CHAPTER 5

EMPLOYEE BENEFITS

CRUZ, JERICA MAY A.

CBET-01-501E
IAS 19 Employee Benefits, paragraph 8 defines employee benefits as all forms of consideration
given by an entity in exchange for service rendered by employees or for termination of
employment.

IAS 19 identifies four categories of employee benefits:

1. Short-term employee benefits
2. Post-Employee Benefits
3. Other Long-Term Employee Benefits

4. Termination Benefits
1. SHORT-TERM EMPLOYEE BENEFITS
Short-term employee benefits are those, other than termination benefits, that are
expected to be settled wholly before 12 months after the end of the annual reporting
period in which the employees render the related service.

Recognition and Measurement:

•Short-term employee benefits are recognized as an expense during the reporting period
when the employee has rendered service, unless the cost of such employee benefits forms
part of the cost of another asset, such as inventories or property, plant, and equipment.
•At the end of the reporting period, the unpaid amount of these short-term benefits shall be
recognized as a liability at its undiscounted amount.
1. SHORT-TERM EMPLOYEE BEENFITS
•The accrual of wages and salaries at year-end is recorded by charging
compensation expense or equivalent account and credited liability

2 types of short-term compensated absences:

1. Accumulating Short-tem employee benefits
•Accumulating compensated 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.
•Vesting
•Non-vesting
•The Last-In, First-Out (LIFO) approach is generally used to measure the obligation.
1. SHORT-TERM EMPLOYEE BEENFITS
ILLUSTRATION:
An entity grants its employees five working days of paid sick leave for each year.
Unused sick leave may be carried forward for one calendar year only. At December
31, 2020, the average unused sick leave of each of its 100 employees is 2 days.
The entity estimates that 80 of its employees will take no more than five-day leave
sick during 2021 and that the remaining 20 employees will take an average of 7 days
sick leave during 2021. An employee earns an average daily rate of ₱500.
1. SHORT-TERM EMPLOYEE BEENFITS
Liability for compensated absences at December 31, 2020 is computed as follows:

Average additional entitlement for compensated

absences in excess of 2021 entitlement (7-5) 2 days
Multiplied by the number of employees expected
to leave in excess of 5 days 20
Total equivalent number of days 40
Multiplied by average rate per day ₱500
Liability for compensated absences ₱20,000

Compensated Absences ₱20,000

Liability for Compensated Absences ₱20,000
1. SHORT-TERM EMPLOYEE BEENFITS
2021

Jan. 1 Liability for Compensated Absences ₱20,000

Compensated Absences ₱20,000
Reversal of last year’s accrual

Jan.–Dec. Compensated Absences XXX

Cash XXX
Actual payment of sick leave
Dec. 31 Compensated Absences XXX
Liability for Compensated Absences XXX
Estimate of year-end obligation
1. SHORT-TERM EMPLOYEE BEENFITS

2. Non-accumulating Short-term employee benefits

•Non-accumulating compensated absences do not carry forward and do not require accrual at
year-end. Thus, an entity shall recognize the cost of non-accumulating compensated
absences when the absences occur.
2. POST-EMPLOYMENT BENEFITS
•Post-employment benefits are employee benefits (other than termination benefits) which
are payable after the completion of employment.

Classification of Pension Plans:

1) Contributory Plans and Non-contributory Plans
•A plan is contributory if both the employer and the employee are required to make contributions
to the fund assets.
•A plan is non-contributory if under the plan the employee is not required to make contributions for
his retirement benefit
2. POST-EMPLOYMENT BENEFITS
2) Funded Plans and Unfunded Plans

•A plan is funded if a trustee is designated to administer the resources accumulated in the fund.

•A plan is unfunded if the employer retains the right to manage the fund for the retirement benefits of
the employees. It also retains the obligation to pay the employees their post-employment benefits.

3) Defined Contribution Plans and Defined Benefit Plans

•Defined contribution plans are post employment benefit plans that specify the employer’s
contribution based on a formula that includes such factors as age, length of service, employer’s
profits, and compensation levels.
2. POST-EMPLOYMENT BENEFITS
ILLUSTRATION:

Assume that ABC Company has a defined contribution plan for the retirement of its employees. The
plan provides for an annual contribution to the funding agency of an amount equal to 5% of gross
payroll. The company’s gross payroll for the year ended December 31, 2020 was ₱10,000,000. The
company remitted ₱450,000 to the funding agency during the year.

Post Employment Benefit Expense (10,000,000X5%) ₱500,000

Cash ₱450,000
Accrued Post Employment Benefit Cost 50,000
Post Employment Benefit Expense ₱500,000
Prepaid Post Employment Benefit Cost 60,000
Cash ₱ 560,000
2. POST-EMPLOYMENT BENEFITS
•Defined benefit plans are plans that define the benefits that employees will receive at retirement,
based on a formula.

Accounting by an entity for defined benefit plan involves the following steps:
1. Determining the deficit or surplus
•Determination of deficit (defined benefit liability) or surplus (defined benefit asset) involves using
actuarial technique called the projected unit credit method to make an estimate of the cost to the
entity of the benefits earned during the current and prior periods.
2. POST-EMPLOYMENT BENEFITS
ILLUSTRATION:

A lump-sum benefit is payable on termination of employment and equal to 5% of annual salary for each
year of service. The salary in year 1 is ₱20,000 and is assumed to increase at 5% per year. The
discount rate used is 10% per annum.

The following table shows how the obligation accumulates, assuming that the employee is expected to
leave the company at the end of year 4.
Year
1 2 3 4
Benefit attributed to prior years 0 1,158 2,316 3,474
Benefit attributed to current year 1,158 1,158 1,158 1,158
Current and prior year 1,158 2,316 3,474 4,632

₱20,000 x 1.05 x 1.05 x 1.05 = ₱23,152 x 5% = ₱1,158

2. POST-EMPLOYMENT BENEFITS
The defined benefit obligation is computed as follows:

Year
1 2 3 4
Opening obligation - 870 1,914 3,158
Interest cost (10% x opening obligation - 87 191 316
Current service cost 870 957 1,053 1,158
Defined benefit obligation, end 870 1,914 3,158 4,632

Current Service Cost:

Year 1 = 1,158 x PV of 1 at 10% for 3 periods = ₱ 870
Year 2 = 1,158 x PV of 1 at 10% for 2 periods = 957
Year 3 = 1,158 x PV of 1 at 10% for 1 periods = 1,053
Year 4 = no need to discount = 1,158
2. POST-EMPLOYMENT BENEFITS
•The movement in defined benefit obligation can be summarized as follows:

Benefit Obligation, Beginning ₱XX

Current Service Cost XX
Past Service Cost XX
Interest Cost (Beginning benefit obligation X Discount Rate) (XX)
Actuarial Loss or (gain) on benefit obligation XX
Benefits paid (XX)
Benefit Obligation, End ₱XX
2. POST-EMPLOYMENT BENEFITS
2. Determining the amount of the net defined benefit liability (asset)
•The excess of the present value of the defined benefit obligation over the fair value of plan assets is
the deficit (net defined benefit liability), while the excess of the fair value of plan assets over the
present value of defined benefit obligation is the surplus (or the net defined benefit asset).

3. Determining the amounts to be recognized in profit or loss

•The total amount of defined benefit cost is composed of the following components:
Taken to profit or loss Taken to other comprehensive income
A. Service Costs: A. Re-measurement of defined benefit obligation
1. Current Service Cost B. Re-measurement of plan asset
2. Past Service Cost
B. Net Interest Cost
C. Gain or loss on settlement
2. POST-EMPLOYMENT BENEFITS
4. Determining the re-measurements of the net defined benefit liability (asset) to be
recognized in other comprehensive income
•Actuarial gains and losses result from:

a. Increases or decreases in the present value of a defined benefit obligation because of changes
in actuarial assumptions and experience adjustments; and

b. Difference between actual return and expected return on plan assets

2. POST-EMPLOYMENT BENEFITS
•Actual return on plan assets > Expected return on plan assets = Gains

•Re-measured Benefit Obligation < Expected Benefit Obligation (based on assumptions) = Gains

•Actual return on plan assets < Expected return on plan assets = Loss

•Re-measured Benefit Obligation > Expected Benefit Obligation (based on assumptions) = Loss
 3. OTHER LONG-TERM EMPLOYEE BENEFTS
Other long-term employee benefits include:
•Long-term paid absences, such as long-service or sabbatical leave

•Jubilee or other long-service benefit

•Long-term disability benefits

•Profit-sharing and bonuses payable twelve months or more after the end of the period in
which the employee render the related service

•Deferred remunerations
 4. TERMINATION BENEFITS
•Termination benefits are employee benefits payable as a result of either:

a. An entity’s decision to terminate employment; or

b. An employee’s decision to accept an entity’s offer of benefits in exchange for termination of

employment.

•An entity shall recognize a liability and expense for termination of benefits at the earlier of
the following dates:
a. When the entity can no longer withdraw the offer of those benefits; and
b. When the entity recognizes costs for restructuring and involves the payment of termination
benefits