Professional Documents
Culture Documents
Defined Benefit Plan
Defined Benefit Plan
Defined Benefit Plan
Simplified approach
Liability is based on • Ignore estimated future salary Projected Unit Credit Method
increase rates
Current Salary and Years • Ignore future service of current
of Service. employees
Does not consider future • Ignore possible in-service
changes in salary rates mortality of current employees
and service periods Actuarial gain and loss -Other
Actuarial gain and loss – P/L or OCI Comprehensive Income
Illustration- Accrual Approach
On December 31, 2018. ABC Company has 15 employees, which includes Employee B. The details of
employee B is as follows:
Monthly rate 15,000
Question: What is the amount of pension liability to be recognized for Employee B as of December 31, 2018?
Answer: 67,500 (13,500 x 5 years)
PFRS for Small Entities PFRS for SME Full PFRS
Accrual Approach Defined Benefit Defined Benefit
Projected Unit Credit Method
Simplified approach
Liability is based on • Ignore estimated future salary Projected Unit Credit Method
increase rates
Current Salary and Years • Ignore future service of current
of Service. employees
Does not consider future • Ignore possible in-service
changes in salary rates mortality of current employees
and service periods Actuarial gain and loss -Other
Actuarial gain and loss – P/L or OCI Comprehensive Income
Illustration
At Dec. 31, 20X1 the entity must recognize a liability of 20,000 for its
defined benefit plan.
200,000 obligation less 180,000 plan assets set aside to fund the defined
benefit obligation.
PFRS for Small Entities PFRS for SME Full PFRS
Accrual Approach Defined Benefit Defined Benefit
Projected Unit Credit Method
Simplified approach
Liability is based on • Ignore estimated future salary Projected Unit Credit Method
increase rates
Current Salary and Years • Ignore future service of current
of Service. employees
Does not consider future • Ignore possible in-service
changes in salary rates mortality of current employees
and service periods Actuarial gain and loss -Other
Actuarial gain and loss – P/L or OCI Comprehensive Income
Illustration- Projected Unit Credit Method
An employer pays lump sum to employees when they retire. The lump sum 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 2020 is 200,000 per annum
d. The discount rate is 10% per annum
The first issue to be settled is the final salary of the employee in 2024. In this case, the “future value of 1
at 8% for 4 years subsequent to 2020 is 1.3605
Final salary= 272,100 (200,000 x 1.3605)
Therefore, the benefit each year is 5% of 272,100 is 13,605 or a total of 68,025 for 5 years