EMPLOYEE BENEFITS

RELATED STANDARDS: PAS 19 – EMPLOYEE BENEFITS; PAS 26 –

ACCOUNTING & REPORTING BY RETIREMENT BENEFIT PLANS
TOPIC OUTLINE

Definition

Short-term Employee Benefits

EMPLOYEE BENEFITS Defined Contribution Plan

(PAS 19)
Post-employment Benefits
Defined Benefit Plan
Other long-term Benefits

Termination Benefits

LECTURE NOTES
DEFINITION
Employee benefits are all forms of consideration given by an entity in exchange for services-
rendered by employees or for the termination of employment.
NOTE: In accordance with PAS 19, employees INCLUDE directors and other management personnel.
Under PAS 19R, employee benefits include (SPOT):
❖ Short-term employee benefits
❖ Postemployment benefits
❖ Other long-term employee benefits (other than postemployment benefits)
❖ Termination benefits
SHORT-TERM EMPLOYEE BENEFITS
Short-term employee benefits are employee benefits other than termination benefits which are expected to
be settled wholly within twelve months after the end of annual reporting period in which the
employees render the related service
Examples of short-term employee benefits:
✓ Salaries, wages and social security contributions
✓ Short-term compensated or paid absences such as paid annual leave and paid sick leave
✓ Profit sharing and bonuses payable within twelve months
✓ Nonmonetary benefits, such as medical care, housing, car and free or subsidized goods.
ACCOUNTING FOR SHORT-TERM EMPLOYEE BENEFITS
Accounting for short-term employee benefits is fairly straight forward because there are no actuarial
assumptions to be made.
The rules for short-term benefits are essentially an application of basic accounting principles and practice.
(1) Unpaid short-term employee benefits at the end of the reporting period shall be recognized as
accrued expense.
(2) Any short-term benefits paid in advance shall be recognized as a prepayment.
(3) The cost of short-term benefits shall be recognized as expense in the period when incurred,
except when such cost may be included within the cost of an asset, such as property, plant
and equipment.

SHORT-TERM COMPENSATED ABSENCES

An entity may pay employees for absences for various reasons such as vacation, sickness and short-term
disability, maternity or paternity and military service.
Short-term compensated absences are classified as:
❖ Accumulating - are those that are carried forward and can be used in future periods if the current
period's entitlement is not used in full.
 • Vesting - Employees are entitled to a cash payment for unused entitlement on leaving the
entity.
• Nonvesting - Employees are not entitled to a cash payment for unused entitlement on leaving
the entity.
❖ Non-accumulating - are those that are not carried forward. Such benefits lapse if the current period's
entitlement is not used. Automatically, employees are not entitled to a cash payment for unused
entitlement on leaving the entity (NON-VESTING).
PROFIT SHARING AND BONUS PLANS
Under some profit-sharing plans, employees shall receive a share of the profit only if they remain with the
entity for a specified period. Such plans create a constructive obligation as employees render service that
increases the amount to be paid if they remain in service until the end of the specified period. The
measurement of such constructive obligation reflects the possibility that some employees may leave
without receiving profit-sharing payments. PAS 19R provides that an entity shall recognize the expected
cost of profit sharing and bonus payment when all of the following conditions are present:
(a) The entity has a present legal or constructive obligation to make such payment as a result of past
event.
(b) A reliable estimate of the obligation can be made. A present obligation exists when the entity has no
realistic alternative but to make the payment.
FORMULAS USED IN COMPUTING BONUS:
(1) Bonus is expressed as a certain percent of income before bonus and before tax.
BONUS = Profit x B%
(2) Bonus is expressed as a certain percent of income after bonus but before tax.
BONUS = P – [(P ÷ (1 + B%)]
(3) Bonus is expressed as a certain percent of income after tax but before bonus.
BONUS = P x [(1 – T%) ÷ ((1 / B%) - T%)]
(4) Bonus is expressed as a certain percent of income after bonus and after tax.
BONUS = P x [(1 – T%) ÷ ((1 / B%) - T% + 1))]
WHERE:
P = Profit before bonus and before tax
B% = Bonus rate
T% = Tax rate
POST-EMPLOYMENT BENEFITS
Postemployment benefits are employee benefits, other than termination benefits and short-term employee
benefits, which are payable after completion of employment.
Examples of post-employment benefits are:
✓ Retirement benefits, such as pensions and lump sum payments on retirement
✓ Postemployment life insurance
✓ Postemployment medical care
NOTE: Post-employment plans can be formal or informal. A plan is FORMAL if it was established as part of
the remuneration package for the employees. A plan is INFORMAL if it is evidenced only by the entity's
practice to pay postemployment benefits.
CATEGORIES OF POST-EMPLOYMENT PLANS
MAJOR CATEGORIES
DEFINED CONTRIBUTION PLAN DEFINED BENEFIT PLAN
❖ The employer commits to make fixed ❖ The employer commits to pay a definite
contributions to a fund. The amount of amount of retirement benefits. Such amount is
benefits that an employee will receive is independent of any fund balance.
dependent on the fund balance.
❖ The risk that the fund may be insufficient to
❖ The risk that the fund may be insufficient to pay for the promised benefits rests with the
meet the expected benefits rests with the employer.
employee.
OTHER CATEGORIES
CONTRIBUTORY PLAN NON-CONTRIBUTORY PLAN
❖ Both the employer and employee contribute to ❖ Only the employer contributes to the
the retirement fund (e.g. SSS). retirement fund of the employee.
FUNDED PLAN UNFUNDED PLAN
❖ The fund is being isolated from the control of ❖ The fund is being managed by the employer.
the employer and such is transferred to a In addition, the employer pays directly the
trustee who undertakes to manage the fund retiring employees.
and pay directly the retiring employees.
MULTI-EMPLOYER PLANS INSURED BENEFITS
❖ Under a multi-employer plan, various ❖ An employer may pay insurance premiums to
unrelated employers contribute to a common fund a post-employment plan. It is classified
fund that is managed by a trustee to provide either as defined contribution or defined
post-employment benefits to the employees of benefit plan. It is classified as defined benefit
the participating employers. It is classified as plan if the employer retains the obligation to
either defined contribution or defined benefit either pay directly the benefits to the
plan. employee or make good any deficiency if the
insurer fails to pay in full the benefits.

ACCOUNTING FOR DEFINED CONTRIBUTION PLANS

Accounting for a defined contribution plan is straightforward because the obligation of the entity is
determined by the amount contributed for each period.
REQUIRED CONTRIBUTION = EXPENSE
✓ Any unpaid contribution at the end of the period shall be recognized as accrued expense.
✓ Any excess contribution shall be recognized as prepaid expense but only to the extent that the
repayment will lead to a reduction in future payments or a cash refund.
✓ The amount of contribution is measured at an UNDISCOUNTED amount unless it is due beyond 12
months.
ACCOUNTING FOR DEFINED BENEFIT PLANS
Accounting for a defined contribution plan more complex since there is discounting and actuarial
assumptions.
REQUIRED CONTRIBUTION ≠ EXPENSE
The following steps shall be followed in accounting for defined benefit plan
STEP 1: Determine the Defined Benefit Obligation (DBO)
STEP 2: Determine the Fair Value of Plan Assets
STEP 3: Determine the Deficit or Surplus
STEP 4: Determine the Net Defined Liability or Asset
STEP 5: Determine the Defined Benefit Cost
STEP 1: Determine the Defined Benefit Obligation (DBO)
DBO is the present value of expected future payments required to settle the obligation resulting from
employee service in the current and past periods.
This is determined using an actuarial valuation called PROJECTED UNIT CREDIT MEHOD. This method
sees each period of service as giving rise to an additional unit of benefit entitlement and measures each
unit separately to build up the final obligation.
How to compute the ending balance of DBO? See the following T-account to answer the question.
Defined Benefit Obligation (PV)
Actuarial Gain xx Beginning Balance xx
Benefits Paid xx Current Service Cost xx
C.A. of DBO settled in advance xx Past Service Cost xx
Interest Expense xx
Actuarial Loss xx
Ending Balance xx
NOTES:
❖ Current service cost is the increase in the present value of the defined benefit obligation resulting
from employee service in the current period. An employee’s retirement benefit expense increases as
he or she renders service.
❖ 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.
Plan amendment includes introduction of defined benefit plan or changes to an existing defined
benefit plan.

Plan curtailment is a significant reduction in the number of employees covered by the defined benefit
plan.
All past service costs, whether vested or unvested, shall be recognized as expense immediately.
❖ Interest expense is computed by multiplying the defined benefit obligation at the beginning of the
reporting period by the "discount rate". The discount rate is based on HIGH QUALITY CORPORATE
BONDS or ON GOVERNMENT BONDS in the absence thereof.
❖ Actuarial gains and losses are changes in the present value of the defined benefit obligation resulting
from experience adjustments and the effects of changes in actuarial assumptions.
Actuarial assumptions are an entity's best estimate of the variables that would determine the ultimate
cost of providing postemployment benefits. Actuarial assumptions shall be unbiased and mutually
compatible.
Actuarial assumptions comprise of demographic assumptions and financial assumptions.
Demographic assumptions deal with mortality, rate of employee turnover, disability, early retirement,
proportion of plan members eligible for benefits, and claim rates under medical plans.
Financial assumptions deal with discount rate, future salary and benefit levels, future medical costs
and taxes payable by the plan.
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.
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.
❖ Benefits paid results from the settlement of the plan. A settlement is a transaction that eliminates all
further legal or constructive obligations for part or all of the benefits provided under a defined benefit
plan. This is referred to as "routine settlement".
An entity shall recognize gain or loss on the settlement of a defined benefit plan when the settlement
occurs. This happens if the employee opted an early retirement.
STEP 2: Determine the Fair Value of Plan Assets
FVPA represents the balance of any fund set aside for the payment of the retirement benefits.
Plan Assets comprise:
(1) Assets held by a long-term employee benefits fund
The assets are held by an entity, the fund itself, that is legally separate from the reporting entity.
(2) Qualifying insurance policies
A qualifying insurance policy is an insurance policy issued by an insurer that is not a related party of
the reporting entity
NOTE: Both are not available to the employer’s creditors even in bankruptcy and cannot be returned to the
employer unless the amount returned represents surplus assets.
How to compute the ending balance of FVPA? See the following T-account to answer the question.
Fair Value of Plan Assets
Beginning Balance xx Benefits paid xx
Actual Return xx Settlement price of PBO settled in advance xx
Contributions made xx
Ending Balance xx
NOTES:
❖ Actual return comprises interest income and remeasurement gain. Interest income is computed by
multiplying the fair value of plan assets at the beginning of the reporting period by the same
discount rate used for interest expense.
STEP 3: Determine the Deficit or Surplus
If FVPA < DBO = Deficit
If FVPA > DBO = Surplus
STEP 4: Determine the Net Defined Liability or Asset
Net Defined Benefit Liability (Accrued Pension) = Deficit
Net Defined Benefit Asset (Prepaid Pension) = The lower of Surplus and Asset Ceiling
NOTE: 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.
DBO and FVPA are items kept only in the memorandum records of the sub-entity. The "prepaid/accrued
benefit cost" is the item that appears in the statement of financial position of the employer entity.
STEP 5: Determine the Defined Benefit Cost

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.
Disclosures - defined benefit plan
a. Characteristics of the defined benefit plan and risks associated with the plan, for example, the nature
of benefits provided and any minimum funding.
b. Reconciliations for the fair value of plan assets, the present value of the defined benefit obligation and
the effect of asset ceiling.
c. Separate showing of current service cost, past service cost, interest expense or income and
remeasurements in the reconciliations.
d. Disaggregation of the fair value of plan assets into classes that distinguish the nature and risks of
assets, subdividing the plan assets into those that have a quoted market price and those that do not
have a quoted market price.
e. A sensitivity analysis for each significant actuarial assumption showing the effect on the defined
benefit obligation for any change in the relevant actuarial assumption.
f. Description of any funding arrangement and funding policy.
g. Expected contribution to the plan for the next annual reporting period.
h. Maturity profile of the defined benefit obligation.
OTHER LONG-TERM BENEFITS
The term "other long-term employee benefits" is a residual definition. Other long-term employee benefits
are all employee benefits other than short-term employee benefits, postemployment benefits and
termination benefits.
Other long-term employee benefits usually include the following:
a. Long-term paid absences such as long service or sabbatical leave
b. Jubilee or other long service benefit
c. Long-term disability benefit
d. Profit sharing and bonus
e. Deferred compensation
The recognition and measurement of liability for other long-term employee benefits are the same as the
recognition and measurement of defined benefit obligation. In other words, the liability recognized for
other long-term employee benefits at the end of reporting period shall be the net total of the following
amount:
a. Present value of the benefit liability
b. Fair value of the plan assets
For other long-term employee benefits, all of the following components of defined benefit cost are
recognized in profit or loss and included in employee benefit expense:
TERMINATION BENEFITS
Termination benefits are employee benefits provided in exchange for the termination of an employee's
employment as a result of either:
a. An entity's decision to terminate an employee's employment before the normal retirement date.
b. An employee's decision to accept an offer of benefits in exchange for the termination of employment.
The event that gives rise to an obligation is the termination of employment rather than employee service.
An entity shall recognize an expense and a liability for termination benefits at the earlier of the following
dates:
a. When the entity can. no longer withdraw the offer of the termination benefits, for example, when the
plan of termination is already communicated to affected employees.
b. When the entity recognizes the cost of restructuring that involves the payment of termination
benefits.
If the termination benefits are expected to be settled wholly within twelve months after the end of
reporting period in which the termination benefit is recognized, the requirements for short-term employee
benefits shall be applied.
If the termination benefits are expected not to be settled wholly within twelve months after the end of
reporting period, the requirements for other long-term employee benefits shall be applied.

QUIZZER (DO-IT-YOURSELF DRILL)

THEORIES
1. Which of the following is within the scope of PAS 19?
I. Semi-monthly salaries and wages
II. One sack rice allowance
III. Bonus in the form of entity’s shares
A. I and II
B. II and III
C. I and III
D. I, II and III
E. Answer not given
2. Which is not a characteristic of short-term employee benefits?
I. Actuarial assumptions are required to measure the benefit obligation.
II. Short-term employee benefit obligations are measured on an undiscounted basis.
III. Short-term employee benefits are recognized at each year-end regardless of services rendered
by an employee.
A. I and II D. I, II and III
B. II and III E. Answer not given
C. I and III
3. Short-term employee benefits include profit-sharing and bonuses payable in more than twelve
months after the end of the period in which the employees render the related service.
Accumulating compensated absences are those that expire if not fully used during the year of
entitlement.
A. True, false
B. False, true
C. False, false
D. True, true
4. A profit-sharing plan requires an entity to pay a specified proportion of the cumulative profit for a
five-year period to employees who serve throughout the five-year period. What is the profit-sharing
plan?
A. A postemployment benefit
B. A short-term employee benefit
C. A termination benefit
D. Other long-term employee benefit
5. KGA CORP’s post-employment benefit plan states that employees will receive retirement benefits
equal to one month salary, at the salary level on retirement, for each year of service with maximum
service period of 10 years. The plan is a
A. Defined contribution plan C. Contributory plan
B. Defined benefit plan D. Funded plan
6. I. A formula in a defined contribution plan defines the benefits that the employee will receive at
the time of retirement.
II. Any unpaid contribution at the end of the period for defined contribution plan shall be
recognized as accrued liability.
III. The amount expensed in a defined contribution plan is not necessarily the expense to be
recognized since its accounting is more complex.
A. True, false, false D. False, false, true
B. False, true, false E. True, false, true
C. True, true, false
7. Which of the following statements characterizes defined benefit plans?
I. The investment risk is borne by the employee.
II. The employer commits to pay retiring employees a definite amount.
III. The formula in a defined benefit plan ensures that enough fund would be available at
retirement.
A. I and II
B. II and III
C. I and III
D. I, II and III
E. Answer not given
8. In rare circumstances, when a retirement benefit plan has attributes of both defined contribution and
defined benefit plan, it is deemed
A. Defined benefit plan
B. Defined contribution plan
C. Both defined benefit plan and defined contribution plan
D. Neither defined benefit plan nor defined contribution plan
9. Which of the following components of defined benefit obligation (DBO) is properly accounted?
I. Current service cost – Increases DBO
II. Actuarial gain – Increases DBO
III. Interest cost – Increases DBO
A. I and II D. I, II and III
B. II and III E. Answer not given
C. I and III

10. ____I____ is the increase in the present value of the defined benefit obligation resulting from
employee service in the current period.
____II____ is the increase in the present value of the defined benefit obligation for employee service
in prior periods, resulting from a plan amendment or curtailment.
A. I – Current service cost; II – Past service cost
B. I – Past service cost; II – Current service cost
C. I – Current service cost; II – Current service cost
D. I – Past service cost; II – Past service cost
11. The projected unit credit method is the measure of pension obligation that
A. can no longer be used under GAAP as an estimate for reporting the service cost component of
pension expense.
B. is not an allowable estimate for reporting the service cost component of pension expense for
defined benefit plans.
C. is one of several allowable estimates for reporting the service cost component of pension
expense.
D. is required under PAS 19.
12. Which of the following statements is incorrect concerning the actuarial assumptions?
A. Actuarial assumptions shall be unbiased and mutually compatible.
B. Actuarial assumptions are unbiased if they are neither imprudent nor excessively conservative.
C. Actuarial assumptions comprise of demographic assumptions and financial assumptions.
D. Postemployment benefit obligations shall be measured on a basis that reflects current salary
and ignores future salary increases.
13. Plan assets are assets held by a long-term benefit fund and must satisfy all of the following
conditions, except
A. The assets in the fund are available to pay only employee benefits.
B. The assets in the fund are not available to the reporting entity's own creditors.
C. The assets are held by an entity, the fund itself, that is legally separate from the reporting
entity.
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.
14. Which of the following component of plan assets is deducted to arrive to its ending balance?
A. Return on plan assets C. Benefits paid
B. Contributions to the plan D. None from the choices
15. The deficit or surplus is the difference between the present value of the defined benefit obligation and
the fair value of plan assets.
If the present value of the defined benefit obligation is greater than the fair value of plan assets,
there is a deficit.
 A. True, false C. False, false
B. False, true D. True, true
16. When there is a surplus, the entity shall measure the net defined benefit asset at
A. The surplus where the fair value of plan assets exceeds the present value of defined benefit
obligation
B. The asset ceiling
C. Either the surplus or asset ceiling depending on the entity’s discretion
D. The lower between the surplus or asset ceiling
17. What is the relationship between the amount funded and the amount reported for defined benefit
cost?
A. Defined benefit cost must equal the amount funded.
B. Defined benefit cost is less than the amount funded.
C. Defined benefit cost is more than the amount funded.
D. Defined benefit cost may be more than, equal to, or less than the amount funded.
18. A pension liability is reported when
A. The defined benefit obligation exceeds the fair value of plan assets.
B. The accumulated benefit obligation is less than the fair value of plan assets.
C. Cumulative other comprehensive income exceeds the fair value of plan assets.
D. The pension expense reported for the period is greater than the funding amount for the same
period.
19. Which of the following is a component of a defined benefit cost?
I. Amortization of transition gain or loss
II. Benefits paid
III. Interest on effect of asset ceiling
A. I and II D. I, II and III
B. II and III E. Answer not given
C. I and III
20. 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. Interest expense on defined benefit liability less applicable income tax.
D. The difference between interest expense on defined benefit liability and interest income on the
fair value of plan assets.

PROBLEMS
Use the following in answering the next item(s):
RIZAL CORP. grants its employees 10 days of paid vacation leave per year. Per company’s policies,
employees are required to take vacation leave each year but not necessarily to take the whole
vacation leave credits each year. Vacation leaves not taken during a year can be carried over
indefinitely.
RIZAL CORP. has 400 employees with an average salary of P800 per day. There is an average increase
in salary of 5% every year. During 2018, total leave vacation taken by employees were 3,200 days.
Based on past experience, 80% of unused vacation leave for a year are taken immediately next year.
1. If the unused vacation leaves vest, what amount should be reported as vacation pay expense in
2018?
A. 3,097,600 C. 3,200,000
B. 3,232,000 D. 2,560,000
2. If the unused vacation leaves do not vest, what amount should be reported as vacation pay expense
in 2018?
A. 3,097,600 C. 3,200,000
B. 3,232,000 D. 2,560,000

3. BONIFACIO CORP. has an agreement to pay its sales manager a bonus of 4% on the company’s
annual profit. The income for the year before bonus and tax is P2,600,000. The income tax rate is
30% of income after bonus. If the bonus is based on income after bonus and after tax, what is the
bonus for the year?
A. 100,000 C. 70,817
B. 104,000 D. 73,684

4. GREGORIO COMPANY provided the following information pertaining to a pension plan for 2018:
Actuarial value of projected benefit obligation on January 1 600,000
Assumed discount rate 8%
 Current service cost 200,000
Past service cost 50,000
Pension benefits paid 180,000
Decrease in PBO due to actuarial assumptions 40,000
What is the projected benefit obligation on December 31, 2014?
A. 1,128,000 C. 680,400
B. 678,000 D. 1,118,000
5. LUNA COMPANY provided the following information with respect to the defined benefit plan for the
current year:
Projected benefit obligation:
January 1 3,000,000
December 31 3,500,000
Contribution to the plan 600,000
Benefits paid to retirees 500,000
Settlement discount rate 10%
What is the current service cost for the current year?
A. 300,000 C. 600,000
B. 500,000 D. 700,000

Use the following in answering the next item(s):

The following information is made available involving the defined benefit pension plan of APOLINARIO
CORP. for the year 2013:
Fair value of plan asset, 1/1/13 P3,500,000
Present value of benefit obligation, 1/1/13 3,750,000
Current service cost 700,000
Actual return on plan asset 420,000
Contribution to the plan 600,000
Benefits paid to retirees 750,000
Decrease in the present value of
benefit obligation due to change in actuarial assumptions 100,000
Present value of defined benefit obligation settled 250,000
Settlement price of defined benefit obligation 200,000
Discount rate 10%
6. What amount employee benefit cost should be reported in the profit or loss?
A. P675,000 C. P1,025,000
B. P725,000 D. P1,075,000
7. What is the net amount of remeasurements for the year 2013?
A. P50,000 C. P100,000
B. P75,000 D. P170,000
8. What is the fair value of the plan asset as of December 31, 2013?
A. P3,500,000 C. P3,770,000
B. P3,570,000 D. P4,100,000
9. What is the present value of benefit obligation as of December 31, 2013?
A. P3,725,000 C. P3,975,000
B. P3,825,000 D. P4,825,000
10. What is balance of the prepaid or accrued pension as of December 31, 2013?
A. Prepaid pension P155,000 C. Prepaid pension P325,000
B. Accrued pension P155,000 D. Accrued pension P325,000

11. DAGOHOY INC. plans to close one of its branches in 3 months’ time. There are 20 employees in the
branch. Because DAGOHOY wants to fill in some pending customer order, it offers employees the
following:
a) Each employee who stays and renders service until the closure of the branch will receive on the
termination date a cash payment of P130,000.
b) Employees leaving before closure of the branch will receive P40,000.
DAGOHOY expects that half of the employees will leave before closure.
How much is the termination benefits?
A. 800,000 C. 900,000
B. 400,000 D. 1,800,000

12. The actuarial valuation report of an entity shows the following information:
Present value of defined benefit obligation, Jan. 1 340,000
 Current service cost 30,000
Discount rate 10%
Benefits paid to retirees 100,000
Actuarial gain 60,000
How much is the year-end balance of the present value of defined benefit obligation?
A. 210,000 C. 304,000
B. 244,000 D. 364,000
13. JUAN INC. has an agreement to pay its sales manager a bonus of 5% of the income after bonus and
after tax. The income for the year before bonus and tax is P5,250,000. The income tax rate is 30% of
income after bonus. What is the bonus for the year?
A. 177,536 C. 250,000
B. 186,548 D. 262,500