefit cost-December 31 (3,300,000)

Reconciliation
FVPA - January 1 5,000,000
Contribution to the plan 1,000,000
Interest income on FVPA 500,000
Remeasurement gain on plan assets 300,000
Benefits paid (500,000)
FVPA - December 31 6,300,000

Simple approach
FVPA - January 1 5,000,000
Contribution to the plan 1,000,000
Actual return on plan assets 800,000
Benefits paid (500,000)
FVPA - December 31 6,300,000

Fair Value of Plan Assets

Beginning Balance 5,000,000 Benefits paid 500,000
Settlement price of PBO settled in
Actual Return 800,000 advance 0
Contributions made 1,000,000
Ending Balance 6,300,000

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PBO - January 1 7,000,000
Current service cost 1,200,000
Past service cost 300,000
Interest expense on PBO 700,000
Benefits paid (500,000)
Actuarial loss due to increase in PBO 900,000
PBO - December 31 9,600,000

Defined Benefit Obligation (PV)

Actuarial Gain 0 Beginning Balance 7,200,000
Benefits Paid 500,000 Current Service Cost 1,200,000
Past Service Cost 300,000
Interest Expense 700,000
Actuarial Loss 900,000
Ending Balance 9,600,000

FVPA - December 31 6,300,000

PBO - December 31 (9,600,000)
Prepaid/accrued benefit cost – credit (3,300,000)

Settlement of plan
 A settlement is a transaction that eliminates all further legal or constructive obligations for part or
all of the benefits provided under a defined benefit plan.
 Entities may settle their postemployment benefit plans by purchasing annuity contracts from
insurance entities for less than the amount in the retirement fund. (purchase of an insurance policy
is a settlement.)
 A lump sum payment to plan participants in exchange for their rights to receive specified
postemployment benefits is also a settlement. However, PAS 19 clarified that a lump sum payment
to plan participants made under the terms of the existing defined benefit plan is not a settlement.
 This is referred to as routine settlement and considered an actuarial assumption that should be
included in the measurement of the defined benefit obligation.
 The most obvious example of a routine settlement is the option to take a lump sum payment instead
of an annuity or a periodic payment.

Gain or loss on settlement

 PAS 19, paragraph 110, provides that an entity shall recognize gain or loss on the settlement of a
defined benefit plan when the settlement occurs.
 The gain or loss on settlement is the difference between the settlement price and the present value
of the defined benefit obligation on the date of settlement.
 The settlement price includes any plan assets transferred and any payments made directly by the
entity in connection with the settlement.
 Any gain or loss on settlement is fully recognized and included in service cost in the computation of
employee benefit expense.

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Illustration
At the beginning of current year, the memorandum records of a defined benefit plan showed the
following:
Fair value of plan assets 4,000,000
Projected benefit obligation 5,500,000
Prepaid/accrued benefit cost (1,500,000)

During the current year, the following transactions are gathered:

Current service cost 800,000
Actual return on plan assets 300,000
Contribution to the plan 600,000
Settlement price of defined benefit obligation 450,000
Present value of defined benefit obligation settled 500,000
Discount rate 5%

Computations
Present value of defined benefit obligation settled 500,000
Settlement price 450,000
Settlement gain 50,000

Current service cost 800,000

Settlement gain (50,000)
Interest expense on PBO (5% x 5,500,000) 275,000
Interest income on FVPA (5% x 4,000,000) (200,000)
Employee benefit expense 825,000

Actual return on plan assets 300,000

Interest income on FVPA (200,000)
Remeasurement gain on plan assets 100,000

Employee benefit expense 825,000

Remeasurement gain-OCI (100,000)
Defined benefit cost 725,000
Contribution to the plan 600,000
Accrued benefit cost during the year 125,000

Journal entry
Employee benefit expense 825,000
Remeasurement gain – OCI 100,000
Cash 600,000
Prepaid/accrued benefit cost 125,000

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Prepaid/accrued benefit cost - January 1 (1,500,000)
Credit adjustment - accrued benefit cost during year (125,000)
Prepaid/accrued benefit cost - December 31 (1,625,000)

Reconciliation
FVPA - January 1 4,000,000
Contribution to the plan 600,000
Settlement price of defined benefit obligation (450,000)
Interest income on FVPA 200,000
Remeasurement gain on plan assts 100,000
FVPA - December 31 4,450,000

PBO- January 1 5,500,000

Current service cost 800,000
Interest expense on PBO 275,000
Present value of defined benefit obligation settled (500,000)
PBO - December 31 6,075,000

FVPA - December 31 4,450,000

PBO - December 31 6,075,000
Prepaid/accrued benefit cost-credit (1,625,000)

FVPA more than PBO

 If the fair value of plan assets is more than the projected benefit obligation, the plan is overfunded
and therefore, there is a prepaid benefit cost which PAS 19 calls it surplus.
 PAS 19, paragraph 64, provides that the surplus in a defined benefit plan must not exceed the asset
ceiling determined by using the discount rate in the measurement of the defined benefit obligation.
 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.

Illustration
At year-end, a defined benefit plan revealed the following data:
Fair value of plan assets 6,000,000
Projected benefit obligation 5,000,000
Prepaid/accrued benefit cost – surplus 1,000,000

 The asset ceiling or the present value of available future refunds and reduction in future contributions
is P1,200,000.
 The surplus does not exceed the asset ceiling.
 Therefore, a prepaid benefit cost or surplus asset of P1,000,000 shall be reported in the statement of
financial position at year-end.

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Comprehensive illustration
A defined benefit plan revealed the following information at the beginning of current year:
Fair value of plan assets 4,500,000
Projected benefit obligation 4,000,000
Prepaid/accrued benefit cost –surplus 500,000
Asset ceiling 300,000
Effect of asset ceiling 200,000

The following data are provided for the current year:

Current service cost 900,000
Actual return on plan assets 1,000,000
Contribution to the plan 700,000
Benefits paid 200,000
Actuarial gain due to decrease in PBO 300,000
Asset ceiling on December 31 800,000
Discount rate 10%

Computations
FVPA - January 1 4,500,000
Contribution to the plan 700,000
Actual return on plan assets 1,000,000
Benefits paid (200,000)
FVPA - December 31 6,000,000

PBO - January 1 4,000,000

Current service cost 900,000
Interest expense on PBO (10% x 4,000,000) 400,000
Actuarial gain due to decrease in PBO ( 300,000)
Benefits paid (200,000)
PBO - December 31 4,800,000

FVPA-December 31 6,000,000
PBO - December 31 4,800,000
Prepaid/accrued benefit cost – surplus 1,200,000
Asset ceiling - December 31 800,000
Effect of asset ceiling 400,000

Current service cost 900,000

Interest expense on PBO (10% x 4,000,000) 400,000
Interest income on FVPA (10% x 4,500,000) (450,000)
Interest expense on effect of asset ceiling (10% x 200,000) 20,000
Employee benefit expense 870,000

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Actual return on plan assets 1,000,000
Interest income on FVPA 450,000
Remeasurement gain on plan assets 550,000

Actuarial gain-decrease in PBO 300,000

Effect of asset ceiling - December 31 400,000

Effect of asset ceiling - January 1 200,000
Total change in the effect of asset ceiling 200,000
Interest expense on effect of asset ceiling on January 1(10% x 200,000) ( 20,000)
Remeasurement loss on asset ceiling 180,000

 Paragraph 126 provides that the interest on the effect of the asset ceiling is part of the total change
in the effect of the asset ceiling. The amount is determined by multiplying the effect of the asset
ceiling at the beginning of the period by the discount rate.
 The difference between the total change in the effect of the asset ceiling and the interest on the
effect of the asset ceiling is considered the remeasurement.
 Any increase in the effect of asset ceiling is a remeasurement loss.
 Any decrease in the effect of asset ceiling is a remeasurement gain.

Remeasurement gain on plan assets 550,000

Actuarial gain due to decrease in PBO 300,000
Remeasurement loss on the change in the effect of asset ceiling (180,000)
Net remeasurement gain-OCI 670,000

Employee benefit expense 870,000

Net remeasurement gain-OCI (670,000)
Defined benefit cost 200,000
Contribution to the plan 700,000
Prepaid benefit cost during the year 500,000

Employee benefit expense 870,000

Prepaid/accrued benefit cost 500,000
Remeasurement gain-OCI 670,000
Cash 700,000

Reconciliation
Prepaid/accrued benefit cost - January 1 asset ceiling 300,000
Debit adjustment - prepaid benefit cost during year 500,000
Prepaid/accrued benefit cost - December 31 800,000

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Note that the prepaid benefit cost on December 31 is ₱800,000 which is equal to the asset ceiling on
December 31.

Transitional Provision
Revised PAS 19, paragraph 173, provides that an entity shall apply this standard restrospectively.
This means that any transitional effect of the application of the amendment under PAS 19 shall be
accounted for as adjustment of the beginning balance of retained earnings.
In other words, assets such as inventory and property, plant and equipment that include employee
benefit costs in their carrying amount do not have to be restated.

Illustration
On January 1, 2020, the memorandum records showed the following:

Fair value of plan assets 4,000,000

Unamortized past service cost 400,000
Unrecognized actuarial loss 500,000
Projected benefit obligation (6,000,000)
Prepaid/accrued benefit cost (1,100,000)

On January 1, 2020, the entity applied the revised PAS 19 in relation to the recognition of past service
cost and actuarial gains and losses.

Effective January 1, 2020, all past service costs during the year are fully recognized in profit or loss.

All actuarial gains and losses during the year are fully recognized in other comprehensive income.

Accounting question
The question is the treatment of the unamortized past service of ₱400,000 and the unrecognized actuarial
loss of ₱500,000 on January 1, 2020.

Under the transitional provision of revised PAS 19, the unamortized past service cost and the
unrecognized actuarial loss shall be eliminated and accounted for retrospectively as an adjustment of
retained earnings.

The adjustment on January 1, 2020 to eliminate the unamortized past service cost and the unrecognized
actuarial loss is:
Retained earnings 900,000
Prepaid/accrued benefit cost 900,000

If this adjustment is posted to the general ledger, the effect would be the following:
Prepaid/accrued benefit cost (1,100,000)

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 Credit adjustment (900,000)
Adjusted credit balance (2,000,000)

This means that the adjusted accrued benefit cost is ₱2,000,000 on January 1, 2020.

As a proof, the memorandum records would show the following on January 1, 2020 after transition:
Fair value of plan assets 4,000,000
Projected benefit obligation (6,000,000)
Prepaid/accrued benefit cost-credit balance (2,000,000)

Note that the unamortized past service cost and the unrecognized actuarial are now eliminated and no
longer reported.

Disclosures
a. Characteristics of the defined benefit plan and risks associated with the plan
b. Reconciliations for the fair value of plan assets and the present value of the defined benefit obligation
c. Separate showing of current service cost, past service cost, interest expense or income and
remeasurements
d. Disaggregation of the fair value of plan assets into classes that distinguish the nature and risks of
assets
e. A sensitivity analysis for each significant actuarial assumption showing the effect on the defined
benefit obligation for any change
f. Description of any funding arrangement and policy
g. Expected contribution to the plan for the next period
h. Maturity profile of the defined benefit obligation

PAS 26
 This standard deals with "accounting and reporting by retirement benefit plans".
 It is the standard for the preparation of general purpose financial statements or financial reports of
retirement plans which may be a defined contribution plan or defined benefit plan.
 In rare cases, a retirement benefit plan may contain characteristics of both defined contribution plan
and defined benefit plan.
 For purposes of this standard, such a hybrid plan is deemed to be a defined benefit plan.

Report of defined contribution plan

 The report of a defined contribution plan shall contain a statement of net assets available for
benefits and a description of the funding policy.
 In preparing the "statement of net assets available for benefits", the plan investments shall be
carried at fair value.

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  When plan investments are held for which an estimate is not possible, the reason why fair value
is not used shall be disclosed.
 In practice, in many cases, plan assets will have determinable fair value because in the discharge
of their fiduciary responsibility, plan trustees will mandate that retirement plans hold only
marketable investments.

Illustration - Amounts are assumed

Generous Company - Defined Benefit Plan
Statement of Net Assets Available for Benefits
December 31, 2020

ASSETS
Cash 500,000
Receivables:
Amounts due from
stockbrokers on sale of
securities 1,500,000
Accrued interest receivable 400,000
Dividends receivable 100,000 2,000,000
Investments at fair value:
Treasury bills 2,500,000
Equity securities 1,000,000
Debt securities 500,000 4,000,000 6,500,000

LIABILITIES
Amounts due to stockbrokers on purchase
of securities 300,000
Benefits payable 700,000
Accrued expenses 100,000 1,100,000
NET ASSETS AVAILABLE FOR BENEFITS 5,400,000
Actuarial present value of benefits:
Vested benefits 1,200,000
Nonvested benefits 200,000 1,400,000
EXCESS OF NET ASSETS OVER BENEFITS 4,000,000

Frequency of actuarial valuation

 In many countries, actuarial valuations are not obtained frequently than every three years.
 PAS 26 does not make it incumbent upon the plan to use annual actuarial valuation.
 If an actuarial valuation has not been prepared on the date of the report, the most recent valuation
is used and the date of actuarial valuation is disclosed.

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Disclosure
The report of a retirement plan, defined contribution and defined benefit, shall disclose the following
information:
A. Statement of changes in net assets available for benefits.
B. Summary of significant accounting policies.
C. Description of the plan and the effect of any changes in the plan during the period.

III. Activity – Supplementary

Problems 18-2, 18-3, 18-5 to 18-8

IV. Activity/Assessment – Visit the MS Teams

V. References
Intermediate Accounting 2, 2021 edition by Conrado Valix

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DISCLAIMER: The information content provided in this course material is designed to provide helpful
information on the subjects discussed. Some information is compiled from different materials and
summarized from different books. Some information is based on contributors' perspective and
understanding. References are provided for informational purposes only and do not constitute
endorsement of websites or other sources. Readers should be aware that the websites/electronic
references listed in this course material may change. Hence, the contributors do not claim any
information presented in the materials and do not reflect their own work.

Subject Code: BAIACC3X

Subject Title:
Subject Description:
Intermediate Accounting 3
This course will introduce the concepts of shareholder’s equity, some
special topics and preparation of financial statements. It will specifically
discuss the application of accounting standards on shareholder’s equity,
special topics on employee benefits and the preparation of financial
statements.

No. of Units: 3
Class Schedule: ACT201: Tuesday 8:00 am – 12:00 pm

ACT202: Friday 8:00 am – 12:00 pm

Course Learning Outcomes:

At the end of this course, the student will be able to:
5. Recognize, measure, and present non-current liabilities and equity in accordance with applicable
PFRS
6. Describe the principles and standards underlying the recognition, measurement, presentation, and
disclosure requirements of the other liabilities and shareholders’ equity in statement of financial
position.
7. Prepare a complete set of financial statements in accordance with applicable PFRS.
8. Apply acquired knowledge and skills to pass professional licensure / certification examinations.

About the Instructor:

PROF. MICHAEL ANGELO M. MANAYAO, CPA, MBA
 Professional Lecturer, Baliwag Polytechnci College
 Master in Business Administration – Far Eastern University (2021)
 Graduated from Baliwag Polytechnic College (Cum Laude) – Batch 2018
 Member, PICPA Bulacan

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MODULE 3 – OTHER EMPLOYEE BENEFIT

I. Learning Outcomes
 To identify short-term employee benefits.
 To know the recognition and measurement of short-term employee benefits.
 To identify other long-term employee benefits.
 To know the recognition and measurement of other long-term employee benefits.
 To know the recognition and measurement of termination benefits.

II. Content

Short-Term Employee Benefits

 Short-term employee benefits are employee benefits other than termination benefits which are
expected to be settled wholly within twelve months after the end of annual reporting period in
which the employees render the related service
 Examples of short-term employee benefits:
 Salaries, wages and social security contributions
 Short-term compensated or paid absences such as paid annual leave and paid sick leave
 Profit sharing and bonuses payable within twelve months
 Nonmonetary benefits, such as medical care, housing, car and free or subsidized goods.

Accounting for Short-Term Employee Benefits

Accounting for short-term employee benefits is fairly straight forward because there are no actuarial
assumptions to be made.

The rules for short-term benefits are essentially an application of basic accounting principles and practice.
(1) Unpaid short-term employee benefits at the end of the reporting period shall be recognized as
accrued expense.
(2) Any short-term benefits paid in advance shall be recognized as a prepayment.
(3) The cost of short-term benefits shall be recognized as expense in the period when incurred,
except when such cost may be included within the cost of an asset, such as property, plant and
equipment.

Short-Term Compensated or Paid Absences

An entity may pay employees for absences for various reasons such as vacation, sickness and short-term
disability, maternity or paternity and military service.

Short-term compensated absences are classified as:

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 Accumulating - are those that are carried forward and can be used in future periods if the current
period's entitlement is not used in full.
 Vesting - Employees are entitled to a cash payment for unused entitlement on leaving the
entity.
 Nonvesting - Employees are not entitled to a cash payment for unused entitlement on leaving
the entity.
 Non-accumulating - are those that are not carried forward. Such benefits lapse if the current period's
entitlement is not used. Automatically, employees are not entitled to a cash payment for unused
entitlement on leaving the entity (NON-VESTING).

Illustration
Employees are each entitled to two weeks of paid vacation leave. During the year, the employees earned
1,000 weeks of vacation leave and used 600 weeks.

The current salary of the employees is an average of ₱2,000 week and the salary is expected to increase
by ₱200 per week or a future weekly salary of ₱2,200.

Accumulating paid vacation leave

1. To record the used vacation weeks:
Vacation pay expense (600 x ₱2,000) 1,200,000
Cash 1,200,000
2. To accrue the unused vacation weeks:
Vacation pay expense (400 weeks x ₱2,200) 880,000
Accrued vacation pay 880,000

PAS 19, paragraph 13, provides that an entity shall recognize as expense the expected cost of the short-
term benefit in the form of paid absences.

Nonaccumulating paid vacation leave

1. To record the used vacation weeks:
Vacation pay expense 1,200,000
Cash 1,200,000
2. To accrue the unused vacation weeks:
No accrual is necessary because nonaccumulating paid absences are recognized when the
absences occur and lapse when the entitlement is not used in full.

Another illustration
Employees are each entitled to 10 working days of paid sick leave for each year.

Unused sick leave may be carried forward for one calendar year only.

Sick leave is taken out of any balance brought forward from the previous year and then out of the current
year's entitlement on a FIFO basis.

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On January 1, 2020, the accrued sick leave pay was measured at ₱20,000. On December 31, 2020, the
sick leave records of employees A, B and C are:
A B C
Daily wage 1,000 1,500 2,000
Unused sick leave on January 1, 2020 8 4 2
Sick leave earned in 2020 10 10 10
Sick leave taken in 2020 6 6 8
Wage increase effective January 1, 2020 5% 10% 10%

A B C
Unused sick leave - January 1, 2020 8 4 2
Sick leave taken in 2020 from previous year (6) (4) (2)
Sick leave on 1/1/2020 not taken – forfeited 2 0 0

Sick leave earned in 2020 10 10 10

Sick leave taken in 2020 from current year - (2) (6)
Unused sick leave - December 31, 2020 10 8 4

 Note that the unused sick leave of employee A on January 1, 2020 is 8 days. However, only 6
days are taken in 2020.The balance of 2 days cannot be carried forward anymore because the sick
leave is good only for the next calendar year.
 In other words, the maximum unused sick leave for each year is only 10 days which can be carried
forward for one calendar year.
 In the case of B, the sick leave taken is 4 days from previous year and 2 days from 2020 or a total
of 6 days taken.
 In the case of C, the sick leave taken is 2 days from previous year and 6 days from 2020 or a total
of 8 days taken.

Expected daily wage

A (1,000 x 105%) 1,050
B (1,500 x 110%) 1,650
C (2,000, x 115%) 2,300

Accrued sick leave pay – December 31, 2020:

А (1,050 x 10 days) 10,500
B (1,650 x 8 days) 13,200
C (2,300 x 4 days ) 9,200
Total accrued liability - December 31, 2020 32,900
Accrued sick leave pay - January 1, 2020 20,000
Increase in accrued liability 12,900

Journal entry on December 31, 2020

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 Sick leave pay expense 12,900
Accrued sick leave pay 12,900

Profit Sharing and Bonus Plans

 Under some profit-sharing plans, employees shall receive a share of the profit only if they remain
with the entity for a specified period.
 Such plans create a constructive obligation as employees render service that increases the amount
to be paid if they remain in service until the end of the specified period.
 The measurement of such constructive obligation reflects the possibility that some employees may
leave without receiving profit-sharing payments.

Measurement and Recognition

PAS 19 provides that an entity shall recognize the expected cost of profit sharing and bonus payment
when all of the following conditions are present:
(a) The entity has a present legal or constructive obligation to make such payment as a result of past
event.
(b) A reliable estimate of the obligation can be made. A present obligation exists when the entity has
no realistic alternative but to make the payment.

Formulas:
(1) Bonus is expressed as a certain percent of income before bonus and before tax.
BONUS = Profit x B%

(2) Bonus is expressed as a certain percent of income after bonus but before tax.
BONUS = P – [(P ÷ (1 + B%)]

(3) Bonus is expressed as a certain percent of income after tax but before bonus.
BONUS = P x [(1 – T%) ÷ ((1 / B%) - T%)]

(4) Bonus is expressed as a certain percent of income after bonus and after tax.
BONUS = P x [(1 – T%) ÷ ((1 / B%) - T% + 1))]

WHERE:
P = Profit before bonus and before tax
B% = Bonus rate
T% = Tax rate

Illustration
A profit sharing bonus plan requires an entity to pay employees 5% of income for the year. The entity
reported income of ₱20,000,000 for the current year. The bonus payment is to be made at the end of the
following year.

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Journal entries
1. To record the bonus in the current year:
Bonus expense (5% x 20,000,000) 1,000,000
Bonus payable 1,000,000

2. To record the bonus payment at the end of the following year:

Bonus payable 1,000,000
Cash 1,000,000

Another illustration
A profit sharing bonus plan requires income for the year to employees who serve current year and who
will continue to serve throughout the following year

The entity reported income of ₱50,000,000 for the current year. The entity expects to save 5% of the
maximum possible bonus payment through staff turnover. The bonus will be paid at the end of the
following year.

Journal entries
1. To recognize the bonus in the current year:
Bonus expense 4,750,000
Bonus payable 4,750,000

Maximum possible bonus (10% x 50,000,000) 5,000,000

Saving through staff turnover ( 5% x 5,000,000) (250,000)
Estimated liability 4,750,000

2. To record the bonus payment at the end of the following year, assuming there is no change in the
estimated liability:
Bonus payable 4,750,000
Cash 4,750,000

Other Long-Term Employee Benefits

 The term other long-term employee benefits is a residual definition
 Other long-term employee benefits are all employee benefits other than short-term employee
benefits, postemployment benefits and termination benefits.
 In other words, other long-term employee benefits are employee benefits which are not expected to
be settled wholly within twelve months after the end of annual reporting period in which the
employees render the related service.

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Examples of Other Long-Term Employee Benefits
a. Long-term paid absences such as long service sabbatical leave
b. Jubilee or other long service benefit
c. Long-term disability benefits
d. Profit sharing and bonuses
e. Deferred compensation

Recognition and measurement

 The recognition and measurement of liability for other long-term employee benefits are the same as
the recognition and measurement of defined benefit obligation.

 In other words, the liability recognized for other long-term employee benefits is equal to the excess
of the present value of the liability over the fair value of the plan assets at the end of reporting
period.

 The only difference is the recognition of the components of the defined benefit cost.

 For other long-term employee benefits, all of the following components of defined benefit cost are
recognized in profit or loss and included in the computation of employee benefit expense:
a. Current service cost
b. Past service cost
c. Any gain or loss on settlement
d. Net interest expense or net interest income
e. Remeasurements, such as actuarial gains and losses, the difference between actual return on plan
assets and interest income, and the change in the effect of asset ceiling.

If you recall, all remeasurements are recognized fully through other comprehensive income under a
defined benefit plan. But for other long-term employee benefits, all remeasurements 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:
A. An entity's decision to terminate an employee's employment before the normal retirement date.
B. An employee's decision to accept an offer of benefits in exchange for the termination of
employment.

The event that gives rise to an obligation is the termination of employment rather than employee service.

An entity shall recognize an expense and a liability for termination benefits at the earlier of the following
dates:
A. When the entity can no longer withdraw the offer of the termination benefits, for example, when
the plan of termination is already communicated to affected employees.

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 B. When the entity recognizes the cost of restructuring that involves the payment of termination
benefits.

If the termination benefits are expected to be settled wholly within twelve months after the end of
reporting period in which the termination benefit is recognized, the requirements for short-term employee
benefits shall be applied.

If the termination benefits are expected not to be settled wholly within twelve months after the end of
reporting period, the requirements for other long-term employee benefits shall be applied.

Illustration
An entity is committed to close a factory in 10 months and at that time, shall terminate the employment
of all the remaining employees of the factory.

The plan of termination is as follows:

A. An employee leaving before closure of the factory shall receive ₱10,000.
B. Each employee that renders service until the closure of the factory shall receive on the termination
date a cash payment of ₱30,000.
C. There are 120 employees at the factory.
D. The entity expects 20 employees to leave before closure and 100 employees to render service
until closure.
E. The total expected cash outflow under the plan is determined as follows:

Employees leaving before closure (20 x ₱10,000) 200,000

Employees leaving until closure (100 x ₱30,000) 3,000,000
Total cash outflow 3,200,000

The total amount of ₱3,200,000 shall be accounted for as partly termination benefits and partly
short-term employee benefits.

As termination benefits
The benefit provided in exchange for termination of employment is ₱10,000.
This is the amount that the entity would have to pay for terminating employment without future service.
Termination benefit 10,000
Multiply by the total number of employees 120
Liability for termination benefits 1,200,000

This amount of ₱1,200,000 shall be paid regardless of whether the employees leave before closure or
render service until closure.

As short-term employee benefits

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The incremental benefits that employees shall receive if they render services for the full ten-month period
are recognized as short-term employee benefits.
The incremental benefits for employees leaving until closure amount to ₱2,000,000

Total payment for 10-month period 30,000

Termination benefit (10,000)
Short-term employee benefit 20,000
Multiply by employees leaving until closure 100
Short-term employee benefit 2,000,000

The short-term employee benefit may be accrued monthly over 10 months or a monthly expense and
liability of ₱200,000

III. Activity – Supplementary

Problems 19-1 to 19-4

IV. Activity/Assessment – Visit the MS Teams

V. References
Intermediate Accounting 2, 2021 edition by Conrado Valix

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