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33-Employee-Benefits - Intermediate Accounting 2 PUP

Lecture Notes
Inter Acco (Polytechnic University of the Philippines)

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BLUE NOTES
CHAPTER

33 S
L
Employee Benefits
Under the revised PAS 18, employee benefits are all forms of consideration given by an entity in exchange for
services rendered by employees or for the termination of employment.

Postemployment Short-term Employee Other Long-term Termination Benefits

Benefits Benefits Employee Benefits
Employee benefits other Employee Benefits other Employee benefits other Employee benefits provided
than termination benefits than termination benefits than short-term, post in exchange for the
and short-term employee which are expected to be employment and termination of an
benefits, which are payablesettled wholly within twelve termination benefits. employee’s employment as
after completion ofmonths after the end of a result of either:
employment. annual reporting period in a. Long-term paid
which the employees absences such as long a. An entity’s decision to
a. Retirement benefits, render the related service. service or sabbatical terminate an
such as pensions and leave employee’s
lump sum payments on a. Salaries, wages, and b. Jubilee or other long employment before the
retirement SSS contributions service benefit normal retirement
b. Postemployment life b. Short-term c. Long-term disability date.
insurance compensated or paid benefits
Postemployment medical absences such as paid d. Profit sharing and b. An employee’s decision
care annual leave and paid bonus to accept an offer of
sick leave e. Deferred compensation benefits in exchange for
c. Profit sharing and the termination of
bonuses payable within employment
twelve months
d. Nonmonetary benefits,
such as medical care,
housing, car and free or
subsidized goods.

POSTEMPLOYMENT BENEFITS

Defined Contribution Plan Defined Benefit Plan

The contribution is definite but the benefit is indefinite. The benefit is definite but the contribution is indefinite

Contributory Noncontributory Funded Unfunded

The employer and Only the employer makes The entity sets aside funds The entity retains the
employee make contributions to the for future retirement obligation for the payment
contributions to the retirement benefit plan benefits by making of retirement benefits
retirement benefit plan payments to a funding without the establishment
agency of a separate fund

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Chapter 33 – Employee Benefits USL Blue Notes 125

Accounting for defined contribution plan

 The obligation of the entity is determined by the amount contributed for each period.

ACCOUNTING FOR DEFINED BENEFIT PLAN

COMPONENTS OF DEFINED BENEFIT COST

Profit / Loss
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 liability
b. Interest income on plan assets
Other Comprehensive Income
3. Remeasurements
a. Actuarial gain and loss
b. Actual return on plan assets less interest income on plan assets
c. Any change in the asset ceiling
Note: The projected unit credit method, sometimes known as accrued benefit method, shall be used in determining the present value of the
defined benefit obligation and the related current service and where applicable, past service cost.

CURRENT SERVICE COST

 The increase in the present value of the defined benefit obligation resulting from employee service in the
current period.

PAST SERVICE COST

 The change in the present value of defined benefit obligation for employee service in prior periods resulting
from a plan amendment or curtailment.
Note: All past service cost, whether vested or unvested, shall be recognized as an expense immediately 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.

GAIN OR LOSS ON SETTELEMENT

 The difference between the settlement price and the present value of the defined benefit obligation on the
date of settlement.
Note:
 The settlement price includes any plan assets transferred and any payments made directly in connection with the settlement.
 Any gain or loss is fully recognized and included in service cost in the computation of employee benefit expense.

NET INTEREST
 The difference between the interest expense on the defined benefit obligation and the interest income on the
plan assets.
Composition:
a. Interest Expense – this is computed by multiplying the defined benefit obligation at the beginning of the

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126 USL Blue Notes Chapter 33 – Employee Benefits

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 discount rate.
Note: Under PAS19R, only the discount rate is to be used.

ACTUARIAL GAINS AND LOSSES

 Changes in the present value of the defined benefit obligation resulting from experience adjustments and the
effects of changes in actuarial assumptions.
Usual Causes of Actuarial Gains and Losses
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.
Determination of Actuarial Gains and Losses
Gain: Actual benefit obligation < Estimated Amount
Loss: Actual benefit obligation > Estimated Amount
Note: Actuarial gains and losses shall be recognized immediately in other comprehensive income and not subsequently reclassified to profit and
loss.

RETURN ON PLAN ASSETS

Components of return on plan assets:
a. Interest, dividend and other income derived from the plan assests.
b. Realized and unrealized gains and losses on the plan assets.
Deductions in computing return on plan assets:
a. Any costs of managing the plan assets or costs of managing investments.
Any tax payable by the plan itself or any tax on investment income.
Note:
 Plan assets are measured at fair value.
 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.
 Remeasurement is included in other comprehensive income without any subsequent reclassification to profit or loss.

ASSET CEILING
 The maximum amount for prepaid benefit cost.
 It 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.
If the fair value of plan assets is more than the projected benefit obligation, the plan is overfunded and therefore,
there is a prepaid benefit cost which PAS 19R calls it surplus.
Note:
 PAS 19R provides that the surplus in a define benefit plan must not exceed the asset ceiling determined by using the discount rate in
the measurement of the defined benefit obligation.
 Any change in the effect of the asset ceiling, excluding interest on the effect of the asset ceiling is a remeasurement to be recognized
through other comprehensive income.
 The “interest on the effect of the asset ceiling” is part of the total change in the effect of the asset ceiling and is determined by
multiplying the effect of the asset ceiling at the beginning of the period by the discount rate.

TRANSITIONAL PROVISIONS
 PAS 19R requires retrospective application.
 Any transitional effect of the application of the amendment under PAS 19R shall be accounted for as

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Chapter 33 – Employee Benefits USL Blue Notes 127

adjustment of the beginning balance of retained earnings.

DISCLOSURES – DEFINED BENEFIT PLAN

1. Characteristics of the defined benefit plan and risks associated with the plan, for example, the nature of
benefits provided and any minimum funding.
2. Reconciliations for the fair value of plan assets, the present value of the defined benefit obligation and the
effect of asset ceiling.
3. Separate showing of current service cost, past service cost, interest expense or income and remeasurements in
the reconciliations.
4. Disaggreagtion of the fair value 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.
5. A sensitivity analysis for each significant actuarial assumption showing the effect on the defined benefit
obligation for any change in the relevant actuarial assumption.
6. Description of any funding arrangement and funding policy.
7. Expected contribution to the plan for the next annual reporting period.
8. Maturity profile of the defined benefit obligation.

Formulas

Fair Value of Plan Assets - Ending Projected Benefit Obligation – Ending

Beginning FVPA Beginning PBO
Add: Add:
Contribution to the fund Current Service Cost
Interest Income Past Service Cost
Remeasurement gain on plan assets Interest Expense
Total Actuarial loss due to increase in PBO
Less: Total
Benefits paid Less:
Remeasurement loss on plan assets Benefits paid
Ending FVPA Actuarial gain due to decrease in PBO
Ending PBO

ACCOUNTING FOR OTHER LONG TERM EMPLOYEE BENEFITS

The recognition and measurement of liability for other long-term employee benefits are the same as the recognition
and measurement of defined benefit obligation.
The only difference is the recognition of the components of the defined benefit cost.
Note: For other long-term employee benefits, ALL REMEASUREMENTS ARE RECOGNIZED FULLY THROUGH PROFIT OR LOSS.

ACCOUNTING FOR TERMINATION BENEFITS

RECOGNITION OF TERMINATION BENEFITS

PAS 19R, par 165, provides that an entity shall recognize a liability and an expense for termination benefits at the
earlier of the following dates:
a. When the entity can no longer withdraw the offer of the termination benefits. e.g. when the plan of

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128 USL Blue Notes Chapter 33 – Employee Benefits

termination is already communicated to affected employees.

b. When the entity recognizes the cost of restructuring that involves the payment of termination benefits.
MEASUREMENT
Termination Benefit Manner of Accounting
a. Termination benefits are expected to be settled The requirements for short-term employee benefits shall
wholly within twelve months after the end of be applied.
reporting period Measured at the undiscounted amount.
b. Termination benefits are expected NOT to be wholly The requirements for other long-term employee benefits
settled twelve months after the end of the reporting shall be applied.
period Measured at discounted amount.

Illustration

A defined benefit plan revealed the following information

on January 1, 2013:
Actual return on plan assets 1,000,000
Fair value of plan assets 4,500,000 Interest income on FVPA 450,000
Projected benefit obligation 4,000,000 Remeasurement gain on
Prepaid benefit Cost/Surplus 500,000 plan assets 550,000
Asset Ceiling 300,000
Effect of Asset Ceiling 200,000 Actuarial gain – decrease in PBO 300,000
The following data are provided for the current year:
Current Service Cost 900,000 Effect of asset ceiling, Dec 31 400,000
Actual return on plan assets 1,000,000 Effect of asset ceiling, Jan 1 200,000
Contribution to the plan 700,000 Total change in the effect of
Benefits paid 200,000 asset ceiling 200,000
Actuarial gain due to Interest expense on effect of
Decrease in PBO 300,000 asset ceiling (10% x 200,000) (20,000)
Asset ceiling on Dec 31, 2013 800,000 Remeasurement Loss on
Discount rate 10% Asset ceiling 180,000

Computations
FVPA, Jan 1 4,500,000 Total Remeasurements to be presented in OCI:
Contribution to the plan 700,000
Actual return on plan assets 1,000,000 Remeasurement gain on plan assets 550,000
Benefits paid (200,000) Actuarial gain due to decrease in PBO 300,000
FVPA, Dec 31 6,000,000 Remeasurement loss on the change in the effect of asset
ceiling (180,000)
PBO, Jan 1 4,000,000 Net remeasurement gain – OCI 670,000
Current service cost 900,000
Interest expense on PBO Journal Entry
(10% x 4,000,000) 400,000
Actuarial gain due to Employee benefit expense 870,000
Decrease in PBO (300,000) Prepaid/accrued benefit cost 500,000
Benefits paid (200,000) Remeasurement gain – OCI 670,000
PBO, Dec 31 4,800,000 Cash 700,000

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Chapter 33 – Employee Benefits USL Blue Notes 129

FVPA, Dec 31 6,000,000

PBO, Dec 31 4,800,000 Reconciliation
Prepaid Benefit Cost 1,200,000
Asset Ceiling, Dec 31 800,000 Prepaid benefit cost - Jan1 asset ceiling300,000
Effect of Asset Ceiling 400,000 Debit adjustment 500,000
Prepaid benefit cost - Dec 31 *800,000
Current Service Cost 900,000
Interest Expense on PBO *Equal to the asset ceiling on December 31, 2013.
(10% x 4,000,000) 400,000
Interest income on FVPA
(10% x 4,500,000) (450,000)
Interest expense on effect of
asset ceiling (10% x 200,000) 20,000
Employee Benefit Expense 870,000

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