IA2 10 01 Employee Benefits PDF

Intermediate Accounting 2
1
What to discuss
I. Employee Benefits
1. Categories of Employee Benefits
a. Post-employment benefits
a1. Defined Contribution Plan
a2. Defined Benefit Plan
b. Short-term employment benefits
c. Other long-term employment benefits
d. Termination benefits
2
Employee Benefits
3
Employee Benefits
 All forms of consideration given by an entity in exchange for

services rendered by employees1 or for the termination of
employment.
 Categories of Employee Benefits

b. Short-term employment benefits
c. Other long-term employment benefits
d. Termination benefits
4
 According to PAS 19.8, these are employee benefits (other than

termination benefits and short-term employee benefits) that are payable
after the completion of employment

 Examples:
 Retirement benefits (lump sum payment or pensions)
 Other post-employment benefits (post-employment life insurance or
medical care)
 Post-employment benefit plan2 can be:
 Contributory vs. Non-contributory
 Funded vs. Unfunded
5
Contributory Non-contributory
• Both employee and • Only the employer
employer contribute to contributes to the
the retirement benefits retirement benefits fund
fund of the employee, of the employee, and
and they share in the thus shoulders all the
retirement benefit cost retirement benefit cost
• They do not necessarily

contribute equal
amounts
6
Funded Unfunded
• The retirement fund is isolated from • The employer manages any
the employer’s control and is established fund and pays directly the
transferred to a funding agency3 (e.g., retiring employees
investment company, et.al) who
undertakes to manage the fund and • The entity retains the obligation for
pay directly the retiring employees the payment of retirement benefits
without the establishment of a
• Funding = the transfer of assets to an separate fund
entity, called the retirement fund, via
a funding agency (trustee, bank or
insurance company) which is
separate from the reporting entity
7
Defined Contribution Plan (DCP) Defined Benefit Plan (DBP)
• The employer commits to make fixed • The employer commits to pay a
contributions to a fund (a separate specific, or agreed, or definite
entity: trustee). The amount of benefits amount of retirement benefits.
that an employee will receive is
dependent on the fund balance • The entity must make contributions
such that the contributions plus
• The entity will have no legal or earnings would be sufficiently large
constructive obligation to pay further to cover future retirement benefits4
contributions if the fund does not
hold sufficient assets to pay all • The benefit is definite but the
employee benefits relating to contribution is indefinite
employee service in the current and
prior periods4
• The contribution is definite but the

benefit is indefinite
8
Defined Contribution Plan (DCP) Defined Benefit Plan (DBP)
• Accounting for DCP is • Accounting for DBP is complex – it
straightforward – the employer requires actuarial valuations using
recognizes the agreed fixed the projected unit credit method (or
contribution as retirement benefit accrued benefit method)
cost after the end of each period that Steps in accounting for DBP:
the employees have rendered service 1. Determine the deficit or surplus
• Steps in accounting for DCP:  If FVPA < PV of DBO=deficit/
1 . The contribution shall be recognized underfunded (accrued benefit cost-
as expense in the period it is payable NonCurrent Liability)
2. Any unpaid contribution at the end of  If FVPA > PV of DBO=surplus or
the period shall be recognized as overfunded (prepaid benefit cost-
accrued expense NonCurrent Asset)
3. Any excess contribution shall be 2. Determine the net defined benefit liability
recognized as prepaid expense but or asset
only to the extent that the prepayment  net defined benefit liability=deficit
will lead to a reduction in future  net defined benefit asset=lower of
payments or a cash refund surplus and ‘asset ceiling’
3. Determine the components of the defined
benefit cost to be recognized in P/L or OCI
Prob17-1 to 4, pages 592-593 Prob17-5 to 17-11, pages 593-597 9
Terms used in Step 1
1. PV of DBO = present value of defined benefit obligation; represents entity’s
obligation for the accumulated retirement benefits earned by employees to
date. This is determined by using an actuarial valuation method called the
projected unit credit method (or accrued benefit method)
The projected unit credit method shall be used in determining the PV of DBO, and the related current service cost
and where applicable, past service cost
 DBO=defined benefit obligation, also called the projected benefit obligation

(PBO), is the PV of expected future payments required to settle the obligation
arising from employee service in the current and prior periods
 DBO or PBO is analogous to an off-statement of financial position liability with
a credit balance
10
Steps in computing DBO or PBO:
1. Get the final or future salary of the employee: Current salary x future
value factor
2. Multiply by the percentage of benefit and number of years worked/serviced
by the employee
3. Get the PV of the result in #2 (based on number of years the employee will
receive the benefits)
4. Get the PV of the benefit obligation based on the result on #3 (based on
number of years pertaining to the remaining service period of the employee
before his/her retirement age
11
2. FVPA = fair value of plan assets; represents the balance of any fund (or
source of funds) set aside for the payment of the retirement benefits
 FVPA is analogous to an off-statement of financial position asset with a debit
balance
 PV of DBO and FVPA are kept only in the memorandum records of

the subentity. Subentity maintains information that does
not appear in the financial statements of the primary
entity.
Subentity= the benefit plan

Primary entity = employer entity
 The prepaid/accrued benefit cost is the item that appears on

the financial statement of the employer entity
12
• Illustrations on underfunding, overfunding, and prepaid/accrued benefit cost
– see page 606
13
1. Net defined benefit liability or asset = amount that is presented in the
statement of financial position
2. Asset ceiling = the present value of any economic benefits available in the
form of refunds from the plan or reductions in future contributions to the plan
1. Defined benefit cost = see formula on the next slide
14
Defined benefit cost is determined using the formula here:
Service cost: (recognized in P/L)
(a) Current service cost xx
(b) Past service cost xx
(c ) any gain or loss on settlement xx xx
Net interest on the net defined benefit liability or asset
(recognized in P/L)
(a) Interest cost or expense on the defined benefit obligation xx
(b) Interest income on plan assets xx
(c ) interest (expense) on the effect of the asset ceiling xx xx
Remeasurements of the net defined benefit liability or asset
(recognized in OCI)
(a) Actuarial (gains) and losses/ remeasurement of projected benefit xx
obligation
(b) Difference between interest income on plan assets and return on xx
plan assets/ remeasurement of plan assets
(c) Difference between the interest on the effect of the asset ceiling and xx xx
change in the effect of the asset ceiling/ remeasurement of the effect
of asset ceiling
Total Defined Benefit Cost xx
15
More on DBP:
See comprehensive illustration on page 607 to 610
Prob 18-1 Shakira company, page 626
Prob 18-2 Shiela company, page 627
16
END
17

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Intermediate Accounting 2

 All forms of consideration given by an entity in exchange for

 Categories of Employee Benefits

 According to PAS 19.8, these are employee benefits (other than

after the completion of employment

• They do not necessarily

• The contribution is definite but the

 DBO=defined benefit obligation, also called the projected benefit obligation

 PV of DBO and FVPA are kept only in the memorandum records of

Subentity= the benefit plan

 The prepaid/accrued benefit cost is the item that appears on

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