ACC 226 – IFRS for SMEs and PFRS for Small Entities – Handout 3.

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Topic: Sample Problems – Employee Benefits
Instructor: Leenuel M. Bernarte, CPA

EMPLOYEE BENEFITS
Employee benefits are all forms of consideration given by an entity in exchange for services rendered or for the
termination of employment. Employee benefits include the following:
1) Short-term employee benefits are employee benefits (other than termination benefits) that are expected to be
settled wholly before twelve months after the end of the annual reporting period in which the employees render
the related service.
2) Post-employment benefits are employee benefits (other than termination benefits and short-term employee
benefits) that are payable after the completion of employment. Examples are pensions, retiring allowances and
retiree medical and life insurance plans.
3) Other long-term employee benefits are all employee benefits other than short-term employee benefits, post-
employment benefits and termination benefits. Examples are long-service awards, long-term paid absences and
long-term disability benefits.
4) 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; or
(b) an employee’s decision to accept an offer of benefits in exchange for the termination of employment.

CLASSIFICATION OF EMPLOYEE BENEFITS

EMPLOYEE POST-EMPLOYMENT EMPLOYEE OTHER LONG-TERM EMPLOYEE TERMINATION

BENEFITS BENEFITS BENEFITS

within 12 months after completion of employment residual category result of termination before retirement
for current employees other than termination benefits

SHORT-TERM EMPLOYEE BENEFITS

Short-term employee benefits are employee benefits (other than termination benefits) that are expected to be settled
wholly before twelve months after the end of the annual reporting period in which the employees render the related
service.

Examples of short-term employee benefits

a) wages, salaries and social security contributions
b) compensated absences (paid vacation and sick leave) due to be settled within twelve months after the end of the
period
c) profit sharing plans payable within twelve months after the end of the period
d) bonuses payable within twelve months after the end of the period
e) non-monetary benefits such as medical and life insurance benefits, housing benefits, car benefits and free or
subsidized goods or services given to employees

RECOGNITION AND MEASUREMENT

When an employee has rendered service to an entity during an accounting period, the entity shall
recognize the
undiscounted amount of short-term employee benefits expected to be paid in exchange for that service:
a. As a liability (accrued expense), after deducting any amount paid.
b. As an asset (prepaid expense) to the extent that the prepayment will lead to, for example, a reduction
in future payments or a cash refund.
c. As an expense, unless the benefit paid forms part of cost of an asset (i.e., PPE, inventories)

If the entity’s expectations of the timing of settlement change temporarily, it need not reclassify a short-term
employee benefit.
SHORT-TERM EMPLOYEE
BENEFITS
Employee benefits to be settled within twelve months after the endof the
period in which the employees render the related service.

Wages, salaries Compensated

EXAMPLES: absences (paid Profit sharing and Non-monetary
and social security
vacation and sick bonuses benefits
contributions
leave)
ACCOUNTING: Debit: Asset/Expense xx Credit: Liability/Cash xx

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Compensated Absences: Short-Term Paid Absences
An entity shall recognise the expected cost of short-term employee benefits in the form of paid absences as follows:
a. Accumulating – recognize expense when service that increases entitlement is rendered. e.g. leave pay
b. Non-accumulating – recognize expense when absence occurs.

An entity may pay employees for absence for various reasons including holidays, sickness and short-term
disability, maternity or paternity, jury service and military service. Entitlement to paid absences falls into two
categories:
(a) accumulating; and
(b) non-accumulating.

Accumulating
Accumulating paid absences are those that are carried forward and can be used in future periods if the current
period's entitlement is not used in full. Accumulating paid absences may be either vesting or non-vesting.
1. Vesting - employees are entitled to a cash payment for unused entitlement on leaving the entity
2. Non-vesting - employees are not entitled to a cash payment for unused entitlement on leaving

An obligation arises as employees render service that increases their entitlement to future paid absences. The
obligation exists, and is recognised, even if the paid absences are non-vesting, although the possibility that
employees may leave before they use an accumulated non-vesting entitlement affects the measurement of that
obligation.

An entity shall measure the expected cost of accumulating paid absences as the additional amount that the entity
expects to pay as a result of the unused entitlement that has accumulated at the end of the reporting period.

Non-accumulating
Non-accumulating paid absences do not carry forward. They lapse if the current period's entitlement is not used in
full anddo not entitle employees to a cash payment for unused entitlement on leaving the entity. This is commonly the
case for sick pay (to the extent that unused past entitlement does not increase future entitlement), maternity or
paternity leave and paid absences for jury service or military service. An entity recognises no liability or expense until
the time of the absence, because employee service does not increase the amount of the benefit.

POST EMPLOYMENT BENEFITS

Employee benefits payable after the completion of employment (excluding termination and short term benefits), such
as:
(a) Retirement benefits (e.g. pensions, lump sum payments)
(b) Other post-employment benefits (e.g. post-employment life insurance, medical care).

Two types of post-employment benefit plans

a) Defined contribution plan
b) Defined benefit plan

POST-EMPLOYMENT EMPLOYEE BENEFITS

Defined contribution
Types plans

To contribute to the fund

Entity’s Obligation

Fixed/Defined Contribution
Actuarial &
Investment
Risk

DEFINED CONTRIBUTION PLANS

Defined contribution plans are post-employment benefit plans under which an entity pays fixed contributions into a
separate entity (a fund) and will have no legal or constructive obligation to pay further contributions if the fund does
not hold sufficient assets to pay all employee benefits relating to employee service in the current and prior periods.
Under defined contribution plans, the amount of contribution is definite but the benefits of employees are indefinite.

Accounting for defined contribution plans

Accounting for defined contribution plans is straightforward because the reporting entity’s obligation for each period
is determined by the amounts to be contributed for that period. Consequently, no actuarial assumptions are required
to measure the obligation or the expense and there is no possibility of any actuarial gain or loss. Moreover, the
ACC 226-Bernarte-Employee-Benefits
obligations are measured on an undiscounted basis, except where they are not expected to be settled wholly before
twelve months after the end of the annual reporting period in which the employees render the related service.

Recognition and measurement

When an employee has rendered service to an entity during a period, the entity shall recognize the contribution
payable toa defined contribution plan in exchange for that service:
(a) as a liability (accrued expense), after deducting any contribution already paid. If the contribution already
paidexceeds the contribution due for service before the end of the reporting period,
(b) as an asset (prepaid expense) to the extent that the prepayment will lead to, for example, a reduction in
futurepayments or a cash refund.
(c) as an expense, unless another PFRS requires or permits the inclusion of the contribution in the cost of
an asset (see, for example, PAS 2 and PAS 16).

DEFINED CONTRIBUTION PLAN

Accounting:
Debit Credit

If payable beyond 12 months Compute present value

Projected unit credit method (PUCM)

The projected unit credit method (sometimes known as the accrued benefit method pro-rated on service or as the
benefit/years of service method) sees each period of service as giving rise to an additional unit of benefit entitlement
and measures each unit separately to build up the final obligation.

The following steps are necessary:

1. Attributing benefits to the periods of service
2. Measurement
3. Preparation of journal entries

Memorandum record accounts under a defined benefit plan

1. Fair value of plan assets – Is the fund set aside for the payment of future benefits. This fund is increased
by contributions from the employer and any income from the investment of the fund.
2. Reimbursement right- An entity’s right to reimbursement by a third party of some or all of the benefit
payments ismeasured at fair value and recognized as an asset of the entity
Changes are recognized in same manner as changes in plan assets
3. Projected benefit obligation – Actuarially computed present value of future benefits to be paid to the
employees upon retirement. This obligation is increased by the current service cost and interest on the
projected benefit obligation.

Accumulated benefit obligation is the actuarial present value of all benefits attributed by the pension
benefit formula to employee service rendered before a specified date. The amount is based on current
compensation level of employees and therefore includes no assumptions about future salary increases.

Projected benefit obligation:

Annual benefit (% x current year salary x future value of 1
for remaining service period x years of service) XX
Multiply by PV of ordinary annuity of 1 at discount rate for
The life expectancy of the employee XX
Present value value-year of retirement XX
Multiply by PV of 1 at discount rate for
remaining service period XX
Present value of benefit obligation-Year of determination XX

Accumulated benefit obligation

Annual benefit (% x current year salary x
years of service) XX
Multiply by PV of ordinary annuity of 1 at discount rate for
The life expectancy of the employee XX
Present value value-year of retirement XX
Multiply by PV of 1 at discount rate for
ACC 226-Bernarte-Employee-Benefits
 remaining service period XX
Present value of benefit obligation-Year of determination XX

4. Actuarial gains or losses – Memorandum account that absorbs differences between actual results and
actuarial estimates. Actuarial gains and losses may arise from increases or decreases in the projected
benefit obligation due to the changes in actuarial assumptions or differences between the net interest
income and actual return on plan assets.
❖ Note: Memorandum record accounts do not appear in the financial statements, but only the sum of these
three accounts (prepaid/accrued benefit cost) is shown in the balance sheet as either a noncurrent asset or
noncurrent liability.

Statement of financial position

• Entities recognize the net defined benefit liability (asset) in the statement of financial position (being equal to the
deficit (surplus) in the defined benefit plan and the possible effect of the asset ceiling).
• When an entity has a surplus in a DBP, it measures the net defined benefit asset at the lower of:
o The surplus in the defined benefit plan
o The asset ceiling (being the present value of any economic benefits available in the form of refunds from
the plan or reductions in future contributions to the plan), determined using the discount rate in reference to
market yields at the end of the reporting period on high quality corporate bonds.

Offsetting plan asset and plan liability

An entity shall offset an asset relating to one plan against a liability relating to another plan when, and only when, the
entity:
a. has a legally enforceable right to use a surplus in one plan to settle obligations under the other plan; and
b. intends either to settle the obligations on a net basis, or to realize the surplus in one plan and settle its
obligation under the other plan simultaneously.

Current/non-current distinction
PAS 19 does not specify whether an entity should distinguish current and non-current portions of assets and liabilities
arising from post-employment benefits.

Statement of comprehensive income

Components of defined benefit cost under a defined benefit plan

1. Service Cost
a. Current service cost – is the increase in the present value of the defined benefit obligation resulting
from employee service in the current period.
b. Past service cost – the change in the present value of the defined benefit obligation for employee
service in prior periods, resulting from a plan amendment (the introduction or withdrawal of, or changes
to, a defined benefit plan) or a curtailment (a significant reduction by the entity in the number of
employees covered by a plan) (Treated as outright expense whether vested or unvested); and

Vested benefits are employee benefits that are not conditional on future employment.
Benefits are not vested if the employee losses all benefits if he is separated from the entity before
retirement.

c. Settlement gains or losses

2. Net interest costs – the change during the period in the net defined benefit liability (asset) that arises
from the passage of time. The discount rate used is the market yields of high quality corporate bonds.
3. Remeasurements of the net defined liability (asset) is recognized in OCI and comprise:
a) Actuarial gains or losses on the DBO - changes in the present value of the defined benefit obligation
resulting from:
1. experience adjustments (the effects of differences between the previous actuarial assumptions
and what has actually occurred); and
2. the effects of changes in actuarial assumptions.
b) The return on plan assets excluding amounts included in net interest on the net defined liability (asset)
c) Any change in the effect of asset ceiling excluding amounts included in net interest on the net defined
liability (asset).

Presentation of the three components of ‘defined benefit cost’

Profit or loss:
Current service cost XX
Past service cost XX
Net- Interest cost on the net defined liability (or asset) XX
Loss (or Gain) on settlement of defined benefit obligation XX

ACC 226-Bernarte-Employee-Benefits
 Defined benefit cost-P&L XX
Actuarial loss (or Gain) XX
Actuarial loss (or Gain) on the difference between actual return and interest income on plan assets XX
Remeasurement loss (or Gain) on change between change and interest on effect of asset ceiling-increase XX
(or decrease)
Defined benefit cost-OCI XX
Total defined benefit cost XX
• Amended PAS 19 specifies that amounts recognized in OCI should not be reclassified to P&L in
subsequent periods.
• For other long-term benefits, the re-measurement component will continue to be recognized in P&L and not
OCI.
• Service cost and net interest cost may be shown separately or combined into a single P&L item, but
must be separately disclosed in the notes.

OTHER LONG-TERM BENEFITS

Other long-term employee benefits include items such as the following, if not expected to be settled wholly before
twelve months after the end of the annual reporting period in which the employees render the related service:
a. long-term paid absences such as long-service or sabbatical leave;
b. jubilee or other long-service benefits;
c. long-term disability benefits;
d. profit-sharing and bonuses; and
e. deferred remuneration.

Recognition and measurement

Accounting for long-term benefits is same with accounting for post-employment benefits in that:
o actuarial gains and losses are recognized immediately and no 'corridor' (as discussed above for post-
employment benefits) is applied; and
o all past service costs are recognized immediately.
Statement of financial position
• Carrying amount of liability = present value of obligation minus the fair value of any plan assets
• Actuarial gains and losses are recognized immediately in OCI in full.
• Past service costs are recognized immediately in profit or loss.

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.

Settlement price includes any plan assets transferred and any payments made directly by the entity in connection
with the settlement.

T-A CCOUNTS

Fair value of Plan Assets

Beg. Balance XX XX Benefits paid
Interest income XX XX Settlement price of DBO
Remeasurement gain on plan assets XX XX Remeasurement loss on plan assets
Contribution XX XX Balance end-

Total =

OR
Fair value of Plan Assets
Beg. Balance XX XX Benefits paid
Actual return XX XX Balance end-
Contribution XX XX Settlement price of DBO

Total =

Defined Benefit Obligation

Benefits paid XX XX Beg. Balance
Balance end XX XX Current service cost
Dec. in DBO due to changes XX Interest expense
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 In actuarial assumption XX Inc. in DBO due to changes
PV of DBO settled XX XX In actuarial assumption
XX Past service cost

Total =

Benefit Expense
Current Service cost XX XX Interest income on FVPA, beginning
Interest expense on DBO XX XX Gain on settlement of DBO
Past service cost XX
Loss on settlement of DBO XX
Interest expense on effect of XX XX Ben. Expense
Asset ceiling, beginning*

Total XX XX

Gain or (loss) on settlement:

Settlement Price XX
Less Present value of defined benefit obligation settled XX
Loss (or Gain) on settlement XX

Surplus or Prepaid Benefit Cost

When an entity has a surplus in a defined benefit plan, it shall measure the net defined benefit
asset at the lower of:
(a) the surplus in the defined benefit plan; and
(b) the asset ceiling, determined using the discount rate.

Asset ceiling is the Present value of any economic benefits available in the form of refunds from the plan or
reduction in future contribution to the plan.

Assuming there is Surplus:

Fair value of Plan Assets XX

Projected Benefit obligation XX

Surplus (note this is positive amount) XX
vs Asset Ceiling whichever is lower XX
Net Benefit Asset-Lower figure XX

If Surplus is Higher than the Asset ceiling

Effect of asset ceiling is computed as follows:
Surplus XX
Less Asset Ceiling XX
Effect on asset Ceiling XX

Note:
✓ If these amounts are from the beginning balances, the effect on asset ceiling would be the beginning balance
also.
✓ If Surplus is lower than Asset ceiling, then there is no “Effect of Asset ceiling.”

Interest expense on effect of asset ceiling is computed as follows:

Effect on asset ceiling, Jan. 1 XX
X discount rate %
Interest expense on effect of asset ceiling-P&L XX

Net interest expense may be computed as follows:

Net benefit asset, Jan. 1 XX
X discount rate %
Net interest INCOME on the defined benefit asset –P&L XX

ACC 226-Bernarte-Employee-Benefits
Or alternatively,
Interest expense on DBO (DBO, beg x discount rate) XX
Interest income on Plan Assets (FVPA, beg x discount rate) XX
Interest expense on effect of asset ceiling (Effect of Asset ceiling, beg x discount rate) XX
Net interest INCOME on the defined benefit asset-P&L XX

Effect on asset ceiling-End of the year XX

Less Effect on asset ceiling-beginning of the year XX
Total change in the effect of asset ceiling-increase (or Decrease) XX
Less Interest expense on Effect on asset ceiling-beginning XX
of the year* (Discount rate x Effect on asset ceiling-beginning of the year)-P&L
Remeasurement loss (or gain) on asset ceiling-OCI XX

Increase in the effect of the asset ceiling Remeasurement Loss

Decrease in the effect of the asset ceiling Remeasurement Gain

Assuming there is Deficit:

Fair value of Plan Assets XX
Projected Benefit obligation XX
Net defined liability (note this is negative amount) XX

Net interest expense may be computed as follows:

Net benefit liability, Jan. 1 XX
X discount rate %
Net interest cost on the defined benefit asset –P&L XX

Or alternatively,
Interest expense on DBO (DBO, beg x discount rate) XX
Interest income on Plan Assets (FVPA, beg x discount rate) XX
Interest expense on effect of asset ceiling (Effect of Asset ceiling, beg x discount rate) (Note this is zero 0
because, there is no “effect of asset ceiling”)
Net interest cost on the defined benefit asset-P&L XX

PROCEDURAL APPROACH
Step 1: Determine the Surplus or deficit at the start of the year.
Jan. 1
Fair value of plan assets XX
Defined benefit obligation XX
Surplus ( or net benefit liability or deficit) XX

SKIP Steps Nos 2 to 3 if there is no surplus at the start of the year.

Step 2: Determine Net defined asset at the start of the year and the asset ceiling. The net defined asset is the
lower between the Surplus, Jan. 1 and the Present value of economic benefits available in the form of refunds from
the plan. The effect of the asset ceiling is the excess of the surplus and the asset ceiling.

Step 3: Determine the interest on the effect of the asset ceiling to be recognized in the profit or loss as component
of employee benefit expense.
Effect of the asset ceiling-Jan. 1 XX
Discount rate XX
Interest on the effect of the asset ceiling-P&L XX

Step 4: Using the T-account of the Fair value of plan assets, determine the fair value of the plan assets at the end
of the year.

Step 5: Using the T-account of the defined benefit obligation, determine the defined benefit obligation at the end of the
year.

Step 6: Determine the Surplus or deficit AND the net defined asset at the end of the year.
ACC 226-Bernarte-Employee-Benefits
 Dec. 31
Fair value of plan assets XX
Defined benefit obligation XX
Surplus (or net benefit liability or deficit) XX

Note skip Steps 7-10 if there is no surplus at the end of the year.

Step 7: Determine the effect of the asset ceiling at the end of the year.
Determine Net defined asset at the start of the year and the asset ceiling. The net defined asset is the lower
between theSurplus, December 31 and the Present value of economic benefits available in the form of refunds from
the plan. The effect of the asset ceiling is the excess of the surplus and the asset ceiling.

Step 8: Determine the total change in the effect of the asset ceiling.
Effect of the asset ceiling-Dec. 31 XX
Effect of the asset ceiling-Jan. 1 XX
Increase (or Decrease) of the asset ceiling XX

Step 9: Determine the remeasurement gain (or loss) in the OCI.

Total increase (or decrease) of the asset ceiling XX
less: Interest on the effect of the asset ceiling during the year
(Effect of the asset ceiling-Jan. 1 x disc. Rate) XX
Remeasurement loss recognized in-OCI XX

Step 10: Compute for the gain or loss on settlement of a defined benefit plan when the settlement occurs. The
formula is as follows:
Settlement price XX
Less: Present value of defined benefit obligation settled XX
Loss (or if negative gain) on settlement XX

Step 11: Using the T-account of employee benefit expense, determine the defined benefit cost or employee benefit
expense to be recognized in the profit or loss.

Step 12: Determine the defined benefit cost to be recognized in the other comprehensive income and total benefit
cost.
Actual return on plan assets XX
Interest income on FVPA XX
Remeasurement gain on plan assets XX
Actuarial loss due to increase in PBO XX
Net Measurement gain-OCI XX

Net benefit expense XX

Net measurement loss (or gain) XX
Total defined benefit cost XX

TERMINATION BENEFITS
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 or group of employee before the normal retirement date ; or
b) An employee’s decision to accept an offer of benefits in exchange for the termination of employment.

Recognition of termination benefits

Recognize liability and expense at the earlier of:
(a) The date the entity can no longer withdraw the benefit or offer
(b) The date the entity recognizes restructuring costs under PAS 37.

Measurement of termination benefits

An entity shall measure termination benefits on initial recognition, and shall measure and recognize subsequent
ACC 226-Bernarte-Employee-Benefits
 changes, in accordance with the nature of the employee benefit, provided that if the termination benefits are an
enhancement to post- employment benefits, the entity shall apply the requirements for post-employment benefits.
Otherwise:
• If termination benefits settled wholly before 12 months from reporting date, liabilities should not be discounted.
• If termination benefits are not settled wholly before 12 months from reporting date, they should be discounted.

MULTI EMLOYER PLANS

These are post-employment plans other than state plans that:
a) pool the assets of various entities that are not under common control; and
b) use those assets to provide benefits to employees of more than one entity on the basis that contribution and
benefit levels are determined without regard to the identity of the entity that employs the employees.

Accounting for Multi-Employer Plans

1. If an entity participates in a multi-employer defined benefit plan, it shall:
▪ account for its proportionate share of the defined benefit obligation, plan assets and cost associated with
the plan in the same way as for any other defined benefit plan; and
▪ disclose the required information
2. When sufficient information is not available to use defined benefit accounting for a multi-employer defined
benefit plan, an entity shall:
(a) account for the plan as if it were a defined contribution plan; and
(b) disclose the required information

DISCUSSION PROBLEMS

PROBLEM 1 – SHORT TERM EMPLOYEE BENEFITS

Employees of ABC Company are entitled to 2 weeks of paid vacation leave. During 2022, the employees earned 2,000
weeks of vacation leave and used 1,200 weeks.

The 2022 weekly salary rate of the employees is P4,000 per week. The weekly salary rate of the employees increases
by 10% every year.

REQUIRED:
1. Compute for the employee benefits expense for 2022 assuming the entitlement is accumulating.
2. Compute for the employee benefits expense for 2022 assuming the entitlement is non-accumulating.

PROBLEM 2 – ENTITLEMENTS TO PAID ADVANCES – WITHOUT EXPIRATION

Hone Company provides its employees entitlements to paid vacation and sick leaves. Employees are entitled to one-
day vacation and one-day sick leave for each month worked during the year. Unused entitlements to vacation leaves
may be carried forward but unused entitlements to sick leave does not accumulate. Employees are paid based on their
pay rate in effect at the time of the leave.

The following information were taken from the records of the company for the year 2022:
Employee Date employed Unused vacation Vacation leave Sick leaves used Daily pay rate
leaves used in 2022 in 2022
(1/1/2022)
A 3/14/2020 - 7 5 562.50
B 6/14/2021 6 3 10 525.00
C 10/29/2022 - - 5 500.00
D 7/31/2022 - 1 2 475.00

REQUIRED:
1. How much is the employee benefits expense related to the vacation and sick leaves to be reported for the year
2022?
2. What amount should be reported as liability for compensated absences on December 31, 2022?

PROBLEM 3 – ENTITLEMENTS TO PAID ADVANCES – WITH EXPIRATION

Agent Company has an employee benefit plan which required that employees are each entitled to ten working days of
paid sick leave for each year. Unused sick leave may be carried for one calendar year only.

Sick leaves are taken out on a FIFO basis, meaning, the leaves are first taken out of any balance brought forward from
the previous year and then out of the current year’s entitlement.

The company provided the sick leave records of its three employees during 2022:
Employee #1 Employee #2 Employee #3
Daily wage rate – 2022 P 2,250.00 P 3,750.00 P 6,000.00
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 Unused sick leave, 10 6 4
1/1/2022
Sick leave taken in 2022 7 9 6
Wage increase effective 20% 30% 40%
January 1, 2023

REQUIRED:
What amount should be reported as liability for compensated balances on December 31, 2022?

PROBLEM 4 – DEFINED CONTRIBUTION PLAN

Under Dynamic Co.’s defined contribution plan, it agrees to make fixed annual contributions of P300,000 to a retirement
fund for the benefit of its employees.

REQUIRED:
Prepare journal entries for the following cases:

Case 1: The defined contribution plan is funded (i.e., the fund is held by a trustee)
a. XYZ contributes P300,000 to the fund held by a trustee.
b. XYZ contributes only P120,000 to the fund held by a trustee.
c. XYZ contributed P345,000 to the fund held by a trustee.
d. An employee retired and was eligible to P45,000 retirement benefits based on the operating efficiency and
investment earnings of the fund.
Case 2: The defined contribution plan is unfunded but with established separate fund (i.e., the fund is not held by a
trustee)
a. XYZ contributes P300,000 to the fund.
b. XYZ contributes only P120,000 to the fund.
c. XYZ contributed P345,000 to the fund.
d. An employee retired and was eligible to P45,000 retirement benefits based on the operating efficiency and
investment earnings of the fund.
Case 3: The defined contribution plan is unfunded and no established separate fund (i.e., the fund is not held by a
trustee)
a. An employee retired and was eligible to P45,000 retirement benefits based on the operating efficiency and
investment earnings of the fund.

PROBLEM 5 – DEFINED BENEFIT OBLIGATION – PROJECTED UNIT CREDIT METHOD

An employer pays lump sum to employees when they retire. The lumpsum is equal to 5% of their salary in the final year
of service, for every year of service. The following data pertain to a certain employee:
a. The employee is expected to work for 5 years (actuarial assumption).
b. The salary is expected to rise by 8% per annum (actuarial assumption).
c. The salary in 2019 is P200,000 per annum.
d. The discount rate is 10% per annum.

REQUIRED:
1. Compute for the following:
a. Employee benefits expense
b. Projected benefit obligation

PROBLEM 6 – DEFINED BENEFIT OBLIGATION – ESTIMATED PENSION LIABILITY

A director of Easter Company shall receive a retirement benefit of 20% of final salary per annum for contractual period
of three years. The anticipated salary is P1,000,000 for 2019, P1,200,000 for 2020 and P1,500.000 for 2021. The
discount rate is 10%. The present value of 1 at 10% is .909 for one period and .826 for two periods. Under the projected
benefit unit credit method, what is the estimated pension liability on December 321, 2020?
A. 900,000
B. 520,500
C. 600,000
D. 545,280

PROBLEM 7 – DEFINED BENEFIT COST

Jelie Company provided the following information relating to a defined benefit plan for the current year:
Current service cost 1,600,000
Actual return on plan assets 350,000
Interest income on plan assets 400,000
Past service cost during the year 50,000
Annual interest on pension liability 500,000
What amount should be reported as defined benefit cost for the current year?
A. 2,150,000
ACC 226-Bernarte-Employee-Benefits
 B. 1,700,000
C. 1,800,000
D. 1,750,000

PROBLEM 8 – COMPREHENSIVE PROBLEM FOR POST-EMPLOYMENT BENEFITS

On January 1, 2014, Dakak Company reported the following information in relation to a defined benefit plan:

Fair Value of plan assets 7,000,000

Projected benefit obligation 7,500,000

During the current year, the entity determined that the current service cost was P1,400,000 and the discount rate is
10%.

The actual return on plan assets during the year was P840,000. Other related information for the current year is as
follows:
Contribution to the plan 1,200,000
Benefits paid to retirees 1,500,000
Decrease in projected benefit obligation due to changes in
actuarial assumptions 200,000
Present value of defined benefit obligation settled 500,000
Settlement price of defined benefit obligation 400,000

REQUIRED:
1. What amount should be reported in the income statement for the current year as employee benefit expense?
a. 2,150,000 b. 2,050,000 c. 1,350,000 d. 1,450,000

2. What is the net amount of “re-measurements” for 2014?

a. 140,000 b. 200,000 c. 340,000 d. 100,000

3. What is the fair value of plan assets on December 31, 2014?

a. 7,140,000 b. 7,540,000 c. 8,200,000 d. 7,000,000

4. What is the projected benefit obligation on December 31, 2014?

a. 7,950,000 b. 7,450,000 c. 7,650,000 d. 9,650,000

5. What is the balance of the prepaid/accrued benefit cost on December 31, 2014?
a. 310,000 debit b. 310,000 credit c. 650,000 debit d. 650,000 credit

PROBLEM 9 – PREPAID OR ACCRUED BENEFIT COST

On January 1, 2014, Emy Company reported the following balances in relation to a defined benefit plan prior to the
adoption of PAS 19R:
Fair value of plan assets 8,000,000
Unamortized past service cost 1,500,000
Projected benefit obligation 9,000,000

The remaining average vesting period for the employees covered by the past service cost is 5 years.

Current service cost 1,500,000

Interest expense on PBO 900,000
Interest income and actual return on plan assets 800,000
Contribution to the plan 2,000,000
Benefits paid to retirees 1,000,000
On December 31, 2014, what is the prepaid or accrued benefit cost?
A. 400,000 prepaid C. 600,000 prepaid
B. 400,000 accrued D. 600,000 accrued

PROBLEM 10 - COMPREHENSIVE PROBLEM FOR POST-EMPLOYMENT BENEFITS

On January 1, 2017, Shiela Company had the following balances related to a defined benefit plan:

Fair value of plan assets 5,500,000

Projected benefit obligation 6,500,000

The actuary provided the following data for the current year:
Current service cost 500,000
Past service cost 100,000
Discount rate 10%
ACC 226-Bernarte-Employee-Benefits
 Actual return on plan assets 700,000
Contribution to the plan 900,000
Benefits paid to retirees 100,000
Settlement price 450,000
Present value of the defined benefit settled 500,000

REQUIRED:
1. How much is the employee benefit expense?
2. How much is the re-measurements?
3. How much is the defined benefit cost?
4. How much is the Prepaid/Accrued Benefit Cost at the end of the year?
5. How much is the balance of the Plan Assets at the end of the year?
6. How much is the balance of the Projected benefit obligation at the end of the year?

PROBLEM 11 – WITH ASSET CEILING

On January 1, 2016, Rachelleen Company provided the following information in relation to a defined benefit plan:

Fair value of plan assets 6,000,000

Project benefit obligation 5,000,000
Prepaid /accrued benefit costs 1,000,000
Asset ceiling 700,000
Effect of asset ceiling 300,000

During the current year, the following data are gathered:

Current service cost 700,000
Actual return on plan assets 900,000
Contribution to the plan 1,000,000
Past service cost 200,000
Decrease in projected benefit obligation due change
in actuarial assumptions 500,000
Asset ceiling on DECEMBER 31, 2016 1,200,000
Discount rate 10%

REQUIRED:
1. Determine the fair value of the plan asset on December 31, 2016.
2. Determine the projected benefit obligation on December 31, 2016.
3. Determine the effect of asset ceiling on December 31, 2016.
4. Compute the employee benefit expense for the current year.
5. Compute the “re-measurement” on December 31, 2016.
6. Prepare journal entry to record the employee benefit expense.
7. Reconcile the prepaid/accrued benefit cost account.

PROBLEM 12 – TERMINATION BENEFITS

A company plans to close one of its branches in three months’ time. There are 100 employees in the branch. Because
the company wants to fill in some pending customer orders, the company offers its employees the following:
• Each employee who stays and render service until the closure of the branch will receive on the termination
date a cash payment of P130,000.
• Employees leaving before closure of the branch will receive P40,000.
The company expects that 25 employees will leave before the closure of the branch.

REQUIRED:
1. How much is the liability for termination benefits?
2. How much will be short-term employees’ benefits expense in three months’ time?

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ACC 226-Bernarte-Employee-Benefits