PAS 19 - EMPLOYEE BENEFITS

A. Post Employment Benefits

Post-employment benefits are arrangements where an entity provides monetary & other forms of
benefits to employees after their retirement, e.g. pensions or lump sum payments, life insurance and
medical care.

A post-employment benefit plan is a retirement plan that requires an employer to make contributions to
a pool of funds set aside for a worker's future benefit. The pool of funds is invested on the employee's
behalf, and the earnings on the investments generate income to the worker upon retirement.

Note that aside from pension plans from social security systems, the entity may setup a separate private
fund to further improve employee satisfaction or encourage loyalty.

Kinds of Employee Benefits

➢ Postemployment Benefits
➢ Short-term Employee Benefits
➢ Other Long-Term Employee Benefits
➢ Termination Benefits

DEFINED CONTRIBUTION PLAN DEFINED BENEFIT PLAN

• Employer pays fixed contributions to the
fund trustee.
• No legal or constructive obligation to
make additional payments.
• Obligation is therefore effectively limited
to the amount agreed to contribute
EMPLOYER PROMISES:
“I will pay P2,500 per month to SSS to
finance your retirement pension as long
as you work for me”
• Employer provides agreed benefits to
employee-retirees.
• Places actuarial and investment risk on
the entity.
• Obligation is to deliver the agreed
benefits and ensure sufficiency of the
funds.
EMPLOYER PROMISES:
“I will make sure you receive P10,000
per month as pension after your
retirement”

• Employee benefits mostly deals in EXPENSE and LIABILITY recognition.

• Post-employment benefits (pensions) are similar in nature to salaries and allowances. The
only important difference therein is salaries are paid during employment and pensions are
paid after employment.
• Salaries and pension however are similar in the way they are recorded as EXPENSE, wherein
both are expense as incurred and payable when employees render service to the company.
(i.e. day to day office work).
A.1 Defined Contribution Plan

In this setup of post-employment benefits, the employer will be obliged to pay a fixed contribution;
while the employees receive undefined benefit. Accounting-wise, the only worry of the accountant here
is determining how much the fixed contribution is. Once that is set, no complex problems will be
encountered since the expense/liability recognition is set as equal to that of the fixed contribution.

Often, the fixed contribution is expressed as a percentage of annual salary or a predetermined fixed
amount. It is also common for employers to add a variable contribution which gives incentive to
employees based on company performance. This is often calculated as a percentage of sales, net income
or other measure of financial performance.

Overfunding or underfunding the pension plan will result to recording either a liability or an asset as
follows:
• LIABILITY. If during the reporting period there is a balance in accrued benefit payable, it means that
the entity is behind in pension contributions (Underfunding).
• ASSET. On the other hand, if prepaid benefit expense is present, it means that an advance contribution
has been made for services yet to be rendered by the employees (Overfunding)

A.2 Defined Benefit Plan

Defined benefit plan is more intricate in comparison to defined contribution plans in a sense that the
amount of funding contributions and related expense and liability to be recorded is not immediately
determined in the terms of the post-employment benefit plan.

A.2.1 Prepaid benefit expense & Accrued benefit payable

Plan assets and Benefit obligation

To review the idea of post-employment benefits, conceptually the entity contributes to a fund for future
pensions, the fund is invested and held in trust by a trustee (i.e. financial institutions, investment
companies or bank), then later when employees retire, they receive pension payments from the
earnings of the fund.

The fund and the expected future pensions however may not be equal at all times due to difficulty in
estimating actuarial assumptions. In that event this will result to overfunding (Asset) or underfunding
(Liability)

Important Terminologies:
➢ Plan assets. The fund held by a trustee contributed by the employer to cover benefit payments
to pensioners.
➢ Benefit obligation. Is the amount the employer must pay to the fund to satisfy the estimated
pension entitlements of employees.
➢ Prepaid benefit expense. A result of overfunding a pension plan; is presented as an ASSET in the
financial statements
➢ Accrued benefit payable. A result of underfunding a pension plan; is presented as a LIABILITY in
the financial statements.
➢ Actuarial assumptions. Estimates and projections on fund investment & future pension
payments that involve various considerations such as the economy, the strength of the
Philippine peso, the mortality of pension recipients their life expectancy including their health
conditions (in most cases they receive pensions in perpetuity and payments only cease until
their eventual death). Fund and pension projection estimates rest in the able skills of an actuary
and an accountant is not normally expected to be responsible for estimating them.
B. Defined benefit cost
Defined benefit cost represents the amount of obligation that the entity incurs in an accounting period.
It is split into two recognition components but divided into three (SNR) if classified by nature of the cost:

Effect of asset ceiling

Effect of asset ceiling is the decrease in prepaid benefit cost due to a limitation in the defined benefit
plan as to the estimated amount recoverable upon settlement of all benefit obligations. This limitation
in prepaid benefit cost is known as asset ceiling which in more technical terms is defined as the present
value of future economic benefits in a form of reduction in the future contribution or refund. The
presence of asset ceiling in a benefit plan is in effect, like an impairment test. But it will only be relevant
in problem solving when the defined benefit plan results in a surplus (prepaid benefits).
SUMMARY

Classification of Postemployment Benefit Plan

➢ Defined Contribution Plan – fixed contribution; undefined benefit
How to compute cost?
• Contribution is expensed when it is payable
• Unpaid contribution is accrued
➢ Defined Benefit Plan – fixed benefit, undefined contribution
How to compute cost?

Employee Benefit Expense

Add/Less: Remeasurement Gain Loss (Gain)
Defined Benefit Cost

Components of Defined Benefit Cost

1. Employee Benefit Expense (Profit/Loss)

➢ Service Cost
❖ Current Service Cost
❖ Past Service Cost
❖ Gain (Loss) on Settlement
 ➢ Net Interest
❖ Interest expense on defined benefit liability
❖ Interest income on plan assets
❖ Interest in the effect of asset ceiling

2. Remeasurements (Other Comprehensive Income)

➢ Actuarial gain or loss
➢ Actuarial return on plan assets less interest income on plan assets
➢ Any change in the effect of asset ceiling less interest on the effect of asset ceiling-
beginning

Current Service Cost

Service Cost Past Service Cost

Settlement Price
Gain (Loss on Settlement)

Employee Benefit PV of PBO Settled

Expense Change in the Effect
Interest Expense on Beg PBO of Asset Ceiling

Interest Expense on Effect

Net Interest
Defined Benefit Cost of Asset Ceiling- Beginning

Interest Income on
Beginning FVPA

Actual Return on
Plan assets

Actuarial Gain (Loss)

Remeasurements Actual Return on Plan Assets less Interest Income

Change in the Effect of Asset Ceiling less Interest

Expense on Effect of Asset Ceiling - Beginning
FVPA- Beginning Balance PBO - Beginning Balance
Add: Past Service Cost
Add: Current Service Cost
Add: Interest Income on FVPA Add: Interest Expense on PBO
Add: Contribution by entity to FVPA
Add/Less: Remeasurement Gain (Loss) on FVPA Add/Less: Actuarial Loss (Gain) on PBO
Less: Benefits Paid Less: Benefits Paid

Less: Settlement Price of plan settlement Less: Present Value of Settled Obligation
FVPA- Ending Balance PBO - Ending Balance

FVPA PBO
Beginning -Beginning = Surplus -Asset Ceiling = Effect of Asset Ceiling -Beginning
Ending -Ending = Surplus -Asset Ceiling = Effect of Asset Ceiling -Ending
Change of Effect of Asset Ceiling
(Interest Expense on Asset Ceiling - Beginning)
Remeasurements Loss (Gain)

SHORT –TERM EMPLOYEE BENEFITS

➢ Unpaid short-term employee benefits is accounted for as accrued expense
➢ Advance payment is accounted for as prepayment
➢ Short term compensated or paid absences is accounted as expense using expected cost

OTHER LONG-TERM EMPLOYEE BENEFITS

➢ The same recognition and measurement of defined benefit obligation except all measurements
are recognized in profit/loss instead to OCI.

TERMINATION BENEFITS

➢ If settled within 12 months after reporting period, requirements of short-term employee

benefits shall be applied
➢ If not settled after 12 months after reporting period, requirements of other long-term employee
benefits
 PRACTICAL EXERCISES

I. Woodstock Company has established a defined benefit pension plan for a lone employee.

Annual payments under the pension plan are equal to the employee's highest lifetime salary multiplied by
2% multiplied by number of years with the entity.

On December 3 1, 2022, the employee had worked for Woodstock Company for 10 years. The salary in
2022 was P500,000.

The employee is expected to retire in 25 years and the salary increases are expected to average 3% per
year during that period.

The employee is expected to live for 15 years after retiring and will receive the first annual pension payment
one year after retirement.

The discount rate is 8%. The relevant present value and future value factors are:
Future value of I at 3% for 25 periods 2.094

PV of an ordinary annuity of I at 8% for 15 periods 8.559

PV of I at 8% for 25 periods 0.146

l. What is the annual pension payment that should be used in computing the projected benefit obligation on
December 31 , 2022?

a. 100,000
b. 250,000
c. 209,400
d. 515,000

2. What is the projected benefit obligation on December 31, 2022?

a. 209,400
b. 261,669
c. 100,000
d. 124,961

II. Jessabel Company has established a defined benefit pension plan for a lone employee.

Annual payments under the pension plan are equal to the employee's highest lifetime salary multiplied by
3% multiplied by number of years with the entity.

On December 3 1 , 2022, the employee had worked for 15 years. The current salary is P500,000.

The employee is expected to retire in 5 years and the salary increases are expected to average 4% per year
during that period.
The employee is expected to live for 6 years after retiring and will receive the first annual pension payment
one year after retirement

The discount rate is 12%. The relevant present value and future value factors are:

Future value of I at 4% for 5 periods 1.22

PV of an ordinary annuity of I at 12% for 6 periods 4.11

PV of 1 at 12% for 5 periods 0.57

1. What is the projected benefit obligation on December 31, 2022?

a. 643,071

b. 225,000

c. 924,750

d. 610,000

III. At the beginning ofcurrent year, Shiela Company had the following balances related to a defined
benefit plan:

Fair value of plan assets 5,750,000

Projected benefit obligation 6,500,000

The actuary provided the following data for the current year:

Current service cost 600,000

Settlement discount rate 10%

Expected return on plan assets 8%

Actual return on plan assets 700,000

Contribution to the plan 900,000

Benefits paid to retirees 100,000

1. What amount should be reported as employee benefit expense?

a. 675,000
b. 600,000
c. 700,000
d. 650,000

2. What amount should be reported as remeasurement gain on plan assets?

a. 700,000
b. 125,000
c. 575,000
d. 240,000

3. What amount should be reported as defined benefit cost?

a. 435,000
b. 900,000
c. 550,000
d. 675,000

4. What amount should be reported as prepaid/accrued benefit cost at year-end?

a. 1,100,000 prepaid
b. 1,100,000 accrued
c. 400,000 prepaid
d. 400,000 accrued

Note that the expected return of 8% on plan assets is ignored completely. There is no more concept of
expected return.

Components of defined benefit cost

l. Service cost which comprises:
a. Current service cost
b. Past service cost
c. Any gain or loss on plan settlement

2. Net interest which comprises:

a. Interest expense op defined benefit liability
b. Interest income on plan assets
c. Interest expense on the beginning effect ofasset ceiling

3. Remeasurements which comprise:

a. Actuarial gain and loss
b. Actual return on plan assets less interest income on plan assets
c. Any change in the effect ofasset ceiling minus interest on the beginning effect of asset ceiling

The service cost and net interest are included in profit or loss as component of employee benefit
expense.
The net interest expense or net interest income is the difference between the interest expense on
defined benefit liability, interest expense on the effect of asset ceiling and interest income using the
same discount rate. The defined benefit cost is partly profit or loss representing service cost and net
interest, and partly other comprehensive income or OCI representing the remeasurements.
Remeasurements are fully recognized in other comprehensive income and permanently excluded from
profit or loss.

The remeasurements are subsequently transferred to retained earnings.

The amount of remeasurement of plan assets is equal to the actual return on plan assets minus the
interest income on the fair value of the plan assets at the beginning of the reporting period.
Note that if the actual return on plan assets is higher than interest income, the difference is a
remeasurement gain.
However, if the interest income is higher than the actual return on plan assets, the difference is a
remeasurement loss.

THEORY OF ACCOUNTS
1. These are all forms of consideration given by an entity in exchange for services rendered by
employees.
a. Employee Benefits
b. Employee Compensation
c. Fringe Benefits
d. Salaries and wages

2. These are employee benefits which are payable after the completion of employment:
a. Short-term employee benefits
b. Postemployment employee benefits
c. Other long-term employee benefits
d. Termination benefits

3. Short-term employee benefits include all, except:

a. Wages, salaries, and social security contributions
b. Short-term compensated absences
c. Profit-sharing and bonuses payable in more than twelve months after the end of the period
in which the employees render the related service
d. Nonmonetary benefits such as medical care, housing, car, and free and subsidized goods

4. Which of the following statements best describes “other long-term employee benefits”?
a. Benefits that are not expected to be settled within twelve months after the end of the
reporting period
b. Benefits that are expected to be settled within twelve months after the end of the reporting
period
c. Benefits payable as a result of an entity’s decision to terminate an employee’s employment
before the normal retirement date
d. Benefits which are payable after completion of employment
5. These are employee benefits that are payable as a result of an entity’s decision to terminate an
employee’s employment before the normal retirement date, or an employee’s decision to accept an
offer of benefits in exchange for termination of employment.
a. Termination benefits
b. Short-term employee benefits
c. Other long-term employee benefits
d. Postemployment employee benefits

6. Which is true concerning the recognition and measurement of a defined contribution plan?
a. The contribution shall be recognized as expense in the period it is payable
b. Any unpaid contribution at the end of the period shall be recognized as accrued liability
c. Any excess contribution shall be recognized as prepaid expense but only to the extent that
the prepayment will lead to a reduction in future payments or a cash refund
d. All of these statements are true about a defined contribution plan
7. Which is incorrect concerning the recognition and measurement of a defined benefit plan?
a. Actuarial assumptions are required to measure the obligation and expense and there is a
possibility of actuarial gain and losses
b. The obligation is measured on a discounted basis
c. The defined benefit plan must be fully funded.
d. The expense recognized for a defined benefit plan is not necessarily the amount of
contribution due for the period

8. The components of defined benefit cost include all, except:

a. Service cost
b. Net interest
c. Remeasurements
d. Contribution to the plan

9. The service cost of defined benefit plan comprises all, except:

a. Current service cost
b. Past service cost
c. Gain or loss on settlement
d. Net interest

10. Which of the following components of defined benefit cost shall be recognized through other
comprehensive income?
a. Current service cost
b. Past service cost
c. Net interest
d. Remeasurement

11. It is the increase in the present value of the defined benefit obligation resulting from employee
service in the current period
a. Current service cost
b. Interest expense
c. Past service cost
d. Remeasurement
12. It is the increase in the present value of the defined benefit obligation for employee service in prior
periods, resulting from a plan amendment or curtailment?
a. Current service cost
b. Net interest
c. Past service cost
d. Employee benefit cost

13. When an entity amends a pension plan, past service cost should be:
a. Treated as a prior period adjustment because no future periods are benefited
b. Amortized over the remaining service period of employees
c. Recorded in other comprehensive income
d. Reported as an expense in the period the plan is amended

14. Which of the following should be included in plan assets?

a. Assets held by long-term employee benefit fund
b. Qualifying insurance policy
c. Both assets held by a long-term employee benefit fund and qualifying insurance policy
d. Neither assets held by a long-term employee benefit fund nor qualifying insurance policy

15. These are the entity’s best estimate of the variables that will determine the ultimate cost of
providing postemployment benefits:
a. Actuarial assumptions
b. Demographic assumptions
c. Financial assumptions
d. Actuarial assumptions

16. The discount rate used in making actuarial assumptions shall be determined by reference to:
a. Market yield at the end of reporting period on high quality bonds
b. Stated rate on high quality bonds
c. Market yield at the end of reporting period on government bonds
d. Stated rate on government bonds

17. What is the treatment of actuarial gains and losses?

a. As remeasurements recognized immediately in other comprehensive income and
permanently not reclassified
b. As remeasurements recognized in profit or loss
c. As remeasurements recognized in retained earnings
d. As remeasurements recognized immediately in other comprehensive income and
subsequently reclassified to retained earnings

18. A pension liability is reported when:

a. The projected benefit obligation exceeds the fair value of plan assets
b. The accumulated benefit obligation is less than the fair value of plan assets
c. The pension expense reported for the period is greater than the funding amount for the
same period
d. Cumulative other comprehensive income exceeds the fair value of plan assets
19. The return on plan assets:
a. Is equal to the change in the fair value of the plan assets during the year
b. Includes interest, dividends, and change in the fair value of the plan assets during the year
c. Is equal to the discount rate times the fair value of the plan assets at the beginning of the
period
d. Is equal to the expected rate of return times the fair value of plan assets at the beginning of
the period

20. What is the meaning of “net interest” in relation to a defined benefit cost?
a. Interest expense on defined benefit liability
b. Interest income on the fair value of plan assets
c. The difference between interest expense on defined benefit liability and interest income on
the fair value of plan assets
d. Interest expense on defined benefit liability less applicable income tax