Unit7 Module
Unit7 Module
Learning Outcomes
Pretest
Directions: Read and analyze each item. Provide the letter of your answer. Encode your
answer in a separate word file and submit in the classwork section of our google class on
or before the date as reflected in your study schedule. Please follow the format in naming
the file for submission: Lastname_Unit7_Pretest
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 nor defined contribution plan
d. Both defined benefit and defined contribution plan
11. Plan assets are assets held by a long-term benefit fund and must satisfy all of the
following conditions, except
a. The assets are held by an entity, the fund itself, that is legally separate from
the reporting entity.
b. The assets in the fund are available to pay only employee benefits.
c. The assets in the fund are not available to the reporting entity’s own
creditors.
d. The assets in the fund can be returned to the entity even if the remaining
assets are insufficient to meet all employee benefit obligations.
12. When an entity amends a pension plan, past service cost should be
a. Treated as a prior period adjustment because no future periods are
benefited.
b. Amortized over the remaining service period of employees.
c. Recorded in other comprehensive income.
d. Reported as an expense in the period the plan is amended.
13. What is the meaning of net interest in relation to a defined benefit cost?
a. Interest expense on defined benefit liability
b. Interest income on the fair value of plan assets
c. The difference between interest expense on defined benefit liability,
interest expense on effect of asset ceiling and interest income on plan
assets
d. Interest expense on defined benefit liability less applicable income tax
Topic 1
Postemployment Benefits
Content
EMPLOYEE BENEFITS
Postemployment Benefits
Contributory Noncontributory
Funded Unfunded
• The entity sets aside funds for future • The entity retains the obligation for
retirement benefits by making the payment of retirement benefits
payments to a funding agency, such
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.
The entity will have no legal or constructive obligation to pay further contributions
if the fun does not hold sufficient assets to pay all employee benefits relating to employee
service in the current and prior periods.
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.
Insured Benefits
An entity may pay insurance premium 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.
The payment of fixed premium 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.
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.
1. Service cost
a. Current service cost
b. Past service cost
c. Any gain or loss on settlement
2. Net interest
a. Interest expense on defined benefit obligation
b. Interest expense on plan assets
c. Interest expense on effect of asset ceiling
3. Remeasurements
a. Remeasurement of plan assets
b. Remeasurement of projected benefit obligation
c. Remeasurement of the effect of asset ceiling
The service cost and net interest are included in profit or loss as component of
employee benefit expense.
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.
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:
b. Interest income
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.
Plan curtailment is a significant reduction by the entity in the number of employees covered
by the defied 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
PAS 19 provides that an entity shall recognize past service cost as an expense at
the earlier of the following dates:
a. When the 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 costs over the remaining future vesting period. Vested benefits are
employee benefits that are not conditional on future employment.
Plan Assets
Plan assets comprise assets held 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.
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.
Plan assets exclude unpaid contributions due from the reporting entity o 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.
However, the following shall be deducted in computing the return on 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.
b. If the actual return on plan assets is lower than the interest income on fair value
of plan assets, the difference is a remeasurement loss.
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.
Actuarial Assumptions
Actuarial assumptions are an 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 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
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.
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.
Assessment
Directions: Read and analyze problem. Select the best answer from the choices given
and provide solutions. No merit shall be given for answers without solutions. Encode your
answer in a separate word file and submit in the classwork section of our google class on
or before the date as reflected in your study schedule. Please follow the format in naming
the file for submission. Lastname_Unit7_Topic1_Assessment
Activity 1
Answer Problem 2 of the Chapter 5 of your book Intermediate Accounting 2 pages 217-
219. Select the best answer from the choices given and provide the letter of your answer.
Activity 2
Answer Problem 3 of the Chapter 5 of your book Intermediate Accounting 2 pages 219-
221. Answer the questions given on each problem. Provide solutions. No merit shall be
given for answers without solutions.
Activity 3
Answer Problem 4 of the Chapter 5 of your book Intermediate Accounting 2 pages 222-
223. Select the best answer from the choices given. Provide solutions for each problem.
No merit shall be given for answers without solutions.
Topic 2
Defined Benefit Plan
Content
The benefit plan shall be viewed as a subentity separate and distinct from the
primary entity, which is the employer entity. The subentity maintains information that
does not appear in the financial statements of the primary entity.
Such information is kept only by means of memorandum records and therefore not
reflected in the general ledger accounts of the primary entity. The information contained
in the memorandum records of the subentity contains the following:
These 2 items are kept only in the memorandum records of the subentity.
The “prepaid/accrued benefit cost” is the item that appears on the financial statement
of the employer entity.
Illustration 1 – Underfunding
To simplify the example, the only component of the benefit expense is the current service
cost of P500,000. The entity made a contribution of P450,000 to the defined benefit plan
for the current year. The journal entry to record the expense and the contribution is:
Illustration 2 – Overfunding
Again, the only component of the benefit expense is the current service cost of P500,000.
The entity made a contribution of P600,000 to defined benefit plan for the current year.
The journal entry to record the expense and the contribution is:
Observe that the “prepaid/accrued benefit cost” account is the balancing figure. As the
yeas go by, this account will build up and it may have debit or credit balance at the end of
current reporting period.
Settlement of Plan
A lump sum payment to plan participants in exchange for their rights to receive specified
postemployment benefits is also a settlement. However, PAS 19 clarified that a lump sum
payment to plan participants made under the terms of the existing defined benefit plan is
not a settlement.
The most obvious example of a routine settlement is the option to take a lump sum
payment instead of an annuity or a periodic payment.
PAS 19 provides that an entity shall recognize gain or loss on the settlement of a
defined benefit plan when the settlement occurs. The gain or loss on settlement is the
difference between the settlement price and the present value of the defined benefit
obligation on the date of settlement.
Any gain or loss on settlement is fully recognized and included in service cost in
the computation of employee benefit expense.
PAS 19 provides that the surplus in a defined benefit plan must not exceed the
asset ceiling determined by using the discount rate in the measurement of the defined
benefit obligation.
The asset ceiling is the present value of any economic benefits available in the
form of refunds from the plan or reductions in future contributions to the plan.
Illustration
The asset ceiling of the present value of available future refunds and reduction in future
contributions is P1,200,000. The surplus does not exceed the asset ceiling. Therefore, a
prepaid benefit cost or surplus asset of P1,000,000 shall be reported in the statement of
financial position at year-end.
Transitional Provision
Revised PAS 19 provides that an entity shall apply this standard retrospectively.
This means that any transitional effect of the application of the amendment under PAS 19
shall be accounted for as adjustment of the beginning balance of retained earnings.
However, an entity need not adjust the carrying amount of assets for changes in
employee benefit costs that were included in the initial carrying amount of the assets. In
other words, assets such as inventory and property, plant and equipment that include
employee benefit costs in their carrying amount do not have to be restated.
a. Characteristics of the defined benefit plan and risks associated with the plan
b. Reconciliations for the fair value of plan assets and the present value of the defined
benefit obligation
c. Separate showing of current service cost, past service cost, interest expense or
income and remeasurements
d. Disaggregation of the fair value of plan assets into classes that distinguish the
nature and risks of assets
e. A sensitivity analysis for each significant actuarial assumption showing the effect
on the defined benefit obligation for any change
f. Description of any funding arrangement and policy
g. Expected contribution to the plan 'for the next period
h. Maturity profile of the defined benefit obligation
PAS 26
• This standard deals with “accounting and reporting by retirement benefit plans”.
• For purposes of this standard, such a hybrid plan is deemed to be a defined
benefit plan.
1. A statement that shows the net assets available for benefits, the actuarial present
value of promised benefits, distinguishing between vested and nonvested benefits,
and the resulting excess or deficit.
2. A statement of net asset available for benefits, including either a note disclosing
the actuarial present value of promised vested and nonvested benefits or a
reference to this information in an accompanying actuarial report.
As in the case of defined contribution plan, investments of a defined benefit plan shall be
carried at fair value.
In many countries, actuarial valuations are not obtained more frequently than every
three years. PAS 26 does not make it incumbent upon the plan to use annual actuarial
valuation.
If an actuarial valuation has not been prepared on the date of the report, the most
recent valuation is used and the date of actuarial valuation is disclosed.
Disclosure
The report of a retirement plan, defined contribution and defined benefit, shall disclose.
the following information:
Assessment
Directions: Read and analyze problem. Select the best answer from the choices given
and provide solutions. No merit shall be given for answers without solutions. Encode your
answer in a separate word file and submit in the classwork section of our google class on
or before the date as reflected in your study schedule. Please follow the format in naming
the file for submission. Lastname_Unit7_Topic2_Assessment
Activity 1
Answer Problem 2 of the Chapter 6 of your book Intermediate Accounting 2 pages 259-
261. Select the best answer from the choices given and provide the letter of your answer.
Activity 2
Answer Problem 3 of the Chapter 6 of your book Intermediate Accounting 2 pages 262.
Answer the questions given on each problem. Provide solutions. No merit shall be given
for answers without solutions.
Activity 3
Answer Problem 4 of the Chapter 6 of your book Intermediate Accounting 2 pages 262-
265. Select the best answer from the choices given. Provide solutions for each problem.
No merit shall be given for answers without solutions.