AEC 64 - Auditing and Assurance: Concepts and Applications 2

1. Contractual agreement ➢ Amount of post-employment benefits to be received

2. Legislation depends on the amount of contributions to the fund together
3. Informal practices that create constructive obligations with the investment income therefrom
➢ If LESS THAN EXPECTED, employer has NO OBLIGATION
RECOGNITION to make good the deficiency
○ Risk that retirement benefits may be insufficient
expense When employee rendered
rests with the EMPLOYEE
service

XPN: extent that the employee

benefits form part of the cost of
another asset DEFINED BENEFIT PLANS
➢ Employer commits to pay a definite amount of retirement
liability Already earned but not yet paid
benefits which can be determined using a plan formula
➢ Amount of promised benefits INDEPENDENT OF ANY
FOUR CATEGORIES OF EMPLOYEE BENEFITS UNDER PAS 19 FUND BALANCE
1. Short-Term Employee Benefits ➢ If fund is INSUFFICIENT, employer is OBLIGATED to make
2. Post-Employment Benefits good the deficiency
3. Other Long-Term Employee Benefits ○ Risk of fund insufficiency rests with the
4. Termination Benefits EMPLOYER

POST-EMPLOYMENT BENEFITS Defined contribution plan Defined benefit plan

Examples: ● Fixed contributions ● Definite amount of

a. Retirement benefits - lump sum payment and pensions ● Amount of benefits retirement benefits
b. Other post-employment benefits - post-employment life dependent on the fund ● Independent of any fund
insurance or medical care balance balance
● Risk of insufficiency rests ● Risk of insufficiency rests
with the employee with the employer
➔ Employee benefits (other than termination benefits and
short-term employee benefits) that are payable after the
completion of employment
➔ Provided through post-employment benefits plans (aka
retirement plans or pension schemes) HYBRID PLANS
➔ Can be: ➢ Fixed contributions
◆ formal - explicitly stated in the employment ➢ Amount of benefits dependent on the fund balance
contract ➢ Risk of insufficiency rests with the employee have
◆ Informal - not documented but implied from the characteristics of both a defined contribution plan and a
employer’s past practice or the minimum defined benefit plan
➢ For accounting purposes: considered as DEFINED
requirement of law
BENEFIT PLANS
➔ Can also be:

Contributory Non-contributory

Both employer and employee Only the employer contributes

OTHERS
contribute to the retirement fund Classified as either defined contribution plan or defined benefit plan
1. Multi-employer plans - various unrelated employers
contribute to a common fund that is managed by a trustee
to provide post-employment benefits to the employees of
Funded Unfunded
the participating employers
Isolated from the employer’s Employer manages any 2. State plans - established by law and operated by the
control and is transferred to a established fund and pays government, mandatory (GSIS, SSS)
trustee (e.g. investment directly the retiring employees 3. Insured benefits - employer pays insurance premiums to
company) who undertakes to fund a post-employment benefit plan (DBP if employer
manage the fund and pay retains the obligation to either pay directly the benefits to the
directly the retiring employees
employee or make good any deficiency if the insurer fails to
pay in full the benefits
Post employment benefit plans are either:
a. DEFINED CONTRIBUTION PLANS
b. DEFINED BENEFIT PLANS
ACCOUNTING FOR DEFINED CONTRIBUTION PLAN

DEFINED CONTRIBUTION PLANS

➢ Employer commits to fixed contributions to a fund that will Recognized contribution as: When:
be used to pay for the retirement benefits of the employees
Expense Employees had rendered
 AEC 64 - Auditing and Assurance: Concepts and Applications 2

RECOGNIZED IN OCI
service

Liability If unpaid and when employees Service cost (P/L)

have rendered service (a) Current service cost xx
(b) Past service cost xx
Prepaid asset Amount contributed exceeds xx xx
(c) Any (gain) or loss on settlement
the fixed amount of contribution

Net interest on the net defined benefit liability

(P/L)
MEASURED AT: xx
(a) Interest cost on the DBO
xx
(b) Interest income on plan assets
Undiscounted amount If due within 12 months
(c) Interest on the effect of the asset
xx xx
Discounted If due beyond 12 months ceiling

NOTE: Actuarial valuations are not necessary; NO ACTUARIAL Remeasurements of the net defined benefit
GAINS OR LOSSES. liability (OCI)
(a) Actuarial (gains) and losses xx
(b) Differences between interest income on
plan assets and return on plan assets
xx
ACCOUNTING for DEFINED BENEFIT PLAN (c) Difference between the interest on the
Actuarial assumptions are necessary to measure the obligation on a effect of the asset ceiling and change in
discounted basis. the effect of the asset ceiling xx xx
➔ Results to actuarial gains or losses
TOTAL DEFINED BENEFIT COST xx
➔ Retirement benefit cost: not necessarily equal to the
contribution due for the period

Service Cost
Step 1: Deficit or surplus
Current ➢ Increase in the PV of DBO resulting from
Difference between: service employee service in the CURRENT PERIOD
a. PV of DBO (Present value of defined benefit obligation) cost
➢ entity’s obligation for the accumulated retirement
benefits earned by employees to date. Past ➢ Increase in the PV of DBO resulting from
service employee service in the PRIOR PERIODS
➢ Determined using an actuarial valuation methods:
cost resulting from a plan amendment or
projected unit credit method curtailment
b. FVPA (Fair value of plan assets) ➢ Recognized immediately as expense
➢ Represents the balance of any fund set aside for ○ When the plan amendment or
the payment of the retirement benefits curtailment occurs; OR
○ Entity recognized related restructuring
costs or termination benefits, whichever
FVPA < PV of DBO deficit comes earlier
➢ Can be positive (PV of DBO increases) or
FVPA > PV of DBO surplus negative (decreases

Plan amendment occurs when entity:

a. Introduces or withdraws a defined benefit
plan
Step 2: Net defined benefit liabilty/asset b. Changes the benefits payable under an
existing defined benefit plan
➔ Amount presented in the SFP Curtailment occurs when entity:
a. Significantly reduces the number of
employees covered by a plan
deficit Net defined benefit liability (noncurrent liability)
Gain or ➢ Arises when employer's obligation to provide
surplus Lower of: loss on benefits is eliminated other than from
a. Surplus settlement payment of benefits according to the terms of
b. Asset ceiling the plan
➢ Difference between
Asset ceiling - present value of any economic benefits available in a. PV of DBO being settled as determined
on the date of settlement
the form of refunds from the plan or reductions in the future
b. Settlement price, including any plan
contributions to the plan assets transferred and any payments
made directly by the entity in connection
with the settlement

Step 3: Defined Benefit Cost Net interest on the net defined benefit liability
(asset)

RECOGNIZED IN P/L
 AEC 64 - Auditing and Assurance: Concepts and Applications 2

➔ Exclude:
❖ Change in the net defined benefit liability (asset) during the
◆ Unpaid contributions due from the employer
period that arises from the passage of time
❖ SAME discount date is used for the three items: based on ◆ Non-transferable financial instruments
high quality corporate bonds, or in absence thereof, FVPA
government bonds, determined at the start of the annual
reporting period
beg. xx

Remeasurements of the net defined benefit liability (asset)

Return on plan assets xx xx Benefits paid

Actuarial Changes in the PV of DBO resulting from changes Contributions to the fund
gains and in actuarial assumptions
losses
xx end.
● Actuarial assumptions - estimates of variables
used in determining the ultimate cost of providing
post-employment benefits
○ Demographic assumptions - employee
turnover rate, mortality or lifespan and health
Determining the ultimate cost of a defined benefit
condition
○ Financial assumptions - discount rate, future
salary levels, future medical costs
Actuarial valuation method
Discount rate: based on high quality corporate
PROJECTED UNIT CREDIT METHOD
bonds
- Retirement benefit obligations measured based on future
PAS 19: encourages (but does not require) salary levels
involving a qualified actuary in measuring
defined benefit obligations
Current service cost = benefit entitlement per year x PV factor
PV of DBO = accumulated benefits x PV factor
Return on Represents the investment income earned by the
plan assets plan assets during the year after deducting
costs of managing the fund and taxes
F2F Meeting
Apr 22, 2023

Retirement benefits expense

RA 7641 RETIREMENT PAY LAW
Net defined benefit liability
AUDIT PROCEDURES ON PENSION
Remeasurement of defined benefit liability
● Basis for minimum retirement obligation of the employer to
(closed to RE)
his/her employees
● 60 to 65 yrs old compulsory retirement age
PV of DBO ● Serve at least 5 years to the company
➔ Normal credit balance ● ½ of the Salary per month, 1/12 of 13th month, 5 days of
➔ Affected by adjustments resulting from plan amendment, incentive leave
curtailment or settlement
Two Types of Pension
1. Defined Contribution Plan
PV of DBO
2. Defined Benefit Plan
xx beg.
Actuary will make the report (employed by the client) - Management's
Current & past service Expert
Benefits paid xx xx cost
❖ Competence - License
❖ Objectivity - Scope of Work, Service Fee (significant or not),
xx Interest cost

Actuarial gain due to Actuarial loss due to AUDITOR’S

decrease in PV of DBO xx xx increase in PV pf DBO ➢ IT
➢ Consulting
end. xx ➢ Transaction Advisory

FVPA PENSION
➔ Normal debit balance
AUDIT AUDIT EVIDENCE ASSERTION
Plan assets PROCEDURE
➔ Intended solely for paying employee benefits
➔ Assets held by a long-term employee benefit fund Agreement of SL ● Trial Balance (GL) Existence
◆ Assets held by an entity that is legally separate and GL ● Actuarial valuation
report (AVR)
from the employer
○ done by the Actuary
➔ Qualifying insurance policies (Management’s
◆ Insurance policy issued by an insurer that is not Expert)
related to the employer