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Employee Benefits
Employee Benefits
PAS 19 EMPLOYEE BENEFITS
Lesson Objectives:
1. Differentiate the four classifications of employee benefits
under PAS 19
2. State the timing of recognition of employee benefits
3. Differentiate between a defined contribution plan and defined
benefit plan
4. 4. Account for defined contribution plan
DISCUSSION AND APPLICATION
Employee Benefits are “all forms of consideration given by an entity in exchange for
service rendered by employees or forthe termination of employment (PAS 19.8)
Employee benefits can be in any form, i.e. cash, goods or services, and may be
provided to either the employees or their dependents.
Employees include all employees whether regular, part time or casual and regardless
of position in the entity, i.e. rank-and-file, director or other management personnel.
Recognition :
Employee benefits are recognized as expense when employees have rendered service,
except to the extent that the employee benefits from part of the cost of another asset (e.g.,
salaries of factory workers are included in the cost of inventories)
Employee benefits already earned by employees but not yet paid are recognized as
liabilities.
Employee benefits may arise from contractual agreements (e.g., employment contracts),
legislation (e.g. Social Security System “SSS” contributions) or informal practices that
create constructive obligations.
Four categories of employees
benefits under PAS 19
a. Short-term employee benefits
b. Post-employment benefits
c. Other long-term employee benefits
d. Termination benefits.
Short term employee benefits
Short term employee benefits are those that are due to
be settled within 12 months after the end of the period
in which the employees have rendered the related
services. Examples include:
Salaries, wages, and SSS, Philhealth and Pag-ibig
contributions
Paid vacation leaves and sick leave
Profit-sharing bonuses
Non-monetary benefits (e.g., free goods or services
General accounting requirements
The accounting for short-term employee benefits is relatively
simple, in the sense that actuarial valuations and
discounting are not necessary in measuring the cost. The
benefits are recognized as expense (or as part of the cost of
another asset)after the employee has rendered service and
becomes entitled to payment.
An accrued liability is recognized if the benefits are
unpaid.
A prepaid asset is recognized if there is excess payment.
Short term employee benefits are recognized periodically,
e.g. salaries are usually paid every 15th and 30th of the
month.
ILLUSTRATION:
ABC Co. pays salaries twice a month and does not pay
salaries in advance. Employees work five days a week and
compensation are computed on these working days. In
December 20x1, ABC Co. paid the second semi-monthly
salaries on December 26 which falls on a Friday. The next
non-working holiday is on New Year’s Day. ABC has 100
employees who earn P1,000 per day. ABC’s cost accountant
identified that 70% of salaries incurred pertain to the
production of goods.
Requirement: How much is the accrued salaries as of
December 31, 20x1?
ILLUSTRATION:
Working days after last salary payment (Dec. 29, 30,
31) is 3 days
Multiply by: Number of employees 100
Total working days 300
Multiply by: Average pay per day 1,000
Accrued Salaries – December 31, 20x1 100,000
• December 27 and 28 shall fall on weekend
SHORT TERM PAID ABSENCES
Short-term paid absences include
vacation, holiday (e.g., regular and
nonworking holidays), maternity,
paternity and sick leaves. Entitlement to
paid absences may be either:
ACCUMULATING
NON ACCUMULATING
SHORT TERM PAID ABSENCES
a. Accumulating – Those that can be carried forward and
used in future periods if not used in the current period.
Accumulating paid absences may be either:
i. Vesting – unused entitlement are paid in cash when
the employee leaves the entity (i.e. monetized)
ii. Non-vesting – unused entitlement are not monetized.
ACCRUED LIABILITY COMPUTATION
CASE 1: NONVESTING UNUSED VL
ACCRUED LIABILITY COMPUTATION
ANALYSIS
In case 1 all the unused vacation leave are accrued because they
are accumulating and vesting, meaning even if not taken, the
leaves will eventually be paid in cash when the employee resigns
or retires.
Examples:
Retirement benefits (e.g. lump sum payment and pensions)
Other post-employment benefits (e.g., post-employment life
insurance or medical care).
Post-employment benefits are provided to employees through
post-employment benefits plans (a.k.a. retirement plans or
pension schemes).
POST EMPLOYMENT BENEFITS
A post employment benefit plan can be formal (e.g.,
explicitly stated in employment contract) or informal
(i.e., not documented but implied from the
employer’s past practice or the minimum
requirement of law).
A post employment benefit plan can also be:
A. Contributory or non-contributory and
B. Funded or Unfunded
COMPARISON
CONTRIBUTORY NONCONTRIBUTORY
Both the employer and Only the employer contributes
employee contributes to the to the retirement fund
retirement fund(can be unequal)
FUNDED UNFUNDED
The retirement fund is isolated The employer manages any
from employer’s control and is established fund and pays
transferred to a trustee (e.g., directly the retiring employees
investment company) who
undertakes to manage the fund
and pay directly the retiring
employees
-retirement fund is set aside
POSTEMPLOYMENT BENEFITS
Post-employment benefit plans are classified either:
a. Defined contribution plans: or
b. Defined benefits plans
Under a defined contribution plan, the employer commits to
make fixed contributions to a fund that will be used to pay for
the retirement benefits of the employees.
The amount of post-employment benefits to be received by
employees depends on the amount of contributions to the fund
together with the investment income therefrom.
If the fund balance is less than expected, the employer has no
obligation to make good the deficiency. Therefore, the risk that
retirement benefits may be insufficient rest with the employee.
POSTEMPLOYMENT BENEFITS
Defined benefits plans
Under the defined benefit plan, the employers commits to
pay a definite amount of retirement benefits, which can be
determined using a plan formula. The amount of promised
benefits is independent of any fund balance.
Accordingly, if the fund is insufficient to pay for the promised
benefits, the employer is obligated to make good the
deficiency.
Therefore, the risk of fund insufficiency rest with the
employers:
COMPARISON
Defined Contribution plan Defined benefit plan
The employer commits to The employer commits to
make fixed contributions to a pay a definite amount of
fund retirement benefits.
The amount of benefits that Such amount is independent
an employee will receive is of any fund balance
dependent on the fund The risk that the fund may be
balance insufficient to pay for the
The risk that the fund may be promised benefits rests with
insufficient to meet the the employer.
expected benefits rest with Contribution is indefinite
the employee but benefit is definite
Contribution is definite but
benefit is indefinite
COMPARISON
Defined Contribution plan Defined benefit plan
Required contribution shall be 1. Plan assets measured at fair
recognized as expense value – FVPA
Required contribution> actual 2. Projected ben obligation –
cost= accrued benefit cost PBO- actuarial benefit cost
Required contr < actual contri= 3. FVPA> PBO – PREPAID
prepaid asset 4. FVPA < PBO- ACCRUED
ILLUSTRATION
Case 1
Entity A agrees to provide post employment benefits to its
employees by making monthly contribution equal to 10% of
employees monthly salary to a retirement fund. Upon retirement,
the employee is entitled to any accumulated contributions to a
fund plus any investment income thereon. The employee bears
any investment losses.
Analysis:
This is a defined contribution plan because the benefits to be
received by the employee are dependent on the contributions to
the retirement fund. The employee bears the risk that benefits
will be less than expected.
ILLUSTRATION
Case 2
Entity A agrees to provide post-employment benefits to its
employees in the form of a lump sum payment of P2M upon
retirement plus monthly pension equal to half of the final monthly
salary level, for two years after the retirement date. After the first
two years, monthly benefits will decrease by 10% every year and
will cease upon the death of the retired employee.
Analysis:
This is a defined benefit plan because the benefits to be received by
the employee are definite amounts and not dependent on
contributions to a retirement fund. The employer bears the risk that
the fund set aside will be deficient of the promised benefits.
ILLUSTRATION
Case 3
Upon retirement, the employees of Entity A are
entitled to a lump sum payment of equal to half of the
final monthly salary level multiplied by the number
of years of service. The minimum service period is 10
years.
Lump-sum amount – for retiree who has not paid the required 120 monthly
contributions.
MONTHLY PENSION
The monthly pension is based on the contributions paid,
credited years of service and the number of dependent minor
children . The amount of monthly pension is the highest of the
following:
1. The sum of P300 plus 20% of the average monthly summary
credit plus 2% of the average monthly salary credit for each
credited year of service in excess of ten years; or
2. 40% of the average monthly salary credit; or
3. P1,200 provided that the credited years of service (CYS) is
at least 10 or more but les than 200 or P2,000, if the CYS is20
or more. The monthly pension is paid for not less than 60
months.
MONTHLY PENSION
A retiree has the option to receive in advance, upon date of
eligibility, the first 18 monthly pension in lump sum
discounted at a preferential rate of interest to be determined by
the SSS. The member will receive the monthly pension on the
19th month and month thereafter.
IF the member retires after age of 60, the monthly pension shall
be the higher of the following.
The monthly pension computed at the earliest time the
member could have retired, had been separated from self-
employment or ceased to be self-employed plus all the
adjustments thereto;
The monthly pension computed at the time when the
member actually retires.
LUMP SUM PENSION
The lump sum benefit is
equal to the total
contributions paid by the
member and by the employer
including interest.
ILLUSTRATION
Death of retiree:
Upon the death of the retiree, the primary beneficiaries are entitled to
100% of the monthly pension, and the dependents to the
“dependents” pension. If the retiree dies within 60 months from the
commencement of the monthly; pension and has no primary
beneficiaries, the secondary beneficiaries are entitled to a lump sum
benefit equivalent to the total monthly pensions corresponding to the
5-year guaranteed period excluding the “dependents” pension.
Requirement: Identify whether the retirement benefit plan described above is a defined
contribution plan or definedbenefit plan.
ILLUSTRATION
Analysis:
• The retirement plan is not a state plan –
although it is promulgated by law, it is not
operated by the government
• If is a defined benefit plan – Entity A is liable
to pay retiring employees the minimum
amount computed in accordance with the
provisions of the law.
INSURED BENEFITS
An employer may pay insurance premiums to
fund a post-employment benefit plan. Such
plan is classified as either defined contribution
plan or defined benefit plan.
It is a defined benefit plan if the employer
retains the obligation to either pay directly the
benefits to the employee or make good any
deficiency if the insurer fails to pay in full the
benefits.
DEFINED CONTRIBUTION PLAN
The accounting for defined contribution plans is
straightforward. Since the employer’s obligation is limited to
the amount that it has agreed to contribute, it simply
recognizes the contribution as expense (unless it forms part o
the cost of another asset) and a liability (if unpaid) when
employees have rendered service during a period. If the
amount contributed exceeds the fixed amount of contribution,
the excess is treated as prepaid asset.
The fact that an employee has actually retired and was paid his/he
retirement benefits during the period does not affect the accounting
above. For example, assume that an employee has retired during the
period and was paid 1M for her retirement benefits. The amount of
retirement benefit cost that Entity A recognizes for the period is still
P200,000, I,e.,the agreed amount of contribution.
If the plan is funded, the trustee is the one who will pay the retiring
employee and not the Entity A.
SCENARIOS
Scenario 1: Entity A’s retirement benefits plan is
funded. Entity A contributes P200,000 to the fund held
by a trustee.
ENTRY:
EMPLOYEE BEN EXPENSE 150,000
PREPAID BEN EXPENSE 50,000
CASH 200,000
ILLUSTRATION
DEFINED CONTRIBUTION PLAN
ILLUSTRATION
DEFINED CONTRIBUTION PLAN
ENTRIES (2021)
EMP. BENEFIT EXPENSE
2,000,000
ACCRUED BEN EXP. 2,000,0000
2022
EMP. BENEFIT EXPENSE 2,000,000
ACCRUED BEN EXP. 2,000,0000
PREPAID BENEFIT 700,000
CASH 4,700,000
2023
EMP. BENEFIT EXPENSE 2,000,000
CASH 4,700,000
PREPAID BENEFIT 700,000
ACCRUED BEN EXP 100,000
ENRICHMENT ACTIVITY
1. Adarna Company’s employees earn two weeks of paid
vacation for each year of employment. Unused vacation time
can be accumulated and carried forward to succeeding years
and will be paid at the salary in effect when the vacation as
taken. As of December 31, 2020, when Ibon salary was ₱9,600
per week. Ibon had earned 18 week vacation time and had
used 12 weeks of accumulated vacation time. At December
31, 2020, how much should Adarna carry as liability for
Ibon’s accumulated vacation time?
___________________________________
Answer: P 57,600
ENRICHMENT ACTIVITY
2. Mars, Inc. distributed annual bonuses to its sales
manager and two sales agents. The company reported
₱2,400,000profit for 2020 before bonuses and income
taxes. Income taxes of Mars, Inc. average 30%.How
much is the total amount of bonus if bonus of each is
computed at 15% of profit after taxes and bonuses?
___________________________________
Answer: P 574,904
Employee Benefits (Part 2)
Related standards:
PAS 19 Employee Benefits
PAS 26 Accounting and Reporting by Retirement Benefit
Plans
Learning Competencies
State the accounting procedures for defined benefit
plans.
Compute for the net defined benefit liability (asset).
State the components of the defined benefit cost.
Describe the accounting for other long-term employee
benefits and termination benefits.
Accounting for Defined benefit plan
Accounting for defined benefit plans is
complex because actuarial assumptions are
required to measure the obligation and the
expense and there is a possibility of
actuarial gains and losses.
Fair value of plan assets
FVPA DBO EBE REM- gain
BEG. 9.2 M 10 M
CSC 1.2 M 1.2 M
Interest expense 900,000 900,000
Interest Income 828,000 (828,000)
Loss on Actual Ret (578,000) (578,000)
Contribution 1,050,000
Benefits paid (1.1 M) (1.1 M)
Balance end 9.4 million 11 million 1,272,000 (578,000
1.6 million accrued 1.85 million loss
1. 1,272,000
2. 578,000 loss
3. 1.6 million accrued
ILLUSTRATION NO.3
FVPA PBO EBE REM
BEG. 2.6M 2M
CSC 100,000 100,000
Interest expense 200,000 200,000
Interest Income (260,000)
Actual return 200,000
Loss on actual ret 60,000 (60,000)
Contribution 350,000
Benefits paid (150,000) (150,000)
Effect of asset ceiling 40,000 (160,000)
Net of 40K interest
Actuarial gain (50,000) 50,000
Balance end 3M 2.1 M 140,000 (170,000)
1. 200,000 4. (170,000)
2. 50,000
3. 140,000
PLAN ASSETS
Plan assets comprise:
1.Assets held by a long-term employee benefit fund – are
assets (other than non-transferable financial instruments issued by
the reporting entity) that are legally separate from the employer
and exist solely to pay employee benefits and are not available to
the employer’s own creditors even in case of bankruptcy.
a. If the termination benefits are payable within 12 months, the entity shall
account for the termination benefits similarly with short-term employee
benefits.