EMPLOYEE BENEFITS

September 21, 2020

 LEARNING OBJECTIVES

At the end of the session, you should be able to:

• Understand the nature and categories of employee benefits;
• Record and measure short-term employee benefits;
• Understand the difference between defined contribution plans and defined benefit plans;
• Record and measure post-employee benefit cost under defined contribution plan and defined benefit plan;
• Measure the resulting asset or liability under both the defined contribution plan and defined benefit plan;
• Record and measure the termination benefit cost; and
• Identify the required financial statement disclosures pertaining to employee benefits.
DEFINITION AND CATEGORIES
 EMPLOYEE BENEFITS

Definition
• All forms of consideration given by an entity in
exchange for services rendered by employees
or for termination of employment.
Categories
• Short-term employee benefits
• Post-employee benefits

• Include directors and management personnel

• Other long-term employee benefits; and
• Termination benefits
 CATEGORIES
Category Inclusions/Definitions Expected date of settlement
Short-term Wages, salaries, SS contributions, paid To be settled wholly before 12 months before
employee benefits annual leave, compensated absences the end of the annual reporting period in
such as sick and vacation leaves, profit which the employees render the related
sharing and bonuses services

Post-employment Pension, lump-sum payments of Payable after the completion of employment

benefits retirement, post-employment life
insurance and post-employment
medical care
 CATEGORIES (cont.)
Category Inclusions/Definitions Expected date of settlement
Other long-term Long service leave or sabbatical leave, Not applicable
employee benefits jubilee or other long-service benefits,
long-term stability benefits
Termination Employee benefits provided in Payable upon termination
benefits exchange for the termination of an
employee’s employment as a result of
either an entity’s decision to terminate
an employee’s employment before the
normal retirement date or an
employee’s decision to accept benefits
in exchange for the termination of
employment
POST-EMPLOYMENT BENEFITS
 POST-EMPLOYMENT BENEFITS
In terms of Contributions: In terms of Funding:

CONTRIBUTORY FUNDED
• Employee (EE) and Employer (ER) • With set aside funds
contribute • Funding agency pays retirement benefits

NON-CONTRIBUTORY UNFUNDED
• Only the ER contributes in the • No separate funds
retirement fund • Entity retains the obligation for the
payment of benefits
 DIFFERENCE BETWEEN DEFINED
CONTRIBUTION PLANS AND DEFINED
BENEFIT PLANS
 DEFINED CONTRIBUTION PLAN vs.
DEFINED BENEFIT PLAN
Category
Employer’s liability
Investment risk
Recognition of ER’s contribution
to the retirement
Contribution Benefit
To the extent of the contribution To the extent of the present
only value of obligation
Shouldered by the EE Shouldered by the ER
Outright Expense (any excess Component of Plan Assets
between the actual retirement
expense and contribution is
recognized either as an asset or a
liability)
 DEFINED CONTRIBUTION PLAN vs.
DEFINED BENEFIT PLAN
JOURNAL ENTRIES CONTRIBUTION BENEFIT
Periodic contribution to DR: PENSION EXPENSE DR: PENSION EXPENSE
the plan CR: CASH CR: CASH

Year-end adjustment If, Contribution = Required Expense* If, Contribution = Required Expense*
No AJE necessary No AJE necessary

If, Contribution < Required Expense* If, Contribution < Required Expense**
DR: Pension Expense XX DR: Pension Expense XX
CR: Accrued Pension Expense XX CR: Accrued Pension Expense XX

If, Contribution > Required Expense*
DR: Prepaid Pension Expense XX
CR: Pension Expense XX
Where *Required Expense = Defined
contribution or the periodic contribution to
the plan as per agreement with employees.
If, Contribution > Required Expense**
DR: Prepaid Pension Expense XX
CR: Pension Expense XX
- the prepaid pension is subjected to an
asset ceiling test before the entry to
set it up.
Where **Required Expense will be
discussed in succeeding slides
COMPONENTS OF DEFINED BENEFIT
COST
 DEFINED BENEFIT COST
REPORTED IN:
SERVICE COST

• Current Service Cost

• Past Service Cost
• Plan Amendment (changes in defined benefit plan)
• Plan Curtailment (significant reduction in the number of employees covered by the plan)
• Gain (Loss) on Settlement
P&L
NET INTEREST EXPENSE

• Interest expense on beginning balance of Projected Benefit Obligation (PBO)

• Interest income on beginning balance of Plan Assets (PA)
• Interest Expense on effect of asset ceiling at the beginning of reporting period

NET REMEASUREMENT LOSS (GAIN)

OCI w/o RECYCLING to
• Actuarial Loss (Gain) on PA P&L but with
• Actuarial Loss (Gain) on PBO RECLASSIFICATION to
• Remeasurement on the effect of the asset ceiling RETAINED EARNINGS
REMEASUREMENTS
Projected
Plan Assets Benefit
Obligation
Experience Adjustments
• Previous actuarial assumptions
Actual Return on Plan Assets vs actual occurrence
less Interest Income

Effects of changes in
actuarial assumptions
• Demographic
• Financial
• Discount rate (reference to
market yield at end of
reporting period on high
quality bonds)

Simply:
Actual > Estimated =
Remeasurement Loss

Actual < Estimated =

Remeasurement Gain
 EFFECT OF ASSET CEILING
If the fair market value of the plan asset at year-end is higher than the present value of the
projected benefits (PA>ABO), the prepaid pension expense is tested for asset ceiling (tested
for possible impairment), before the same is set-up as prepayment at year end.
The ASSET CEILING shall be the sum of the present value of any expected future benefits
from over-funding the benefit obligation (usually in the form of reduction in future
contribution or future refunds).
If the asset ceiling is higher than the prepaid pension (PA– ABO), there is no loss.
If the asset ceiling however is lower that the prepaid pension (PA– ABO), the prepaid pension
is written-down to the ceiling and additional loss shall be recognized as a component of
pension expense as other comprehensive income/loss.
COMPUTATIONS
 COMPUTATIONS

FAIR VALUE OF PLAN ASSETS (FVPA) DEFINED BENEFIT OBLIGATION (DBO)

Beginning Balance
Contribution to the plan
Interest income on the
plan asset, beg.
Actuarial gain (squeeze) or
Ending Balance (at FV)
Settlement price to retirees
Actuarial loss (squeeze)
Settlement to retirees at CV
Actuarial gain (squeeze) or
Beginning Balance
Current service cost
Past service cost
Interest expense on DBO,
beg.
Actuarial loss (squeeze)
Ending Balance (at PV)
 THANK YOU!
Reference Books:
Intermediate Accounting Volume 2 by Nenita S. Robles, Patricia M. Empleo
Advanced Auditing by Christopher Espenilla
Intermediate Accounting Volume 2 by Conrado T. Valix, Jose F. Peralta, Christian Aris M. Valix