Chapter 5 Employee Benefit Part 1

Chapter 5 Employee Benefits (Part I)
Related standards:
PAS 19 Employee Benefits
PAS 26 Accounting and Reporting by Retirement Benefit Plans

Employee benefits
Employee benefits are "all forms of consideration given by an entity in
exchange for service rendered by employees or for the 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 form 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 employee benefits under PAS 19

a. Short-term employee benefits
b. Post-employment benefits
c. Other long-term employee benefits
d. Termination benefits

a. 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:
a. Salaries, wages, and SSS, PhilHealth and Pag-IBIG contributions
b. Paid vacation leaves and sick leaves
c. Profit-sharing and bonuses
d. 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.

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:
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 is paid in cash when the employee leaves the
entity (i.e., monetized).
ii. Non-vesting — unused entitlement is not monetized.
b. Non-accumulating — those that expire if not used in the current period and are
not paid in cash when the employee leaves the entity.
Compensated absences are recognized as follows:
a. Accumulating and vesting — all unused entitlements are accrued and
measured at their expected settlement amount.
b. Accumulating and non-vesting — unused entitlements are accrued but taking
into account the possibility that the employees may leave before they use those
entitlements.
c. Non-accumulating — unused entitlements are not accrued but recognized only
when the absences occur.
Profit-sharing and bonus plans
Profit-sharing and bonuses are additional incentives given employees for a variety of
reasons — the most obvious is motivate the employees to be more productive. Profit
sharing and bonuses are recognized when
(a) the entity has a present obligation to pay for them and
(b) the cost can be measured reliably.
Examples of bonus schemes:
1. Bonus before bonus and before tax
2. Bonus after bonus and before tax
3. Bonus before bonus and after tax
4. Bonus after bonus and after tax

1. Bonus before bonus and before tax — the bonus is computed as a percentage
of the profit before deducting the bonus and the income tax expense. The
formula is:
B= P x Br
Where: B = bonus
P profit before deducting the bonus and the income tax expense
Br bonus rate or bonus percentage
2. Bonus after bonus and before tax — the bonus is computed as a
percentage of the profit after deducting the bonus but be deducting income tax expense.
The formula is:
B= P - P/1+Br
3. Bonus before bonus and after tax — the bonus is computed as percentage of
the profit before deducting the bonus but a deducting income tax expense. The
formula is:
B= P x 1-Tr/ 1/Br-Tr
Where: Tr=tax rate
4. Bonus after bonus and after tax — bonus is computed as percentage of the
profit after deducting the bonus and the income tax expense. The formula is:
B= P x 1- Tr/ 1/Br-Tr + 1
b. Post-employment benefits
Post-employment benefits are "employee benefits (Other than termination benefits
and short-term employee benefits) that are payable after the completion of
employment." (PAS 19.8)
Examples:
a. Retirement benefits (e.g., lump sum payment and pensions)
b. 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).
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

a. Contributory
• Both the employer and employee contribute to the retirement fund of the employee.
a. Non-contributory
• Only the employer contributes to the retirement fund of the employee.
b. Funded
• The retirement fund is isolated from the employer's control and is transferred to a
trustee (e.g., investment com an who undertakes to manage the fund and pay directly
the retiring employees)
c. Unfunded
• The employer manages any established fund and pays directly the retiring employees.
Post-employment benefit plans are either:
a. Defined contribution plans; or
b. Defined benefit plans
a. Defined contribution 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 rests
with the employee.
b. Defined benefit plans
Under a defined benefit plan, the employer 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 rests with the employer.

Defined contribution plan
• The employer commits to make fixed contributions to a fund. The amount of benefits
that an employee will receive is dependent on the fund balance.
• The risk that the fund may be insufficient to meet the expected benefits rests with the
employee.
Defined benefit plan
• The employer commits to pay a definite amount of retirement benefits. Such amount is
independent of any fund balance.
• The risk that the fund may be insufficient to pay for the promised benefits rests with
the employer.
Hybrid plans
Hybrid plans are retirement benefits plans that have characteristics of both a
defined contribution plan and a defined benefit plan. For accounting purposes, hybrid
plans are considered as defined benefit plans.
Multi-employer plans
Under a multiemployer plan, various unrelated employers contribute to a
common fund that is managed by a trustee to provide post-employment benefits to the
employees of the participating employers. Contribution and benefit levels are
determined without regard to the identities of the employers. A multiemployer plan is
classified as either a defined contribution plan or a defined benefit plan.
State plans
A state plan is one that is established by law and operated by the
government. It is mandatory for all entities within its scope and is not subject to control
or influence by the entity.
Examples include:
 Government Service Insurance System (GSIS), which covers government
employees; and
 Social Security System (SSS), which covers those in the private sector.
A state plan is accounted for similar to a multiemployer plan, i.e., classified as
either a defined contribution plan or a defined benefit plan.

Types of retirement benefits:
• Lifetime monthly pension — for a retiree who has paid at least 120 monthly
contributions prior to retirement, and
• Lump sum amount — for a 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 not to exceed five. The amount of monthly
pension is the highest of the following:
1. The sum of P300 plus 20% of the average monthly salary 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. P 1,200, provided that the credited years of service (CYS) is at least 10 or more but
less than 20 or P2,000, if the CYS is 20 or more. The monthly pension is paid for not
less than 60 months.
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 every month thereafter.

If the member retires after age of 60, the monthly pension shall be the higher of the
following:
1. 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
adjustment thereto; or
2. The monthly pension computed at the time when the member actually retires.
Lump sum:
The lump sum benefit is equal to the total contributions paid by the member and
by the employer including interest.
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 defined benefit plan.
Analysis:
-The retirement plan is a state plan — it is established by law and operated by the
government.
-It is a defined contribution plan — Entity A is liable to the employees only for its
share in the monthly SSS contributions.
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.

Accounting for 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 of 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 a prepaid asset.
The amount of contribution is measured at an undiscounted amount if it is due
within 12 months; if due beyond 12 months, it is discounted. Actuarial valuations are
not necessary; therefore, there are no actuarial gains or losses.
Chapter 5: Summary
-Employee benefits are all forms of consideration given to employees in exchange for
the services they have rendered. Employee benefits are classified under PAS 19 as: (a)
Short-term, (b) Post-employment, (c) Other long-term, and (d) Termination.
-Accumulating paid absences are those that can be carried over to the next period if
not used in the current year. Non- accumulating paid absences expire if not used.
-Vesting paid absences are those that are monetized if not used. Non-vesting paid
absences are not monetized.
-Accumulating & vesting are accrued in full. Accumulating & non- vesting are
accrued but subject to estimate. Non-accumulating is not accrued, but recognized only
when the absences occur.
-Post-employment benefits are employee benefits (other than
termination benefits) that are payable after the completion of employment. Post-
employment benefit plans are either (a) Defined contribution plan or (b) Defined benefit
plan.
-Defined contribution plan — the employee's retirement benefit is dependent on the
employer's contributions to the plan and on the plan's investment performance. The
employee retains the risk that the benefits to be received may be insufficient.
-Defined benefit plan — the employer assures the employee a definite amount of
retirement benefit. The employer retains the risk that funds needed to pay the agreed
benefits may be insufficient.
-Under a contributory plan, both the employer and employee contribute to a retirement
fund. Under a non-contributory plan, only the employer contributes to a retirement fund.
-Under a funded plan, plan assets are transferred to a trustee who assumes the
obligation of managing the fund and disbursing funds to retiring employees. Under an
unfunded plan, plan assets, if any, are retained and managed by the employer.
- A post-employment benefit plan that contains characteristics of both defined
contribution and defined benefit is considered defined benefit.
-The accounting for defined contribution plan is straightforward — actuarial
computations are not required. Retirement benefit expense is equal to the agreed
periodic contributions to the fund.

Chapter 5 Employee Benefit Part 1

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Chapter 5 Employee Benefit Part 1

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Chapter 5 Employee Benefits (Part I)

Four categories of employee benefits under PAS 19

Post-employment benefits are provided to employees through post-employment

Accounting for defined contribution plan

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