Module 7 - Ia2 Final CBL

PCOA 008 – INTERMEDIATE ACCOUNTING II
MODULE 7: Postemployment Benefits

Introduction
• This module is all about postemployment benefits.
• The module is organized as follows:
o Employee benefits
o Defined contribution plan
o Accounting procedures
o Defined benefit plan
o Components of defined benefit cost
o Projected benefit obligation
o Assessment
• This module tackles the accounting for defined contribution plan and defined benefit costs
• This topic requires knowledge of Time value of money, critical thinking and analysis.
• Assessment is the theoretical and application of accounting standards for postemployment
benefits
Learning Outcomes:
At the end of this module, the students can:
• Distinguish defined contribution plan and defined benefit plan.
• Learn the recognition of defined contribution plan.
• Identify the components of defined benefit cost.
• Apply the projected unit credit method in computing projected benefit obligation.
• Learn the recognition of actuarial gains and losses.
Employee Benefits
Employee benefits are all forms of consideration given by an entity in exchange for services
rendered by employees or for termination of employment.
For the purpose of this standard, employees include directors and other management personnel.
The employee benefits include:
a. Postemployment benefits
b. Short-term employee benefits
c. Other long-term employee benefits
d. Termination benefits
Postemployment benefits
THIS MODULE IS FOR THE EXCLUSIVE USE OF THE UNIVERSITY OF LA SALETTE, INC. ANY FORM OF REPRODUCTION, DISTRIBUTION,
UPLOADING, OR POSTING ONLINE IN ANY FORM OR BY ANY MEANS WITHOUT THE WRITTEN PERMISSION OF THE UNIVERSITY IS
STRICTLY PROHIBITED.
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Postemployment benefits are employee benefits, other that termination benefits and short-term
employee benefits, which are payable after completion of employment. Postemployment benefits
include:
a. Retirement benefits, such as pensions and lump sum payments on retirement
b. Postemployment life insurance
c. Postemployment medical care
Most employment benefit plans are formal arrangements between an employer entity and the
employee. These plans are usually established as part of the remuneration package for its
employees.
Some postemployment benefits plans are informal as evidenced only by the entity’s practice to
pay postemployment benefits. The plans may also be established by law whereby entities are
required to contribute to national benefit plans.
Postemployment benefit plans are classified as either defined contribution plans or defined benefit
plans. Such plans may be contributory or noncontributory, and funded or unfunded.
Contributory Plan
Under a contributory plan, the employer and employee make contributions to the retirement benefit
plan but they do not necessarily contribute equal amounts. Both employer and the employee share
in the retirement benefit cost.
Noncontributory Plan
Under a noncontributory plan, only the employer makes contribution to the retirement benefit plan.
The employer shoulders all the retirement benefit cost.
Funded Plan
Funding is the transfer of assets to an entity, called the retirement fund, which is separate from the
reporting entity for the purpose of meeting obligations arising from a retirement benefit plan.
Under a funded plan, the entity sets aside funds for the future retirement benefits by making
payments to a funding agency, such as a trustee, bank or insurance company.
The funding agency is then responsible for the accumulation of funds and for making payments to
retired employees when the benefits become due.
Unfunded Plan
Under an unfunded plan, the entity retains the obligation for the payment of retirement benefits
without the establishment of a separate fund.
Defined Contribution Plan
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A defined contribution plan is a postemployment benefit plan under which an entity pays fixed
contributions into a separate entity known as the fund. The entity will have no legal or constructive
obligation to pay further contributions if the fund does not hold sufficient assets to pay all
employee benefits relating to employee service in the current and prior periods. Simply stated, 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 contribution may be a fixed amount, a percentage of employer’s income, a percentage of
employee’s earnings or a combination of these factors. Actually, in this case, the entity makes the
contribution to a trustee which administers, manages and invests the funds. Consequently, when
an employee retires, the accumulated fund in the hands of the trustee determines his retirement
benefit.
The employee’s retirement benefit therefore depends on how the plan has been managed by the
trustee. If the plan provides exceptional investment performance, the employee will share in the
gain in the form of larger retirement benefit. If the plan does poorly, the employee will share in
the lost by receiving smaller retirement benefit.
In effect, the employee bears the investment risk in a defined contribution plan. Once the defined
contribution is paid, the employer has no more obligations under the plan.
Defined Benefit Plan
A defined benefit plan is simply defined as a postemployment plan other than a defined
contribution plan. Under a defined benefit plan, an entity obligation is to provide the agree benefits
to employees. In other words, an employee is guaranteed specific or definite amount of benefit
which is usually related to his salary and years of service.
The benefit is definite but the contribution is indefinite.
Actually, in this case, the entity must make contributions such as that the contributions plus
earnings would be sufficiently large to cover future retirement benefits. Thus, the entity assumes
the investment risk in a defined benefit plan. If the plan is exceptionally good, the entity may take
a “contribution holiday”, meaning stop paying the contribution for a while. However, if the plan
is poor, the entity must make additional contributions for any expected shortfall in order to satisfy
the promised future benefits.
Multiemployer Plan
This is a defined contribution plan or defined benefit plan that pools the assets contributed by
various entities that are not under common control and uses those assets to provide benefits to
employees of more than one entity.
Postemployment Benefit Plans under the Law
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a. Social Security System – this postemployment benefit plan is a defined contribution plan
because the entity’s obligation is limited to specified contributions to the plan as a
percentage of salary.
b. R. A. 7641 – this postemployment benefit plan is a defined benefit plan because the entity’s
obligation is to provide specific level of benefit for every year of service.
Insured Benefits
An entity may pay insurance premiums to fund a postemployment benefit plan. Such
postemployment benefit plan shall be treated as defined contribution plan. However, such a plan
shall be accounted for as a defined benefit plan, if the entity has a legal or constructive obligation:
a. To pay the employee benefits directly when they fall due.
b. To pay further amounts if the insurer does not pay all future employee benefits relating to
employee service in the current and future periods.
When an insurance policy is in the name of a specified plan participant or a group of participants
and the entity does not have any legal or constructive obligation to cover any loss on the policy,
the entity has no obligation to pay benefits and the insurer has sole responsibility for paying the
benefit. The payment of fixed premiums under the insurance contract is in substance the settlement
of the employee benefit obligation, rather than an investment to meet the obligation. Consequently,
the entity no longer has an asset or a liability. Therefore, the entity shall treat insurance payments
as contribution to a defined contribution plan.
Accounting for Defined Contribution Plan
Accounting for a defined contribution plan is straightforward because the obligation of the entity
is determined by the amount contributed for each period. There are no actuarial assumptions to
measure the contribution and there is no possibility of any actuarial gain or loss.
Moreover, 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 reporting period.
Accounting procedures
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 but only to the extent that
the prepayment will lead to a reduction in future payments or a cash refund.
Disclosures – defined contribution plan
a. The amount recognized as expense for the defined contribution plan.
b. The contribution to defined contribution plan for key management personnel as required
by PAS 24 on related party disclosures.
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Illustration 1
An employee is a member of the faculty of accounting at a certain university. During the current
year, the employee earned 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 of P30,000 for the current year to a trustee.
Assuming yearly contribution, the university shall recognize the contribution as expense as
follows:
Employee Benefit Expense 30,000
Cash 30,000
Having made the defined contribution, the university’s obligation is fulfilled and no further entries
are necessary for the university. Upon retirement, the trustee shall pay large or small benefit to the
employee depending on the investment performance of the trust or pension fund.
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
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, 2020, an entity paid P200,000 contribution to a defined contribution plan. Of
this amount, P150,000 is in part of 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.
Prepaid Benefit Expense 50,000
Cash 200,000
Accounting for Defined Benefit Plan
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Accounting for a defined benefit plan is complex because actuarial assumptions are required to
measure the obligation and the expense and there is a possibility of actuarial gains and losses.
Moreover, the obligation is measured on discounted basis.
Defined benefit plans may be unfunded, fully funded or partly funded by the contributions of the
entity.
Consequently, under a defined benefit plan, the expense recognized is not necessarily the amount
of contribution for the period.
Components of Defined Benefit Cost
PAS 19, paragraph 120, provides that an entity shall recognize the following components of
defined benefit cost:
1. Service cost which comprises:
a. Current service cost
b. Past service cost
c. Any gain or loss on settlement
2. Net interest which comprises:
a. Interest expense on defined benefit obligation
b. Interest income on plan assets
c. Interest expense on effect of asset ceiling
3. Remeasurements which comprise:
a. Remeasurement of plan assets
b. Remeasurement of projected benefit obligation
c. Remeasurement of the effect of the asset ceiling
The service cost and net interest are included in profit or loss as a component of employee benefit
expense. All of the remeasurements are fully recognized through other comprehensive income.
Paragraph 122 provides that remeasurements are subsequently transferred within equity or
reclassified to retained earnings.
Accordingly, the defined benefit cost is partly profit or loss representing service cost and net
interest, and partly other comprehensive income representing the remeasurements.
The measurement of defined benefit cost is usually made by an actuary, the mathematical expert
best qualified to do the job. PAS 19R encourages but does not require an entity to involve a
qualified actuary in the measurement of a defined benefit obligation.
Actuarial Valuation Method
The projected unit credit method, sometimes known as the accrued benefit method, shall be used
in determining the present value of the defined benefit obligation and the related current service
cost and where applicable, past service cost.
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The method sees each period of service as giving rise to an additional unit of benefit entitlement
and measures each nit separately to build up the final obligation.
Illustration
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 P200,000 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 final salary
is P200,000 multiplied by P272,100. Therefore, the benefit each year is 5% of P272,100 or P13,605
or a total of P68,025 for 5 years. Observe the following schedule:
2020 2021 2022 2023 2024

Prior years 0 13,605 27,210 40,815 54,420
Current years 13,605 13,605 13,605 13,605 13,605
13,605 27,210 40,815 54,420 68,025
Note that the future benefit builds up to P68,025 over the 5 years, at the end of which the employee
is expected to leave and the benefit is paid. But the next issue is how much current service cost
shall be recognized each year?
The “current service cost” is equal to the present value of the future benefit using the 10% discount
rate. In this case, the “present value of 1” factor is necessary.
The mathematical table shows the present value of 1 at 10% as follows:
Period Present value of 1
1 0.909
2 0.826
3 0.751
4 0.683
The annual benefit is discounted from the end of 2024, which is the year of retirement. Thus, the
2020 benefit is 4 years away from 2024 and discounted for 4 periods, the 2021 benefit is 3 years
away from 2024, and discounted for 3 periods, and so on.
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Present Value of the Future Benefits
(a) (b) (a x b)
Benefit PV factor Present
value
2020 13,605 0.683 9,292
2021 13,605 0.751 10,217
2022 13,605 0.826 11,238
2023 13,605 0.909 12,367
2024 13,605 1.000 13,605
68,025 56,719
Projected benefit obligation

The projected benefit obligation at the end of each year is determined as follows:
Date Current Interest Present
service cost expense value
Dec. 31, 2020 9,292 – 9,292
Dec. 31, 2021 10,217 930 20,439
Dec. 31, 2022 11,238 2,044 33,721
Dec. 31, 2023 12,367 3,372 49,460
Dec. 31, 2024 13,605 4,960 68,605
Current service cost is the present value of the future benefit each year as determined previously.
Interest expense is 10% of the present value at the beginning of each year. Thus, for 2021, 10%
times P9,292 equals P930, and so on.
For 2024, 10% times 49,460 equals to 4,946 but the interest expense is P4,960 to make the total
add up to P68,025, due to rounding.
Present value is the present value at the beginning of each year plus current service cost and
interest expense. Thus, on December 31, 2021, P9,292 plus P10,217 plus 930 equals P20,439, and
so on.
Accordingly, the total employee benefit expense to be reported each year is as follows:
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Date Current Interest Present
Service cost Expense Value
Dec. 31, 2020 9,292 9,292
Dec. 31, 2021 10,217 930 11,147
Dec. 31, 2022 11,238 2,044 13,282
Dec. 31, 2023 12,367 3,372 15,739
Dec. 31, 2024 13,605 4,960 18,565
56,719 11,306 68,025
Current Service Cost

Current service cost is the increase in the present value of the defined benefit obligation resulting
from employee service in the current period. Otherwise stated, current service cost is the cost to
an entity under a defined benefit plan for service rendered by employees in the current year.
This component of the benefit expense understandably increases expense and defined benefit
obligation.
Net interest
Net interest on defined benefit liability or asset is the change in the defined benefit obligation, plan
assets and effect of asset ceiling as a result of the passage of time. The net interest can be viewed
as comprising three elements, namely:
a. Interest expense on defined benefit liability
This is computed by multiplying the defined benefit obligation at the beginning of the
reporting period by the discount rate.
b. Interest income
This is computed by multiplying the fair value of plan assets at the beginning of the
reporting period by the same discount rate.
c. Interest expense on effect of asset ceiling
This is computed by multiplying the effect of the asset ceiling at the beginning of the
reporting period by the same discount rate.
In other words, the net interest expense or net interest income is the difference between the interest
expense on the defined benefit obligation, interest expense on effect of asset ceiling and interest
income on the plan assets.
Illustration
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At the beginning of the current year, the records showed the following:
Fair value of plan assets 4,000,000

Defined benefit obligation 5,000,000
Discount rate 12%
Expected return on plan assets 10%
The net interest is determined as follows:
Interest expense on defined benefit obligation

(12% x 5,000,000) 600,000
Interest income on plan assets
(12% x 4,000,000) 480,000
Net interest expense 120,000
Note that the expected return of 10% on plan assets is ignored completely.
The discount rate of 12% is used in computing both interest expense and interest income. The net
interest expense of P120,000 is included in the computation of total employee benefit expense.
The interest expense of P600,000 is included in the computation of defined benefit obligation at
year-end in the memorandum record of the trustee. The interest income of P480,000 is included in
the computation of fair value of plan assets at year-end in the memorandum record of the trustee.
Past Service Cost
Past service cost is the change in the present value of defined benefit obligation for employee
service in prior periods resulting from a plan amendment or curtailment.
In other words, past service cost is the cost to an entity under a defined benefit plan for services
rendered by employees in prior period resulting from the introduction of a defined benefit plan or
amendment of an existing plan or curtailment of an existing plan.
Plan amendment includes the introduction of defined benefit plan or changes to an existing defined
benefit plan.
Plant curtailment is a significant reduction by the entity in number of employees covered by the
defined benefit plan. A curtailment may arise from an isolated event, such as the following:
a. Closing of a plant
b. Discontinuance of an operation
c. Termination or suspension of a plan
Recognition of Past Service Cost
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PAS 19, paragraph 103, provides that an entity shall recognize past service cost as an expense at
the earlier of the following dates:
a. When a plan amendment or curtailment occurs.
b. When the entity recognizes related restructuring costs or termination benefits.
This means that all past service costs, whether vested or unvested, shall be recognized as an
expense immediately. An entity can no longer defer recognition of unvested past service cost over
the remaining future vesting period.
Vested benefits are employee benefits that are not conditional on future employment.
Illustration
An entity operates a defined benefit plan that provides for a benefit of 5% of final salary for each
year of service. The benefits become vested after years of service.
On January 1, 2020, the entity improves the benefit of 6% of final salary for each year of service
including prior years.
At the date of the amendment on January 1, 2020, the present value of the additional benefits
increased as follows:
Employees with more than 5 years of service on

January 1, 2020 300,000
Employees with less than 5 years of service on
January 1, 2020 and average period until
vesting is 3 years 150,000
The total past service cost of P450,000 shall be recognized as expense immediately as component
of total benefit expense. The total amount is added to the defined benefit obligation.
Plan Assets
Plan assets comprise assets by a long-term benefit fund and qualifying insurance policies. The
conditions for assets held by a long-term benefit fund are:
a. The assets are held by an entity, the fund itself, that is legally separate from the reporting
entity.
b. The assets are available to pay only employee benefits.
c. The assets are not available to the reporting entity’s own creditors even in bankruptcy.
d. The assets cannot be returned to the reporting entity or can be returned to the reporting
entity if the remaining assets of the fund are sufficient to meet all employee benefit
obligations or the assets are returned to the reporting entity to reimburse it for employee
benefits already paid.
Qualifying Insurance Policy
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A qualifying insurance policy is an insurance policy issued by an insurer that is not a related party
of the reporting entity. The proceeds of the policy can be used only to pay employee benefits and
are not available to the reporting entity’s own creditors even in bankruptcy.
The proceeds of the policy cannot be paid to the reporting entity, except:
a. When the proceeds represent surplus assets not needed for the policy to pay employee
benefits.
b. When the proceeds are returned to the reporting entity to reimburse it for employee benefits
already paid.
When an insurance policy held by entity is not a qualifying insurance policy, that insurance policy
is not a plan asset.
Measurement of Plan Assets
Plan assets are measured at fair value. Fair value of an asset is the price that would be received to
sell an asset in an orderly transaction between market participants.
Plan assets exclude unpaid contributions due from the reporting entity to the fund, as well as any
nontransferable financial instruments issued by the entity and held by the fund.
Plan assets are reduced by any liabilities of the fund that do not relate to employee benefits, for
example, trade and other payables and liabilities resulting from derivative financial instruments.
Return on Plan Assets
The components of Return on Plan assets include the following:
a. Interest, dividend and other income derived from the plan assets.
b. Realized and unrealized gains and losses on the plan assets.
However, the following shall be deducted in computing the return on plan assets:
a. Any costs of managing the plan assets or costs of managing investments.
b. Any tax payable by the plan itself or any tax on investment income.
Remeasurement of Plan Assets
The return on plan assets is fully recognized as a remeasurement and accounted for as component
of other comprehensive income.
The amount of remeasurement is equal to the actual return on plan assets minus the interest income
on the fair value of the plan assets at the beginning of the reporting period.
a. If the actual return on plan assets is higher than the interest income on fair value of plan
assets, the difference is a remeasurement gain.
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b. If the actual return or plan assets is lower than the interest income on fair value of plan
assets, the difference is a remeasurement loss.
Such remeasurement is included in other comprehensive income without any subsequent recycling
or reclassification to profit or loss. The remeasurement is reclassified subsequently through equity
or retained earnings.
Illustration
An entity provided the following data for the current year related to a defied benefit plan:
Fair value of plan assets – beginning 5,000,000

Actual return on plan assets during the year 900,000
Contribution to the fund 1,000,000
Benefits paid 200,000
Discount rate 6%
Actual return on plan assets 900,000

Interest income on plan assets (6% x 5,000,000) 300,000
Remeasurement gain on plan assets 600,000
The interest income of P300,000 will be included in the computation of employee benefit expense
as a deduction. The remeasurement gain of P600,000 is fully recognized as component of other
comprehensive income.
Computation of Fair Value of Plan Assets
Fair value of plan assets - beginning 5,000,000
Interest income 300,000
Remeasurement gain on plan assets 600,000
Fair value of plan assets - ending 6,700,000
Another Approach:
Fair value of plan assets - beginning 5,000,000
Actual return on plan assets during the year 900,000
Fair value of plan assets - ending 6,700,000
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Components of Fair Value of Plan Assets
a. Contribution to the fund
b. Interest income on plan assets
c. Remeasurement gain or loss on plan assets
d. Benefits paid upon retirement
e. Settlement price of plan settlement before retirement
Projected Benefit Obligation
Projected benefit obligation is 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 increases. If the benefit obligation is based on current salary level, it is known
as accumulated benefit obligation.
The defined benefit obligation contemplated under PAS 19 is the projected benefit obligation.
Illustration
An entity has established a defined benefit plan. The characteristics of the plan on January 1, 2020
are:
a. The defined annual benefit formula is 5% of the highest salary times the number of years
of service. The annual benefit is paid at the end of each year after retirement.
b. The age of retirement is 65.
c. The discount rate is 10%
d. The life expectancy of the employee is 8 years beyond retirement.
This means that an employee shall receive annual benefit for 8 years after retirement or
until death.
Note that the benefit is not received lump sum but rather in the form of an annual pension
from retirement.
On January 1, 2020, an employee is 40 years of age and has worked for the entity for 5 years. The
current salary is P500,000 annually.
Since the retirement age is 65, it means that the employee has a remaining of 25 years. Assume
that the current salary of the employee of P500,000 will increase by 5% every year until retirement.
Mathematical question
How much will be the salary by the year 2044, the last year of employment, after 25 years from
January 1, 2020.
The salary for 2044 is simply computed by multiplying P500,000 by the future value of 1 at 5%
for 25 years or 3.3864 or an amount of P1,693,200.
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Following the defined benefit formula, the annual benefit is determined as:
a. For one (1) year of service (5% x P1,693,200 x 1) 84,660
b. For five (5) years of service (5% x P1,693,200 x 5) 423,300
c. For thirty (30) years of service (5% x P1,693,200 x 30) 2,539,800
Thus, if the employee retires at the age of 65 with 30 years of service period, the employee is
entitled to annual benefit of P2,539,800 for 8 years from retirement. However, the employee has
worked only for 5 years and has earned only the annual benefit of P423,300.
Another mathematical question
How much benefit obligation shall be recognized at this point in time of January 1, 2020?
The answer is that the benefit obligation is equal to the present value of the annual benefit of
423,300 already earned by employee in 5 years.
Computation of Present Value
The present value of the benefit obligation of January 1, 2020 is determined as:
Annual benefit (5 years of service) 423,300
Multiply by PV of ordinary annuity of 1 at 10% for 8 years 5.335
Present value – January 1, 2045 2,258,305
Multiply by PV of 1 at 10% for 25 years 0.0923
Present value of benefit obligation – January 1, 2020 208,442
The annual benefit of 423,300 is multiplied by the PV of annuity factor of 5.335 because the
annual payment is to be made only over 8 years from retirement.
The present value on January 1, 2045 of P2,258,000 is multiplied by the PV of 1 factor of 0.0923
because the annual benefit is to be paid only 25 years from now, January 1, 2020.
On January 1, 2020, the present value of the benefits earned by the employee for services rendered
during the past 5 years or P208,442 based on future salary is known as projected benefit obligation.
Let us continue the “build up” of the projected benefit obligation for another 5 years.
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Present value of 1 at 10%
Period Present value of 1
20 0.1486
21 0.1351
22 0.1228
23 0.1117
24 0.1015
The current service cost or the present value of the future benefits for the next 5 years is determined
as follows:
(a) (b) (c) (a x b x c)
Benefit PV of annuity PV of 1 Current
Service cost
2020 84,660 5.335 0.1015 45,884
2021 84,660 5.335 0.1117 50,451
2022 84,660 5.335 0.1228 55,464
2023 84,660 5.335 0.1351 61,019
2024 84,660 5.335 0.1486 67,117
The benefit is multiplied by the PV of an ordinary annuity of 1 at 10% for 8 periods or 5.335
because the annual benefit is to be paid only over 8 years from retirement.
The benefit is multiplied by the PV of 1 at 10% because the benefit is discounted from the end of
2044, which is the year of retirement. Thus, the 2020 benefit is 24 years away from 2044 and
discounted for 24 periods, the 2021 benefit is 23 years away from 2044 and discounted for 23
periods, and so on.
The “build up” of the projected benefit obligation for the succeeding 5 years may appear as:
Date Current Interest PBO
service cost expense
Jan. 1, 2020 208,442
Dec. 31, 2020 45,884 20,844 275,130
Dec. 31, 2021 50,451 27,513 353,094
Dec. 31, 2022 55,464 35,309 443,867
Dec. 31, 2023 61,019 44,387 549,273
Dec. 31, 2024 67,117 54,927 671,317
The interest expense is 10% of the beginning balance. Thus, for 2020, 10% times P20,844, and so
on.
The PBO is equal to the beginning balance plus current service cost and interest expense. Thus, on
December 31, 2020, P208,442 plus P45,844 plus P20,844 equals P275,130 and so on.
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Actuarial Gains and Losses
Actuarial gains and losses are changes in the present value of the projected benefit obligation
resulting from experience adjustments and the effects of changes in actuarial assumptions.
Experience adjustments are adjustments from differences between the previous actuarial
assumptions and what has actually occurred.
Experience adjustments arise because actual events inevitably differ from actuarial assumptions.
Actuarial assumptions
Actuarial assumptions are entity’s best estimate of the variables that will determine the ultimate
cost of providing postemployment benefits.
Actuarial assumptions shall be unbiased and mutually compatible. Actuarial assumptions are
unbiased if they are neither imprudent nor excessively conservative. Actuarial assumptions are
mutually compatible if they reflect the economic relationships between factors such as inflation,
rate of salary increase, the return on plan assets and discount rates.
Actuarial assumptions comprise of demographic assumption and financial assumption.
Demographic and Financial Assumptions
Demographic assumptions deal with mortality rate of employee turnover, disability, early
retirement, proportion of plan members eligible for benefits, and claim rate under medical plans.
Financial assumptions deal with discount rate, future salary and benefit levels, future medical costs
and taxes payable by the plan.
The discount rate shall be determined by reference to market yields at the end of reporting period
on high quality bonds. If there are no such bonds, the market yields on government bonds shall be
used as discount rate.
Projected benefit obligations shall be measured on a basis that reflects estimated future salary
increases.
Causes of Actuarial Gains and Losses
Actuarial gains and losses result from increases or decreases in the present value of the projected
benefit obligation because of changes in actuarial assumptions and experience adjustments.
The usual causes of actuarial gains and losses include the following:
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.
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Actuarial gains and losses do not include changes in the present value of the projected benefit
obligation arising from the introduction, amendment, curtailment or settlement of the benefit plan.
Such changes result in past service cost or gain and loss on plan settlement.
Remeasurement of Projected Benefit Obligations
a. If the actual benefit obligation is higher than the estimated amount, there is an actuarial
loss.
This means that the projected benefit obligation has increased and the increase is
recognized as an actuarial loss.
b. If the actual benefit obligation is lower than the estimated amount, there is an actuarial
gain.
This means that the projected benefit obligation has decreased and the decrease is
recognized as an actuarial gain.
Illustration 1
Projected benefit obligation – actual 6,000,000

Projected benefit obligation – estimated 5,000,000
Actuarial loss 1,000,000
If the actual obligation is higher than the estimated amount, the difference is actuarial loss
because there is an increase in the projected benefit obligation
Illustration 2
Projected benefit obligation – actual 8,000,000

Projected benefit obligation – estimated 9,500,000
Actuarial gain 1,500,000
If the actual obligation is lower than the estimated amount, the difference is an actuarial gain
because there is a decrease in the projected benefit obligation.
The actuarial gain and loss arising from remeasurement of projected benefit obligation are
recognized in other comprehensive income. The actuarial gain and loss are not subsequently
reclassified to profit or loss but transferred to retained earnings.
18
Assessment
Multiple Choice: (1 pt. each)
1. Which statement characterizes defined contribution plan?
a. Define contribution plans are more complex that defined benefit plans.
b. The employer’s obligation is satisfied by making the appropriate amount of
periodic contribution.
c. The investment risk is borne by the employer.
d. Contributions are made in equal amounts by employers and employees.
2. Which is not a characteristic of defined contribution plan?
a. The employer contribution each period is based on a formula.
b. The benefits to be received are usually determined by an employee’s highest salary.
c. The accounting for a defined contribution plan is straightforward and
uncomplicated.
d. The benefit of gain or the risk of loss from the assets contributed to the plan is borne
by the employee.
3. A formula in a defined contribution plan
a. Defines the benefits that the employee will receive at the time of retirement.
b. Ensures that the defined benefit cost and funding are the same.
c. Requires an employer to contribute a certain sum each period based on the formula.
d. Ensures that enough fund would be available.
4. Which statement is true concerning the recognition and measurement of a defined
contribution plan?
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
liability.
c. Any excess contribution shall be recognized as prepaid expense but only to the
extent that the prepayment will expense but only to the extent that the prepayment
will lead to a reduction in future payments or a cash refund.
d. All of these statements are true about a defined contribution plan
5. Which statement characterizes defined benefit plan?
a. Defined benefit plans are comparatively simple.
b. Retirement benefits are based on the plan’s benefit formula.
c. Retirement benefits depend on how well pension fund assets have been managed.
d. The investment risk is borne by the employee.
6. Which statement is incorrect concerning the recognition and remeasurement of a defined
benefit plan?
a. Actuarial assumptions are required to measure the obligation and expense and there
is a possibility of actuarial gains and losses.
b. The obligation is measured on a discounted basis.
c. The defined benefit plan must be fully funded.
19
d. The expense recognized for a defined benefit plan is not necessarily the amount of
contribution due for the period.
7. In a benefit plan, the process of funding refers to
a. Determining the defined benefit obligation.
b. Determining the accumulated benefit obligation
c. Making the periodic contributions to a funding agency to ensure that funds are
available to meet claims.
d. Determining the among reported for pension expense.
8. In accounting for defined benefit plan
a. An appropriate funding must be established to ensure that enough fund would be
available at retirement.
b. The employer responsibility is simply to make a contribution each year.
c. The expense recognized each period is equal to the cash contribution to the plan.
d. The liability is determined based upon variables that reflect current salary levels.
9. The formula in a defined benefit plan
a. Requires that benefit of gain or the risk of loss from the assets contributed to the
plan should be borne by the employee.
b. Defines the benefits that the employee will receive at the time of retirement.
c. Requires that the defined benefit cost and funding must be the same.
d. Defines the contribution to be made by the employer and no promise is made
concerning the ultimate benefits to be paid out to the employee.
10. In rare circumstances, when a retirement benefit plan has attributes of both defined
contribution and defined benefit plan, the plan is deemed
a. Defined benefit plan
b. Defined contribution plan
c. Neither defined benefit or defined contribution plan.
d. Both defined benefit and defined contribution plan
Problem Solving: (3 pts. each requirement)
1. Jessa Company has established a defined benefit pension plan for an employee. Annual
payments under the pension plan are equal to the employee’s highest lifetime salary
multiplied by 3% multiplied by number of years with the entity
On December 31, 2020, the employee had worked for Jessa Company for 15 years. the
current salary is P500,000.
The employee is expected to retire in 5 years and the salary increases are to average 4%
per year during that period.
The employee is expected to live for 6 years after retiring and will receive the first annual
pension payment on year after retirement. The discount rate is 12%
20
Future value of 1 at 4% for 5 periods 1.217
PV of an ordinary annuity of 1 at 12% for 6 periods 4.111
PV of 1 at 12% for 5 periods 0.567
What is the projected benefit obligation on December 31, 2020?

2. A director of Sunshine Company shall receive a retirement benefit of 20% of final salary
per annum for a contractual period of three years.
The anticipate salary is P1,000,000 for 2020, P1,200,000 for 2021 and 1,500,000 for 2022.
The discount rate is 10%. The present value of 1 at 10% is 0.909 for one period and 0.826
for two periods.
Under the projected unit credit method, what is the estimated liability on December 31,
2021?
3. Heneroso Company has established a defined benefit plan indicating a plan formula for
annual benefit equal to 2% multiplied by the number of years in service multiplied by the
final year’s salary. The annual benefit is payable at the end of each year.
An employee was hired by the entity on January 1, 2000 and expected to retire on
December, 2044. The employee’s retirement is expected to span 21 years.
The employee’s final salary at retirement is expected to be P800,000 and the appropriate
discount rate is 8%.
On January 1, 2020. The plan formula was amended by increasing the percentage from 2%
to 3% the amendment was made retroactive to consider past service years.
The present value of an ordinary annuity of 1 at 8% for 21 periods is 10.02 and the present
value of 1 at 8% for 25 periods is 0.15.
Required:
a. What is the projected benefit obligation before amendment on January 1, 2020?
b. What is the projected benefit obligation after amendment on January 1, 2020?
c. What is the past service cost for 2020 as a result of the amendment?
21
Reference
Valix, C. T., Peralta, J. F., & Valix, C. A. M. (2020). Postemployment Benefits. In Intermediate
Accounting (2020th ed., Vol. 2, pp. 583–624). GIC ENTERPRISES & CO., INC.
22

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PCOA 008 – INTERMEDIATE ACCOUNTING II

MODULE 7: Postemployment Benefits

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

2020 2021 2022 2023 2024

Projected benefit obligation

Current Service Cost

Fair value of plan assets 4,000,000

Interest expense on defined benefit obligation

Employees with more than 5 years of service on

Fair value of plan assets – beginning 5,000,000

Actual return on plan assets 900,000

Projected benefit obligation – actual 6,000,000

Projected benefit obligation – actual 8,000,000

What is the projected benefit obligation on December 31, 2020?

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