POSTEMPLOYMENT BENEFITS

CHAPTER 17
Employee Benefits
All forms of consideration given by an entity in exchange for
services rendered by employees or for the termination of
employment.

Employees includes directors and other management personnel.

A. Postemployment benefits
B. Short-term employee benefits
C. Other long-term employee benefits
D. Termination benefits
Postemployment Benefits
Employee benefits which are payable after completion of employment.

1. Retirement benefits
2. Postemployment life insurance
3. Postemployment medical care

Most postemployement benefit plans are formal arrangements. Remuneration

package.

Defined contributions plans or defined benefit plans.

Contributory or noncontributory. Funded or unfunded.

Postemployment Benefits
Contributory Plan
The employer and employee make contributions to the retirement benefit plan but they do not
necessarily contribute equal amounts.

Noncontributory Plan
Only employer makes contributions to the retirement benefit plan.

Funded Plan
The entity set aside funds for future retirement benefits by making payments to a funding agency.
Trustee, bank, or insurance company.

Unfunded Plan
The entity retains the obligation for the payment of retirement benefits without the establishment
of a separate fund.
Defined Contribution Plan
A postemployment benefit plan under which an entity pays fixed
contributions into a separate entity known as fund.

The entity makes a specific or definite amount of contribution to a separate

fund without specifying the retirement benefit to be received by the employee.

The contribution is definite but the benefit is indefinite.

The employee bears the investment risk in a defined contribution plan.

Once the defined contribution is paid, the employer has no more obligation
under the plan.
Defined Benefit Plan
An entity’s obligation is to provide the agreed benefits to
employees.

The benefit is definite but the contribution is indefinite.

The entity assumes the investment risk.

Contributory holiday or additional contributions.

Insured Benefits
Treated as Defined Contribution Plan but accounted for as
Defined Benefit Plan.

A. To pay the employee benefits directly when they fall due.

B. To pay future amounts if the insurer does not pay all future
employee benefits relating to employee service in the current
and future periods.

The entity has no longer has an asset or liability.

Accounting for Defined Contribution Plan
It is straightforward because the obligation of the entity is determined by the
amount contributed for each period.

No possibility of actuarial gain or loss.

The obligations are measured on an undiscounted basis, except when they are not
expected to be settled wholly within twelve months after the end of the period.

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
expense.
C. Any excess contribution shall be recognized as prepaid expense.
 Illustration 1
An employee is a member of the faculty of accounting a certain
university. During the current year, the employee eraned P600,000.

The employee is covered by the university’s defined contribution plan

which requires the university to contribute the equivalent of 5% of the
employee’s salary or P30,000 for the current year to a trustee.

The university shall recognize the contribution as expense as follows:

Employee benefit expense 30,000

Cash 30,000
 Illustration 2
On January 31, 2021, an entity paid P100,000 contribution to a defined
contribution plan in exchange for services performed by the employees in
December 2020.

1. To record the accrual of benefit on December 31, 2020:

Employee benefit expense 100,000

Accrued benefit payable 100,000

2. To record the payment of the contribution on January 31, 2021:

Accrued benefit payable 100,000

Cash 100,000
Illustration 3
On December 31, 2021, an entity paid P200,000 contribution to a
defined contribution plan. Of this amount, P150,000 is in part exchange
for services performed by the employees in December 2020, and the
balance of P50,000 is in respect of services to be performed in 2021.

The contribution to the defined contribution plan is recorded on

December 31, 2020.

Employee benefit expense 150,000

Prepaid benefit expense 50,000
Cash 200,000
Defined Benefit Plan
The obligation is measured on discounted basis.

There is possibility of actuarial gains and losses.

The expense recognized is not necessarily the amount of

contribution for the period.
Defined Benefit Cost
1. Service Cost
A. Current Service Cost
B. Past Service Cost
C. Gain or Loss on Settlement
2. Net Interest
A. Interest expense on DBO
B. Interest income on plan assets
C. Interest expense on effect of asset ceiling
3. Remeasurement
A. Plan assets
B. PBO
C. Effect of asset ceiling
Defined Benefit Cost
1. Service Cost – Profit and loss as component of employee
benefit expense
2. Net Interest – Profit and loss as component of employee
benefit expense
3. Remeasurement – Other comprehensive income

Remeasurement may be transferred within equity or

reclassified to retained earnings.
Actuarial Valuation Method
Projected unit credit method / Accrued benefit method
 Shall be used in determining the present value of the
defined benefit obligation and the related current
service cost and past service cost.

 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.
Defined Benefit Cost
Current service costs - increase the present value of the obligation
resulting from employee service in the current period.

Past service costs - change the present value of the obligation for
employee service in prior periods. They arise from amendments to
the terms and conditions of a defined benefit plan or a curtailment.
Additional costs arise where new benefits are introduced or existing
benefits are improved. Costs are reduced where existing benefits
are reduced. Past service costs should be recognized in the period of
the plan amendment.
Fair Value of Plan Assets
1. Contribution to the fund
2. Interest Income on PA
3. Remeasurement gain or loss on PA
4. Benefits upon retirement
5. Settlement price of plan settlement before retirement

Actual Return on PA > Interest Income on FVPA – Gain

Actual Return on PA < Interest Income on FVPA – Loss
Projected Benefit Obligation
The actuarial present value of all benefits attributed by the
pension benefit formula to employee service rendered before a
specified date based on future compensation level or future
salary increase.

Current salary level – Accumulated benefit obligation

Actuarial Gains or Losses
Changes in the present value of the projected benefit
obligation resulting from experience adjustments and
the effects of changes in actuarial assumptions.

Experience adjustments – differences between

previous actuarial assumptions and what has actually
occurred.
 Actuarial Assumptions
Entity’s best estimate of the variables that will determine the ultimate cost
of providing postemployment benefits.

Unbiased and mutually compatible

Demographic assumptions
Financial assumptions

Discount rate – market yields. High quality bonds / Government bonds

Estimated future salary increases.

Actuarial Gains or Losses
Increases or decreases in the present value of the projected
benefit obligation because of changes in actuarial assumptions
and experience adjustments.

A. Unexpected high or low rate of employee turnover, early

retirement or mortality and increases in salary.
B. Change in assumptions concerning benefit payment options.
C. Change in discount rate.
Remeasurement of PBO
Actual Benefit Obligation > Estimated Amount – Actuarial
Loss
Actual Benefit Obligation < Estimated Amount – Actuarial
Gain